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Economic Trends
April 2008
(Covering March 13, 2008, to April 10, 2008)

In This Issue
Inﬂation and Prices
February Price Statistics
Money, Financial Markets, and Monetary Policy
What is the Yield Curve Telling Us?
Down Another Seventy-Five
International Markets
Should the Fed Prop Up the Buck?
Economic Activity
Does the Recent Trend in Labor Demand Presage Recession?
Real GDP: Fourth-Quarter 2007 Final Estimate
Recession: Are We or Aren’t We?
The Employment Situation
Regional Activity
Fourth District Employment Conditions

Inﬂation and Prices

February Price Statistics
03.25.08
Michael F. Bryan and Brent Meyer

February Price Statistics
Percent change, last
1 mo.a 3 mo.a 6 mo.a 12 mo.

2007
avg.

5 yr.a

Consumer Price Index
All items

0.3

3.1

4.7

4.0

2.9

4.2

Less food and energy

0.5

2.3

2.5

2.3

2.1

2.4

Medianb

1.4

3.0

3.2

3.0

2.6

3.1

16% trimmed meanb

1.0

2.7

3.0

2.8

2.4

2.8

Producer Price Index
Finished goods

4.2

4.0

9.6

6.4

3.9

7.0

Less food and energy

6.8

4.8

3.2

2.4

1.9

2.1

a. Annualized.

b. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor, Bureau of Labor Statistics; and Federal Reserve
Bank of Cleveland.

CPI, Core CPI, and Trimmed-Mean CPI
Measures
12-month percent change
4.75
4.50
4.25
4.00
3.75
CPI
3.50
Median CPI a
3.25
3.00
2.75
2.50
2.25
2.00
1.75
16% trimmed1.50
C ore C P I
mean C P I a
1.25
1.00
1998
2000
2002
2004
2006

The Consumer Price Index (CPI) was virtually
unchanged from January, rising only 0.3 percent at
an annualized rate in February. This moderation—
from increases of 4.8 percent in January and 4.4
percent in December—resulted from a modest increase in food prices, which was oﬀset by a
decrease in energy prices, and a slowdown in price
appreciation among all items less food and energy.
The CPI excluding food and energy (core CPI)
was ﬂat, rising only 0.5 percent (at an annualized
rate) during the month, compared to a 3.8 percent jump in January. The Median and 16 Percent
Trimmed-Mean CPI measures rose 1.4 percent and
1.0 percent, respectively, in February. This stands in
stark contrast to last month, when both measures
of underlying inﬂation rose in excess of 4 percent.
Producer prices remained elevated in February, as
the Producer Price Index (PPI) for ﬁnished goods
rose 4.2 percent and the PPI excluding food and
energy surged 6.8 percent, outpacing all of its
longer-term trends.
The 12-month growth rate in the CPI was 4.0 percent in February, down 0.3 percentage point from
a month ago. The core CPI and trimmed-mean
measures ticked down as well and are now ranging
between 2.3 percent and 2.8 percent.

2008

a. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor, Bureau of Labor Statistics, and Federal Reserve
Bank of Cleveland.

Over the past three months, nearly 55 percent of
the components of the CPI rose in excess of 3.0
percent, compared to only 32 percent in February.
Some relatively large components, such as lodging
away from home and motor fuel prices, decreased
during the month, after posting strong increases
over the last quarter. However, components with
strong responsiveness to commodity prices—like
jewelry and watches—continued to show large
price increases.
Core services prices rose just 1.0 percent in February, their smallest increase since May 2005. As a
consequence, the 12-month growth rate in core
services prices ticked down to 3.2 percent from

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

3.4 percent in January. Core goods prices fell 0.9
percent during the month and have remained unchanged over the past 12 months.

CPI Component Price Change Distributions
Weighted Frequency
45
February 2008
40
Average over past three months
35

According to the March preliminary Survey of
Consumers (University of Michigan) near-term
(one-year ahead) household inﬂation expectations
jumped up from 3.9 percent in February to 4.6
percent. Expectations over the longer-term (5 to 10
years), however, actually ticked down to 3.3 percent.

30
25
20
15
10
5
0
<0

0 to 1
1 to 2
2 to 3
3 to 4
4 to 5
Annualized monthly percent change

Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Core CPI Goods and Core CPI Services

Household Inflation Expectations*

12-month percent change
8.0
One-month annualized
7.0
perc ent c hange
6.0
C ore s ervic es
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
C ore goods
-4.0
-5.0
One-month annualized perc ent c hange
-6.0
1998
2000
2002
2004
2006
2008

12-month percent change

Source: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

6.0
5.5
5.0
4.5

One year ahead

4.0
3.5
3.0

F ive to 10 years ahead

2.5
2.0
1.5
1.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
*Mean expected change as measured by the University of Michigan’s Survey of
Consumers.
Sources: University of Michigan.

Financial Markets, Money, and Monetary Policy

What Is the Yield Curve Telling Us?
03.20.08
Joseph G. Haubrich and Katie Corcoran

Yield Spread versus Real GDP Growth
Percent
12
10

R eal G DP
growth
(year-to year
percent change)

8
6
4
2
0

10-year minus three-month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

Note: Shaded bars represent recessions.
Sources: Bureau of Economic Analysis; Federal Reserve Board.

Yield Spread versus One-Year-Lagged
Real GDP Growth
Percent
12
10

One year lagged real G DP growth
(year-to-year perc ent c hange)

8
6
4
2
0
10-year minus three-month
yield s pread

-2
-4
1953

1963

1973

1983

1993

2003

Sources: Bureau of Economic Analysis; Federal Reserve Board.

Since last month, the yield curve has gotten steeper,
with long-term interest rates rising and short-term
interest rates falling. One reason for noting this
is that the slope of the yield curve has achieved
some notoriety as a simple forecaster of economic
growth. The rule of thumb is that an inverted yield
curve (short rates above long rates) indicates a
recession in about a year, and yield curve inversions
have preceded each of the last six recessions (as deﬁned by the NBER). Very ﬂat yield curves preceded
the previous two, and there have been two notable
false positives: an inversion in late 1966 and a very
ﬂat curve in late 1998. More generally, though, a
ﬂat curve indicates weak growth, and conversely, a
steep curve indicates strong growth. One measure
of slope, the spread between 10-year bonds and
3-month Treasury bills, bears out this relation, particularly when real GDP growth is lagged a year to
line up growth with the spread that predicts it.
The yield curve has continued to get steeper, with
a slight drop in long rates overshadowed by the
plunge in short rates. The spread remains positive, with the 10-year rate moving down to 3.51
percent while the 3-month rate dropped all the way
to 1.37 percent (both for the week ending March
14). Standing at 214 basis points, the spread is
well above February’s 144 basis points, and January’s 127 basis points. Projecting forward using
past values of the spread and GDP growth suggests
that real GDP will grow at about a 2.7 percent rate
over the next year. This is on the high side of other
forecasts.
While such an approach predicts when growth is
above or below average, it does not do so well in
predicting the actual number, especially in the case
of recessions. Thus, it is sometimes preferable to
focus on using the yield curve to predict a discrete
event: whether or not the economy is in recession.
Looking at that relationship, the expected chance
of the economy being in a recession next March
stands at 2.7 percent, down from February’s 3.7

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Yield Spread versus Predicted GDP Growth
Percent
6
5

R eal G DP growth
(year-to-year perc ent c hange)

P redic ted
G DP growth

3
2
1
0
10-year minus three-month
yield spread

-1
-2
2002

2003

2004

2005

2006

2007

On the other hand, a year ago, the yield curve
was predicting a 46 percent chance that the US
economy would be in a recession in March 2008, a
number that seemed unreasonably high at the time.

Probability of Recession Based on
Yield Spread*

To compare the 2.7 percent probability of recession
to some other probabilities and learn more about
diﬀerent techniques of predicting recessions, head
on over to the Econbrowser blog.

Percent
100
90
P robability of
R ec es s ion

70
F orec as t

60
50
40
30
20
10
0
1960

1966

1972

1978

1984

1990

1996

This probability of recession is below several recent estimates, and perhaps seems strange the in
the midst of the recent ﬁnancial concerns, but one
aspect of those concerns has been a ﬂight to quality,
which lowers Treasury yields. Also related to those
concerns is the reduction of the federal funds target
rate and the discount rate by the Federal Reserve,
which tends to steepen the yield curve. Furthermore, the forecast is for where the economy will be
next March, not earlier in the year.

2008

Sources: Bureau of Economic Analysis; Federal Reserve Board.

percent, and from January’s already low 4.8 percent.

2002

*Estimated using probit model
Note: Shaded bars represent recessions.
Sources: Bureau of Economic Analysis; Federal Reserve Board; and author’s
calculations.

2008

Of course, it might not be advisable to take this
number quite so literally, for two reasons. First,
this probability is itself subject to error, as is the
case with all statistical estimates. Second, other
researchers have postulated that the underlying
determinants of the yield spread today are materially diﬀerent from the determinants that generated
yield spreads during prior decades. Diﬀerences
could arise from changes in international capital
ﬂows and inﬂation expectations, for example. The
bottom line is that yield curves contain important
information for business cycle analysis, but, like
other indicators, they should be interpreted with
caution.
For more detail on these and other issues related to
using the yield curve to predict recessions, see the
Commentary “Does the Yield Curve Signal Recession?”

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Financial Markets, Money, and Monetary Policy

Down Another Seventy-Five
03.25.08
Charles T. Carlstrom and Sarah Wakeﬁeld

Reserve Market Rates
Percent
8
7

Effective federal funds rate

6
5

Primary credit rate b

4
3
2

Discount rate b

Intended federal funds rate b

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
a. Weekly average of daily figures.
b. Daily observations.
Sources: Board of Governors of the Federal Reserve System, “Selected Interest
Rates,” Federal Reserve Statistical Releases, H.15.

Since September 2007, the FOMC has cut its
funds rate target 300 basis points. While the speed
of the cuts has certainly been dramatic, it is useful to recognize that the overall quantity cut is not
unprecedented. Just before the beginning of the
2001 recession, the FOMC began to cut rates and
by the end of six months, it had cut them 275 basis
points. From January 2001 to December 2001,
rates were cut a whopping 475 basis points.

Three-Month LIBOR Spread
Percent
2.50

On March 18, 2008, the Federal Open Market
Committee (FOMC) voted to lower its target for
the federal funds rate by 75 basis points to 2.25
percent. In supporting the move, the committee
noted that “Growth in consumer spending has
slowed and labor markets have softened. Financial
markets remain under considerable stress, and the
tightening of credit conditions and the deepening of the housing contraction are likely to weigh
on economic growth over the next few quarters.”
Despite these concerns, the committee noted that
“Inﬂation has been elevated, and some indicators of
inﬂation expectations have risen.” Concerns about
inﬂation were behind the two dissents recorded at
the meeting. Those dissenting, Richard W. Fisher
of Dallas and Charles I. Plosser of Philadelphia,
“preferred less aggressive action at this meeting.”

Asian crisis
Russian default

2.00

1.50

1.00

0.50

0.00
1997

1999

2001

2003

2005

2007

Note: Daily observations. LIBOR spread is the three-month LIBOR minus the
three-month Treasury bill.
Sources: Bloomberg Financial Services; and Financial Times.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

One indicator of the ﬁnancial pressure mentioned
in the committee’s statement is the spread between
the three-month LIBOR, the rate at which banks
lend to each other in the wholesale London money
market, and the rate on the on the comparable
90-day Treasury security, the rate at which the
U.S. government borrows. A look at this spread
shows that stress in ﬁnancial markets has been quite
elevated since July 2007. More alarming is that the
spread is higher now than it was during the Russian default crisis or the Asian crisis. To address
this stress, the Federal Reserve has not only cut the
funds rate, but it has also created two new lending
programs, the Term Auction Facility (TAF) and the
Term Security Lending Facility (TSLF).
6

Three-Month LIBOR Spread
Percent
2.50

First TAF Announcement

TSLF Announcement
Fed guarantees Bear
Stearns’ assets

2.00

FOMC Rate Cut

1.50

1.00

0.50

0.00
07/07

09/07

11/07

01/08

03/08

Note: Daily observations. LIBOR spread is the three-month LIBOR minus the
three-month Treasury bill.
Sources: Bloomberg Financial Services; and Financial Times.

Bond Spread
Percent
4.0
3.5
3.0

Moody’s AAA spread

2.5
2.0
1.5
1.0
0.5
0.0
1997

1999

2001

2003

2005

2007

Note: The spread is between yields on AAA-rated securities and 10-year Treasury
notes.
Source: Federal Reserve Board.

April Meeting Outcomes
Implied probability
1.0

FOMC statement; PPI (Feb)
Bear Stearns; Industrial Production (Feb)

0.9
0.8

Fed announces TSLF

0.7
0.6
1.50%

0.5
0.4
2.25%

0.3
0.1
0.0
2/21

2.00%

1.75%

0.2
2.75%
2/24

2.50%
2/27

3/01

3/04

3/07

3/10

3/13

3/16

Note: Probabilities are calculated using trading-day closing prices from options on
federal funds futures that trade on the Chicago Board of Trade.
Source: Chicago Board of Trade and Bloomberg Financial Services

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

The TAF was introduced in December to address
“elevated pressures in short-term funding markets.”
The TAF provides another means by which the
Federal Reserve can inject liquidity into the banking system. Historically, the Fed did this with loans
to ﬁnancial institutions, but concern had arisen
that such loans did not always adequately accommodate periods of ﬁnancial stress. One reason for
this shortcoming was thought to be ﬁnancial institutions’ possible reluctance to borrow through the
discount window for fear it would signal ﬁnancial
weakness. The TAF was instituted to overcome this
stigma eﬀect. In addition, it provides a 28-day loan
rather than the overnight loans that were typically
oﬀered at the discount window.
In its March 11 announcement, the Fed aﬃrmed
that the TSLF facility was instituted “to promote
liquidity in the ﬁnancing markets for Treasury and
other collateral and thus to foster the functioning
of ﬁnancial markets more generally.” It provides
increased liquidity by dealing directly with a group
of primary dealers (including some major nondepository investment banks, which do not have
direct access through the TAF). It also accepts a
wider range of assets as collateral than the TAF. In
particular, the program allows these institutions to
borrow Treasury securities backed by the pledge of
Aaa-rated mortgaged-backed securities. These securities, however, were already allowed as collateral
through the discount window. Like the TAF, the
TSLF also provides loans with 28-day terms.
Besides short-term ﬁnancial stresses, oﬃcials are
concerned that longer-term credit is becoming
harder to secure. The fear is that shorter-term
liquidity issues can become longer-term credit
problems. Should credit issues gain a hold, they
cannot be attacked through the short-term funding arrangements oﬀered by the Fed. Instead, broad
cuts in the funds rate, as well as clear communication about the rate’s future path, will be needed to
attack longer-term credit issues.
One measure of these longer-term credit problems
is the spread between yields on Aaa-rated securities,
the highest-quality corporate bond, and the comparable 10-year Treasury note. This measure of credit
risks is clearly elevated but does remain below its
7

April Meeting Probabilities (percent)
Date

1.50%

1.75%

2.00%

2.25%

2.50%

3/3/2008

19.15

10.40

38.01

22.18

10.26

3/4/2008

21.38

9.58

41.22

17.28

10.53

3/5/2008

16.35

6.00

36.43

27.72

13.49

3/6/2008

18.22

19.54

32.22

20.04

9.97

3/7/2008

25.99

23.17

27.28

13.98

9.59

3/10/2008

37.07

0.00

40.60

12.52

9.81

3/11/2008

12.71

8.11

31.80

35.23

12.15

3/12/2008

12.24

10.65

34.75

29.61

11.76

3/13/2008

27.36

0.00

37.42

25.74

9.48

3/14/2008

50.52

0.00

32.15

13.64

3.69

3/17/2008

87.36

0.00

3.11

8.33

1.20

3/18/2007

39.64

19.72

31.56

7.16

1.92

Note: Probabilities are calculated using trading-day closing prices from
options on federal funds futures that trade on the Chicago Board of
Trade.

Source: Chicago Borad of trade and Bloomberg Financial Services.

One-Year Overnight Index Swap
Percent
6.00

Fed announces TSLF
Federal Reserve guarantees
assets of Bear Stearns

5.00

levels during the 2001 recession. More alarming to
some is that since July, it has increased more than
125 basis points—a six-month movement beyond
anything witnessed in recent history.
While acknowledging the risks to inﬂation, the
committee indicated that these risks were outweighed by risks to the real economy by stating,
“However, downside risks to growth remain.” The
markets interpreted this statement as evidence that
more rate cuts are almost certain to occur. Over
90 percent of participants in the fed funds futures
market expect at least a 25 basis point cut at or
before the next scheduled meeting, April 29–30.
Nearly 60 percent of participants are betting on a
cut of at least 50 basis points.
While fed funds futures provide a sense of where
the funds rate is expected to head in the immediate future, the one-year Overnight Index Swap rate
(OIS) provides a measure of what the funds rate
is expected to average over the next year. A look at
this rate suggests that the funds rate will average 50
basis points lower than the current funds rate, and
thus that by next year, more than another 50 basis
points will be cut.

FOMC rate cut

4.00
3.00
2.00
1.00
0.00
7/2007

8/2007

10/2007

12/2007

2/2008

Note: Daily observations.
Source: Bloomberg Financial Services.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

International Markets

Should the Fed Prop Up the Buck?
04.09.08
by Owen F. Humpage and Michael Shenk
Congress mandates the Federal Reserve “to promote
eﬀectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Maintaining price stability over the long term is, of
course, absolutely indispensable for achieving the
other objectives. Recently, some observers have suggested that the Federal Reserve pay more attention
to the dollar, but adding an exchange-rate objective
to the existing menu could greatly complicate the
Fed’s ability to hit its key domestic objectives. A
lot depends on what the reasons behind the dollar’s
depreciation are.
If, for example, the Federal Reserve were supplying
more money than the public wanted to hold, the
dollar would depreciate and inﬂation in the United
States would start to rise. In such a situation, the
dollar might actually depreciate in response to the
excessive monetary policy even before goods prices
started to move. In this case, tightening monetary
policy to slow the dollar’s depreciation would be
consistent with price stability, but simply focusing
monetary policy on price stability and ignoring the
dollar would achieve the desired outcome. At best,
the Federal Reserve might keep an eye on the dollar,
along with the other data that it monitors, as an indicator of potential inﬂation pressures, but it would
not need to treat exchange rates as an objective.
If, however, the dollar were depreciating because
foreign investors were diversifying their portfolios
away from dollar-denominated assets, then targeting monetary policy on the exchange rate could
easily interfere with price stability. In this case,
tightening monetary policy would moderate and
eventually reverse the dollar’s depreciation, but it
also would slow the pace of economic growth and
pull inﬂation below an acceptable level. Generally,
any time factors other than domestic monetary
policy are causing dollar exchange rates to move,
targeting an exchange rate with monetary policy is
a bad idea.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Since its recent peak in February 2002, the U.S.
dollar has depreciated nearly 25 percent on average against our major trading partners. Initially, the
dollar depreciation seemed to reﬂect the expansion
of U.S. aggregate demand after the 2001 recession.
Monetary policy was fairly accommodative, particularly between mid-2003 and mid-2004. Inﬂation
and inﬂation expectations rose somewhat, but inﬂation in the United States was, on balance, only a bit
higher than the average rate of inﬂation among our
trading partners.

Nominal Broad Dollar Index
Index, Jan 1997=100
140
120
100
80
60
40
20
1975

1980

1985

1990

1995

2000

2005

Source: Board of Governors of the Federal Reserve System.

U.S. Dollar-to-Euro Exchange Rate
U.S. dollars per euro
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1975

1980

1985

1990

1995

2000

2005

Note: Prior to 1999 the dollar exchange rate is calculated using a synthetic euro
based on 1997 GDP weights.
Source: Board of Governors of the Federal Reserve System.

Japanese Yen-to-Dollar Exchange Rate
Yen per U.S. dollar
320
270
220
170
120
70
20
1975

1980

1985

1990

1995

2000

2005

Source: Board of Governors of the Federal Reserve System.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Since the end of 2005—at least through the end of
last year—the dollar depreciation seemed to reﬂect
portfolio shifts. Global investors are not overtly
dumping dollars, but they seem reluctant to add
dollars to their portfolios as fast as they are adding
euros, which puts downward pressure on dollar exchange rates. Since August of last year, the Federal
Reserve has cut the federal funds rate target by 300
basis points in an eﬀort to ease liquidity problems
in ﬁnancial markets and to head oﬀ a recession. The
easing of policy appears to have hastened the pace
of diversiﬁcation, but inﬂation expectations still
seem fairly well contained. Inﬂation does not seem
to be driving the dollar’s decline.
Admittedly, we are a bit uncertain about what
factors have dominated the dollar’s dive in recent
months, but that just reinforces our point. At any
particular time, central banks may be uncertain
about exactly which fundamentals are causing
exchange rates to change. If a central bank guesses
wrong, using the exchange rate as a target for
monetary policy can have serious implications for
achieving its domestic goals, so most central banks
simply eschew exchange-rate objectives. The conﬂict between domestic objectives and exchange-rate
targets ended the perennially beleaguered Bretton
Woods ﬁxed-exchange-rate system and initiated
generalized ﬂoating in 1973.
Some observers suggest that the United States,
ideally in conjunction with the Bank of Japan and
the European Central Bank, undertake sterilized
intervention to prevent further dollar depreciation.
Sterilized interventions refer to purchases or sales of
foreign exchange that are not allowed to aﬀect the
amount of dollar reserves in the banking system.
10

Hence sterilized intervention cannot interfere with
a central bank’s domestic mandates. The United
States and other central banks that operate with
an over-night interest-rate target routinely sterilize
their interventions because they do not allow them
to interfere with achieving the interest rate target.
Sterilized intervention can aﬀect exchange rates in
the desired direction, but it is a hit-or-miss proposition. The odds of success seem to increase if the
intervention is large, conducted infrequently, and
coordinated among central banks. Nevertheless,
sterilized intervention does not change any fundamental determinants of exchange rates, so while it
may give exchange rates an occasional nudge, it is
of little lasting consequence.
Against this limited eﬀectiveness central banks
must weigh one ﬁnal problem: Sterilized intervention may confuse markets about monetary policy.
Suppose, for example, that a central bank is easing
policy to achieve a domestic object, but is simultaneously buying its currency through sterilized
foreign-exchange operations. Even though the
intervention is sterilized, the domestic and exchange-market operations may appear to be at cross
purposes. They may leave markets unsure about the
central bank’s commitment to its domestic objectives. As such, they are not conducive to policy
transparency.
It took central banks nearly 30 years to learn that
intervention often conﬂicted with good monetary
policy. Hopefully, the lessons will not be lost.

Economic Activity

Does the Recent Trend in Labor Demand Presage Recession?
03.24.08
Murat Tasci and Beth Mowry
The number of job openings or vacancies posted
by employers constitutes a good measure of unmet
labor demand. Assuming employers spend some
time and resources to recruit workers, this measure
could give us a nice clue about their expectations of
future labor market conditions.
The longest time series of vacancies that we have
is the Help-Wanted Advertising Index (HWAI)
Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Job Postings and Labor Market Tightness
Index, 1987 = 100

Ratio of job postings to number of unemployed

2.4

120
Job postings (HWAI)

Labor market
tightness

100

1.6

1.2

0.8

0.4

0
1951

1959

1967

1975

1983

1991

1999

0
2007

a. HWAI is the Help-wanted Ads in Newspapers Index.

b. This series is the ratio of help wanted ads in newspapers to the number of
unemployed workers.
Note: all numbers are seasonally-adjusted. Shaded bars represent recessions.
Source: The Conference Board.

Help-Wanted Ads Online
Thousands
5,000
Total ads online
4,000
New ads online

3,000
2,000
1,000
0
2005

2006

2007

Note: Data are national and not seasonally adjusted.
Source: The Conference Board Help-Wanted Online Data Series.

Help-Wanted Ads Online
Year-over-year change, thousands
900

Total online ads

700

New ads

500

300

100
Jun
Sep
2006

Dec
Mar
2007

Jun

Sep

Dec
2008

Source: The Conference Board Help-Wanted Online Data Series.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

provided by the Conference Board. This index is
monthly and tracks help-wanted ads in more than
50 major metro area newspapers. HWAI is normalized to 100 for 1987. A higher index value indicates
higher numbers of help-wanted ads are appearing
in newspapers.
The HWAI experienced sharp declines in every
postwar recession. More interestingly, every decline
in the index has been accompanied by a recession,
with the exception of the mid-1960s. After hovering in the 40s for most of the 2003–2005 period,
the index started to fall gradually at the beginning
of 2006. In January 2008, the index hit 21, its alltime low.
Ironically, the index by itself may not be very informative about the diﬃculty employers have in ﬁlling
positions, because that diﬃculty depends not just
on how many vacancies there are, but also on the
number of workers who are looking for jobs. For
instance, the index could be low (indicating few
vacancies), but employers could expect to ﬁll vacant
positions relatively easily if many unemployed
people are searching for work.
In order to assess employers’ diﬃculty in ﬁnding
workers, we need measure of market tightness,
which we have in the ratio of help-wanted newspapers ads to the number of unemployed workers.
Movements in this ratio closely follow those of the
HWAI. During expansions, both market tightness
and the HWAI rise, and during recessions, they
both decline. Recent labor market conditions, according to this measure, have been exceptionally
slack. Currently, the ratio stands at 0.205, the lowest it has ever been.
However, the declining trend in these measures
might be related to factors independent of labor
market conditions. In particular, a shift toward
posting vacancies online rather than in newspapers
could be responsible for it. The Conference Board
started to gather and report data on online helpwanted ads in May 2005. Although this series is
not long enough to cover a full business cycle, we
still see that vacancies, as measured by online ads,
have grown from about 3.1 million to more than
4.3 million in two years (May 2005–May 2007).
These numbers suggest that the HWAI might be
12

HWAI And JOLTS Views of Job Openings
Index, 1987 = 100
120

Thousands
5000

100
JOLTS
4000

80
60
HWAI

3000

40
20

2000

0
2000

2002

2004

2006

Note: Data are seasonally adjusted. Bar indicates a recession.
Sources: The Conference Board; and the Bureau of Labor Statistics.

JOLTS Job Openings
Thousands
800
700

Education and health services
Trade, transport, and utilities

PBS a

600
500

Government

400
300

Manufacturing

Leisure
and hospitality

200
100
0
2001

2002

2003

2004

2005

2006

2007

a. PBS is professional business services (professional, scientific, and technical
services, management of companies and enterprises, administrative and support,
and waste management and remediation services.
Note. Data are seasonally adjusted, three-month moving averages. Shaded bar
indicates a recession.
Source: Bureau of Labor Statistics.

understating the true availability of jobs in the
labor market. In addition to tracking the number
of help-wanted ads posted online, the Conference
Board also tracks how many of those postings are
new. It would be fair to assume that movements in
total help-wanted ads are driven by the new postings every month. However, the raw data captures
a lot of seasonal movements. When we look at
year-over-year changes in online ads to remove this
seasonality, we see an increasing trend in job postings until mid-2007, after which postings decline.
In February 2008, total new ads increased by only
103,000 relative to February 2007, the smallest
year-over-year increase since May 2006.
One other major source of data on job availability, and one that is more comprehensive than the
HWAI, is the Job Openings and Labor Turnover
Survey (JOLTS) published by Bureau of Labor
Statistics. It samples from the same universe as the
Current Employment Survey, and each establishment in the Survey provides data on job openings
in a given month.
The picture painted by JOLTS data conﬁrms the
view that the HWAI might be understating the
actual availability of jobs. According to JOLTS,
employers were creating more and more vacancies every month up until mid-2007. Since then,
the trend seems to have reversed. According to the
most recent data, there were about 3,925,000 job
openings in January 2008.
Four industries accounted for almost two-thirds
of the total monthly job openings on average—
education and health services; professional and
business services; trade, transportation, and utilities; and leisure and hospitality. All sectors roughly
follow a similar pattern over time, although three
sectors experienced larger declines in response to
the last economic downturn: professional and business services; manufacturing; and trade, transportation, and utilities. Even though job openings have
leveled oﬀ recently in these sectors, we have not
observed a decline similar enough the one observed
at the onset of the last recession to indicate a signiﬁcant slowdown in the labor market.
Overall, diﬀerent measures of job availability all
suggest that the number of new job vacancies ad-

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

vertised might be falling. Total job openings are still
far from their pre-recession peak of 4,580,000 (in
December 2000), which is consistent with the last
recovery’s designation as a “jobless” one.

Economic Activity

Real GDP: Fourth-Quarter 2007 Final Estimate
03.31.08
Brent Meyer

Real GDP and Components
Quarterly
change
(billions of
2000$)

Annualized percent
change, last:
Quarter

Four
quarters

Real GDP

16.8

0.6

2.5

Personal consumption

46.9

2.3

2.6

Durables

6.2

2.0

4.2

Nondurables

7.4

1.2

1.5

Services

32.9

2.8

Business fixed investment

20.5

6.0

7.1

8.2

3.1

3.6

Equipment

9.2

12.4

15.1

Residential investment

Structures

-32.4

-25.2

-18.6

Government spending

9.8

1.9

2.3

National defense
Net exports
Exports
Imports
Change in business inventories

-0.7

-0.5

1.5

29.9

—

22.9

6.5

8.4

-7

-1.4

1.0

-48.9

—

Source: Bureau of Labor Statistics.

Change in Business Inventories
Billions of chained 2000 dollars (SAAR)
140
120
100
80
60
40
20
0
-20
-40
-60
-80
-100
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Real GDP, according to the ﬁnal estimate by the
Bureau of Economic Analysis (BEA), was unchanged from both the preliminary and advance
estimates, rising at an annualized rate of 0.6 percent
in the fourth quarter. While the overall growth
rate in GDP remained identical to the advance
estimate, the performance of its underlying components changed. Personal consumption was revised
up from the 2.0 percent of the advance release to
2.3 percent in the ﬁnal. After incorporating more
complete information about the fourth quarter, net
exports improved as well. Imports (which subtract
from GDP) fell from 0.3 percent in the advance
release to –1.4 percent in the ﬁnal. Final exports
rose 6.5 percent, an upward adjustment of 2.6 percentage points over the advance estimate. Oﬀsetting these improvements to growth, both business
and residential investment deteriorated with the
revisions. Business ﬁxed investment was adjusted
down from 7.5 percent to 6.0 percent in the fourth
quarter. Also, residential investment worsened, according to the ﬁnal estimate, from –23.9 percent to
–25.2 percent.
Fourth-quarter corporate proﬁts were released
along with the ﬁnal GDP estimate. Nominal pretax
corporate proﬁts decreased $52.9 billion during
the quarter, following a $20.5 billion loss in the
third quarter, the ﬁrst back-to-back decrease since
the fourth quarter of 2000 and the ﬁrst quarter of
2001. Proﬁts in the ﬁnancial sector fell $74.4 billion, their largest nominal quarterly loss ever, even
without factoring in recent subprime write-downs.
According to the BEA release, “asset write-downs
and loan-loss provisions…are not expensed in
current-production proﬁts in the National Income
and Product Accounts.”

Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Real private inventories decreased $18.3 billion in
the fourth quarter, according to the ﬁnal estimate,
following an accumulation of $30.6 billion last
quarter. Initially, the advance release pegged the loss
at $3.4 billion. Falling inventories could be taken
as a sign that businesses see weaker demand in the
near future and do not want to be stuck with stockrooms ﬁlled with unsold products. While this may
not bode well for the near term, stark inventories
help in the recovery process. As consumer demand
returns, companies respond by ramping up production at a quicker pace than they would if their
warehouses were full.

Change in Corporate Profits*
Billions of dollars (SAAR)
140
120
100
80
60
40
20
0
-20
-40
-60
-80
-100
-120
1990 1992 1994 1996

1998

2000

2002

2004

2006

2008

*Nominal corporate profits before tax with inventory valuation and capital
consumption adjustments.
Source: Bureau of Economic Analysis

Real GDP Growth
Annualized quarterly percent change
6
Final estimate
Blue Chip forecast
5
4
3

Looking forward, the Blue Chip panel of economists continues to trim its growth forecasts over
the near term. The panel currently (as of March
10, 2008) expects ﬁrst-quarter GDP to grow at an
annualized rate of 0.1 percent. Four months ago,
the consensus estimate was for 1.9 percent growth
in the ﬁrst quarter. Snapback, aided by the ﬁscal
stimulus package, occurs in the third quarter of
2008, and GDP growth starts to return to trend by
the end of 2009.

2
1
0
IIIQ IVQ IQ IIQ IIIQ IVQ IQ
2007
2006

IIQ IIIQ IVQ IQ IIQ IIIQ IVQ
2008
2009

Source: Blue Chip Economic Indicators, March 2008; Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Economic Activity

Recession: Are We or Aren’t We?
03.31.08
Paul W. Bauer and Katie Corcoran
Living in an age when we expect access to virtually
all goods and services 24/7 and real-time reporting on even minor news events, many people have
little patience with economists who cannot say for
sure whether we are currently in a recession or not.
Given the ﬁnancial headlines and carnage in the
housing markets, how could there be any uncertainty?
No one is arguing, economically speaking, that
these are “the best of times,” but weak economic
growth is not the same thing as a recession. As
deﬁned by the Business Cycle Dating Committee of the National Bureau of Economic Research,
“A recession is a signiﬁcant decline in economic
activity spread across the economy, lasting more
than a few months, normally visible in real GDP,
real income, employment, industrial production,
and wholesale–retail sales.” This is an intentionally broad deﬁnition designed more for academic
studies of business cycle dynamics than feeding
the 24-hour news channels. The March 2001 peak
of the last business cycle was not announced until
November 26, 2001, while the November 2001
trough was not called until July 17, 2002. You can
do pretty well without the Dating Committee with
the rough rule of thumb that a recession is two
consecutive quarters of negative GDP growth, but
even this measure leaves us waiting at least two full
quarters for an answer.
With any deﬁnition of recession, there is going to
be a delay due to the time it takes the various statistical agencies to collect and publish the data. For
example, estimates of GDP are made on a quarterly
basis, and although we get preliminary estimates
within one month after the end of a quarter, those
ﬁgures face signiﬁcant revision over the next two
months, as additional data become available. It
might be possible to reduce the time to get initial
estimates and the magnitude of subsequent estimates, but timely, accurate data is costly—and real
(inﬂation-adjusted) federal appropriations for ecoFederal Reserve Bank of Cleveland, Economic Trends | April 2008

nomic statistics have been largely ﬂat over the past
decade, even as the size of the economy has nearly
doubled.

GDP
Percent change from previous quarter
4

Of course, one does not have to wait for a formal
decision on whether the economy is oﬃcially in a
recession or not to know that the U.S. economy is
not ﬁring on all cylinders. Even though the ﬁnal
estimate for real GDP in the fourth quarter of
2007 remained positive at 0.6 percent (we are still a
month away from the advance estimate for the ﬁrst
quarter of 2008), that is still a very weak growth
rate.

-2

-4
1952

1962

1972

1982

1992

2002

How weak? Because the U.S. population grew
nearly 1 percent, real GDP per capita, a widely employed measure of a country’s ability to provide for
the material well-being of its population, actually
fell last quarter.

Sources: S&P and Federal Reserve Board.

Population
Percent change from previous year
3.0

Looking at this series over time, we see that there
have been a number of quarters in which economic
growth has not kept up with population growth,
and yet the economy was not formally in a recession. That is, while most of the time, when GDP
per capita is negative, the economy is in recession,
it is not always the case. Besides the fourth quarter
of 2007, we have had two such quarters just in this
last cycle—the fourth quarter of 2002 and the ﬁrst
quarter of 2007.

2.5
2.0
1.5
1.0
0.5
0.0
1953

1963

1973

1983

1993

2003

Sources: S&P and Federal Reserve Board.

GDP Per Capita
Percent change from previous quarter
4

-2

-4
1952

1962

1972

Economic
Sources: S&P andActivity
Federal Reserve Board.

1982

1992

How strong should growth be going forward?
Population growth has varied from nearly 2 percent
in the early 1950s at the peak of the baby boom
to a bit under 1 percent, about where we are now.
Consequently, a 1 percent real GDP growth rate is
currently needed just to maintain our current living
standards. However, a healthy growth rate would
be more like 2.7 percent, the sum of the expected
population rate (and thus roughly the growth rate
of the labor force) and long-run trend in labor
productivity growth (how much more output each
worker is able to produce, which the Social Security
Administration estimates to be about 1.7 percent,
as measured by GDP per hour worked by all workers). If the Blue Chip Forecast is correct, the U.S.
economy will be back to this growth rate in the
third quarter of 2008.

2002

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

The Employment Situation
04.07.08
Murat Tasci and Beth Mowry

Average Nonfarm Employment Change
Change, thousands of jobs

250

Revised
Previous estimate

200
150
100
50
0
-50
-100

2005 2006 2007 2008 Q2
YTD 2007

Q1 Jan
2008

Feb

Mar

Source: Bureau of Labor Statistics.

Private Sector Employment Growth
Change, thousands of jobs: three-month moving average

350
300
250
200
150
100
50
0
-50
-100
-150
-200
2003

2004

2005

2006

2007

Source: Bureau of Labor Statistics.

2008

Total nonfarm payroll employment declined by
80,000 in March to 137,846, according to the
initial estimate released by the Bureau of Labor Statistics (BLS) today. The BLS also published its revisions for January and February 2008. The revisions
suggest that payroll employment declined more
in each month than initially reported; in January,
22,000 more job losses were added to the original
estimate, bringing the month’s total to 76,000, and
in February 63,000 more job losses were added,
bringing the month’s total also to 76,000. Overall
these numbers indicate a quarterly decline in payroll employment of 232,000 (an average of 77,000
each month), the lowest employment growth since
the ﬁrst quarter of 2003.
Job losses in March were quite broad-based, affecting most goods-producing industries as well
as several service-providing industries. The construction sector lost the most jobs in March with
51,000, followed by manufacturing with 48,000.
Most of the decline in construction employment
was in residential construction (–31,000), another
manifestation of housing market troubles. Nonresidential construction employment also experienced
a decline of 15,400 jobs in March. The manufacturing sector lost around 48,000 jobs, with 35,000
of them in durable goods manufacturing and the
rest in nondurable goods production. This was the
twenty-ﬁrst straight month of employment decline in the manufacturing sector, indicating that a
declining trend in manufacturing employment was
exacerbated by recent business-cycle factors.
Perhaps the most important reason for the signiﬁcant employment decline in the ﬁrst quarter was
the relatively low performance of the service sector.
Services added only 13,000 jobs this month, due
mostly to education and health services, which in
the previous month had contributed more than
40,000 jobs. Service industries managed to add a
mere 12,000 jobs in the ﬁrst quarter, which is the
worst performance for the sector since the ﬁrst
quarter of 2003. Professional and business services,

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Labor Market Conditions
Average monthly change
(thousands of employees, NAICS)
2005

2006

2007

YTD
2008

March
2008

Payroll employment

211

175

−77

−80

Goods-producing

−38

−81

−93

Construction

−19

−42

−51

−1

−7

−5.1

−2

−10

−30

−31

−5

−15.4

−7

−14

−22

−46

−48

Heavy and civil engineering
Residentiala
Nonresidentialb
Manufacturing
Durable goods

−4

−16

−29

−35

−8

−10

−6

−14

−13

Service-providing

179

172

130

Retail trade

−25

−12.4

Financial activitiesc

−9

−8

−5

−32

−35

Temporary help services

−7

−20

−21.6

Education and health svcs.

Leisure and hospitality

Government

6.1

Nondurable goods

PBSd

Local educational
services

Average for period (percent)
Civilian unemployment rate

5.1

4.6

4.9

5.1

a. Includes construction of residential buildings and residential specialty trade
contractors.

b. Includes construction of nonresidential buildings and nonresidential specialty trade
contractors.
c. Includes the finance, insurance, and real estate sector and the rental and leasing
sector.
d. PBS is professional business services (professional, scientific, and technical
services, management of companies and enterprises, administrative and support, and
waste management and remediation services).
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

which has led employment growth for some time,
reported a decline of 35,000. If we compare servicesector employment ﬁgures for March and the ﬁrst
quarter of 2008 with those of the past three years,
we see that several service industries—education
and health services, leisure and hospitality, and
government—have continued to create jobs, while
professional and business services and retail trade
have started to report major declines.
The three-month moving average of private sector employment growth shows a deﬁnite declining
trend over the past year, and even more broadly
over the past three months. Currently, the threemonth moving average of private sector employment growth stands at -95,000, its lowest value
since April 2003.
The BLS also reported that the unemployment rate
rose 0.3 percentage point in March to 5.1 percent,
from 4.8 percent in February. Most of this increase
was accounted for by an increase in the labor force
(410,000) and not by a signiﬁcant decline in employment numbers (-24,000).
These numbers all point to a weak labor market in
March, with many sectors losing jobs relative to the
previous month. The job loss reported in March
combined with the downward revisions for January
and February indicate that the labor market might
have started to experience a downward cyclical turn
in the ﬁrst quarter of 2008. This is consistent with
the observed downward trend in job openings we
started to experience starting at the end of 2007
and which we discussed in an earlier Trends article.
Payroll numbers for February and March are subject to revision in the next report.

Labor Market Conditions and Revisions
Average monthly change
(thousands of employees, NAICS)
Jan
current

Revision
to Jan

Payroll employment

−76

−54

−76

−13

−80

Goods-producing

−69

−15

−82

−93

Construction

Feb
current

Revision
to Feb

Mar
2008

−39

−14

−37

−51

Heavy and civil engineering

−9.2

−4

−7

−2

−5

Residentiala

−35

−5

−25

−31

Nonresidentialb

5.2

−5

−4

−15

−35

−4

−46

−48

Manufacturing
Durablegoods

−21

−2

−30

−35

Nondurable goods

−14

−2

−16

−4

−13

Service-providing

−7

−39

−20

Retail trade

−16

−15

−47

−13

−12

−8

−11

−5

−30

−21

−30

−10

−35

Financial activitiesc
PBSd
Temporary help services

−4

−34

−6

−22

Education and health services

−2

−1

−5

−1

Leisure and hospitality
Government
Local educational services

a. Includes construction of residential buildings and residential specialty trade contractors.

b. Includes construction of nonresidential buildings and nonresidential specialty trade contractors.
c. Includes the finance, insurance, and real estate sector and the rental and leasing sector.
d. PBS is professional business services (professional, scientific, and technical services, management of
companies and enterprises, administrative and support, and waste management and remediation servicesSource: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

Regional Activity

Fourth District Employment Conditions
04.08.08
By Tim Dunne and Kyle Fee

Unemployment Rates
Percent
8
7
Fourth District

6
5
United States
4
3
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Notes: Shaded bars represent recessions; some data reflect revised inputs, reestimation,
and new statewide controls. For more information, see http://www.bls.gov/lau/launews1.htm.
a. Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

County Unemployment Rates
U.S. unemployment rate = 4.9%

4.0% - 4.9%
5.0% - 5.9%
6.0% - 6.9%
7.0% - 8.5%
8.6% - 10.5%
Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | April 2008

The district’s unemployment rate dropped 0.1
percent to 5.6 percent for the month of January.
Since this same time last year, the Fourth District’s
unemployment rate increased 0.1 percentage point,
while the national rate rose 0.3 percentage point.
The district’s unemployment rate dropped 0.1
percent to 5.6 percent for the month of January.
The decrease in the unemployment rate can be
attributed to decreases in the number of people
unemployed (-1.6 percent) and the labor force (-0.2
percent) as well as an increase in the number of
people employed (0.1 percent). The district’s unemployment rate has been consistently higher than the
nation’s since early 2004, and January, with the rate
0.7 percent higher in the district, was no exception.
Since this same time last year, the Fourth District’s
unemployment rate increased 0.1 percentage point,
while the national rate rose 0.3 percentage point.
County-level unemployment rates vary throughout the district. Of the 169 counties in the Fourth
District, 28 had an unemployment rate below the
national average in January, and 141 had a higher
rate. Rural Appalachian counties continue to experience higher levels of unemployment.
The distribution of unemployment rates across
Fourth District counties ranges from 4.0 percent to
10.5 percent, with the median county unemployment rate at 6.0 percent. Pennsylvania counties
populate the middle to lower half of the distribution while, Ohio and Kentucky counties cut across
the entire range. Four of West Virginia’s six Fourth
District counties fall in the upper half of the distribution.

County Unemployment Rates
Percent
10.5
9.5

Ohio
Kentucky
Pennsylvania
West Virginia

8.5
7.5

Median unemployment rate = 6.0%

6.5
5.5
4.5
3.5
County
Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

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Federal Reserve Bank of Cleveland, Economic Trends | April 2008

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