Academic journal article Federal Reserve Bulletin

Record of Policy Actions of the Federal Open Market Committee

Academic journal article Federal Reserve Bulletin

Record of Policy Actions of the Federal Open Market Committee

Article excerpt

Record of Policy Actions of the Federal Open Market Committee

Domestic Policy Directive

The information reviewed at this meeting suggested that, apart from the direct effects of the drought, economic activity had continued to expand at a fairly vigorous pace. The latest information on prices indicated little change in the rate of inflation from recent trends, while labor costs had continued to accelerate.

After strong gains in the fourth quarter, total nonfarm payroll employment rose sharply in January. Although some of the strength may have reflected such temporary factors as unusually mild winter weather, job gains were widespread; in manufacturing, sizable increases were registered in nonelectrical machinery, transportation equipment, and food processing. The civilian unemployment rate, at 5.4 percent, remained in the lower part of the range that had prevailed since the early spring of last year.

Industrial production rose appreciably further in December and January, with gains continuing at about the robust pace experienced in 1988 as a whole. Output of consumer goods advanced strongly, despite a somewhat slower pace of automobile assemblies over the two months, and production of business equipment picked up a bit. Total industrial capacity utilization moved higher, owing to a sizable jump in the utilization of manufacturing capacity to the highest level since 1979. Housing starts declined somewhat in December but were up substantially on balance for the fourth quarter as a whole, largely because of a strengthening in single-family construction. Multifamily starts have remained relatively flat in recent months.

Consumer spending was up considerably in the fourth quarter, capping a strong year. Spending on household durables rose vigorously in the quarter; and outlays for services again advanced at a rapid pace, reflecting big increases in expenditures for medical care, airline travel, and recreation. Consumption of nondurables advanced further, after a steep rise the previous quarter, while purchases of motor vehicles were little changed over the quarter as a whole.

Indicators of business capital spending suggested some weakening in recent months from the rapid increases evident earlier in 1988. Real outlays for business fixed investment were estimated to have fallen somewhat in the fourth quarter. Softness was fairly widespread among various types of equipment, but the most pronounced weakness was in office and computing equipment. Nonresidential construction activity picked up in December but was estimated to have been about flat on balance for the quarter; oil drilling and expenditures on commercial buildings other than offices declined further. Inventory investment in the manufacturing sector in the fourth quarter was little changed from the third-quarter pace, with much of the accumulation continuing to occur in durable goods industries where demand had been strong. At the retail level, increases in nonautomobile inventories generally kept pace with the growth in sales.

Excluding food and energy, producer prices of finished goods rose sharply in December, the rise reflecting large increases for tobacco products, women's apparel, and passenger cars. Prices for intermediate materials again increased substantially in November and December. The most notable hikes occurred in industries such as metals, chemicals, and paper products in which capacity utilization has been high. Consumer prices, reflecting more favorable developments in the food, energy, and apparel components, rose at a somewhat slower pace in November and December. Excluding food and energy, consumer prices rose in the fourth quarter at about the rate observed over 1988 as a whole. Reflecting tighter market conditions, wages and salaries, and labor costs more generally, advanced at a faster pace in the fourth quarter than was observed a year earlier.

The nominal U. …

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