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.

Class III FOMC - Internal (FR)

October 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 and Prices of New Homes ......................................................1 Consumer Sediment .........................................................................1 Orders and Shipments of Durable Goods ........................................2 Tables Private Housing Activity..................................................................3 Michigan Survey of Consumer Attitudes ........................................5 Orders and Shipments of Nondefense Capital Goods......................6 Charts Private Housing Starts and Permits..................................................3 Indicators of Single-Family Housing...............................................4 The Domestic Financial Economy .............................................................. 2 Tables Selected Financial Market Quotations .............................................7 Commercial Bank Credit .................................................................8

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Supplemental Notes The Domestic Nonfinancial Economy Sales and Prices of New Homes Sales of new homes rose 4¾ percent in September to an annual rate of 770,000 units, but from an August figure that was revised down nearly 8 percent to an annual rate of 735,000 units. In addition, sales in June and July were both marked down to annual rates of about 800,000 units. These sales figures were generally in line with our expectations, given that initial estimates of new home sales have been revised down systematically over the past two years.1 As for prices, the incoming data provide solid evidence to support anecdotal reports that builders are now resorting to aggressive price cuts to entice reluctant buyers. The inventory of new homes for sale edged down for the seventh consecutive month in September and is now about 9 percent below the all-time high reached in July of last year. Even so, these inventories still amounted to 8¼ months’ supply at September’s sales pace—up from about 6½ months late in 2006 and about twice what we view as the builders’ desired target. The constant-quality price index for new homes was down ¾ percent relative to its level four quarters earlier. This was the first outright four-quarter decline in this index since 1992 and only the fifth such decline since 1964. Average new-home prices—which are not quality adjusted—were down 2¾ percent in September relative to twelve months earlier, their third-consecutive twelve-month decline. Consumer Sentiment After having been unchanged in September, the Reuters/University of Michigan index of consumer sentiment fell to 80.9 in October. The decrease was slightly larger than had been reported in the preliminary estimate released in the middle of the month, implying that sentiment fell a bit further in the second half of the month. Since July, the level of sentiment has fallen below what would seem to be consistent with the news on inflation, the labor market and, until recently, the stock market; the decline may well reflect households’ continued concerns regarding financial turmoil and unfavorable

1

Since the beginning of 2006, the Census has revised down its initial estimates of new home sales by an average of about 6 percent.

1

developments in housing markets. The “expected conditions” component of the overall index decreased significantly between September and October while the “current conditions” component was unchanged. Nonetheless, both indexes are down noticeably from their mid-year highs. Among those items not included in the overall sentiment index, consumers’ expectations about the change in unemployment over the next twelve months worsened a little in October. Consumers’ appraisals of buying conditions for cars also softened, as respondents reported less favorable pricing and credit conditions. However, consumers’ appraisals of buying conditions for houses strengthened in October, largely because of an increase in number of households noting that prices were low. Among households, the median of expected inflation over the next twelve months remained unchanged at 3.1 percent in October, and the median of expected inflation over the next five to ten years ticked down to 2.8 percent, the lowest level in two years. Orders and Shipments of Durable Goods Shipments of nondefense capital goods excluding aircraft rose 1.0 percent in September, on the heels of an upward-revised increase of 1.8 percent in August; new orders were up 0.4 percent. Within the high-tech category, orders and shipments of computers and peripherals posted a robust gain in September and were revised up significantly in August. Orders and shipments of communications equipment also rose in September. Outside of the high-tech sector, shipments increased at a solid rate last month on top of upward revisions to August, while orders were flat. The three-month moving average of the staff’s constructed series on real adjusted durable goods orders increased in September for the sixth month in a row. This series—which strips out nondefense aircraft, defense capital goods, and industries for which reported orders actually equal shipments—is an indicator of near-term industrial production.

The Domestic Financial Economy

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Private Housing Activity (Millions of units, seasonally adjusted; annual rate except as noted) 2007 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

Q1

Q2

Q3

July

Aug.

Sept.

1.80 1.84

1.46 1.56

1.46 1.46

1.30 1.32

1.37 1.39

1.33 1.32

1.19 1.26

1.47 1.38 1.41 .133

1.17 1.12 1.14 .132

1.17 1.05 1.07 .116

1.00 .94 .97 .112

1.06 1.01 1.03 .115

.98 .93 .96 .115

.96 .88 .92 .112

1.05 6.36

.85 7.64

.86 7.65

.77 8.30

.80 8.08

.74 8.67

.77 8.15

5.68 6.35

5.63 7.12

5.15 8.34

4.72 9.26

5.00 8.75

4.79 8.95

4.38 10.07

.336 .461 .062

.288 .440 .076

.298 .411 .081

.296 .384 .076

.313 .381 .081

.347 .388 .077

.228 .384 .076

.117

.094

.099

.099

.097

.801

.790

.767

.750

.690

n.a. .700

n.a. .660

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

Millions of units

1.0

2.0

.9

1.8 Single-family starts (right scale)

.8

1.6

.7

1.4

.6

1.2 Single-family adjusted permits (right scale)

.5

Sept.

.4

.8

.3

.6 Multifamily starts (left scale)

Sept.

.2 .1 .0

1.0

.4 .2

1999

2000

2001

2002

2003

2004

2005

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

3

2006

2007

.0

Indicators of Single-Family Housing

Homebuying Indicators Thousands of units

Thousands of units 1500 1400

Existing home sales (right scale) New home sales (left scale)

7500

Index 150

7000

140

1300

6500

1200

6000

1100

5500

1000

5000

900

4500

800

4000

700

3500

Content partially redacted.

Home Sales

130 120 110 100 90

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

Source. For pending home sales, National Association of Realtors.

Content partially redacted.

New Home Sales Months' Supply

Mortgage Rates Months

Percent

9

9 30-year jumbo FRM 30-year conforming FRM 1-year conforming ARM

8

7 Months' supply (right scale)

6

8 7

5 6

4 3

5

2 4 3 Note. . Months' supply is calculated using the 3-month moving average of sales. Source. ; for months' supply, Census Bureau.

Note. The Oct. readings are for data through Oct. 24, 2007. Source. Conforming rates are from Freddie Mac. The jumbo rate is the sum of the 30-year conforming FRM rate and the jumbo conforming spread from bankrate.com.

Prices of Existing Homes

Prices of New Homes Percent change from year earlier

Percent change from year earlier Repeat transactions, purchase-only index Average price of homes sold Case-S hiller price index

25

30 Constant quality index Average price of homes sold

25 20

20 15

15 10 10

5 5 0

0

-5

-5 ~uu~~uu~~~uu~~uu~~~uu~~-10

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

Note. The Case-Shiller price index is the 10-city index. Source. For repeat transactions, OFHEO; for average price, National Association of Realtors; for Case-S hiller, Chicago Mercantile Exchange.

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October 26, 2007

Reuters/University of Michigan Survey of Consumers Indexes of consumer sentiment (Not seasonally adjusted) 2007 Category Composite of current and expected conditions1 Current conditions1 Expected conditions1 Personal financial situation Now compared with 12 months ago2 Expected in 12 months2

Mar.

Apr.

May

June

July

Aug.

Sept. Oct.P

Oct.F

88.4 103.5 78.7

87.1 88.3 104.6 105.1 75.9 77.6

85.3 101.9 74.7

90.4 104.5 81.5

83.4 98.4 73.7

83.4 97.9 74.1

82.0 98.2 71.6

80.9 97.6 70.1

111 126

119 127

113 125

110 117

115 125

103 120

109 119

111 116

111 119

95 94

87 90

97 89

94 88

105 96

87 88

82 96

84 86

78 84

Appraisal of buying conditions Cars Large household appliances2 Houses

138 157 137

132 152 138

124 160 135

118 154 131

125 156 129

133 152 118

139 144 123

133 143 134

128 142 131

Expected unemployment change - next 12 months

123

129

120

125

123

131

127

133

130

Prob. household will lose a job - next 5 years

22

18

19

23

21

24

21

21

21

Expected inflation - next 12 months Mean Median

3.6 3.0

4.0 3.3

4.3 3.3

4.2 3.4

4.2 3.4

4.0 3.2

4.0 3.1

3.5 3.0

3.7 3.1

Expected inflation - next 5 to 10 years Mean Median

3.3 2.9

3.6 3.1

3.7 3.1

3.3 2.9

3.6 3.1

3.4 2.9

3.4 2.9

3.0 2.8

3.1 2.8

Expected business conditions Next 12 months2 Next 5 years2

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. P Preliminary. F Final. 1. Feb. 1966 = 100. 2. Indicates the question is one of the five equally-weighted components of the index of sentiment. Expected inflation Consumer sentiment 1966 = 100 130

1985 = 100 180 160

Percent 5

5

120 4 Reuters/Michigan (right scale)

140

4

Median, 5 to 10 years ahead

110

120

3

100

100

Sep.

90

80

Oct.

80

3 Oct.

2

2 Median, 12 months ahead

1 60 40

Conference Board (left scale) 2000

2002

2004

1

70

2006

2008

60

0

5

2000

2002

2004

2006

2008

0

Orders and Shipments of Nondefense Capital Goods (Percent change; seasonally adjusted current dollars) 2007 Category

Q2

Q3

July

Annual rate

Aug.

Sept.

Monthly rate

Shipments Excluding aircraft Computers and peripherals Communications equipment All other categories

9.7 9.6 11.9 12.6 9.0

8.3 5.0 -23.7 16.3 7.4

1.0 .0 -15.1 1.0 1.5

1.6 1.8 16.2 2.4 .5

.2 1.0 2.2 1.0 .9

Orders Excluding aircraft Computers and peripherals Communications equipment All other categories

34.2 13.0 7.5 64.2 9.6

-2.7 1.4 -7.3 8.2 1.7

4.8 .9 -12.1 7.6 1.7

-12.2 -.1 14.4 -3.0 -1.2

4.4 .4 1.1 3.2 .0

Memo: Shipments of complete aircraft1

40.2

n.a.

42.5

51.3

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

58

20 17 14

11

11

8

8

52

2

190

42

42

37

37

5

2000 2002 2004 2006 2000 2002 2004 2006 2008 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.

2000 = 100

2

32

Billions of chained (2000) dollars

22

15

130

13

110

11

90

9

2004 2004

2006 2006

1040 900

17

150

2002 2002

1240

19 Sept.

2000 2000

2000 2002 2004 2006 2000 2002 2004 2006 2008 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

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

170

70

47 Sept.

Computers and Peripherals 220

58 52

47

Sept. 5

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

2008 2008

7

6

1240 1040 900

760

760

620

620

480

480

340

Sept. 340

200

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.

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

2000 2002 2004 2006 Note. Annual rate, FRB seasonals. Source. For sales, Ward’s Communications; for orders, ACT Research.

2008

200

III-T-1

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

2006

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

2007

Instrument June 28

June 29

Sept. 17

Oct. 25

2004 June 28

2006 June 29

2007 Sept. 17

1.00

5.25

5.25

4.75

3.75

-.50

-.50

1.36 1.74

4.88 5.06

4.05 4.15

3.84 3.88

2.48 2.14

-1.04 -1.18

-.21 -.27

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

1.28 1.45

5.27 5.37

5.23 5.25

4.71 4.74

3.43 3.29

-.56 -.63

-.52 -.51

Large negotiable CDs1 3-month 6-month

1.53 1.82

5.47 5.59

5.52 5.36

4.85 4.74

3.32 2.92

-.62 -.85

-.67 -.62

Eurodollar deposits3 1-month 3-month

1.29 1.51

5.33 5.49

5.55 5.60

4.81 5.00

3.52 3.49

-.52 -.49

-.74 -.60

Bank prime rate

4.00

8.25

8.25

7.75

3.75

-.50

-.50

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

4.12 4.18 4.58

3.77 3.97 4.48

.89 .00 -.42

-1.49 -1.18 -.80

-.35 -.21 -.10

U.S. Treasury indexed notes5 5-year 10-year

1.60 2.26

2.51 2.61

2.04 2.15

1.77 2.03

.17 -.23

-.74 -.58

-.27 -.12

Municipal general obligations (Bond Buyer)6

5.01

4.71

4.46

4.33

-.68

-.38

-.13

Private instruments 10-year swap 10-year FNMA7 10-year AA8 10-year BBB8 10-year high yield8

5.21 5.38 5.60 6.25 8.41

5.81 5.59 6.20 6.74 8.74

5.17 5.01 6.05 6.46 8.95

4.98 4.88 5.86 6.23 8.68

-.23 -.50 .26 -.02 .27

-.83 -.71 -.34 -.51 -.06

-.19 -.13 -.19 -.23 -.27

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

6.21 4.19

6.78 5.82

6.34 5.65

6.33 5.66

.12 1.47

-.45 -.16

-.01 .01

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

Record high

2006

Change to Oct. 25 from selected dates (percent)

2007

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

Level

Date

June 29

Sept. 17

Oct. 25

Record high

2006 June 29

2007 Sept. 17

14,165 1,565 5,049 856 15,807

10-9-07 10-9-07 3-10-00 7-13-07 10-9-07

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

13,403 1,477 2,582 776 14,839

13,672 1,514 2,751 806 15,311

-3.48 -3.24 -45.51 -5.80 -3.14

22.17 18.98 26.51 12.85 19.19

2.00 2.56 6.55 3.91 3.18

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. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect. 6. Most recent Thursday quote. 7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 8. 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. September 17, 2007, is the day before the most recent FOMC announcement.

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_______________________________________________________________________

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

Total

Level1 Oct. 2007p

2005

2006

H1 2007

Q3 2007

Aug. 2007

Sept. 2007

Oct. 2007p

10.5

9.7

9.2

12.1

17.0

16.1

6.7

8,646

Loans2 Total To businesses Commercial and industrial Commercial real estate

11.6

11.0

9.8

12.2

19.7

18.2

7.0

6,519

13.5 17.1

16.4 13.9

9.6 11.3

24.0 7.7

31.5 8.1

44.3 8.2

38.3 1.2

1,379 1,554

To households Residential real estate Revolving home equity Other Consumer Originated3 Other4

11.9 13.3 11.4 3.1 .7 8.3

7.0 1.4 9.2 5.9 6.9 12.2

8.4 1.8 10.7 6.3 5.1 13.4

5.6 6.4 5.3 10.5 10.2 18.8

1.7 9.2 -.8 3.9 9.0 74.5

8.5 11.2 7.6 11.6 9.3 23.1

-.5 11.8 -4.6 -4.3 .4 -3.4

1,856 471 1,385 779 1,176 951

7.5 2.4 17.5

5.9 2.0 12.6

7.6 -4.5 26.2

12.0 4.6 21.8

8.8 -.2 20.8

9.7 -21.2 49.6

5.8 -40.7 62.6

2,127 1,125 1,002

Securities Total Treasury and agency Other5

Note. Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data have been adjusted to remove the effects of mark-to-market accounting rules (FIN 39 and FAS 115), the consolidation of certain variable interest entities (FIN 46), the adoption of fair value accounting (FAS 159), and the effects of sizable thrift-to-bank and bank-to-thrift structure activity in October 2006, March 2007, and October 2007. Data also account for breaks caused by reclassifications. 1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels. 2. Excludes interbank loans. 3. Includes an estimate of outstanding loans securitized by commercial banks. 4. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables. 5. 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. p Preliminary.

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