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January 2004
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•

FEDERAL
RESERVE

•

BANK OF
CLEVELAND

ECONOMIC
TRENDS
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Federal
Reserve
Bank of
Cleveland

Economic Trends is published by the Research
Department of the Federal Reserve Bank of
Cleveland.
Views stated in Economic Trends are those of
individuals in the Research Department and not
necessarily those of the Federal Reserve Bank of
Cleveland or of the Board of Governors of the
Federal Reserve System.
Materials may be reprinted provided that
the source is credited. Please send copies
of reprinted materials to the editors.
Anyone interested in receiving this publication
on a regular basis should contact the Research
Department, Federal Reserve Bank of Cleveland,
P.O. Box 6387, Cleveland, Ohio 44101. You may
also e-mail your request to 4d.subscriptions
@clev.frb.org or fax it to 216-579-3050.
Economic Trends is now available electronically
through the Cleveland Fed’s home page on the
World Wide Web: http://www.clevelandfed.org
We invite comments, questions, and suggestions.
Please e-mail us at editor@clev.frb.org.
Editors: Michele Lachman
Deborah Ring

FRB Cleveland • January 2004

ISSN 0748-2922

1 •

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The Economy in Perspective

2 •

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Inflation and Prices

4 •

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• Monetary Policy

5 •

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• Money and Financial Markets

8 •

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10 •

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Economic Activity

12 •

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Employment Trends

14 •

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Migration of College Graduates

16 •

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FDIC-Insured Commercial Banks

18 •

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International Markets

Foreign Central Banks

1
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The Economy in Perspective

FRB Cleveland • January 2004

Dude, Where’s My Economy?…Objectively speaking, the U.S. economy seems to stand on solid
ground. Production and spending accelerated
throughout 2003; by year’s end, employment had
begun to expand, albeit moderately. Moreover, business and consumer sentiment strengthened
throughout the year, and the stock market—
the ultimate financial arbiter of expectations—
rebounded impressively. Mainstream economic
forecasts for 2004 anticipate continued solid growth
in economic activity, with joblessness receding and
inflation remaining dormant.
Yet the nation still has economic issues to contend
with, and public opinion is divided regarding the best
course of action. One question that commands attention nationally, but particularly in the Midwest, is the
fate of the country’s manufacturing sector. Even
manufacturing’s most ardent supporters acknowledge that, for many decades, its contributions to U.S.
gross domestic product and employment have been
shrinking as a proportion of the economy as a whole.
Such a trend by no means implies that manufacturing businesses or employment have become, or
are becoming, unimportant to the country. In fact,
improved productivity growth in manufacturing
industries is a prominent explanation for manufacturing’s smaller share of the growing national work
force. Over time, strong productivity growth has
lowered the prices of many manufactured goods
compared to services. And the manufacturing industries can hardly be blamed for another significant factor in the service sector’s expansion—that
consumer preferences for services increase disproportionately as household wealth and income
increase. Think medical care.
Innovation, productivity, and shifting consumer
preferences go a long way toward explaining which
industries expand and which contract. Within the
context of these longer-term forces, international
trade certainly provides additional challenges, as
well as opportunities, for domestic manufactures.
Some of today’s business and civic leaders are fixated on the challenges of competing with firms that
operate in developing countries, despite two facts.
First, longer-term fundamentals historically have
influenced the overall size of the manufacturing
sector more strongly than foreign competition has.

Second, as developing nations mature, they provide
expanding markets for U.S.-made goods in which
we have a comparative advantage. These desirable
items might not be the same ones that originally
built up Midwestern manufacturing towns and, in
the future, they might not be made in those places
either.
As our nation matured, some towns that once
prospered because of their location or natural
resources were overtaken by innovation, migration,
and new methods of doing business. Then, a century ago, the United States entered a stage in which
its economic power was expanded tremendously
by, but also concentrated in, the hands of monopoly
trusts. Abuses of power and corruption doubtless
augmented the strength of these trusts, but innovation and productivity were the real forces behind
them. It simply made business sense to standardize
products, produce in large batches, and streamline
the distribution and retailing channels.
We should recall that this era of industrialization
brought not only general prosperity but also a reconsideration of the norms of competition and social
justice. Innovation and trade can disadvantage some,
but they have the potential to create far more winners
than losers. Our response to the challenges posed by
global trade should not be to resist change but to
establish and abide by rules of fairness among the
countries that are emerging on the world stage. If we
are committed to a world in which nations trade
freely with one another, then we must inevitably
adjust to the consequences of that commitment
Fortunately, despite the many trials that lie ahead,
the American public seems optimistic about the
economy. For example, according to information collected by the Roper Center for Public Opinion
Research, the overwhelming majority of respondents
to several 2003 surveys expected that the economy
would be in better shape after another year and they
reported that they were very happy overall in their
lives. It is true that most respondents to a December
2003 survey described the nation’s economy as “not
so good” or “poor,” but then again, respondents
answered this question the same way in 1993.
Hey, people may feel down, but they know
they’re not out. Dude, that’s my economy!

2
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Inflation and Prices
12-month percent change
4.00 CPI AND CPI EXCLUDING FOOD AND ENERGY

November Price Statistics

3.75

Percent change, last:
2002
a
a
a
1 mo. 3 mo. 12 mo. 5 yr. avg.

3.50
3.25

Consumer prices

CPI
3.00

All items

–2.6

0.2

1.8

2.4

Less food
and energy

–0.6

0.8

1.1

2.1

2.0

2.50

1.6

2.2

2.0

2.8

3.0

2.25

2.75

Medianb
Producer prices

2.00

Finished goods

–3.3

3.1

3.4

2.0

1.2

Less food
and energy

–0.8

1.9

0.5

0.9 –0.5

1.75
1.50
1.25

CPI excluding food and energy

1.00
1995

1996

1997

1998

1999

2000

2001

2002

2003

12-month percent change
6.0 CORE CPI GOODS AND SERVICES

12-month percent change
4.25 CPI AND TRIMMED-MEAN MEASURES
4.00

5.0

CPI core services c

Median CPI b

3.75

4.0

3.50

CPI

3.0

3.25

CPI core services

2.0

3.00
2.75

1.0

2.50

2.25

–1.0

2.00

CPI core goods

–2.0
CPI core goods c

1.75
–3.0
1.50
CPI, 16% trimmed mean b

1.25

–4.0
–5.0

1.00
1995

1996

1997

1998

1999

2000

2001

2002

2003

1995

1996

1997

1998

1999

2000

2001

2002

2003

FRB Cleveland • January 2004

a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
c. Three months annualized.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Federal Reserve Bank of Cleveland.

The November inflation data show a
continuing, generally broad-based
pattern of disinflation.
The Consumer Price Index (CPI)
declined an annualized 2.6% in
November after holding unchanged
in October. The decline was partly
the result of falling energy prices,
which continued their descent by
slipping another 3.0% after declining 3.9% in October.
The core CPI, a closely watched
measure of inflation that eliminates

the CPI’s volatile food and energy
components, fell at a 0.6% annualized rate in November, its first
decline in more than 20 years. The
median CPI and the 16% trimmedmean CPI, alternative inflation
measures designed to exclude the
most extreme price changes, rose at
a 1.6% annualized rate and declined
at a 0.9% annualized rate, respectively. Year-over-year comparisons
within the core and alternative CPI
inflation measures continued to
trend downward.

Core consumer goods prices,
which account for 23% of the total
CPI, have shown persistent declines
over the past two years, and that
deflation appears to be accelerating.
Moreover, the gap between core
services prices and core goods prices
continues to widen: Whereas the
price level of core services is still
increasing at a year-over-year rate of
roughly 3.0%, the price level of core
goods is deflating at a year-over-year
rate of approximately 2.5%. Prices of

(continued on next page)

3
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Inflation and Prices (cont.)
12-month percent change
30
COMMODITY SPOT PRICES b

November Price Statistics
Percent change, last
a
a
Share
3 mo.
12 mo.
5 yr.

New vehicles

4.8

–2.6

–2.1

–0.9

Household
furnishings and
operations

4.6

–1.9

–2.3

–0.3

Communication

2.8

–3.6

–3.9

–2.1

Used cars and
trucks

1.8

–28.9

–11.2

–3.0

25
Raw industrial materials

20
15
10

All commodities
5
0
–5
–10

Women’s and
girls’ apparel

1.7

–0.7

–2.0

–1.9

–15
–20
1995

12-month percent change
5.0 HOUSEHOLD INFLATION EXPECTATIONS c

1996

1997

1998

1999

2000

2001

2002

2003

Annualized quarterly percent change
5 ACTUAL CPI AND BLUE CHIP FORECAST c

4.5
4

Five to 10 years ahead
4.0

Highest 10%

3
3.5

Consensus

3.0

2.5
1
Lowest 10%

2.0
One year ahead

1.5
1.0
1995

1996

1997

1998

1999

2000

2001

2002

2003

–1
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

FRB Cleveland • January 2004

a. Annualized.
b. As measured by the Knight-Ridder Commodity Research Bureau’s Composite and Raw Industrials Spot Commodity Price Indexes.
c. Mean expected change in consumer prices as measured by the University of Michigan’s Survey of Consumers.
d. Blue Chip panel of economists.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Commodity Research Bureau; University of Michigan; and Blue Chip Economic Indicators,
December 10, 2003.

new vehicles, used cars and trucks,
household furnishings, and apparel
all show persistent declines.
Interestingly, accelerated deflation
in core goods prices persists as the
year-over-year rate of change in commodity prices continues to rise. Some
argue that commodity price movements are a leading indicator of inflation because they are a significant
input cost for producers; however,
evidence of this leading relationship

is mixed. After falling for more than
five years, the recent significant
increase in commodity prices since
mid-2002 has not yet produced a rise
in core goods prices.
Meanwhile, the University of
Michigan’s Survey of Consumers
reveals that household inflation
expectations for the next year are
falling as well. December survey data
suggest that on average, households
expect a 2.8% increase in prices

in the next year and a 3.1% increase
in the next five. The Blue Chip panel
of economists still expects CPImeasured inflation to grow at an annualized rate of about 2% over the
next five quarters, a forecast similar
to the current CPI growth trend. The
inflation pessimists predict a rate of
2.8% by 2004, and the inflation optimists now expect a CPI increase of
about 1.2% by then, a reduction from
last month’s 1.4% estimate.

4
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Monetary Policy
Percent
8 RESERVE MARKET RATES

Percent
8 IMPLIED YIELDS ON FEDERAL FUNDS FUTURES

Effective federal funds rate a

5
Intended federal funds rate b

3
Primary credit rate b

2
Discount rate b

0
1998

1999

2000

2001

2002

2003

2004

Percent, quarterly
9 FEDERAL FUNDS RATE AND INFLATION TARGETS

0
1998

1999

2000

2001

2002

2003

2004

Trillions of dollars
6.8 THE M2 AGGREGATE

8
6.2

M2 growth, 1998–2003 d
12

10%

6
5.6
5

3
10%

4
5.0
5%

1%
5%

4.4

Inflation targets: 4% 3% 2% 1% 0%
(Federal funds rates implied by the Taylor rule) c

5%
Federal funds rate

0
1998

1999

2000

2001

2002

2003

2004

3.8
1998

1999

2000

2001

2002

2003

2004

FRB Cleveland • January 2004

a. Weekly average of daily figures.
b. Daily observations.
c. The formula for the implied funds rate is taken from Federal Reserve Bank of St. Louis, Monetary Trends, January 2002, which is adapted from
John B. Taylor, “Discretion versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, vol. 39 (1993), pp. 195–214.
d. Growth rates are calculated on a fourth-quarter over fourth-quarter basis. Data are seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Congressional Budget Office; Board of Governors of the Federal Reserve System,
“Selected Interest Rates,” H.15, and “Money Stock Measures,” H.6, Federal Reserve Statistical Releases; and Bloomberg Financial Information services.

At its December 9 meeting, the Federal Open Market Committee (FOMC)
decided to keep its target federal
funds rate at 1%. The press release
noted, however, that the FOMC now
finds a reduced probability of “an unwelcome fall in inflation.” In line with
the October 28 statement, policy accommodation is expected to continue
for “a considerable period.”
Market expectations may have
reacted more strongly to the minutes
of the October meeting, which some

market observers took to indicate that
the target rate would remain at its current level longer than they had previously expected. They were perhaps
reacting to the minutes’ statement
that FOMC members felt current
trends “were likely to hold inflation
to very low levels over the next year
or two.”
So it is not surprising that the
implied yields of federal funds futures show only small increases
through 2004, although a glance at
the market’s predictions since 2000

shows it is far from infallible. The
December decision also keeps rates
well below a popular benchmark provided by the Taylor rule, which posits
that the FOMC chooses the target
rate as a balanced response to weakness and inflation. The form of the
Taylor rule depends on the weights
given to inflation and output and to
the assumed inflation target. However, the low rates have not led to a
surge in the money supply, which has
grown less than 5% in 2003.

5
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Money and Financial Markets
12-month percent change
3.5 GOLD PRICES AND CORE INFLATION

Percent, weekly
5.0 TREASURY-BASED INFLATION INDICATORS
4.5

10-year TIIS yield a

Dollars per ounce
400

375

3.0

4.0
CPI less food and energy
3.5

2.5

350

2.0

325

3.0
2.5
2.0

Gold price, London fixing
1.5

300

1.0

275

1.5
1.0

Yield spread: 10-year Treasury minus 10-year TIIS a

0.5
0.5

0
1998

1999

2000

2001

2002

2003

12-month percent change
3.5 FUTURES PRICE INDEX AND CORE INFLATION,
COMMODITY RESEARCH BUREAU

250
1998

2004

Index, 1967 = 100
275

1999

2000

2001

2002

2003

2004

12-month percent change
Billions of dollars
4.5
240 SIMPLE MODEL OF EXCESS MONEY AND INFLATION
4.0

200
250

3.0

3.5

160

CPI less food and energy

CPI Inflation
120

3.0

2.5

2.0

1.5

225

2.5

200

2.0

Futures index b
175

1.5

–40

1.0
Actual M2 minus predicted M2, two quarters previous
0.5

–80
150

1.0
1998

1999

2000

2001

2002

2003

2004

–120
1998

0
1999

2000

2001

2002

2003

2004

FRB Cleveland • January 2004

a. Treasury inflation-indexed securities.
b. All commodities.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the Federal Reserve System, “Selected Interest Rates,” H.15, and
“Money Stock Measures,” H.6, Federal Reserve Statistical Releases; Bloomberg Financial Information Services; Commodity Research Bureau; and
Wall Street Journal.

Much of the current discussion about
monetary policy focuses on the
prospects for inflation—what do financial market indicators say? Expectations derived from the yield spread
between the Treasury’s nominal and
inflation-indexed securities show a
pronounced upward trend in the latter
half of 2003. These expectations have
neared their six-year high, although inflation during this period has been low
by historical standards.
Some close observers of the gold
and commodities markets have
become concerned about the risk

of higher inflation. Gold prices have
posted a dramatic increase of $60
(18%) since March 2003. The commodities futures price also has
increased recently, although it remains near the level at which it
started the year. Prices for both gold
and commodities have increased
substantially since 2001. Unfortunately for fans of these two indexes,
however, neither shows a strong
correlation with inflation. What gold
prices show, if anything, is a negative
correlation with core CPI inflation.
Commodity prices sometimes seem

to anticipate future inflation but
they have not done so for the past
three years.
A classic definition of inflation is
“too much money chasing too few
goods.” By this definition, comparing
the money supply with money demand on the basis of income and
interest rates may indicate incipient
inflation. While the measure of excess
money has trended high in 2003, its
record over the past five years suggests that this indicator should be
used with caution.
(continued on next page)

6
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Money and Financial Markets (cont.)
Percent
8 INTENDED FEDERAL FUNDS RATE AND TWO-YEAR TREASURY

Percent
6 REAL FEDERAL FUNDS RATE c

6
4
Intended federal funds rate b

5
3

Two-year Treasury note a
2

3
1

2
0

–1

0
1998

1999

2000

2001

2002

2003

1998

2004

1999

2000

2001

2002

2003

2004

2000

2001

2002

2003

2004

Percent
7 BERK RATE e

Percent
8
PENNACCHI MODEL d

6
30-day Treasury bill

2
Estimated expected inflation rate

0
Estimated real interest rate

–2
1998

1999

2000

2001

2002

2003

2004

1998

1999

FRB Cleveland • January 2004

a. All yields are from constant-maturity series.
b. Daily observations.
c. Effective federal funds rate deflated by the PCE chain price index (less food and energy and excluding insurance adjustments).
d. The estimated expected inflation rate and the estimated real interest rate are calculated using the Pennacchi model of inflation estimation and the median
forecast for the GDP implicit price deflator from the Survey of Professional Forecasters. Monthly data.
e. The Berk rate is calculated as the 30-year GNMA yield plus the 10-year Treasury inflation-indexed securities yield minus the 10-year Treasury yield.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the Federal Reserve System, “Selected Interest Rates,”
Federal Reserve Statistical Releases, H.15; and Bloomberg Financial Information Services.

Another gauge of policy is the relation between the intended federal
funds rate and other market rates.
A comparison with the two-year Treasury note is particularly apt because
that yield is long enough to avoid
being a mere reflection of guesses
about the Fed’s move, yet short
enough to avoid speculation about
long-run trends. Except for a few brief
episodes, the target fed funds rate has
been below the two-year yield since
late 2001. Since June 2003, the spread

has increased from 11 basis points
(bp) to 84 bp, confirming the continued ease of policy.
One more possible comparison is
between interest rates and inflation.
Inflation means borrowers pay back
dollars that are worth less than the dollars they borrowed, so yields should
be adjusted for inflation. This makes
the real fed funds rate (adjusted for inflation by subtracting the current
growth in CPI from the yield) even
lower than its minimum nominal value

of 1%; in fact, it has been negative for
most of the year. One may also estimate real rates using inflation expectations, and the Pennacchi approach
estimates 30-day real rates. These have
remained steadfastly and substantially
negative throughout 2003.
Longer-term real rates, though
low, have stayed positive and become
more variable. An important real rate,
which is thought to have a particular
influence on investment spending,
(continued on next page)

7
•

•

Money and Financial Markets (cont.)
Percent, weekly average
6.0 YIELD CURVE a,b

Percent, weekly average
9
LONG-TERM INTEREST RATES

5.5
November 7, 2003

5.0
Conventional mortgage

4.5

4.0
3.5
December 6, 2002

6
3.0
2.5

5
20-year Treasury bond a

2.0
1.5

10-year Treasury note a

December 19, 2003
1.0
0.5

3
1998

1999

2000

2001

2002

2003

10
Years to maturity

Percent, weekly average
1.5 TREASURY-TO-EURODOLLAR (TED) SPREAD c

Percent, weekly
4.5 YIELD SPREAD: 10-YEAR TREASURY NOTE
4.0

2004

MINUS THREE-MONTH TREASURY BILL a

3.5

1.2

3.0
2.5
0.9
2.0
1.5
0.6
1.0
0.5
0.3

0
–0.5
–1.0
1998

1999

2000

2001

2002

2003

2004

0
1998

1999

2000

2001

2002

2003

2004

FRB Cleveland • January 2004

a. All yields are from constant-maturity series.
b. Average for the week ending on the date shown.
c. Yield spread: three-month Eurodollar minus three-month constant-maturity Treasury bill.
SOURCES: Board of Governors of the Federal Reserve System, “Selected Interest Rates,” Federal Reserve Statistical Releases, H.15; and Bloomberg Financial
Information Services.

takes a common callable bond, the
30-year GNMA, and subtracts, as an inflation estimate, the yield difference
between a 10-year Treasury bond and a
10-year Treasury inflation-indexed security. This option-adjusted rate
(dubbed the “Berk rate” after the
economist who developed the idea)
has decreased lately, falling about
23 bp since mid-October.
Longer-term interest rates, which
have moved little recently, remain
well above the lows reached in summer 2003. Conventional mortgages

have followed the 20-year bond
closely, although the spread between
them has narrowed from 100 bp to
77 bp since August. Likewise, the
yield curve has remained quiescent;
indeed, it has ended up near the level
it reached at the end of 2002. This
means, among other things, that the
10-year, three-month spread remains
quite high by historical levels—nearly
triple its historical average of 120 bp.
Although it is sometimes taken as an
indicator of future inflation, it is more
reliable as a predictor of strong economic growth in the upcoming year.

International news has been especially prominent in 2003. By one measure, at least, the effect on the financial
markets has not been proportionate.
The Treasury-to-Eurodollar (TED)
spread looks at the difference
between the rate on Eurodollar
deposits and Treasury notes. It is
thought to pick up traders’ worries
about international problems because it is a way to arbitrage rates
between the U.S. and the rest of the
world without bearing any currency
risk. The TED spread remains quite
low by historical standards.

8
•

•

International Markets
Monthly index, January 1990 = 1
2.00 FOREIGN EXCHANGE RATES

Billions of dollars
200 CURRENT ACCOUNT AND COMPONENTS
100

1.75
0

Chinese renminbi
1.50

–100
–200
Canadian dollar

1.25

Current account deficit
150
140

–300
Euro

1.00

–400

Newly industrialized
Asian countries a

130

–500

110
100

0.75
–600

Japanese yen
0.50
1990

Current account

120
Income
Services
Unilateral transfers
Goods

2003

2002

–700
1992

1994

1996

1998

2000

2002

2004

Billions of dollars
400 CAPITAL ACCOUNT AND COMPONENTS

1991

1993

1995

1997

1999

2001

2003 b

Billions of dollars, 12 months trailing
150 TRADE DEFICIT IN GOODS

300
120
200

China

100

Japan

–100

–200

–300

North America
U.S. securities other than Treasuries
Foreign direct investment
U.S. assets owned abroad
U.S. Treasuries
Foreign official assets
Other foreign-owned domestic assets
2000

2001

2002

2003 b

Euro area c

Newly industrialized Asian countries a
0
1992

1994

1996

1998

2000

2002

2004

FRB Cleveland • January 2004

a. Hong Kong, Singapore, South Korea, and Taiwan.
b. Through first three quarters, annualized by multiplying by (4/3).
c. Euro area: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; and Board of Governors of the Federal Reserve System,
“Foreign Exchange Rates,” Federal Reserve Statistical Releases, H.10.

The U.S. dollar continues to decline,
particularly against other major currencies. In December, the dollar
reached a new low against the euro.
Despite this decline, the current
account deficit grew for the second
straight year in 2003, primarily because
of a trade deficit in goods. Many analysts would agree that the current account deficit, as a proportion of GDP,
cannot grow indefinitely. Some research has shown that historically,
reversal occurs when the current
account deficit reaches about 5% of
GDP, slightly below where it stands

now. In 1986, the deficit reached
3.5% before falling. These may not
be good guidelines for the future,
however. As Federal Reserve Chairman Greenspan said in a recent
speech, “our debt-raising capacity
appears to be related to the reduced
cost and increasing reach of international financial intermediation.”
Saying that the current account
deficit cannot rise indefinitely is equivalent to saying that the capital account
surplus cannot rise indefinitely, since
they are tautologically equal. The surplus in the first two quarters of 2003
was financed by accumulating foreign-

owned assets in the U.S. that exceeded the outflow of U.S.-owned
assets abroad. In the third quarter, foreign claims on domestic assets fell,
particularly in foreign direct investment and non-Treasury securities. The
capital account surplus was virtually
unchanged because outflows of U.S.
assets owned abroad fell by almost the
same amount. In short, foreigners
seemed less willing to invest in nonTreasury domestic assets. If this trend
continues, either the rate of return
on domestic assets must increase, or
the capital account surplus must fall.
(continued on next page)

9
•

•

International Markets (cont.)
Percent change, year-over-year
12 REAL GDP GROWTH

Index, January 2000 = 100
150 MAJOR STOCK INDEXES

130

China a

China, Shanghai SE Comp

8
Canada, TSE 300
110
Canada

U.S., DJIA

Newly industrialized Asian countries, trade weighted b

90
Dow Jones
Euro Stoxx d
70

U.S.
0

Newly industrialized Asian
countries, trade weighted b

Euro area c
50

Japan, NIKKEI 225

Japan
–4
2000

30
2001

2002

2003

2000

Billions of dollars, yearly
150 NET PURCHASES OF LONG-TERM DOMESTIC SECURITIES

120

2001

2002

2003

Percent of total private securities, quarterly
25 FOREIGN HOLDINGS OF U.S. TREASURY SECURITIES

Japan

Rest of world

Euro area c
90
15
Newly industrialized
Asian countries b

Japan

China
10

North America

Newly industrialized Asian countries b

0
China
0

–30
1991

1993

1995

1997

1999

2001

2003 e

2000

2001

2002

2003

2004

FRB Cleveland • January 2004

a. Nominal growth.
b. Hong Kong, Singapore, South Korea, and Taiwan.
c. Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.
d. August 2000 = 102.51
e. Through October.
SOURCES: U.S. Treasury, Treasury International Capital System, and Monthly Treasury Bulletin; and Bloomberg Financial Information Services.

The strong economic growth of
the U.S. compared to the rest of the
world may be one reason the current
account deficit has been able to
increase as much as it has. According
to U.S. Treasury Secretary John Snow,
“when our economy is growing faster
than Europe or Japan it means we are
capable of buying more goods from
them than they are buying from us.”
Since the middle of 2001, GDP and
stock market growth from the euro
area and Japan have, in fact, lagged behind ours. However, while the U.S.
trade deficit with the euro area has

been rising predictably over this
period, the trade deficit with Japan
has been falling. Furthermore, net
purchases of long-term domestic
securities from Japan have been
rising, whereas those from the euro
area have been falling. This illustrates
the fact that although the total current account deficit must equal the
capital account surplus, the equivalence need not hold on a country-bycountry basis.
Although our trade deficit with
Japan has fallen—partly because of
our increased trade with China—

Japan continues to be the largest
purchaser of long-term domestic securities, and its purchases of Treasury
securities continue to grow relative
to the rest of the world. China’s economy and exports have grown more
than those of surrounding countries,
but the stock indexes of the newly
industrialized Asian countries have
significantly outperformed China’s
stock market this year—and ours as
well, for that matter. China itself runs
a large trade deficit with these countries and probably will have a small
current account surplus in 2003.

10
•

•

Economic Activity
Percentage points
6.0 CONTRIBUTION TO PERCENT CHANGE IN REAL GDP b

Real GDP and Components, 2003:IIIQ
(Preliminary estimate)

Annualized
Change, percent change, last:
billions
Four
of 1996 $
Quarter
quarters

Real GDP
204.8
Personal consumption 122.6
Durables
64.0
Nondurables
37.4
Services
28.8
Business fixed
investment
33.7
Equipment
36.1
Structures
–1.1
Residential investment 25.0
Government spending
8.3
National defense
–1.6
Net exports
20.8
Exports
24.1
Imports
3.2
Change in business
inventories
4.6

8.2
6.9
28.0
7.3
2.8

3.6
3.7
11.0
4.7
1.9

12.8
17.6
–1.8
21.9
1.8
–1.3
__
9.9
0.8

4.6
6.8
–1.9
9.2
3.9
12.7
__
0.6
2.6

5.0
Last four quarters

Personal
consumption

4.0

2003:IIIQ

3.0

2.0
Residential
investment
1.0

Government
spending

Exports

0
Business fixed
investment

Change in inventories

Imports

–1.0

Percent change from previous quarter
9.0 REAL GDP AND BLUE CHIP FORECAST b
8.0

Percent of GDP
11.0 CORPORATE PROFITS
10.5

Final percent change
Blue Chip forecast

7.0

10.0
9.5

6.0

9.0
5.0
30-year average

8.5

4.0
8.0
3.0
7.5
2.0

7.0

1.0

6.5

6.0
IIIQ

IVQ
2002

IIQ

IIIQ

IVQ

2003

IIQ

IIIQ

3/90

3/94

3/98

3/02

2004

FRB Cleveland • January 2004

a. Chain-weighted data in billions of 1996 dollars. Components of real GDP need not add to the total because the total and all components are deflated using
independent chain-weighted price indexes.
b. Data are seasonally adjusted and annualized.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Blue Chip Economic Indicators, December 10, 2003.

Even with a benchmark revision, the
final real gross domestic product
(GDP) for 2003:IIIQ contained no
surprises. Real GDP surged ahead
8.2%, the same as in the last estimate.
The only changes worth mentioning
are that final sales were revised up
slightly and inventory investment
was revised down.
Real personal consumption accounted for 4.9 percentage points of
the total increase in real GDP, far above
the average increase of 2.6 percentage
points over the last four quarters.

Business fixed investment was the
next-largest contributor, adding
another 1.25 percentage points. The
only negatives were inventories and
imports, each subtracting about
0.1 percentage point, but this was
far less than the 0.4 percentage
point drag that each exerted over
the last four quarters.
Although Blue Chip forecasters do
not expect the third quarter’s outsized real GDP growth to continue,
they do predict that real growth will
average nearly 4% over the next four

quarters. This is well above the 3.2%
average growth of the last 30 years.
Investors will be very pleased with
corporate profits’ strong rebound.
As a percent of GDP, corporate profits
are at the highest level since
1997:IIIQ. Pretax earnings adjusted
for inventory earnings and depreciation rose 9.9% in the third quarter of
2003, after pushing forward 10.3% in
the second quarter.
Strong GDP growth in the second
half of 2003 has boosted industrial

(continued on next page)

11
•

•

Economic Activity (cont.)
Percent of capacity
88 CAPACITY UTILIZATION

Index, 1997 = 100
125 INDUSTRIAL PRODUCTION

120

Manufacturing industrial production

85
Total capacity utilization

115

110

79
Total industrial production

105

100

Manufacturing capacity utilization

95
1/97

1/98

1/99

1/00

1/01

1/02

1/03

1/97

1/98

1/99

1/00

1/01

1/02

1/03

Percent of capacity
110 HIGH-TECH CAPACITY UTILIZATION

Index, 1997 = 100
900 HIGH-TECH INDUSTRIAL PRODUCTION
800

100

700
Semiconductors

600
500

400

Semiconductors

Computers
300
60

Computers
200

0
1/97

Communication equipment

100

40
1/98

1/99

1/00

1/01

1/02

1/03

1/97

1/98

1/99

1/00

1/01

1/02

1/03

FRB Cleveland • January 2004

SOURCE: Board of Governors of the Federal Reserve System.

production and manufacturing production to their highest levels since
March 2001, yet they remain about
3% below their respective June 2000
peaks. Mirroring this improvement
in production, their rates of capacity
utilization have also rebounded from
the most recent lows. After falling as
far as 74.0% for industrial production
and 72.6% for manufacturing late last
spring, in November they recovered
to 75.7% and 74.3%, respectively.
Nonetheless, they remain far below

the roughly 80% they tended toward
in the late 1990s.
Performance for some high-tech
industries has been a bit brighter.
Semiconductor production is up
more than 150% from January 2000.
Although its capacity utilization is
down from the remarkable 100%
achieved in May 2000, the current
82.4% is much more sustainable,
close to the 83.3% it averaged in the
1990s. Production of computers and
peripheral equipment is up a stillimpressive 57%, although its capacity

utilization of 74.4% is significantly
below its 1990s average of 79.4%
Communication equipment manufacturers have recovered somewhat
from the aftereffects of their boom
around the turn of the millennium,
but have not yet recovered fully. Production in this sector is still down
about 5% from its January 2000 level,
and capacity utilization remains at
only 52.1%, which is higher than its
46.9% nadir but far lower than its
1990s average of 81.4%.

12
•

•

Employment Trends
Change, thousands of workers
200 MONTHLY NONFARM EMPLOYMENT

Change, thousands of workers
200 MONTHLY EMPLOYMENT BY INDUSTRY

150
150

100
100
Leisure and hospitality

Professional and business services
Construction

Education and health services

–50
0

–100

Financial activities

Information
–50

Manufacturing

–150
–200
Jan.

Feb.

Mar.

Apr.

May

June
2003

July

Aug. Sept.

Oct.

Nov.

–100
Jan.

Feb.

Mar.

Apr.

May

June

July

Aug. Sept.

Oct.

Nov.

2003

Percent
60 DIFFUSION INDEX OF EMPLOYMENT

Thousands
250 INITIAL UNEMPLOYMENT CLAIMS
AND MASS LAYOFF EVENTS

2,500

210

2,100

Total private
Mass layoff events

40
170

1,700

130

1,300

30
Manufacturing
20
Initial claims
90

900

0
Jan.

Feb.

Mar.

Apr.

May

June July
2003

Aug. Sept.

Oct.

Nov.

50
Jan.

500
Feb.

Mar.

Apr.

May

June
2003

July

Aug.

Sept.

Oct.

Nov.

FRB Cleveland • January 2004

NOTE: All data are seasonally adjusted unless otherwise noted.

The labor market’s 2003 performance
was mixed, with disappointing numbers for the first half of the year and
significant improvement in the final
four months. From the beginning to
the middle of the year, total nonfarm
employment posted net losses; after
August, payroll employment increased
by 328,000 jobs. Employment trends
across industries such as professional
and business services, education and
health services, and construction
have strengthened in 2003. In recent

months, job gains have been increasingly broad based. By November
2003 (the latest available data), the
share of industries that reported a
net increase in employment was at its
high for the year. Since 2001, the
long-suffering manufacturing industry has posted a net loss of 2.5 million
jobs; in recent months, that number
has begun to decline.
The diffusion index of employment
shows whether establishments’ payroll
has increased, decreased, or stayed

the same. An index score of 50 means
that the number of establishments
where employment increased equaled
the number where it decreased.
The diffusion index’ one-month
span for total private employment
approached 50 in September for the
first time in 2003, then continued to
rise, reaching 54.7 in November. The
manufacturing sector’s index varied
between 19 and 42 in 2003 until hitting 42.3 in November. Over the
course of the year, the numbers of

(continued on next page)

13
•

•

Employment Trends (cont.)
Percent
69.3 EMPLOYMENT-TO-POPULATION RATIO

Percent
6.2 EMPLOYED PERSONS HOLDING MORE THAN ONE JOB a
6.0

Percent
56.8

69.2

56.6

69.1

56.4

5.8
Women

56.2

69.0

5.6

Women
56.0

68.9
Men

5.4
Total

68.8

55.8

68.7

55.6

68.6

55.4

5.2

5.0
Men

55.2

68.5

4.8
Jan.

Feb.

Mar.

Apr.

May

June July
2003

Aug. Sept.

Oct.

Percent
7.0 UNEMPLOYMENT RATE

Percent
20

Men and women, 16–19 years

6.5

Jan.

Nov.

Feb.

Mar.

Apr.

May

June July
2003

Aug. Sept.

Oct.

Nov.

Aug. Sept.

Oct.

Nov.

Percent
42 DURATION OF UNEMPLOYMENT
40
15 weeks or more

Men and women,
16 years and older

6.0

18
36

5.5

Men, 20 years and older

Less than 5 weeks
34

5.0

Women, 20 years and older

4.5

4.0

14
Jan.

Feb.

Mar.

Apr.

May

June July
2003

Aug. Sept.

Oct.

Nov.

5–14 weeks
30

28
Jan.

Feb.

Mar.

Apr.

May

June July
2003

FRB Cleveland • January 2004

NOTE: All data are seasonally adjusted, unless otherwise noted.
a. Not seasonally adjusted.

layoff events and initial unemployment insurance claims declined.
Although they trended upward again
in recent months, they remained
below the levels recorded at the beginning of 2003.
In January 2003, the share of men
holding more than one job increased,
then decreased, until the year-end
figure was close to January’s. From
February to April, the corresponding
figure for women declined precipitously but it regained its share over

the course of the year. The employment-to-population ratio for men fell
in the first few months of 2003 and
then rose to 69.1 by November. For
women, it fell over the course of the
year. The overall unemployment rate
varied between 5.7% and 6.4%, reaching 5.9% in November. The jobless
rate for all groups rose in the first half
of 2003. Although it trended downward in the second half of the year (except for teenagers), it was nonetheless
higher in November than in January

2003. The share of those unemployed
for a short duration (less than five
weeks) and those with a medium
duration (five to 14 weeks) fell over
the past year, but the share of those
unemployed for a longer duration
(15 weeks or more) rose significantly.
At the beginning of 2003, 37% were
unemployed for 15 weeks or more;
by year’s end that number had risen
to 41%; for those unemployed less
than five weeks, the share fell from
32.6% to 30.1% over the same period.

14
•

•

Migration of College Graduates
SHARE OF 1993 GRADUATES REMAINING IN THE STATE
IN WHICH THEY ATTENDED COLLEGE, 1994

SHARE OF 1993 GRADUATES REMAINING IN THE STATE
IN WHICH THEY ATTENDED COLLEGE, 1997

National average: 72.4%

National average: 66.7%

Lower than the national average

About the same as the national average (70%–75%)

About the same as the national average (64%–69%)

Higher than the national average

Data not available

SHARE OF 2000 GRADUATES REMAINING IN THE STATE
IN WHICH THEY ATTENDED COLLEGE, 2001

Highest and Lowest State Retention Rates
for 2000 Graduates, 2001

National average: 69.2%

Highest shares (percent)
Idaho (97.4)
Maine (91.7)
Texas (86.7)
California (84.4)
New Jersey (83.1)

Lower than the national average
About the same as the national average (67%–72%)
Higher than the national average

Lowest shares (percent)
Iowa (42.2)
North Dakota (38.4)
Rhode Island (37.6)
Vermont (30.6)
Delaware (30.2)

FRB Cleveland • January 2004

NOTE: Data not available for Alaska and Hawaii.
SOURCE: U.S. Department of Education, National Center for Education Statistics.

The U.S. Department of Education
conducts a Baccalaureate and Beyond
survey that tracks the location,
employment, and family patterns of
college graduates. So far, this longitudinal study has looked at students who
obtained their degrees in 1993 and
those who obtained their degrees in
2000. The first study surveyed students in April 1993, when they graduated, and again in April 1994 and April
1997. The 2000 class was surveyed in
April 2000 and April 2001 and will be
surveyed again in April 2004. The survey provides a unique opportunity to

track college graduates as they move
from state to state.
Among 1993 graduates, 72.4%
were still in the state where their
degree-granting college was located
one year after graduation (1994), and
66.7% were still in the same state as
their degree-granting institution four
years after graduation (1997). Retention rates in the Fourth District states
of Ohio and Kentucky exceeded the
national average in both 1994 and
1997: More than 3/4 of Ohio graduates
still lived in the state in 1994, and just
over 73% still lived there in 1997.
Kentucky’s retention rate rose during

the survey period: In 1994, 80.9% of
Kentucky graduates lived in the state;
by 1997, that figure had risen to
83.3%, the highest retention rate of
any state for which data were available in the 1997 survey.
Respondents in the survey of 2000
graduates seemed more willing to
move, within a year of graduation,
from the state in which they attended
college: In 2001, 69.2% of 2000 grads
nationwide were still in the state
where their school was located.
Although Ohio’s retention rate of
65.1% was below the national mean, it
(continued on next page)

15
•

•

Migration of College Graduates (cont.)
2000 GRADUATES FROM OHIO COLLEGES:
LOCATION IN 2001
65.9% of 2000 graduates from Ohio schools remained in Ohio in 2001.

2000 GRADUATES FROM PENNSYLVANIA COLLEGES:
LOCATION IN 2001
63.8% of 2000 graduates from Pennsylvania schools
remained in Pennsylvania in 2001.

Less than 1%

More than 1% but less than 3%

More than 3% but less than 5%

More than 3% but less than 7%

2000 COLLEGE GRADUATES LIVING IN OHIO IN 2001:
LOCATION OF DEGREE-GRANTING COLLEGE
80.0% of Ohio residents who graduated from
college in 2000 attended Ohio colleges.

2000 COLLEGE GRADUATES LIVING IN PENNSYLVANIA
IN 2001: LOCATION OF DEGREE-GRANTING COLLEGE
78.8% of Pennsylvania residents who graduated from
college in 2000 attended Pennsylvania colleges.

Less than 1%

Less than 1%
More than 1% but less than 3%

More than 1% but less than 2%

More than 3% but less than 4%

More than 3% but less than 3%

FRB Cleveland • January 2004

NOTE: Data not available for Alaska and Hawaii.
SOURCE: U.S. Department of Education, National Center for Education Statistics.

was well within the average range: The
middle 25 states had retention rates
between 60% and 71%. The Fourth
District states of Kentucky, Pennsylvania, and West Virginia were also among
the middle 25, with retention rates of
69.0%, 63.4%, and 61.6%, respectively.
Five states were able to keep more
than four out of every five (80%) graduates they produced in 2000; five
others could not keep even half.
In studying the 2001 data, it is important to remember that economic
factors unique to the recession may
have affected retention rates. Both

Ohio and Pennsylvania were net
exporters of education in 2001, with
Ohio exporting a net of roughly 9,000
graduates, and Pennsylvania exporting about 12,000. A major cause of
this phenomenon was undoubtedly
the region’s struggling labor markets.
A number of critical industries in
both states underwent significant job
reductions both before and during
the recession.
Of students leaving Ohio and Pennsylvania on graduation, a significant
number move to California, Florida,
and New York. Apart from migrants to
those populous states, most graduates

tend to move within the region: Ohio
grads tend to stay in the Great Lakes
region, while Pennsylvania grads who
move out of state tend to favor the
East Coast. Just as some of the students educated in Ohio and Pennsylvania elect to move out of those states
when they graduate, some students
graduating from schools in other
states choose to move into Ohio and
Pennsylvania. In Ohio, the largest
share of inmigrating college grads
come from Indiana schools, while the
largest share of those migrating to
Pennsylvania are from Ohio schools.

16
•

•

FDIC-Insured Commercial Banks
Billions of dollars
30 NET INCOME a

Billions of dollars
120 SOURCES OF INCOME

100

Total interest income

Net operating income
20
80
15
60
10
40
Total noninterest income

5
Securities and other gains/losses
20

–5
1995

1996

1997

1998

1999

2000

2001

2002

1995 1996

2003

Percent
4.7 NET INTEREST MARGIN AND ASSET GROWTH

Percent
12

1997

1998

2001

2002

2003

Percent
20

Return on equity

Return on assets

1.4

Assets growth rate

2000

Percent
1.5 EARNINGS

4.5

1999

Net interest margin

4.3

4.1

3.9

3.7

3.5

0
1995

1996

1997

1998

1999

2000

2001

2002

2003

1.3

1.2

1.1

1.0

0
1995

1996

1997

1998

1999

2000

2001

2002

2003

FRB Cleveland • January 2004

a. Net income equals net operating income plus securities and other gains and losses.
SOURCES: Federal Deposit Insurance Corporation, Quarterly Banking Profile, various issues.

In 2003:IIIQ, FDIC-insured commercial banks’ net operating income
improved on the previous quarter and
recovered strongly from its dip in
2002:IVQ. Compared to a year earlier,
it was up 17.4%. Net income, the sum
of net operating income and securities
gains and losses, was also up, gaining
10.6% relative to a year earlier. The
increase in earnings was kept in
check by reduced gains on the sales
of securities and other assets.
Commercial banks’ total interest income, at $83 billion, declined slightly
from the previous quarter. Because of
falling interest rates, it was significantly

less than the $113 billion achieved in
2000:IVQ. Total noninterest income
continued to rise, reaching a level 9.3%
higher than a year earlier, another sign
that the earnings pressures affecting
banks during the recession of 2001
are abating.
The improvement in overall earnings occurred despite the narrowing
net interest margin (interest plus dividends earned on interest-bearing
assets minus interest paid to depositors and creditors, expressed as a percentage of average earning assets).
It declined from 4.09% in 2002 to
3.81% in 2003:IIIQ.

Although low interest rates are one
cause of shrinking margins, another
reason, just as important, is strong
asset growth. Assets of FDIC-insured
commercial banks grew 7.8% (annualized) in 2003:IIIQ. Yet, even with nearrecord asset growth, depository institutions’ return on assets reached
almost 1.4%, the highest since 1989.
Return on equity, at 15.2%, was at its
post-1999 peak.
Although net loans and leases as a
share of total assets increased slightly
to 57.2% in 2003:IIIQ compared to
the previous quarter, it was still down
(continued on next page)

17
•

•

FDIC-Insured Commercial Banks (cont.)
Percent of assets
63 NET LOANS AND LEASES

Percent
0.6

Percent of loans and leases
1.2 ASSET QUALITY
Problem assets

1.0

0.5

0.8

0.4

Net charge-offs
0.6

0.3

0.4

0.2

0.1

53
1995

1996

1997

1998

1999

2000

2001

2002

Percent
9 HEALTH

0
1995

2003

Percent
2.00

1.75

1.50

1996

1997

1998

1999

2000

2001

2002

2003

Ratio
8.0 CORE CAPITAL

Percent
200
Coverage ratio
180

7.9

Unprofitable banks
6

1.25

1.00

0.75

0.50

0.25
0

1
1995

1996

1997

1998

Core capital (leverage) ratio

Problem banks

1999

2000

2001

2002

2003

7.8

160

7.7

140

7.6

120

7.5

100
1995

1996

1997

1998

1999

2000

2001

2002

2003

FRB Cleveland • January 2004

SOURCES: Federal Deposit Insurance Corporation, Quarterly Banking Profile, various issues.

from a year earlier. Net loans and
leases grew 7.1%, but total assets grew
7.8%, causing the year-over-year ratio
to decrease slightly. Although the ratio
was well below its recent high of
61.3% in 2000:IIIQ, lending was brisk
during the first three quarters of 2003,
partly because of the refinancing activity that resulted from low interest
rates in the lending market.
Asset quality showed signs of
improvement in the third quarter.
Net charge-offs (loans and leases removed from balance sheets because
of uncollectibility minus recoveries)

fell for the first time since 1999,
reaching 0.9% of total loans. Problem
assets (nonperforming loans and
repossessed real estate) as a share of
loans and leases fell to 0.40% from
0.53% at the end of 2002. The improvement in asset quality was
caused by the lower debt-servicing
costs that resulted from refinancing
at lower interest rates, combined
with aggressive tightening of lending
standards.
FDIC-insured commercial banks’
improvement in asset quality was also
reflected in the decline of unprofitable

institutions’ share to 5.4%. Problem
banks (those with substandard exam
ratings) as a proportion of total banks
also fell to 1.34%. The coverage ratio
(prudential reserves as a share of
noncurrent loans and leases) rose to
141% in 2003:IIIQ from 127% at the
end of 2002, the first increase since
1997. Core capital, which protects
commercial banks against unexpected losses, increased slightly to
7.86%. All of these performance indicators show that the banking sector
is strengthening.

18
•

•

Foreign Central Banks
Percent, daily
7 MONETARY POLICY TARGETS a

Trillions of yen
–35
–30

–25

5
Bank of England

European Central Bank

100

–10

–5

Federal Reserve

105

–20
–15

Index, January 2002 = 100
110 FOREIGN CURRENCY PER U.S. DOLLAR

95
U.K. pound
90

–1

Bank of Japan

–2

Japanese yen

–3

–4

–5

–6

35
40

–7
4/1

9/28

3/27

2001

9/23

3/22

Euro

Jan.

9/18

2002

2003

July

Jan.

July

2002

GENERAL GOVERNMENT BUDGET BALANCE
Belgium

2003

GENERAL GOVERNMENT GROSS DEBT
Belgium

2004
2005

Germany

Greece

Greece
Spain

Spain

France

France
Ireland

Ireland

Italy

Luxembourg

Netherlands

Netherlands
Austria

Austria

Portugal

Portugal
Finland

Finland

U.K.

U.K.
–5

–4

–3

2004
2005

Sweden

–2

–1
0
Percent of GDP

60
Percent of GDP

100

120

FRB Cleveland • January 2004

a. Federal Reserve: overnight interbank rate. Bank of Japan: a quantity of current account balances (since December 19, 2001, a range of quantity of current
account balances). Bank of England and European Central Bank: two-week repo rate.
SOURCES: Board of Governors of the Federal Reserve System; Bank of Japan; European Central Bank; Bank of England; People’s Bank of China; Wholesale
Markets Brokers Association; and European Commission, Economic Forecasts, Autumn 2003.

The four major central banks left their
policy targets unchanged as the British
pound, the euro, and the yen continued to appreciate relative to the U.S.
dollar. While the Bank of England held
its repo rate at 3.75%, one member of
its Monetary Policy Committee voted
against the decision, preferring a 4%
rate. Also, consistent with last June’s
announcement and with practice elsewhere in the European Union, the
Chancellor of the Exchequer has reset
the Bank’s inflation target to 2%,
reflecting a change to a harmonized

index of consumer prices as the basis
for targeting.
According to the Bank of Japan,
economic recovery is expected to
continue, “albeit at a moderate pace,”
and consumer prices are “basically
projected to continue falling slightly.”
Likewise, the European Central Bank
“noted that the economic recovery in
the euro area has started and that
confidence has strengthened further”; that annual inflation rates are
likely to fluctuate around 2% over the
coming months; and “that a gradual

and limited decline should take place
later on.”
In a somewhat controversial decision, the European Council held in
abeyance the Excessive Deficit Procedures that the European Commission recommended imposing on
France and Germany. The Commission’s autumn forecasts projected
that the two nations’ government
deficits and debt would remain above
the Growth and Stability Pact ceilings
of 3% and 60% of GDP, respectively,
through 2005.

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Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - January 2004

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