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 02/07/2013.

Confidential (FR) Class III FOMC

January 26, 2007

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 of New and Existing Homes...................................................1 Manufactures’ Shipments and Orders..............................................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 Communications Equipment............................................................5 Non-High-Tech, Nontransportation Equipment ..............................5 Computers and Peripherals ..............................................................5 Medium and Heavy Trucks..............................................................5

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

Supplemental Notes The Domestic Nonfinancial Economy Sales of New and Existing Homes The data on sales of new and existing homes in December provide further evidence that housing demand is stabilizing. Sales of new homes climbed 4¾ percent in December to an annual rate of 1.12 million units following an upward-revised increase of 7½ percent in November. Much of December’s increase was concentrated in the Midwest and may have been related to the unusually warm temperatures in that region in December. Total existing home sales ticked down ¾ percent in December to an annual rate of 6.2 million units. Sales of single-family homes slipped 1¼ percent to an annual rate of 5.4 million units, but remained within the fairly narrow range of readings seen since mid-summer. Sales of existing condos and co-ops were up 2 percent relative to their November reading. The stock of new homes for sale ticked down for the fifth consecutive month in December after having peaked in July. Even so, these inventories amounted to 5¾ months’ supply at December’s higher sales pace, about 20 percent above the upper bound of the relatively tight range that this variable occupied between 1997 and 2005. 1 In the market for existing homes, the stock of single-family existing homes for sale ticked down in December and represented seven months’ supply at December’s sales pace—in line with the elevated readings seen throughout the second half of last year. The average sales prices of both new and existing homes were unchanged in December relative to their levels twelve months earlier. On a constant-quality basis, new home prices in the fourth quarter were 3½ percent higher than their level four quarters earlier, down from the 6½ percent appreciation posted in the preceding four-quarter period. The most recent reading of the purchase-only version of the OFHEO price index, which partially controls for changes in the structural characteristics and amenities of homes sold, was up 6 percent in the third quarter relative to its level four quarters earlier. Manufacturers’ Shipments and Orders Shipments of nondefense capital goods excluding aircraft declined 0.3 percent in December while new orders rose 2.4 percent, partially retracing the declines registered in

1

.

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-2-

Private Housing Activity (Millions of units, seasonally adjusted; annual rate except as noted) 2006 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

Q2

Q3

Q4

Oct.

Nov.

Dec.

1.80 1.84

1.87 1.93

1.71 1.71

1.56 1.56

1.48 1.55

1.57 1.51

1.64 1.61

1.46 1.38 1.41 .131

1.53 1.46 1.49 .156

1.40 1.28 1.31 .137

1.23 1.17 1.19 .131

1.19 1.18 1.20 .142

1.28 1.15 1.17 .137

1.23 1.17 1.20 .131

1.06 6.23

1.10 6.17

1.01 6.76

1.06 6.17

1.00 6.67

1.07 6.08

1.12 5.75

5.68 6.38

5.86 6.12

5.48 7.02

5.49 6.98

5.51 7.03

5.51 6.92

5.44 7.00

.337 .457 .062

.343 .466 .068

.313 .433 .067

.331 .394 .062

.291 .372 .066

.290 .363 .065

.412 .445 .062

.122

.107

.098

.096

.828

.796

.734

.761

n.a. .803

n.a. .757

n.a. .777

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; expressed as the ratio of seasonally adjusted inventories to seasonally adjusted 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

1.6

1.6

1.4

1.4 Dec.

1.2

1.2

Single-family adjusted permits 1.0

1.0

.8

.8

.6

.6 Multifamily starts

.4

Dec.

.2 .0

.4 .2

1999

2000

2001

2002

2003

2004

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

2005

2006

.0

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Indicators of Single-Family Housing Homebuying Indicators

Home Sales Thousands of units 7500

Thousands of units 1500 Existing home sales 1400 New home sales

Index 160

7000

1300

6500

1200

6000

1100

5500

Dec.

1000

5000

900

4500

800

4000

Index 550

Pending home sales index (left scale) MBA purchase index (right scale)

Jan. 19

140

120

450

350 Nov.

700

1998

2000

2002

2004

2006

2008

3500

100

80

1998

2000

2002

2004

2006

2008

150

Note. Purchase index is a 4-week moving average and is seasonally adjusted by FRB staff. Source. For pending home sales, National Association of Realtors; for purchase index, Mortgage Bankers Assoc.

Source. For existing homes, National Association of Realtors; for new homes, Census Bureau.

New Home Sales Months’ Supply

Content partially redacted.

250

Mortgage Rates Months 7

9

6

8

8

7

7

Percent 9 30-year FRM

Dec. Months’ supply (right scale)

5 4

Jan.

6

6

3 2

1998

2000

2002

2004

2006

2008

5

1

4

0

3

Prices of Existing Homes

20

1-year ARM

1998

2000

4

2002

2004

2006

2008

3

Note. The January readings are based on data through January 24, 2007. Source. Freddie Mac.

Note. . Months’ supply is calculated using the 3-month moving average of sales. Source. ; for months’ supply, Census Bureau.

25

5

Prices of New Homes

Percent change from year earlier 25 Repeat transactions, purchase-only index Average price of homes sold 20 Case-Shiller price index

20

Percent change from year earlier 25 Constant quality index Average price of homes sold 20

25

15

15

15

15

10

10

10

10

5

5

0

0

-5

-5

Q3

5

Oct. Dec.

0 -5

1998

2000

2002

2004

2006

2008

Source. For repeat transactions, OFHEO; for average price, National Association of Realtors; for Case-Shiller, Chicago Mercantile Exchange.

5

Q4 Dec.

1998

2000

2002

2004

2006

0

2008

Note. Average price values have been adjusted by Board staff to take into account new sampling procedures adopted in 2005. Source. Census Bureau.

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October and November. For the fourth quarter as a whole, both shipments and orders declined significantly after having posted solid gains in the previous quarters. The weakness in shipments last month was centered in the nondefense communications equipment category, in which shipments plunged 10.5 percent. However, this category is quite volatile, and the accompanying surge in new orders of more than 15 percent is encouraging. Orders and shipments of computer equipment revised up significantly in November, and shipments increased 1.3 percent in December, slightly offsetting the weak news on communications equipment. Outside of high-tech and transportation, shipments rebounded moderately from their November drop. Overall, the sluggishness in this category appears to have become fairly widespread. The three-month moving average of the staff’s constructed series on real adjusted durable goods orders stayed in negative territory for the third month in a row. This series—which strips out nondefense aircraft, defense capital goods, and industries for which reported orders actually equal shipments—has historically had some predictive power for industrial production.

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Orders and Shipments of Nondefense Capital Goods (Percent change; seasonally adjusted current dollars) 2006 Category

Q3

Q4

Oct.

Annual rate

Nov.

Dec.

Monthly rate

Shipments Excluding aircraft Computers and peripherals Communications equipment All other categories

9.9 6.9 25.6 -21.7 8.3

-3.6 -3.5 -32.0 -8.2 1.4

-2.3 -1.5 -22.9 -2.0 1.2

1.8 2.1 35.8 -.8 -.8

-.4 -.3 1.3 -10.5 .6

Orders Excluding aircraft Computers and peripherals Communications equipment All other categories

27.2 14.6 24.3 35.7 11.4

3.0 -6.1 -30.8 -31.5 .6

-14.4 -4.0 -23.7 -21.3 .3

-.3 -1.0 36.8 2.5 -4.7

9.0 2.4 -3.1 15.4 1.9

Memo: Shipments of complete aircraft1

34.8

n.a.

34.4

34.2

n.a.

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

Non-High-Tech, Nontransportation Equipment

Communications Equipment 20 17 14

Billions of chained (2000) dollars, ratio scale Shipments Orders

20 17 14

11

11

8

8

57 52

Billions of chained (2000) dollars, ratio scale Shipments Orders

52

47

Dec. 5

2

170

42

42

37

37

5

1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. Shipments and orders are deflated by a price index that is derived from the BEA’s quality-adjusted price indexes and uses the PPI for communications equipment for monthly interpolation.

2

32

2000 = 100

Billions of chained (2000) dollars

Industrial production (left scale) Real M3 shipments (right scale)

1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. Shipments and orders are deflated by the staff price indexes for the individual equipment types included in this category. Indexes are derived from the BEA’s quality-adjusted price indexes.

32

Medium and Heavy Trucks

Dec.

20 17

150

15

130

13

110

11

90

9

70

7

50

47 Dec.

Computers and Peripherals 200

57

1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. Ratio scales. Shipments are deflated by the staff price index for computers and peripheral equipment, which is derived from the BEA’s quality-adjusted price indexes.

5

1100 920 800

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

920 800

680

680

560 440

560 Dec.

320

200

1100

440 320

1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. Annual rate, FRB seasonals. Source. For class 4-8 trucks, Ward’s Communications; for class 5-8 trucks, ACT Research.

200

-6-

The Domestic Financial Economy

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

Total2

Level,1 Dec. 2006*

2005

H1 2006

Q3 2006

Q4 2006*

Nov. 2006

Dec. 2006

10.5

11.9

9.3

4.6

5.7

5.5

7,903

Loans3 Total To businesses Commercial and industrial Commercial real estate

11.6

11.6

10.8

6.2

5.4

9.8

5,909

13.1 17.1

16.3 15.7

20.2 13.7

9.7 7.1

4.7 7.4

9.3 7.2

1,167 1,433

To households Residential real estate Revolving home equity Consumer Originated4 Other5

12.0 13.3 3.1 .7 8.5

7.7 .1 6.7 7.4 12.0

7.3 3.9 6.5 5.1 4.6

1.6 1.3 .3 4.5 14.8

-2.1 4.3 8.6 9.0 16.1

9.7 7.2 11.4 9.9 13.6

1,743 453 734 1,124 832

7.6 5.4 .0 13.5

12.6 13.3 8.3 20.0

4.8 3.9 6.0 1.6

-.1 -3.4 -4.0 9.1

6.5 9.4 -3.9 26.1

-7.1 1.6 -14.2 21.3

1,994 2,144 1,192 981

Securities Adjusted2 Reported Treasury and agency Other6

Note. Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by reclassifications. 1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels. 2. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 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. 6. 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. * Adjusted to remove the effects of a consolidation of a sizable volume of thrift assets onto a commercial bank’s books in October 2006.

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III-T-1

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

2006

2007

Instrument

Change to Jan. 25 from selected dates (percentage points)

June 28

June 29

Dec. 11

Jan. 25

2004 June 28

2006 June 29

2006 Dec. 11

1.00

5.25

5.25

5.25

4.25

.00

.00

1.36 1.74

4.88 5.06

4.81 4.88

5.01 4.98

3.65 3.24

.13 -.08

.20 .10

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

1.28 1.45

5.27 5.37

5.25 5.23

5.25 5.24

3.97 3.79

-.02 -.13

.00 .01

Large negotiable CDs1 3-month 6-month

1.53 1.82

5.47 5.59

5.31 5.32

5.32 5.36

3.79 3.54

-.15 -.23

.01 .04

Eurodollar deposits3 1-month 3-month

1.29 1.51

5.33 5.49

5.35 5.35

5.32 5.36

4.03 3.85

-.01 -.13

-.03 .01

Bank prime rate

4.00

8.25

8.25

8.25

4.25

.00

.00

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

2.88 3.97 4.90

5.26 5.15 5.28

4.66 4.46 4.59

4.98 4.83 4.93

2.10 .86 .03

-.28 -.32 -.35

.32 .37 .34

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

1.56 2.25

2.49 2.61

2.20 2.19

2.49 2.49

.93 .24

.00 -.12

.29 .30

Municipal general obligations (Bond Buyer)5

5.01

4.71

4.03

4.32

-.69

-.39

.29

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

5.21 5.38 5.60 6.25 8.41

5.81 5.59 6.20 6.74 8.74

5.01 4.83 5.43 5.99 8.20

5.33 5.17 5.75 6.28 8.14

.12 -.21 .15 .03 -.27

-.48 -.42 -.45 -.46 -.60

.32 .34 .32 .29 -.06

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

6.21 4.19

6.78 5.82

6.12 5.45

6.25 5.49

.04 1.30

-.53 -.33

.13 .04

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

Record high

2006

2007

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

Change to Jan. 25 from selected dates (percent)

Level

Date

June 29

Dec. 11

Jan. 25

Record high

2006 June 29

2006 Dec. 11

12,622 1,527 5,049 798 14,752

1-24-07 3-24-00 3-10-00 12-27-06 3-24-00

11,191 1,273 2,174 714 12,846

12,328 1,413 2,443 793 14,248

12,503 1,424 2,434 784 14,359

-.94 -6.78 -51.78 -1.70 -2.66

11.72 11.87 11.95 9.78 11.78

1.41 .77 -.35 -1.12 .78

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. June 29, 2006, is the day the most recent policy tightening ended. December 11, 2006, is the day before the most recent FOMC announcement. _______________________________________________________________________