NationalEconomicTrends October 2002 Commercial Paper: A Colossal Market The nightly financial market news wrap-up tells investors where major stock market indices and bench- mark government bonds stand. The financial news, how- ever, rarely touches on private-issue money markets— the commercial paper market in particular—despite the important role they play in the healthy functioning of the economy. Commercial paper is unsecured short-term corporate debt, and I make a couple of points here about the commercial paper market to highlight its importance. First, I examine the relative contribution of commer- cial paper outstanding to the total market value of firms, which includes the values of their debt and equity. At the end of 2000, the total equity value of domestic com- panies listed on the New York Stock Exchange was $11.5 trillion with corresponding equity values for NASDAQ, Tokyo, and London of $3.6 trillion, $3.2 trillion, and $2.6 trillion, respectively. At the same time, there was $1.615 trillion of commercial paper outstanding. During 2000, the New York Stock Exchange experienced record trading volume with an average of $43.9 billion per day. By comparison, using the historical weighted average of time to maturity for the commercial paper market (about 42 days), the average daily turnover in commercial paper is $38.5 billion. So, using size and volume, we see the contribution of the commercial paper market to the value of firms and the transfer of that value. Second, size alone does not convey how important the commercial paper market is to business activity. Commercial paper—with common terms to maturity of 7, 15, 30, 60, and 90 days—is a vital source of funding for day-to-day business operations. The purpose of this short-term corporate debt is to fund working capital (accounts receivable and inventory) so that businesses can provide the goods and services desired by consumers. One example of the link between business activity and the commercial paper market is the relationship between non-financial commercial paper outstanding and total business inventory. From January 1998 through January 2001 there was a roughly $150 billion increase in inven- tories accompanied by a roughly $150 billion increase in non-financial commercial paper outstanding; from January 2001 through June 2002 there was a decrease in inventory of about $100 billion and a similar decrease in commercial paper outstanding. The correlation in monthly changes in inventory and outstanding commercial paper is 0.49, which suggests a strong positive relationship between inventory and outstanding commercial paper. This relationship exists because the commercial paper market provides important funds that allow businesses to manage inventories and to adjust to unanticipated changes in inventories. The flexibility provided by the commercial paper market allows businesses to react adeptly to economic trends, which enhances their cash flows and, ultimately, their profitability. —Drew B. Winters Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org Total Business Inventory Non-Financial Commercial Paper Inventory ($US millions) Commercial Paper ($US millions) 1,250,000 1,200,000 1,150,000 1,100,000 1,050,000 1,000,000 950,000 400,000 350,000 300,000 250,000 200,000 100,000 150,000 50,000 0 Jan-98 Jul-98 Jan-99 Jul-99 Jul-02 Jan-02 Jul-01 Jan-01 Jul-00 Jan-00
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NationalEconomicTrendsOctober 2002
Commercial Paper:A Colossal Market
The nightly financial market news wrap-up tellsinvestors where major stock market indices and bench-mark government bonds stand. The financial news, how-ever, rarely touches on private-issue money markets—the commercial paper market in particular—despite theimportant role they play in the healthy functioning ofthe economy. Commercial paper is unsecured short-termcorporate debt, and I make a couple of points here aboutthe commercial paper market to highlight its importance.
First, I examine the relative contribution of commer-cial paper outstanding to the total market value of firms,which includes the values of their debt and equity. Atthe end of 2000, the total equity value of domestic com-panies listed on the New York Stock Exchange was $11.5trillion with corresponding equity values for NASDAQ,Tokyo, and London of $3.6 trillion, $3.2 trillion, and$2.6 trillion, respectively. At the same time, there was$1.615 trillion of commercial paper outstanding. During2000, the New York Stock Exchange experienced recordtrading volume with an average of $43.9 billion per day.By comparison, using the historical weighted average oftime to maturity for the commercial paper market (about42 days), the average daily turnover in commercial paperis $38.5 billion. So, using size and volume, we see thecontribution of the commercial paper market to the valueof firms and the transfer of that value.
Second, size alone does not convey how importantthe commercial paper market is to business activity.Commercial paper—with common terms to maturity of7, 15, 30, 60, and 90 days—is a vital source of fundingfor day-to-day business operations. The purpose of thisshort-term corporate debt is to fund working capital(accounts receivable and inventory) so that businesses canprovide the goods and services desired by consumers.
One example of the link between business activity andthe commercial paper market is the relationship betweennon-financial commercial paper outstanding and totalbusiness inventory. From January 1998 through January2001 there was a roughly $150 billion increase in inven-tories accompanied by a roughly $150 billion increasein non-financial commercial paper outstanding; fromJanuary 2001 through June 2002 there was a decrease ininventory of about $100 billion and a similar decrease incommercial paper outstanding. The correlation in monthlychanges in inventory and outstanding commercial paperis 0.49, which suggests a strong positive relationshipbetween inventory and outstanding commercial paper.This relationship exists because the commercial papermarket provides important funds that allow businessesto manage inventories and to adjust to unanticipatedchanges in inventories. The flexibility provided by thecommercial paper market allows businesses to reactadeptly to economic trends, which enhances their cashflows and, ultimately, their profitability.
—Drew B. Winters
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
research.stlouisfed.org
Total Business Inventory Non-Financial Commercial Paper
Inventory ($US millions) Commercial Paper ($US millions)
1,250,000
1,200,000
1,150,000
1,100,000
1,050,000
1,000,000
950,000
400,000
350,000
300,000
250,000
200,000
100,000
150,000
50,000
0
Jan-9
8Ju
l-98
Jan-9
9
Jul-9
9Ju
l-02
Jan-0
2
Jul-0
1
Jan-0
1
Jul-0
0
Jan-0
0
TableofContentsPage
3 Economy at a glance
4 Output and growth
7 Interest rates
8 Inflation and prices
10 Labor markets
12 Consumer spending
14 Investment spending
16 Government revenues, spending, and debt
18 International trade
20 Productivity and profits
22 Quick reference tables
27 Notes and sources
Conventions used in this publication:1. Shaded areas indicate recessions, as determined by the National Bureau of Economic Research.
2. Percent change refers to simple percent changes. Percent change from year ago refers to the percent change from the same month or quarter during the previous year. Compounded annual rate of change shows what the growth rate would be over an entire year if the same simple percent change continued for four quarters or twelve months. The compounded annual rate of change of xbetween the previous quarter t –1 and the current quarter t is:
For monthly data replace 4 with 12.
3. All data with significant seasonal patterns are adjusted accordingly, unless labeled NSA.
National Economic Trends is published monthly by the Research Division of the Federal Reserve Bank of St. Louis. Single-copy subscriptions are available free of charge by writingto the Public Affairs Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442 or by calling (314) 444-8809. Subscription forms may also be completedonline at www.stls.frb.org/research/order/pubform.html. For more information on data in this publication, please visit www.stls.frb.org/fred or call (314) 444-8573. The entirepublication is also available on the Internet at www.stls.frb.org/publications/net.
NotesPages 4, 5: Final sales is gross domestic product (GDP) minus changein private inventories. Advance, preliminary, and final GDP growthrates are released during the first, second, and third months of thefollowing quarter. Changes result from incorporation of more completeinformation. Real GDP is measured in 1996 dollars. The ISM (formerlyPurchasing Managers’) index is a weighted average of diffusion in-dexes for new orders, production, supplier deliveries, inventories, andemployment. Aggregate and average weekly hours are paid hours ofproduction and nonsupervisory employees. The inventory-sales ratiouses nominal (current-dollar) inventory and sales data.
Page 6: For information on how to calculate the contribution of acomponent to the overall GDP growth rate, see the October 1999 issueof the Survey of Current Business, p. 16. The sign is changed for im-ports.
Page 7: Ten-year Treasury yields are adjusted to constant maturity;three-month yields are secondary market averages. All rates used in theyield curves are adjusted to constant maturity. The 30-year constantmaturity series was discontinued by the Treasury Department as of Feb.18, 2002. Standard & Poor’s 500 Index with Reinvested Dividendsshows the total return: capital gains plus dividends.
Pages 8, 9: Oil (West Texas intermediate) and Natural Gas (HenryHub) spot and futures prices are listed in the Wall Street Journal. Spotprices are monthly averages of daily prices; futures prices are usuallytaken from the last trading day of the month. Consumer price index isfor all urban consumers. The consumption chain price index is theindex associated with the personal consumption expenditures compo-nent of GDP. The Employment Cost Index (ECI) covers private non-farm employers. ECI compensation refers to a fixed sample of jobs,while compensation per hour covers all workers in the nonfarm busi-ness sector in a given quarter. In both cases, compensation is wagesand salaries plus benefits.
Pages 10, 11: Nonfarm payroll employment is counted in a survey ofabout 390,000 establishments (Current Employment Survey). It ex-cludes self-employed individuals and workers in private households,but double-counts individuals with more than one job. The householdsurvey (Current Population Survey) of about 50,000 households pro-vides estimates of civilian employment, unemployment rate, labor forceparticipation rate, and employment-population ratio. Population iscivilian, noninstitutional, 16 years and over. The 90 percent confidenceintervals for the unemployment rate (± 0.2 percentage points) andchange in household survey employment (± 376,000) measure uncer-tainty due to sample size. The available labor supply is the sum of theunemployed and those persons not in the labor force but who want towork now. Because the household survey was changed in January1994, data prior to this date are not strictly comparable.
Page 13: The Michigan consumer sentiment index shows changes ina summary measure of consumers’ answers to five questions about theircurrent and expected financial situation, expectations about futureeconomic conditions, and attitudes about making large purchases. Thesurvey is based on a representative sample of U.S. households.
Pages 14, 15: Overall gross saving includes government saving, whichis the sum of the government surplus and capital consumption (seenotes for pp. 16-17). Net foreign investment (NFI) is U.S. investmentabroad minus foreign investment in the U.S. Aside from a statisticaldiscrepancy, NFI also equals the difference between gross domesticinvestment and saving. The comprehensive revision introduced theequipment & software component of business investment.
Pages 16, 17: Government consumption and investment is currentexpenditures on goods and services, including capital consumption(depreciation) and gross investment, as reported in the NIPAs. Theunified federal budget surplus/deficit differs from NIPA basis infour main ways: (1) NIPA excludes transactions involving existingassets; (2) NIPA outlays exclude government investment and includeconsumption of government capital, while unified budget outlays do
the reverse; (3) NIPA accounts exclude Puerto Rico and U.S. territories;and (4) various timing issues are handled differently. Outlays andreceipts are from the NIPAs, except as noted. Since 1977, the federalfiscal year starts on October 1. Excluded agency debt was 0.6 percentof federal debt at the end of fiscal 1997. Federal debt held by thepublic includes holdings of the Federal Reserve System and excludesholdings of the social security and other federal trust funds. Federalgrants in aid to state and local governments appear in both state andlocal receipts and federal outlays.
Pages 18, 19: The trade balance (shown on a balance of paymentsbasis) is the difference between exports and imports of goods (mer-chandise) and services. It is nearly identical in concept to the net ex-ports component of GDP, but differs slightly in accounting details. Theinvestment income balance equals income received from U.S.-ownedassets in other countries minus income paid on foreign-owned assets inthe U.S. The investment income balance is nearly identical in conceptto the difference between gross national product and gross domesticproduct, but differs in accounting details. The current account bal-ance is the trade balance plus the balance on investment income plusnet unilateral transfers to the U.S. from other countries.
Pages 20, 21: Output per hour (Y/H), unit labor cost (C/Y), andcompensation per hour (C/H) are indexes which approximately obeythe following relationship: %(Y/H) + %(C/Y) = %(C/H) with %()meaning percent changes. Unit labor cost is shown on page 9. Realcompensation per hour uses the CPI to adjust for the effects of infla-tion. Nonfarm business accounted for about 76 percent of the value ofGDP in 1996, while nonfinancial corporations accounted for about 54percent. Inventory valuation adjustments (IVA) remove the effect ofchanges in the value of existing inventories from corporate profits andproprietors’ income. (This change in value does not correspond tocurrent production and therefore is not part of GDP). Capital con-sumption adjustments (CCAdj) increase profits and proprietors’income by the difference between estimates of economic depreciationand depreciation allowed by the tax code. Components of nationalincome not shown are rental income of persons and net interest.
NOTE: Measures of retail sales (pp. 12-13), manufacturers’ orders,shipments and inventories (p. 15), and the total business inventory-to-sales ratio (p. 5) are based on the North American Industry Classifica-tion System (NAICS). Before January 1992, data are on the old Stan-dard Industrial Classification (SIC) system. For more information, seehttp://www.census.gov/epcd/www/naics.html.
SourcesBureau of Economic Analysis (BEA), U.S. Dept. of Commerce
National income and product accounts, international trade and in-vestment data (except by country), auto and light truck sales
Census Bureau, U.S. Dept. of CommerceInventory-sales ratios, retail sales, capital goods orders, housingstarts, exports and imports by country
Bureau of Labor Statistics (BLS), U.S. Dept. of LaborAll employment-related data, employment cost index, consumer andproducer price indexes, unit labor cost, output per hour, compensa-tion per hour, multifactor productivity
United States Department of TreasuryUnified budget receipts, outlays, deficit, debt
Federal Reserve BoardIndex of industrial production, treasury yields, exchange rates, capac-ity utilization, household debt
The Survey Research Center, The University of MichiganConsumer sentiment index
The Conference BoardHelp-wanted advertising index
Organization for Economic Cooperation and Development (OECD)GDP for major trading partners (not available on FRED)