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Economic Trends
January 2008
(Covering December 14, 2007, to January 10, 2008)

In This Issue
Inﬂation and Prices
November Price Statistics
Money, Financial Markets, and Monetary Policy
Providing Liquidity
What is the Yield Curve Telling Us?
International Markets
Monetary Policy and the Dollar’s Depreciation
Economic Activity and Labor Markets
The Employment Situation
A Review of the Latest Business Cycle
Third-Quarter 2007 Final GDP
Regional Activity
Fourth District Employment Conditions

Inﬂation and Prices

November Price Statistics
01.09.08
by Michael F. Bryan and Brent Meyer

November Price Statistics
Percent change, last
1mo.a

3mo.a

6mo.a

12mo.

5yr.a

2006
avg.

All items

10.0

5.6

3.1

4.3

3.0

2.6

Less food and
energy

3.3

2.6

2.3

2.1

2.6

Medianb

3.7

3.3

2.8

2.9

2.5

3.1

16% trimmed
meanb

3.7

3.4

2.6

2.7

2.3

2.7

Finished goods

45.4

18.9

7.2

7.7

4.3

1.6

Less food and
energy

4.5

1.7

2.0

1.9

1.6

2.1

Consumer Price Index

Producer Price Index

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 Component Price Change
Distributions
Weighted frequency
45
November

2007 year-to-date average
35
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

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

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

The Consumer Price Index (CPI) rose at an annualized rate of 10.0 percent in November, its largest
spike since a post-hurricane Katrina jump of 15.7
percent in September 2005. Year-to-date (January–
November 2007), the CPI index has advanced 4.2
percent (at an annualized rate), compared to the
2.6 percent increase for all of 2006. Although this
month’s jump in consumer prices was largely due
to a 95.5 percent shock in energy prices, the CPI
excluding food and energy (core CPI) was elevated,
rising 3.3 percent during the month, well above
any of its longer-run trends. Both the median and
16 percent trimmed-mean CPI indicators posted
their largest increases of the year, advancing 3.7
percent in November.
Over the last three months, every major component
of the CPI (except education and communication),
rose at an annualized rate that exceeded 3.0 percent, pushing the 12-month growth rate in the CPI
up to 4.3 percent in November, from 2.0 percent
in August. The longer-term trends in the core CPI
and the trimmed-mean inﬂation estimators have
risen over that period as well (albeit less dramatically), and are ranging between 2.3 percent and 2.9
percent.
November also saw some ﬁrming in core goods
prices, which rose 2.1 percent during the month,
pushing their 12-month growth rate above zero for
the ﬁrst time in nine months. The longer-run trend
in core service prices remained planted above 3.0
percent.
Sixty percent of the CPI index’s components increased more than 3 percent in November, compared to a year-to-date average of 49 percent. Price
increases were relatively broad-based among components, as only 15 percent of the index showed
a deceleration in prices, compared to a 24 percent
average for the year so far. As evidenced in the
graph below, there is not much of a silver lining in
the data this month.
1

Core CPI Goods and Core CPI Services
12-month percent change
4.75
4.50
4.25
4.00
CPI
3.75
Median CPI a
3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
a
1.25
16% trimmed-mean CPI
1.00
1995
1997
1999
2001

However, looking forward, professional forecasters see CPI inﬂation falling to near 2 percent by
the end of next year. Even the most pessimistic
scrooges (the Top 10 Blue Chip average) have the
CPI growth rate falling under 3 percent by the end
of 2008.

C ore C P I
2003

2005

2007

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

CPI Component Price-Change
Distributions
12-month percent change
8.0
1-month
7.0
annualized
6.0 perc ent c hange
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
1-month
-4.0 annualized
-5.0 perc ent c hange
-6.0
1995
1997
1999

CPI and Forecasts
Annualized quarterly percent change
7.0
6.0

Forecast
Actual

5.0
C ore s ervic es

Top 10 forecast

4.0
3.0
2.0
1.0

Bottom 10 forecast

0.0
-1.0
C ore goods

-2.0
-3.0
Mar-06

2001

2003

2005

2007

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Source: Blue Chip panel of economists, December 10, 2007.

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

Money, Financial Markets, and Monetary Policy

Providing Liquidity
01.14.08
by Bruce Champ and Sarah Wakeﬁeld

Reserve Market Rates
Percent
8
7

Effective federal funds rate

6
5

Primary credit rate b

4
3
2
1

b
b
Discount rate
Intended federal funds rate
0
1999 2000 2001 2002 2004 2005 2006 2007
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.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

On December 11, 2007, the Federal Open Market
Committee (FOMC) voted to lower its target for
the federal funds rate by 25 basis points to 4.25
percent. On January 2, 2008, the FOMC released
the minutes of its December meeting. In the
minutes, the committee stated, “The information
reviewed at the December meeting indicated that,
after the robust gains of the summer, economic activity decelerated signiﬁcantly in the fourth quarter.
Consumption growth slowed, and survey measures
of sentiment dropped further. Many readings
from the business sector were also softer.” Meeting
participants also “discussed in detail the resurgence
2

January Meeting Outcomes
Implied probability
1.0
Chairman Ben Bernanke’s speech; Wholesale trade
0.9
Employment report; ISM Nonmanufacturing index
0.8
FOMC minutes released
0.7
0.6

4.00%

0.5
0.4

4.25%

0.3

3.50%

0.2

3.75%

4.50%

0.1

0.0
11/08 11/15 11/22 11/29 12/06 12/13 12/20 12/27 01/03 01/10

Primary Credit
Millions of dollars (not seasonally adjusted)
8000
7000
6000
5000
4000
3000
2000
1000
0
2003

2004

2005

2006

2007

Source: Board of Governors of the Federal Reserve System.

of stresses in ﬁnancial markets in November” and
expressed concerns about liquidity problems in
interbank markets.
On December 31, 2007, participants in the Chicago Board of Trade’s federal funds options market placed a 55 percent probability on a 25 basis
point reduction and a 28 percent probability on
no change in the funds rate at the FOMC’s endof-January meeting. After the publication of the
December minutes, several key data releases, and a
speech by Fed Chairman Bernanke on January 10,
these probabilities shifted signiﬁcantly, tilting toward expectations of a more aggressive January rate
cut. In his speech, Chairman Bernanke stated, “We
stand ready to take substantive additional action as
needed to support growth and to provide adequate
insurance against downside risks.” As of January
10, 2008, participants’ views indicated a 70 percent
probability of a 50 basis point cut in the funds rate
in January.
On December 12, 2007, between the FOMC
meeting and the release of the minutes, the Federal
Reserve announced the creation of a Term Auction
Facility (TAF). The TAF was introduced to address
“elevated pressures in short-term funding markets.” The TAF provides a new means by which the
Federal Reserve can inject liquidity into the banking system. The belief is that the discount window,
through which the Fed has historically made loans
to ﬁnancial institutions, has not always adequately
accommodated periods of ﬁnancial stress. It is
thought that a ﬁnancial institution may be reluctant to borrow through the discount window since
such an action may be interpreted as a sign of
ﬁnancial weakness.
Open market operations can be another source of
liquidity to the system. However, in recent months
concern has arisen that funds made available
through open market operations are not reaching those banks experiencing the greatest liquidity
needs. It is hoped that the TAF will overcome the
stigma eﬀect of standard discount window lending
and elicit greater borrowing as well as channel the
funds to those who need them most. Furthermore,
the TAF allows the Fed to inject funds through a
broader range of counterparties and against a wider

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

range of collateral than open market operations.

Repurchase Agreements
Billions of dollars
70
60
50
40
30
20
10
0
2003
2004
2005
2006
2007
Source: Board of Governors of the Federal Reserve System.

2008

Two auctions for a total of $40 billion have been
conducted so far. Bids for the ﬁrst auction of $20
billion began December 17, with a minimum bid
rate of 4.17 percent. A total of over $61 billion in
propositions were submitted from 93 bidders. The
awarded loans settled on December 20, with a maturity date of January 17, 2008. The stop-out rate
(or the winning bid) was 4.65 percent. The remaining $41 billion in bids were less than 4.65 percent
(but more than 4.17 percent).

Temporary Provision of Liquidity by
the Federal Reserve
Billions of dollars
150
125
100
75
50
25
0
9/1999

9/2001

9/2003

9/2005

Under the Term Auction Facility, the Fed announces an amount of funds to be auctioned and
a term for the loan, typically about a one-month
maturity. A minimum bid rate is determined by the
level of the overnight indexed swap (OIS) rate near
the time of the auction. (The OIS rate is typically
where the market expects the funds rate to average
over the period.) Funds are auctioned to generally
sound ﬁnancial institutions that are eligible for
primary credit through the Fed’s discount window.
The ﬁnal TAF rate is determined by the auction.
Greater detail on the Term Auction Facility can be
found on the Board of Governor’s website.

9/2007

Note: Sum of discount window lending, special liquidity facility (Y2K),
temporary repurchase agreements, and Term Auction Facility lending.
Prior to January 2003, discount window lending consists of adjustment
credit; after that date it consists of primary credit.
Source: Board of Governors of the Federal Reserve System.

The Fed conducted another $20 billion auction on
December 20. Funds available through this auction
will mature on January 31, 2008. The minimum
bid rate was 4.15 percent. Seventy-three bidders
submitted propositions totaling over $57 billion,
and the stop-out rate was 4.67 percent.
Two more auctions are currently slated for January
14 and January 28. Both of these auctions will be
for 28-day loans of $30 billion each. On January
4, the Fed announced that it “intends to conduct
biweekly TAF auctions for as long as necessary to
address elevated pressures in short-term funding
markets” and would make known their decisions
regarding February auctions on February 1.
Both of the December auctions had stop-out rates
only 8 to 10 basis points below the primary credit
rate of 4.75 percent, yet generated a quantity of
loans far in excess of outstanding primary credit.
This seems to imply the program does mitigate the
stigma problems associated with standard discount
window loans.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Absolute Federal Funds Rate Deviation
from Target by Day
Percent
1.60
1.40
1999–2000
1.20
1.00
2007–2008
0.80
0.60
1998–1999

0.40

1990–present
0.20
0.00
12/01 12/06 12/11 12/16 12/21 12/26 12/31

1/05

For 1990–present, values are an average over all years. Dashed portions of lines
correspond to weekends and holidays, when no trading occurs.
Source: Board of Governors of the Federal Reserve System.

The Federal Reserve normally increases their
provision of liquidity to help accommodate typical end-of-year funding pressures. The end of the
year also can be associated with fairly substantial
deviations of the federal funds rate from its target.
These deviations are exacerbated when the system
is simultaneously experiencing unusual liquidity
demands for other reasons. For example, during the
Y2K period and following the Long-Term Capital
Management/Russian default crisis of 1998, large
deviations of the federal funds rate from target were
observed. In 2007, ﬁnancial turmoil associated with
developments in mortgage markets added liquidity
pressures on top of typical year end needs.

Libor Spread
Percent
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
8/2001

8/2002

8/2003 8/2004

Despite the auction of $40 billion of loans in December, the level of temporary open market operations remained elevated through the end of 2007.
Primary credit outstanding, although small relative
to the combined total of TAF lending and temporary open market operations, also was at historically high levels at year’s end. The total amount of
temporary liquidity provided by the Fed near the
end of 2007 reached levels far above that of recent
years and rivals the quantities provided around the
century date turnover (Y2K) and immediately following the terrorist attacks of September 11, 2001.
However, both primary credit outstanding and
temporary repurchase agreements have fallen markedly in the ﬁrst week and a half of 2008.

8/2005

8/2006

8/2007

Note: Daily observations. LIBOR spread is the one month LIBOR rate minus the
one month Treasury bill yield.
Sources: Board of Governors of the Federal Reserve System, “Selected
Interest Rates,” Federal Reserve Statistical Releases, H.15.; Financial Times.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

The minutes from the FOMC’s December meeting
stated, “A number of participants noted some potential for the Federal Reserve’s new Term Auction
Facility and accompanying actions by other central banks to ameliorate pressures in term funding
markets.” These participants may be encouraged by
recent movements in the spread between the London Inter-Bank Oﬀer Rate (LIBOR) and the shortterm Treasury rate. As of December 20, this spread
was at 2.48 percent. Since then it has fallen nearly a
percentage point and a half to 1.03 percent. Nonetheless, the LIBOR spread remains above levels of
recent years.

Money, Financial Markets, and Monetary Policy

What Is the Yield Curve Telling Us?
12.19.07
by Joseph G. Haubrich and Katie Corcoran

Yield Spread and Real GDP Growth*
Percent
12
10

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

8
6
4
2
0

10 year minus 3 month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

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

Yield Spread and Lagged Real GDP
Growth
Percent
12
One-year-lagged real GDP growth
(year-to-year percent change)

10
8
6
4
2
0

10 year minus 3 month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

Sources: Bureau of Economic Analysis; Federal Reserve Board.

Predicted GDP Growth and the
Yield Spread
Percent
6
5

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

Predicted G DP growth

3
2
1
0
-1
-2
2002

10 year minus 3 month yield s pread

2003

2004

2005

2006

2007

2008

Since last month, both long-term and short term
interest rates have decreased, with short rates dipping more, leading to a steeper yield curve. 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 T-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 had been giving a rather pessimistic
view of economic growth for a while now, but with
an increasingly steep curve, this is turning around.
The spread has remained robustly positive, with the
10-year rate at 4.12 percent and the 3-month rate
at 2.92 percent (both for the week ending December 14). Standing at 120 basis points, the spread
is up from November’s 82 basis points as well as
October’s 67 basis points. Projecting forward using
past values of the spread and GDP growth suggests
that real GDP will grow at about a 2.6 percent rate
over the next year. This is broadly in the range of
other forecasts, if a bit on the low side.
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 will be in recession. Looking at that relationship, the expected
chance of the economy being in a recession next

Sources: Bureau of Economic Actvity; Federal Reserve Board

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

December is 5 percent, down from November’s 9
percent, and October’s 14 percent.

Probability of Recession Based on the
Yield Spread*
Percent
100
90
P robability of
recession

80
70

F orec as t

60
50
40
30
20
10
0
1960

1966

1972

1978

1984

1990

1996

2002

2008

*Estimated using probit model
Note: Shaded bars indicate recessions.
Sources: Bureau of Economic Analysis; Federal Reserve Board;
Authors’ calculations

Perhaps the decreasing chance of a recession seems
strange in the midst of recent ﬁnancial concerns,
but one aspect of those concerns has been a ﬂight
to quality, which lowers Treasury yields. In addition, reductions in both the federal funds target
rate and the discount rate by the Federal Reserve
have had the same eﬀect, as lower rates tend to
steepen the yield curve. Furthermore, the forecast is
for where the economy will be next December, not
earlier in the year. The 5 percent probability of a
recession next December is close to the 9.5 percent
calculated by James Hamilton over at Econbrowser
(though we are calculating diﬀerent events: our
number gives a probability that the economy will
be in recession a year from now, and Econbrowser
looks at the probability that the second quarter of
2007 was in a recession).
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, 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 | January 2008

International Markets

Monetary Policy and the Dollar’s Depreciation
01.08.08
By Owen F. Humpage and Michael Shenk

The Current Account and the Real Broad
Dollar Index
Index, 3/1973= 100
120

Percent of GDP
-3.0
-3.5

115

Real Broad Dollar Index

-4.0

110

-4.5

105

-5.0

100

-5.5

Current account

-6.0

-6.5

80
-7.0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: Board of Governors of the Federal Reserve System; and The Bureau
of Economic Analysis.

Real GDP and Components: Third Quarter
Annualized percent change
25
20
15
10
5

Personal
consumption

0
Real GDP
-5

Residential
investment
Business
Exports
fixed
investment

Government
spending

Imports

-10
-15
-20
-25
Source: Bureau of Economic Analysis

The dollar has been depreciating in foreign-exchange markets since February 2002. But in early
2006, the underlying nature of the dollar’s descent
changed. Prior to that time, an expanding U.S.
aggregate demand seemed to have provoked the
dollar’s decline, but thereafter, the diversiﬁcation of
international investors’ portfolios away from dollardenominated assets seemed to be the cause. This
diversiﬁcation and the associated depreciation can
aﬀect the U.S. macroeconomy along at least three
key dimensions: trade, prices, and interest rates. For
that reason, the sharpness and protracted nature
of the depreciation have started to raise questions
about possible implications for U.S. monetary
policy and about possible policy responses to the
dollar’s fall.
The dollar depreciation has raised the dollar price
of U.S. imports and lowered the foreign currency
price of U.S. exports. These relative price changes
shift demand in both the United States and the rest
of the world toward U.S. goods and services. Our
exports rise and our imports fall, directly beneﬁting U.S. ﬁrms that either sell abroad or compete
against foreign ﬁrms in U.S. markets. At a time
when housing-sector weakness threatens growth in
other sectors of U.S. economy, a strong export sector is welcome news for policymakers.
As worldwide demand shifts toward U.S. goods
and services, the dollar price of both our imported
and exported goods will rise. (The foreign-currency
prices of our exports fall, but the dollar prices of
these goods rise. ) These price pressures will ripple
through the economy and become reﬂected in key
aggregate price indexes. While such price pressures
are not in themselves inﬂationary, they greatly
complicate policymakers’ ability to read the degree
of inﬂationary pressure in the economy and to
respond appropriately.
All else constant, a prolonged portfolio reshuﬄing
away from dollar-denominated assets could leave

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Foreign Exchange Indexes
Percent change, year over year
12
Correlation: -0.41
10
8
6

CPI

4
2
0
-2
-4

Import price index:
Nonpetroleum imports

-6
1986

1991

1996

2001

2006

Source: Bureau of Labor Statistics

Net Savings and Investment
Percent of GDP
10
Net investment

8
6
4

Net savings

2
0
-2
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: The Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

real interest rates in the United States higher than
they might otherwise be. The inﬂow of foreign
investment funds that has accompanied the U.S.
current account deﬁcit since 1982 has allowed
domestic investment to exceed domestic savings.
As the current account deﬁcit narrows and as these
foreign ﬁnancial inﬂows slow, domestic investment
and savings must necessarily converge. Higher real
interest rates are the mechanism that will achieve
this convergence. They may imply a slower pace
of U.S. investment or consumption, and they will
complicate further the task of determining which
federal funds rate target is neutral with respect to
the economy and which federal funds rate setting
is currently appropriate for achieving the Fed’s dual
mandate of price stability and maximum sustainable economic growth.
In the 1980s, when the dollar ﬁrst appreciated and
then depreciated, many observers thought that the
United States should direct policy at oﬀsetting—
or at smoothing—the dollar’s movements. Such
a policy might minimize the economic eﬀects of
the change in the dollar’s exchange value. At best,
exchange-rate-focused policies are superﬂuous; at
worst, they conﬂict with the Fed’s dual mandate.
Focusing monetary policy on exchange rates presents the Federal Reserve with a potential mismatch
between the number of policy instruments at its
disposal and the number of policy objectives that
it seeks to attain. Under its current dual mandate,
the Federal Reserve focuses on achieving a federalfunds-rate target consistent with stable prices and
economic growth at its potential. From time to
time, the FOMC may lean one way or the other
with respect to these dual objectives, but doing so
generally does not present much of a conﬂict. Over
the long-term, the FOMC’s objectives are compatible, because the System can only raise the nation’s
potential for long-term economic growth by keeping inﬂation low and stable. Over the short-run,
conﬂicts between objectives can arise, but often
when economic growth falls below its potential
rate, inﬂation tends to moderate, and when economic growth exceeds its potential rate, inﬂation
tends to rise. In such cases, raising or lowering the
federal funds rate promotes both the growth and
inﬂation objectives. A serious problem arises when
9

the economy confronts a supply shock—like rising oil prices—since supply shocks puts upward
pressure on prices while simultaneously trimming
economic growth. Supply shock can force the
FOMC to choose between its inﬂation and growth
objectives, but if its policy has been credible and is
clearly articulated, temporarily doing so is possible.
Adding a third, exchange-rate objective to the
Federal Reserve’s mandates ramps up the instrument-versus-targets problem. If the dollar were
depreciating because monetary policy was excessively easy, no conﬂict would be involved. Tightening monetary policy to slow the depreciation would
be consistent with maintaining a stable prices and
ultimately keeping economic growth at potential.
In this case, however, adding an exchange-rate
target to the Fed’s mandate would be superﬂuous
to the its other objectives. If, however, the dollar
were depreciating because of a diversiﬁcation out of
dollars, an attempt to slow the pace of depreciation
would necessarily conﬂict with one or both of the
Fed’s other objectives. Should the FOMC be tightening to slow the dollar’s depreciation when ﬁnancial markets need liquidity and economic growth is
likely to slow?
Some observers might recommend that the Federal Reserve slow the dollar’s depreciation through
sterilized sales of foreign exchange.1 To conduct a
sterilized sale, the Fed would sell euros or yen for
dollars and oﬀset or “sterilize” the decline in dollar
reserves by buying U.S. Treasury securities from the
banking system. This set of transactions would not
interfere with the FOMC’s federal funds rate target
and, therefore, with the Fed’s price and growth
objectives. Sterilized interventions can sometimes
temporarily aﬀect exchange rates,2 but because
they do not change the underlying macroeconomic
determinants of exchange rates, their impact is at
best ephemeral.
1. “Is Foreign Exchange Intervention a Good Idea?” by Owen F.
Humpage and Michael Shenk, Federal Reserve Bank of Cleveland,
Economic Trends, June 06, 2007 <http://www.clevelandfed.org/
research/trends/2007/0607/01intmar_060607.cfm>.
2. “On the Rotation of the Earth, Drunken Sailors, and Exchange
Rate Policy,” by Owen F. Humpage, Federal Reserve Bank of
Cleveland, Economic Commentary, February 15, 2004 <http://
clevelandfed.org/research/Commentary/2004/0215.pdf>.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Economic Activity and Labor

A Review of the Latest Business Cycle
01.04.08
by Paul W. Bauer and Katie Corcoran

GDP Shares: 2000
Other
14.25%
Private residential
investment
4.55%

Durable goods
8.79%

Nondurable
goods
19.84%

Private
nonresidential
investment
12.55%

Services
40.02%
Source: Bureau of Economic Analysis

GDP Shares: 2007
Other
12.22%
Private residential
investment
4.22%
Private
nonresidential
investment

Durable goods
10.68%

Nondurable
goods
20.72%

11.75%

Services
40.41%
Note: Calculated through the Third Quarter
Source: Bureau of Economic Analysis

Share of GDP: Imports and Exports
Percent
20

15
Imports
10
Exports
5

0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Note: Shaded bars indicate recessions.
Source: Bureau of Economic Analysis; and National Bureau of Economic Research

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

As we move into a new year—and as the current
expansion comes, perhaps, to an end—it is an appropriate time to examine how the U.S. economy
has evolved, so far anyway, over this business cycle.
Services continue to account for the largest share of
gross domestic product (GDP). Through the third
quarter of 2007, they comprised 40.4 percent of
GDP—up very slightly from 40.0 percent in 2000.
Both nondurable and durable goods also increased
their shares of GDP. Durable goods rose from 8.8
to 10.7 percent and nondurable goods from 19.8
to 20.7 percent. Declining in share were both
private residential investment (4.6 to 4.2 percent)
and private nonresidential investment (12.6 to 11.8
percent).
A more signiﬁcant change over this business cycle
is the continuing rise in the importance of international trade to the U.S. economy. Going into the
last recession, both exports and imports declined
as a share of GDP, but throughout this expansion
both have grown at a fairly steady pace, at least
until lately. As the dollar has weakened against
other currencies and economic growth overseas has
become relatively stronger, exports’ share has begun
to accelerate, while imports’ share has leveled oﬀ
and even shrank in the third quarter.
There have also been large changes in the shares of
the components of national income over this business cycle. Compensation of employees retains the
largest share, but it has fallen from over 66 percent
at the end of the last expansion to 64.3 percent.
Over the same period, corporate proﬁt’s share rose
from 8 percent to about 13 percent. Much of this
change though is likely cyclical and not permanent.
As can be seen in the last business cycle, corporate
proﬁts are apt to ﬂuctuate over a cycle, tending to
peak as a share of national income well before the
end of the cycle.
Over this business cycle, rental income has fallen to
0.6 from 1.7 percent. This is mostly due to hom11

Component Shares of National Income
Percent
14

68
Corporate profits

12
10

8
6

65
Proprietors’ income

4
2

64
Compensation of employees

Rental income

0
-2
1990 1992 1994 1996 1998 2000 2002 2004 2006

63
62
61
60

Sources: Bureau of Economic Analysis; and National Bureau of Economic Research

eownership rates reaching record levels. Whether
this is a permanent shift will become apparent as
the housing slump plays out. Lastly, while proprietor’s income has remained fairly ﬂat over this
cycle, since 1990 its share of national income has
increased to 8.5 from 7.5 percent.
Finally, while not related to the business cycle,
the economic impact of the conﬂicts in Iraq and
Afghanistan also appear in the GDP accounts over
this period. At the end of the Cold War, national
defense accounted for 6.8 percent of GDP. With
the “peace dividend” that share fell to 3.9 just prior
to the 9/11 tragedy. Since then, national defense’s
share has averaged 4.4 percent.

Share of GDP: National Defense
Percent
10

0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Bureau of Economic Analysis; and National Bureau of Economic Research

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Economic Activity

The Employment Situation
01.09.08
By Murat Tasci and Beth Mowry

Labor Market Conditions
Average monthly change
(thousands of employees, NAICS)
2004

2005

Jan–Nov
2007
2006

Dec
2007

Payroll employment

172

212

189

111

Goods-producing

−31

−75

Construction

−16

−49

Heavy and civil engineering

–1

–2

Residentiala

−2

−8

−28

Nonresidentialb

–17

Manufacturing

−7

−18

−31

Durable goods

−12

−20

Nondurable goods

−9

−6

−5

−11

144

180

179

142

−3

–24

Service-providing
Retail trade
activitiesc

–2

–4

Temporary help services

−1

−4

Education and health services

Financial
PBSd

Leisure and hospitality
Government
Local educational services

Average for period (percent)
Civilian unemployment rate

5.5

5.1

4.6

4.7

a. Includes construction of residential buildings and residential specialty trade
contractors.
b. Includes construction of nonresidential buildings and nonresidential specialty
trade contractors.
c. Financial activities include 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.

Private Sector Employment Growth
Change, thousands of jobs: three-month moving average
350
300
250
200
150
100
50
0
-50
-100
-150
-200
2002

2003

2004

2005

2006

The labor market created a mere 18,000 jobs in December, falling well below expectations, as well as
November’s upwardly-revised 115,000 ﬁgure. The
December report was the weakest since August of
2003, and the unemployment rate increased to 5.0
percent from 4.7 percent in the previous month.
However, the average monthly job gain for the
fourth quarter stands at 97,000, which is still better
than the third quarter’s average of 77,000, and indicates moderate growth.
Large contributors to December’s weakness were
construction (−49,000 jobs), manufacturing
(−31,000), and retail trade (−25,000). These losses
reﬂect the continuing housing downturn and the
cautious retail environment. All three of these sectors, especially construction, worsened considerably
since November’s report. Residential construction,
for example, lost 28,000 jobs, compared to November’s loss of 8,000. Nonresidential construction
also suﬀered, losing 17,000. Within the manufacturing sector, the lone job creators were food
manufacturing, machinery, and chemicals. Among
the subsectors struggling the most were computer
and electronic products; motor vehicles and parts;
and plastics and rubber products.
Services were the bright spot in the report, adding 93,000 jobs. Professional business services
(43,000), education and health services (44,000),
and government (31,000) were the strongest contributors within the category. All three of these
sectors have been relatively consistent pillars of job
growth in 2007. Management and technical consulting services added 12,300 jobs, and architectural and engineering services added 7,500. Leisure
and hospitality also fared particularly well, with
food services and drinking places adding 26,600
jobs, and healthcare adding 27,900. Although
services created the most jobs in December, this
month’s growth in the sector fell far short of that in

2007

Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

November (160,000), as well as the year’s monthly
average for services (142,000).

Average Nonfarm Employment Change
Change, thousands of jobs
250

Revised
Previous estimate

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 two years. This trend discounts the
constant positive eﬀect the government sector has
had.

200
150
100
50

December’s diﬀusion index slipped to 48.4, indicating that more industries cut back payrolls than
added to them. The last time the index fell below
the neutral 50 mark was way back in September
2003.

0
2004 2005 2006 2007

II
III
2007

Oct Nov Dec

Source: Bureau of Labor Statistics.

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

Revision
to Oct

Nov
current

Revision
to Nov

Dec
2007

159

−11

115

Goods-producing

−43

−21

−45

−12

−75

Construction

−20

−11

−37

−13

−49

1.5

2.1

−2.1

2.4

−2

Residentiala

−13.7

−4.1

−9.9

−2.7

−28

Nonresidentialb

−3.3

−1.3

−2.4

−1.7

−17

−23

−8

−13

−2

−31

Durable goods

−17

−8

−2

−1

−20

Nondurable
goods

−6

−11

−1

−11

Payroll employment

Heavy and civil
engineering

Manufacturing

Service-providing

202

160

Retail trade

−20.4

−5.4

−24

−2

−16

−4

Financial activitiesc
PBSd

22.9

−4.9

11.6

0.3

Education and
health services

Leisure and
hospitality

Government

−2

35.3

5.2

9.6

−0.2

Temporary help
services

Local educational services

These numbers overwhelmingly point to a weak
December labor market, with almost all sectors
worsening from the previous month. However,
monthly data are volatile and subject to revision.
The Bureau of Labor Statistics revised October’s
initial 170,000 payroll gain down to 159,000, and
November’s initial 94,000 was revised up to a gain
of 115,000. Payroll gains in November and December are subject to revision in the next report.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Economic Activity

Third-Quarter 2007 Final GDP
12.21.07
By Brent Meyer

Real GDP and Components, 2007:IIIQ
(final estimate)
Annualized percent change, last:
Quarterly change,
billions of 2000$

Quarter

Four
quarters

138.8

4.9

2.8

Real GDP
Personal consumption

57.9

2.8

3.0

Durables

13.5

4.5

4.7

Nondurables

13.0

2.2

2.3

Services
Business fixed investment
Equipment

32.8

2.8

3.0

30.7

9.4

5.1

16.1

6.2

1.5

Structures

11.6

16.4

13.8

Residential investment

−27.4

−20.5

−16.5

Government spending

18.8

3.8

2.7

National defense

12.2

10.1

5.7

40.8

—

Exports

61.7

19.1

10.3

Imports

20.9

4.3

1.7

24.8

—

Net exports

Change in business inventories
Source: Bureau of Economic Analysis.

Real Gross Domestic Product
Four-quarter percent change
8
Forecast
6

-2
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Real Gross Domestic Product (GDP) advanced at
a 4.9 percent annualized rate in the third quarter,
according to the ﬁnal estimate. The ﬁnal revision
was unchanged from the preliminary estimate and
goes into the books as the strongest quarter since
the third quarter of 2003. While the headline
number remained unchanged from the preliminary
estimate, some of the components were adjusted.
Personal consumption expenditures were revised up
slightly, as durable goods expenditures rose from
4.0 percent in the preliminary release to 4.5 percent
in the ﬁnal estimate. Concurrently, private inventories were revised down from an increase of $27.1
billion to one of $24.8 billion.
Following two consecutive quarters below 2.0 percent, a strong third quarter elevated the four-quarter growth rate in real GDP to 2.8 percent. Since
coming out of the last recession, the year-over-year
growth rate has averaged 2.7 percent.
The ﬁnal estimate of third quarter corporate proﬁts
was released with the GDP report. Proﬁts before
taxes were hampered by fallout from mortgage
foreclosures and ﬁnancial turmoil, and after having
posted a $94.7 billion gain in the second quarter,
fell $20.5 billion in the third. Proﬁts are still up 1.8
percent over the third quarter of 2006, however.
With respect to the economic outlook, the Blue
Chip panel of forecasters is expecting GDP growth
to drop to 0.8 percent (annualized rate) in the fourth
quarter, before returning to trend by the end of 2008.
The uncertainty surrounding the near-term growth
outlook has caused forecasters to trim their predictions over the past couple of months. The Blue
Chip consensus for fourth-quarter GDP growth fell
0.9 percentage point from November 10 to December 10 (the date of the forecast release). Out of 51
forecasting ﬁrms in the Blue Chip panel, 39 revised
their 2008 GDP forecast down from November,
11 forecasts remained the same, and only 1 forecast
was revised up.
15

Corporate Profits
Four-quarter percent change
30
25
20
15
10
5
0
-5
-10
-15
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: Bureau of Economic Analysis.

Real GDP Growth
Annualized quarterly percent change
6

Final estimate
Blue Chip forecast

5
4
3
2
1
0
IVQ IQ
2005

IIQ IIIQ IVQ IQ
2006

IIQ IIIQ IVQ IQ
2007

IIQ IIIQ IVQ
2008

Sources: Blue Chip Economic Indicators, December 2007; and Bureau of
Economic Analysis.

GDP and Forecasts
Annualized quarterly percent change
6
5
Actual
4

October forecast

November forecast

2
1
December forecast
0
3/06

9/06

3/07

9/07

3/08

9/08

Source: Blue Chip panel of economists.

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Regional Activity

Fourth District Employment Conditions
01.08.08
By Tim Dunne and Kyle Fee

Unemployment Rates, Fourth District
and Ohio
Percent
8
7

Fourth District a

6
5
United States

3
1990 1992 1994 1996 1998 2000 2002 2004 2006
a. Seasonally adjusted using the Census Bureau’s X-11 procedure.
Note: Shaded bars represent recessions. Some data reflect revised inputs,
reestimation, and new statewidecontrols. For more information,
see http://www.bls.gov/lau/launews1.htm.
Sources: U.S. Department of Labor; and Bureau of Labor Statistics.

Unemployment Rates, October 2007
U.S. Unemployment rate = 4.7%

3.51
4.51
5.51
6.51
7.51
8.51

4.50
5.50
6.50
7.50
8.50
12.50

Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Source: U.S. Department of Labor; and Bureau of Labor Statistics.

The district’s unemployment rate remained at
5.7 percent for the month of October. Similar
declines in the number of people employed (-0.4
percent), the number of people unemployed (-0.3
percent) and the size of the labor force (-0.4 percent) kept the district’s unemployment rate steady.
Compared to the national unemployment rate in
October, the district’s rate stood 1.0 percent higher
and has been consistently higher since early 2004.
Over the last year, the Fourth District’s unemployment rate increased 0.4 percentage point, whereas
the national unemployment rate increased 0.3
percentage point.
Within the Fourth District, unemployment rates
varied widely across locations. Of the 169 counties
in the Fourth District, 14 had an unemployment
rate below the national average in October while
155 had a higher unemployment rate. Rural Appalachian counties continue to experience high levels
of unemployment, and Fourth District Kentucky
is home to ﬁve counties with unemployment rates
that exceed 10 percent. Unemployment rates for
the District’s major metropolitan areas ranged from
a low of 4.3 percent in Lexington to a high of 7.7
percent in Toledo.
Lexington is the only large metropolitan area where
nonfarm employment grew as fast as the national
average (1.2 percent) over the past 12 months. Akron, Cincinnati, Columbus, and Pittsburgh added
jobs but at a slower rate than the United States.
Conversely, Cleveland, Dayton, and Toledo have
seen either no change or a decrease in nonfarm
employment over the same period. Employment in
goods-producing industries increased in Akron (1.3
percent), while all other Fourth District metropolitan areas lost goods-producing jobs. Nationally,
employment in goods-producing industries fell 1.3
percent.
Focusing on the service sector, Lexington showed
the strongest growth in employment (1.6 percent)

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

and was the only large metro area in the Fourth
District with growth close to the national average
of 1.7 percent. All other Fourth District metro
areas experienced employment growth in the
service sector of less than one-half of the national
rate. Information services expanded in Lexington
(4.3 percent), Toledo (2.5 percent), and Cleveland
(0.6 percent). Professional and business services
employment grew faster than the national rate of
2.0 percent in Columbus (2.2 percent), Toledo
(2.6 percent), and Akron (2.4 percent). Compared
to the nation’s 3.2 percent increase in education
and health services employment over the past 12
months, Cincinnati and Lexington posted stronger
job gains (3.5 percent and 3.6 percent, respectively); all other large Fourth District metropolitan
areas posted modest gains in education and health
services.
Looking over a longer time horizon—from January 2000 forward—nonfarm employment growth
ranged from 4.2 percent in Akron to -6.4 percent
in Dayton. These employment growth rates all
fall well short of the national growth rate of 8.2
percent, and the shortfalls were present in both the
goods-producing and service sectors. All Fourth
District metropolitan areas shown in the table lost
goods-producing jobs at more than twice the national rate. Dayton (-32.0 percent) and Cleveland
(-26.6 percent) led the declines in manufacturing
employment, while Lexington (-17.7 percent) was
the only Fourth District metro area in the table
to lose manufacturing jobs at a slower rate than
the nation (-18.6 percent). However, the substantial diﬀerence in job growth between the nation
and Fourth District metropolitan areas in goodsproducing industries is not primarily a result of
diﬀerences in manufacturing. Instead, the Fourth
District fell well short of the nation’s 23.6 percent
employment growth in natural resources, mining,
and construction industries.
Turning to the service sector, Akron showed the
strongest growth in service-providing employment
of Fourth District cities (10.1 percent)—not too
far below the national average of 11.5 percent.
However, this is the exception, as the remainder
of the Fourth District metropolitan economies all
generated signiﬁcantly lower gains in service-sector
Federal Reserve Bank of Cleveland, Economic Trends | January 2008

employment than the nation. Somewhat surprisingly, there has been a sharp reduction in information services employment for the United States as a
whole, as well as in the Fourth District. Dayton is
the only metro area in the Fourth District to buck
that trend, showing a rise in information services
employment of 4.7 percent. Professional and
business services employment grew faster than the
nation’s 13.1 percent in Columbus (16.3 percent),
Cincinnati (14.4 percent), and Akron (39.7 percent). Finally, education and health services expanded strongly over the period in both the Fourth
District and the United States as a whole.

Payroll Employment by Metropolitan Statistical Area (year over year)
12-month percent change, October 2007
Cleveland
Total nonfarm

Columbus

Cincinnati

Pittsburgh

Dayton

Toledo

Akron

Lexington

U.S.

0.0

0.5

0.3

-0.6

-0.2

0.8

1.2

Goods-producing

-0.9

-1.7

-2.1

-1.7

-1.3

-2.8

1.3

-1.0

-1.3

Manufacturing

-1.5

-1.9

-1.5

-1.6

-1.8

-3.3

1.1

-2.2

-1.5

1.0

-1.4

-3.3

0.1

0.2

-1.2

1.9

2.4

-1.0

0.2

0.8

0.6

-0.5

0.4

0.7

1.6

1.7

Trade, transportation, and
utilities

-0.5

-0.4

-0.5

-1.8

-1.0

0.3

-0.6

0.8

Information

0.6

-0.5

-3.2

-2.2

-0.9

2.5

0.0

4.3

1.1

Financial activities

-0.1

-0.9

-1.0

0.3

2.5

-0.7

0.0

-0.8

0.4

Professional and business
services

-0.8

2.2

1.0

1.3

-2.2

2.6

2.4

-3.5

2.0

Education and health
services

0.9

0.3

3.5

1.8

0.3

1.2

1.3

3.6

3.2

Leisure and hospitality

0.2

2.7

0.5

0.3

-0.3

-0.6

7.0

3.2

Other services

0.5

-1.3

-0.2

-0.8

0.7

1.5

0.0

0.1

0.5

1.2

1.0

-0.2

1.3

0.2

0.1

0.0

3.7

1.1

6.0

5.0

5.2

4.5

6.2

7.7

5.6

4.3

4.7

Natural resources, mining,
and construction
Service-providing

Government
October unemployment rate (sa,
percent)

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

Federal Reserve Bank of Cleveland, Economic Trends | January 2008

Payroll Employment by Metropolitan Statistical Area since January 2000
Percent change since January 2000
Cleveland Columbus
Total nonfarm

Cincinnati

Pittsburgh

Dayton

Toledo

Akron

Lexington

U.S.
8.2

-5.4

3.7

2.6

0.6

-6.4

-4.6

4.2

1.4

Goods-producing

-23.7

-19.6

-14.9

-17.6

-27.9

-20.0

-15.6

-15.9

-6.5

Manufacturing

-26.6

-24.8

-19.4

-24.0

-32.0

-22.6

-19.5

-17.7

-18.6

-9.3

-6.7

-1.6

-3.3

-7.1

-11.4

0.1

-10.8

23.6

0.4

8.1

6.9

4.3

-0.2

0.1

10.1

6.3

11.5

Trade, transportation, and
utilities

-10.1

-3.1

-4.7

-6.5

-16.6

-10.8

3.0

-5.1

2.2

Information

-20.3

-15.0

-25.7

-11.8

4.7

-13.7

-9.5

-3.6

-13.0

Natural resources, mining,
and construction
Service-providing

Financial activities

-2.1

-4.5

9.8

1.5

18.1

4.5

-2.9

2.1

10.7

Professional and business
services

-0.5

16.3

14.4

8.1

0.7

-7.5

39.7

1.5

13.1

Education and health services

16.9

24.3

21.3

17.8

12.0

20.6

18.5

18.3

26.2

Leisure and hospitality

1.5

16.2

12.8

11.3

5.9

2.2

-2.0

18.4

23.1

Other services

-2.8

9.5

1.9

-1.9

2.0

6.2

-0.5

-1.8

7.3

Government

0.4

10.7

6.3

1.8

-0.1

1.4

5.1

11.8

10.8

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

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Federal Reserve Bank of Cleveland, Economic Trends | January 2008

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