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Economic Trends
October 2008
(Covering September 11, 2008, to October 9, 2008)

In This Issue
Inﬂation and Prices
August Price Statistics
Financial Markets, Money, and Monetary Policy
Staying the Course
The Yield Curve
International Markets
Swap Lines
Economic Activity and Labor Markets
Cracks in the Real Economy
The Employment Situation, September
Trend Unemployment and What It Says about Unemployment Patterns
Second-Quarter GDP, Final Revision
Banking and Financial Markets
Housing and the Banking Industry

Inﬂation and Prices

August Price Statistics
09.26.08
Brent Meyer

August Price Statistics
Percent change, last
1mo.a

3mo.a

6mo.a

12mo.

2007
avg.

5yr.a

Consumer Price Index
−1.6

7.2

6.0

5.4

3.5

4.2

Less food and energy

All items

2.4

3.4

2.6

2.5

2.3

2.4

Medianb

3.5

4.3

3.5

3.3

2.8

3.1

16% trimmed meanb

1.2

4.6

4.0

3.5

2.7

2.8

Producer Price Index
Finished goods

−10.5

8.6

9.6

9.7

4.9

7.1

2.9

4.6

4.3

3.7

2.2

2.1

Less food and energy

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

CPI Component Price Change Distributions
Weighted frequency
50
August 2008
45
2008 year-to-date average
40
35
30
25
20
15
10
5
0

0 to 1
1 to 2
2 to 3
3 to 4
Annualized monthly percentage change

4 to 5

Source: Bureau of Labor Statistics.

The Consumer Price Index (CPI) fell for the ﬁrst
time since October 2006, declining at an annualized rate of 1.6 percent in August. It was pulled
down, as expected, by a large decrease (−31.8 percent) in energy prices, which, in the three months
prior to August, had helped to push the CPI up
10.6 percent. The CPI excluding food and energy
(core CPI) increased 2.4 percent during the month,
compared to a 4.0 percent increase in July and a
3.9 percent increase in June. The median and 16
percent trimmed–mean CPI estimates also rose
more slowly in August than in July. The median
CPI rose 3.5 percent during the month, down from
4.7 percent in July. At the same time, the 16 percent trimmed–mean CPI increased just 1.2 percent,
compared to a 7.2 percent increase last month.
In August, 30 percent of the components of the
CPI exhibited price decreases, while 22.5 percent
experienced increases at rates exceeding 5.0 percent
(so a majority of the index’s components fell into
the tails of the distribution). The prices of some
fairly substantial components—gas and piped
electricity, lodging away from home, new vehicles
and used cars and trucks, and communication—
which together account for 16 percent of household expenditures on CPI components, decreased
in August. The combined weight of their decreases
helped to pull down the 16 percent trimmed–
mean. It also explains some of the disparity between the median and the 16 percent trimmed–
mean measures.
Over the past 12 months, the CPI has increased
5.4 percent. The longer-term trends in the core
and trimmed-mean measures remained somewhat
elevated in August, ranging between 2.5 percent
and 3.5 percent.
Core services, which account for roughly 55 percent of the overall CPI, exhibited price gains in
August (up 3.0 percent), roughly in line with the
longer–term trend of 3.3 percent. Core goods pric-

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

CPI, Core CPI, and Trimmed-Mean CPI
Measures

es returned to trend growth, increasing 0.8 percent
in August after a hefty 5.6 percent gain last month.

12-month percent change

Short-term (one-year ahead) average inﬂation
expectations fell to 3.9 percent in September (as
measured by the University of Michigan’s Survey of
Consumers), as energy and commodity prices continued to fall from recent highs. Long–term (5–10
year) average inﬂation expectations decreased from
3.9 percent in August to 3.1 percent in September.

CPI
Median CPIa

1
1998

Core CPI

16% trimmedmean CPIa
2000

2002

2004

2006

2008

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

Core CPI Goods and Core CPI Services
12-month percent change
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
1998

One-month annualized percent change
Core services

Core goods
One-month annualized percent change
2000

2002

2004

2006

2008

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

Household Inflation Expectations
12-month percent change
7.5
7.0
6.5
6.0
5.5
5.0
4.5
One-year ahead
4.0
3.5
3.0
Five to ten-years ahead
2.5
2.0
1.5
1.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Note: Mean expected change as measured by the University of Michigan’s Survey
of Consumers.
Source: University of Michigan.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Financial Markets, Money, and Monetary Policy

Staying the Course
09.17.08
John Carlson and Sarah Wakeﬁeld
In a unanimous vote, the Federal Open Market
Committee (FOMC) voted to keep its target fed
funds rate steady at 2 percent. In its statement, the
FOMC recognized that “Strains in ﬁnancial markets have increased signiﬁcantly...” While noting
that credit conditions had tightened, the statement
concluded, “Over time, the substantial easing of
monetary policy, combined with ongoing measures
to foster market liquidity, should help to promote
moderate economic growth.”

Reserve Market Rates
Percent
8
7

Effective federal funds ratea

6
5

Primary credit rateb

4
3
2
Discount rateb
1

Intended federal funds rateb

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

September Meeting Outcomes
Implied probability
1.0

Industrial Production (Aug)

0.9
0.8
0.7

2.00%

2.75%

0.6
0.5

3.00%

0.4
0.3

1.75%

2.25%

0.2

1.50%

2.50%

0.1
0.0
5/09

5/24

6/08

6/23

7/08

7/23

8/07

8/22

9/06

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

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Just last week, most market participants took the
no-change outcome as a given. However, ﬁnancial
market developments over the weekend sent shockwaves through the whole ﬁnancial system. By Monday, options and futures prices on the fed funds rate
indicated that odds slightly favored a rate cut of at
least 25 basis points. But that was not to be.
The dramatic collapse of Lehman Brothers, the
hasty sale of Merrill Lynch to Bank of America,
and the appeal of AIG for aid changed all that.
Concerns about liquidity and systemic risk, which
had been rising, intensiﬁed. One closely watched
indicator of liquidity conditions, the spread between the term borrowing rate in the London
interbank market (Libor) and the cash market rate
(OIS), reﬂected these developments. The spread
for one-month borrowing had declined considerably from recent peaks; however, recent turmoil in
ﬁnancial markets has caused the spread to increase
substantially.
Rather than addressing this liquidity problem with
a change in the policy rate, the Fed decided to
continue to rely on its several lending facilities. The
New York Federal Reserve Bank added $50 billion
in liquidity to money markets through overnight
repurchase agreements, known as repos. In addition, the Trading Desk, which conducts open
market operations on behalf of the Federal Reserve,
said in a statement that it “stands ready to arrange
further operations later in the day, as needed.”
4

The markets backed oﬀ on an expectation for a rate
hike at the FOMC’s next meeting in October. The
odds for the no-change outcome moved to better
than even.

One-Month LIBOR Spread

October Meeting Outcomes

Percent

Implied probability

1.20

1.0

Industrial Production (Aug)

0.9
1.00

Consumer Price Index (Aug); FOMC Statement

0.8
0.7

0.80

2.00%

0.6
0.5

0.60

0.4

2.50%

1.75%

0.3

0.40

2.25%

0.2

1.25%
1.50%

0.1

0.20

0.0
8/01

0.00
7/07

9/07

11/07

1/08

3/08

5/08

7/08

Notes: Daily observations; LIBOR spread is the one-month LIBOR rate minus the
one-month OIS Rate.

8/12

8/23

9/03

9/14

Sources: Bloomberg Financial Services, Financial Times.

Financial Markets, Money, and Monetary Policy

The Yield Curve
09.26.08
Joseph G. Haubrich and Kent Cherny

Yield Spread and Real GDP Growth
Percent
12
10
P growth
R eal G DP
ea
(year-to-year
percent change)
a

8
6
4
2
0

Ten-yearr minus three-month
eyield s pread
pr

-2
-4
1953

1963

1973

1983

1993

2003

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

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Since last month, the yield curve has moved lower
and gotten steeper, as both short and long-term
interest rates fell. One reason for noting this is that
the slope of the yield curve has achieved some notoriety as a simple forecaster of economic growth.
The rule of thumb is that an inverted yield curve
(short rates above long rates) indicates a recession
in about a year, and yield curve inversions have
preceded each of the last six recessions (as deﬁned
by the NBER). Very ﬂat yield curves preceded the
previous two, and there have been two notable false
positives: an inversion in late 1966 and a very ﬂat
curve in late 1998. More generally, though, a ﬂat
curve indicates weak growth, and conversely, a steep
curve indicates strong growth. One measure of
slope, the spread between 10-year Treasury bonds
and 3-month Treasury bills, bears out this relation,
particularly when real GDP growth is lagged a year
to line up growth with the spread that predicts it.
5

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

10
8
6
4
2
0

Ten-year minus three-month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

Sources: Bureau of Economic Analysis; Federal Reserve Board.

Yield Spread and Predicted GDP Growth
Percent
6
R eal G DP growth
(year-to-year perc ent c hange)

5
4

P redic ted
G DP growth

3
2
1

Ten-year minus three-month
yield s pread

0
-1

-2
2002

2003

2004

2005

2006

2007

2008

2009

Sources: Bureau of Economic Analysis; Federal Reserve Board.

Probability of Recession Based on the
Yield Spread
Percent
100
90
P robability of
rec es s ion

80
70
60

The ﬁnancial crisis showed up in the yield curve,
with rates falling since last month, as investors ﬂed
to quality. This was particularly true at the short
end, with the 3-month rate dropping from 1.86
percent all the way down to 0.62 percent (for the
week ending September 19).
The 10-year rate took a substantial but less impressive drop from 3.91 to 3.52 percent. Consequently,
the slope increased by a full 85 basis points, moving
to 290 basis points up from the 205 basis points
for August and well above the 213 basis points seen
in July. The ﬂight to quality and the turmoil in the
ﬁnancial markets may impact the reliability of the
yield curve as an indicator growth, but projecting
forward using past values of the spread and GDP
growth suggests that real GDP will grow at about a
3.0 percent rate over the next year. This remains on
the high side of other forecasts.
While such an approach predicts when growth is
above or below average, it does not do so well in
predicting the actual number, especially in the case
of recessions. Thus, it is sometimes preferable to
focus on using the yield curve to predict a discrete
event: whether or not the economy is in recession.
Looking at that relationship, the expected chance of
the economy being in a recession next September
stands a miniscule 0.2 percent, down from August’s
1.3 percent and July’s 1.1 percent.
The probability of recession is below several recent
estimates and perhaps seems strange the in the
midst of the recent ﬁnancial concerns, but one
aspect of those concerns has been a ﬂight to quality
which lowers Treasury yields. Furthermore, both
the federal funds target rate and the discount rate
have remained low, which tends to result in a steep
yield curve. Remember also that the forecast is for
where the economy will be next September, not
earlier in the year.

F orec as t

To compare the 0.2 percent to some other probabilities, and learn more about diﬀerent techniques
of predicting recessions, head on over to the Econbrowser blog.

50
40
30
20
10
0
1960

1966

1972

1978

1984

1990

1996

2002

2008

Note: Estimated using probit model.
Sources: Bureau of Economic Analysis; Federal Reserve Board; author’s calculations.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Of course, it might not be advisable to take this
number quite so literally, for two reasons. First, this
probability is itself subject to error, as is the case
6

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?”
To see other forecasts of GDP growth:
http://www.cbo.gov/ftpdocs/89xx/doc8979/02-15-EconForecast_
ConradLetter.pdf
To see other probabilities of recession:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEX73
qWiBrb4
Econbrowser blog is available at:
http://www.econbrowser.com/archives/2008/02/predicting_rece.html
Does the Yield Curve Signal Recession?,” by Joseph G. Haubrich.
2006. Federal Reserve Bank of Cleveland, Economic Commentary,
is available at:
http://www.clevelandfed.org/Research/Commentary/2006/0415.pdf

International Activity

Swap Lines
10.09.08
Owen F. Humpage and Michael Shenk
The current ﬁnancial crisis is global. Banks in many
countries are scrambling for liquidity—not just in
their own currencies, but in dollars too. The Federal
Reserve has attempted to facilitate this process by setting up swap lines with the world’s key central banks.

Libor-Federal Funds Rate Spread
Percent
5
4
3
2
1
0
-1
7/07

10/07

1/08

4/08

7/08

10/08

Note: Spread is calculated with the overnight dollar Libor.
Sources: The Federal Reserve Board; Financial Times.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

The dollar is world’s leading international currency. Many cross-border transactions—even
between individuals who are not residents of the
United States—are denominated in U.S. dollars.
Commodities, most notably oil, are an excellent
example; they typically are priced in U.S. dollars,
and payments usually are made in U.S. dollars.
Because of the dollar’s international role, large
banks around the globe hold signiﬁcant amounts
of dollar-denominated assets and liabilities. Many
of these banks have found themselves stuck with
dollar-denominated assets that are tied to the U.S.
7

real estate debacle or that are otherwise distressed.
These banks, like many U.S. domestic banks, have
been scrambling for needed dollar liquidity, but the
interbank market has frozen up as banks with funds
worry about potential counterparties’ balance sheets.
Indicative of the problem, rates on overnight interbank loans have recently shot skyward. Over the
past year, spreads between the Libor (the index rate
on overnight dollar funds in the London interbank
market) and the federal funds rate, which typically
are miniscule, became large and very volatile. In
September, these rate spreads frequently exceeded a
whopping 4 percentage points.
The Federal Reserve has been helping to provide
dollar liquidity to foreign markets by agreeing to
“swap” U.S. dollars temporarily for foreign currency. On September 29, the System oﬀered swaps totaling $620 billion dollars to nine key central banks
through April 2009, if necessary. In a swap transaction, the Federal Reserve and a foreign central bank
immediately exchange U.S. dollars for the foreign
currency at a speciﬁc exchange rate—typically the
prevailing spot rate—and simultaneously agree to
reverse the transaction at a set exchange rate—often
the same exchange rates—on a speciﬁc date in the
future. Conducting the spot and forward legs of
this currency swap at set exchange rates protects
both the Federal Reserve and its foreign counterpart from losses (or gains) associated with any unanticipated intervening exchange-rate movements.
During the term of the swap, the United States
holds its foreign exchange in a special account at the
foreign central bank, and the participating foreign

Special Temporary Swap Lines
Billions of dollars
Bank of
Australia

Bank of
Canada

National
Bank of
Denmark

Bank of
England

European
Central
Bank

Bank of
Japan

Bank of
Norway

Bank of
Sweden

Swiss
National
Bank

Total

12/12/2007

3/11/2008

5/2/2008

9/18/2008

110

247

9/24/2008

110

277

9/26/2008

120

290

9/29/2008

240

120

620

Source: The Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

central bank uses its newly acquired funds to provide
emergency dollar liquidity to commercial banks.
Over the past 50 years, the Federal Reserves has often
used swaps to ﬁnance foreign exchange interventions
and to provide temporary funding to foreign countries in times of ﬁnancial chaos. During the 1960s,
for example, the Fed established a serious of reciprocal swap lines with the major developed countries. At
the time, the dollar was pegged to gold, and foreign
currencies were ﬁxed to the dollar. When foreign
countries accumulated unwanted dollars reserves,
they could exchange them with the U.S. Treasury for
gold. Often, however, the U.S. monetary authorities
believed that the foreign inﬂow of unwanted dollars
would soon reverse, so they encouraged foreign central banks not to convert dollars into gold too hastily.
A key way of doing so utilized swaps. The Federal
Reserve would swap dollars for foreign currency
with a central bank that held too many U.S. dollars
and then use the newly acquired foreign currency to
buy the excess dollars from that same foreign central
bank. This sounds odd, because this set of transactions left the foreign central bank holding just as
many dollars as initially was the case. It often worked
because the central bank now held dollars under a
swap with an established, single exchange rate for
both the forward and spot legs of the transaction. The
deal then protected the foreign central bank for the
term of the swap against any dollar depreciation.
After March 1973, when exchange rates began to
vary with market pressures, the Fed sometimes
intervened to inﬂuence them. When the Fed wanted
to prop up the dollar by selling foreign exchange, it
often facilitated the operation by drawing foreign
exchange on its swap lines. Use of the swap lines
for foreign exchange intervention waned as the Fed
eventually acquired a substantial portfolio of German marks and Japanese yen, which it could use for
intervention purposes instead. The Fed also used
swap lines to provide dollars temporarily to Mexico
during the peso crises of 1982 and 1995. The United
States terminated all of its on-going swap lines when
Europe inaugurated the euro, except for two lines
with our NAFTA partners, Canada and Mexico.
Nevertheless, swaps are easy to step up and oﬀer
central banks a useful, very ﬂexible mechanism for
acquiring foreign currencies.
Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Economic Activity and Labor Markets

Cracks in the Real Economy
10.02.08
Timothy Dunne and Kyle Fee
Not too surprisingly, news of general economic activity has taken a backseat to news of the problems
plaguing the U.S. ﬁnancial system. A look at the
main data releases of September (which describe
the economic activity of August) suggests a picture
of weakening across a broad range of the economy.
The month opened with the Bureau of Labor
Statistics reporting a sharp rise in the unemployment rate, from 5.7 percent in July to 6.1 percent
in August, along with a drop of 84,000 in payroll
employment. The BLS also revised downward its
estimates of payrolls for June and July.

Unemployment Rate
Percent
7

3
1998

2000

2002

2004

2006

2008

Notes: Data are seasonally adjusted. Shaded bar indicate recession.
Source: Bureau of Labor Statistics.

Payroll Employment
Monthly Change
500
400
300
200
100
0
-100
-200
-300
-400
1998

2000

2002

2004

2006

2008

Notes: Data are seasonally adjusted. Shaded bar indicate recession.
Source: Bureau of Labor Statistics.

Although the unemployment rate is at levels similar
to that experienced shortly after the last recession,
the drop in payroll employment has been relatively modest in comparison to previous recessions.
According to the BLS, payroll employment declined in each month in 2008, though none of the
month’s losses exceeded 100,000 workers. To put
this ﬁgure in perspective, note that job losses during the 2001 recession averaged 200,000 workers a
month.
The employment report for September won’t be
released until tomorrow, but the unemployment
claims data published weekly throughout the
month suggest that labor markets continued to
weaken during the month. The four–week moving
average of continuing claims moved substantially
higher throughout August and the ﬁrst part of
September. To be sure, some of these statistics have
been negatively impacted by the recent hurricanes
in Texas and Louisiana, but even factoring in such
events, initial claims and continuing claims remain
at high levels.
While the labor data over the last several months
have indicated a deteriorating economy, monthly
data on industrial production, durable goods, and
retail sales have oﬀered a somewhat mixed picture
up through July. In fact, initial reports for industrial production and durable goods shipments and

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

orders for July showed some strength. However,
these series turned sharply lower in August, with
July data being revised downward, as well. Industrial production fell 1.1 percent from July to August.
It is important to caution that one month does
not make a trend, and the data are subject to revision. That said, our ﬁrst look at manufacturing for
September shows the sector contracting. The ISM
manufacturing index registered 43.5 for September,
where an index value below 50 indicates contraction. September’s reading of 43.5 was well below
August’s (49.5) and the lowest since 2001.

Unemployment Insurance: Continued
Claims
Four-week moving average (thousands)
4,000

3,500

3,000

2,500

2,000

1,500
1998

2000

2002

2004

2006

2008

Notes: Data are seasonally adjusted. Shaded bar indicate recession.
Source: U.S. Department of Labor.

Durable Goods: Shipments

Residential construction continued to be weak, as
both housing starts and new-home sales hit lows
not seen since the recession in the early 1990s.
This represents year–over–year declines of almost
35 percent for each series, and month-over-month
declines of−1.9 percent for single–family–housing
starts and −11.5 percent for new-home sales.

Monthly percent change
3
2
1
0
-1
-2
-3
-4
8/06

12/06

4/07

8/07

12/07

The softening in the goods sector has also been
evident in the retail sector. Both July and August
showed month–over–month declines in retail sales
of −0.6 percent and −0.3 percent, respectively.

4/08

8/08

Note: Data are seasonally adjusted.
Source: Census Bureau.

Industrial Production
Index, 2002 = 100
113

112

Rounding out the month’s data for August is this
week’s report from Bureau of Economic Analysis
on monthly personal income and outlays. Real
personal consumption expenditures in both July
and August were below the second–quarter’s levels.
This drop reﬂects, in part, the unwinding of the
stimulus package, which had a much larger impact
in the second quarter than in July or August. While
the data for September are not yet available and the
July and August data are still subject to revision,
the ﬁrst two months of data for the third quarter
indicate that real PCE growth may well be negative
for the current quarter.
In short, almost all major monthly data releases
describing economic activity in August show a
deteriorating economic environment.

111

110

109
8/06

12/06

4/07

8/07

12/07

4/08

8/08

Note: Data are seasonally adjusted.
Source: Federal Reserve Board

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

ISM Manufacturing Index

Retail Sales

Composite index, 50+ = increasing

Monthly percent change
2.0

56
55
54
53
52
51
50
49
48
47
46
45
44
43
42
8/06

1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
12/06

4/07

8/07

12/07

4/08

8/08

Note: Data are seasonally adjusted.
Source: Institute for Supply Management.

Housing Starts

12/06

4/07

8/07

12/07

4/08

12/07

4/08

8/08

New Homes Sales
Single-family units (thousands)

Single-family units (thousands)
1,400
1,350
1,300
1,250
1,200
1,150
1,100
1,050
1,000
950
900
850
800
750
700
650
600
8/06

8/06

Note: Data are seasonally adjusted.
Source: Census Bureau; Haver Analytics.

4/07

8/07

12/07

4/08

8/08

1,100
1,050
1,000
950
900
850
800
750
700
650
600
550
500
450
400
8/06

12/06

4/07

8/07

Note: Data are seasonally adjusted annual rates.
Source: Census Bureau.

Real PCE
2000 dollars (billions)
8,375

8,350

8,325

8,300

8,275

8,250
8/06

12/06

4/07

8/07

12/07

4/08

8/08

Note: Data are seasonally adjusted annual rates.
Source: Bureau of Economic Analysis

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Economic Activity and Labor Markets

The Employment Situation, September
10.06.08
Murat Tasci and Beth Mowry

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

2006

YTD
2008

2007

Sept
2008

211

175

−84

−159

Goods-producing

−38

−75

−77

Construction

−19

−38

−35

Heavy and civil engineering

−1

−5

−5.5

−5

−20

−25

−12.9

Nonresidentialb

−7

−16.7

Manufacturing

−7

−14

−22

−44

−51

Durable goods

−4

−16

−32

−37

Nondurable goods

−8

−10

−6

−12

−14

Service-providing

Residentiala

179

172

130

−10

−82

Retail trade

−28

−40.1

Financial activitiesc

−9

−8

−17

PBSd

−33

−27

Temporary help services

−7

−27

−24.1

Education and health services

Leisure and hospitality

−1

−17

Government

Local educational services

16.3

Civilian unemployment rate

5.1

4.6

5.4

6.1

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

Nonfarm payrolls declined by 159,000 between
August and September, with losses spread across
a wide range of industries. This marks the ninth
consecutive month of employment decline and a
continuation of the 6.1 percent unemployment
rate, which remains the highest seen since September 2003. Revisions to July and August payrolls
roughly cancelled each other out and amounted
to modest additional gains of 4,000 for those two
months combined. September’s decline in payrolls
was larger than consensus expectations, which
called for losses in the neighborhood of 105,000.
Since the decline in payrolls started back in January, the United States has shed a total of 760,000
jobs.
The diﬀusion index of employment change sank
further, moving from 44.7 in August to 38.1 in
September. An index reading below 50 indicates
that more employers are cutting jobs than adding
them, and this past month’s movement indicates
that an increasing number of employers began to
do so in September. The index has not been this
low since June 2003.
The goods-producing sector shed 77,000 jobs
last month due to losses in both manufacturing
(-51,000) and construction (-35,000). Manufacturing’s losses were felt predominantly in durable
goods (-37,000), particularly in the area of motor
vehicles and parts (-18,200). Residential and nonresidential construction both recorded job losses in
this report, unlike in August when only residential
construction lost jobs. Natural resources and mining continued to make a lone positive contribution
of 9,000 jobs to goods-producing industries.
Service-providing industries took a greater turn
for the worse in September, losing 82,000 jobs,
compared to August’s smaller loss of 16,000. Losses
were experienced broadly in service industries,
with the exception of a 25,000 gain in education
and health and a 9,000 gain in the government

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Average Nonfarm Employment Change
Change, thousands of jobs
250
Previous estimate
Revised

200
150
100
50
0
-50
-100
-150
-200

2005 2006 2007 2008 Q4
Q1 Q2
YTD 2007 2008

Jul

Aug Sep

Source: Bureau of Labor Statistics.

The three-month moving average of private-sectoremployment growth dug itself deeper into the
negative territory ﬁrst entered back in January and
now sits at -126,000. Although headline payroll
employment numbers for July and August were
revised only modestly, private payrolls for these
two months were revised downward by 40,000 and
43,000, respectively. Government payrolls were
revised up 33,000 and 14,000. For the year, private payrolls are down 969,000, while government
payrolls have risen by 209,000. These revisions
show that overall payroll decline underestimates the
loss in private payrolls due to signiﬁcant gains in
government payrolls.

Private Sector Employment Growth
Change, thousands of jobs: Three-month moving average
350
300
250
200
150
100
50
0
-50
-100
-150
-200
2003

2004

2005

2006

2007

sector. However, the gain in government was less
impressive than gains in the previous two months
(39,000 and 31,000). Likewise, the gain in education and health was the smallest experienced
during all of this year and the last. Within services,
trade, transportation, and utilities lost 58,000 jobs,
professional and business services lost 27,000, and
ﬁnancial activities and leisure and hospitality each
lost 17,000. Retail trade fell further, dropping
40,100 jobs in September, compared to August’s
drop of 25,400. Temporary help services, considered a leading indicator of overall employment conditions, continued to decline, recording its eleventh
consecutive month of losses with a loss this month
of 24,100 jobs.

2008

Source: Bureau of Labor Statistics.

Unemployment Rate
Percent
7

Results from the government’s household survey indicates that the total unemployment rate
stayed steady at 6.1 percent in September. Even
though the number of those employed declined
by 222,000, the labor force declined by 121,000,
keeping the unemployment rate where it was in
August. These monthly changes are common in the
household survey and do not constitute a signiﬁcant change.

3
2000

2002

2004

2006

2008

Note: This is the seasonally adjusted rate for the civilian population, age 16+.
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Economic Activity and Labor Markets

Trend Unemployment and What It Says about Unemployment Patterns
09.19.08
Murat Tasci and Beth Mowry

Unemployment Rate for All Workers
(Aged 16+)
Percent
12
Monthly data
10
Trend
8
6
4
2
1948

1958

1968

1978

1988

1998

2008

Notes: Data are seasonally adjusted. The trend was generated by using
a Hodrick-Prescott filter with a smoothing parameter of 10^5. Shaded bars
indicate recessions.
Source: Bureau of Labor Statistics.

The unemployment rate increased to 6.1 percent in
September from 5.7 percent a month earlier. Just
a few months ago, in May, the rate experienced
another sharp rise, from 5.0 to 5.5 percent. A year
ago, the unemployment rate was just 4.7 percent.
Such movements in the unemployment rate are
not unusual by any measure, and they have been
studied for a long time. For the past 60 years, the
unemployment rate has varied between 2.5 percent
and 10.8, rising during recessions and falling during expansions. This pattern makes it what economists call a countercyclical variable. Typically, the
rate rises sharply at the onset of a recession, but it
usually takes a while for the rate to drop back down
once the recession ends. These cyclical ﬂuctuations
in the unemployment rate are a robust feature of
the data, and even though the timing of the ups
and downs changes somewhat across diﬀerent
historical episodes, the clear countercyclical pattern
tends to hold.
However, monthly ﬂuctuations in the unemployment rate include a lot of cyclical movements that
may be only temporary. Removing those cyclical elements can help to see the longer-term picture, and
this we can do by smoothing the data to calculate
the unemployment rate’s trend. When we look at
the trend along with the monthly data for the last
two recessions and the recoveries that followed, we
see that the trend increased slightly in both cases,
but the unemployment rate stayed above the trend
for more than two years. This view shows that it
takes a while for the unemployment rate to return
to its long-run trend after recessions, but once it
gets there, it stays there for the rest of the expansion. The unemployment rate returns to its trend
only when the expansion is long enough, like the
two that preceded the 2001 recession.
One might expect the pattern just described to be
diﬀerent for various segments of the workforce,
since workers’ desire for employment or their
employability can diﬀer, depending on their age,

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Unemployment Rates for Workers at
Various Ages
Percent
16
20–24
25–34
35–44
45–54

0
1948

1958

1968

1978

1988

1998

2008

Note: Data are seasonally adjusted. Shaded bars indicate recessions.
Source: Bureau of Labor Statistics.

Trend Unemployment Rates for Workers
at Various Ages
Percent
14
12
20–24
10
8
25–34
6
35–44

45–54
2
1948

1958

1968

1978

1988

1998

2008

Notes: Data are seasonally adjusted. The trend was generated using
a Hodrick-Prescott filter with a smoothing parameter of 10^5. Shaded bars
indicate recessions.
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

gender, or education. For instance, older workers
have always had lower unemployment rates than
younger workers. Because older workers are arguably more attached to the labor force and more
experienced at their jobs, they are less likely to be
let go in a downturn and more likely to be hired
in a boom. This story likewise explains the higher
unemployment rate of younger workers as well as
its greater volatility. However, the trend rates for
diﬀerent-aged workers in general follow the overall
pattern of the aggregate unemployment rate. A
look at the trends also suggests that most of the upward trend in unemployment in the late 1960s and
1970s, as well as the downward trend that followed,
was led by young workers.
Education does not appear to aﬀect the basic countercyclical unemployment pattern either. As one
might expect, years of schooling is negatively correlated with the unemployment rate. For instance,
workers with at least a college degree have the lowest unemployment rate, around 2.4 percent on average since 1992. This compares with 3.9 percent
for workers with some college, 4.8 percent for high
school graduates, and 8.9 percent for high school
drop outs. Even though we do not have a long
enough time series to detect a clear cyclical pattern,
we can see that over the last recession the behavior
of the unemployment rates of workers with diﬀerent levels of education ﬁts the general picture.
The unemployment rate for men and women also
follows the countercyclical pattern, rising around
the start of recessions and falling after the end of
downturns. On the other hand, the overall trend in
each of the two groups has been steadily changing
over time. Until mid-1980s, the unemployment
rate for women stayed consistently below that of
men. Since then, the two unemployment rates
have almost converged. One reason for this could
be the higher labor force participation and higher
educational attainment of women in the past two
decades. These two potentially related facts created a female workforce with a stronger attachment
to the labor market, whose unemployment proﬁle
increasing resembled that of men. One might even
argue that the unemployment rate trend for men is
now above the women’s.
16

Trend Unemployment Rates for Workers
with Different Levels of Education

Unemployment Rates for Workers with
Different Levels of Education

Percent
14

Percent

14
12

Less than high school diploma

8
High school

High school

4
2

Less than high school diploma

4
Some college

College and above

0
1992

Some college

College and above

1997

2002

0
1992

2007

1997

2002

2007

Notes: Data are seasonally adjusted. The trend was generated by using
Note: Data are seasonally adjusted. Shaded bar indicates recessions.
a Hodrick-Prescott filter with a smoothing parameter of 10^5. Shaded bars Source: Bureau of Labor Statistics.
indicate recessions.
Source: Bureau of Labor Statistics.

Unemployment Rates for Men and Women
Percent
12

Trend Unemployment Rates for
Men and Women
Percent
10

Men
10

Women

Men

Women

4
4
2
1948

1958

1968

1978

1988

1998

2008

Note: Data are seasonally adjusted. Shaded bars indicate recessions.
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

2
1948

1958

1968

1978

1988

1998

2008

Notes: Data are seasonally adjusted. The trend was generated using
a Hodrick-Prescott filter with a smoothing parameter of 10^5. Shaded bars
indicate recessions.
Source: Bureau of Labor Statistics.

Economic Activity and Labor Markets

Second-Quarter GDP, Final Revision
10.02.08
Brent Meyer

Real GDP and Components,
2008:Q2 Final Revision
Quarterly
change
(billions of
2000$)

Annualized percent change,
last:
Quarter

Four quarters

Real GDP

81.4

2.8

2.1

Personal consumption

25.2

1.2

1.3

Durables

−8.7

−2.8

−1.1

Nondurables

22.8

3.9

1.2

Services

7.8

0.7

1.7

Business fixed investment

8.7

4.2

Equipment

−13.9

−5.0

−0.3

Structures

14.1

18.4

13.9

Residential investment

−13.4

−13.3

−21.6

Government spending

19.8

3.9

2.6

9.2

7.3

5.9

Net exports

80.7

—

Exports

44.1

12.3

11.0

Imports

−36.6

−7.3

−1.9

−50.6

—

National defense

Private inventories

Source: Bureau of Economic Analysis.

Contribution to Percent Change in Real GDP
Percentage points
2.5
2008:Q2 advance
2008:Q2 preliminary
2.0
2008:Q2 final
1.5
1.0
0.5
0.0
-0.5
-1.0

Business
fixed
investment
Personal
consumption

Imports

Change in
inventories
Exports

Residential
investment

Government
spending

-1.5
-2.0
-2.5
Source: Bureau of Economic Analysis

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Real GDP advanced at an annualized rate of 2.8
percent in the second quarter, according to the
ﬁnal release from the Bureau of Economic Analysis. This is a downward revision of 0.5 percentage
point from the preliminary estimate, but it is still
up 0.9 percentage point from the advance estimate.
The downward adjustment (from preliminary to
ﬁnal) was largely due to a revision to real consumption growth, from an increase of 1.7 percent to
1.2 percent. Exports were also revised down from
an increase of 13.2 percent to 12.3 percent, while
the decrease in imports was revised up from −7.5
percent to −7.3 percent. Inventories decreased by
$50.6 billion, according to the ﬁnal estimate, down
from a subtraction of $39.2 billion in the previous
estimate. On a positive note, the contraction in
residential investment, which has been quite a large
drag on growth lately, was revised up 2.5 percentage points, to a decrease of −13.3 percent. While
still negative, this is a considerable improvement
over the −25.0 percent in the ﬁrst quarter.
Personal consumption expenditures added 0.9
percentage point to real GDP growth in the second
quarter, according to the ﬁnal estimate, down from
1.2 percentage points and 1.1 percentage points in
the preliminary and advance estimates, respectively.
The overall private investment picture improved
somewhat, and the severity of the change in private inventories lessened from the advance to ﬁnal
estimates. Net exports provided an unusually large
boost during the quarter, adding 2.9 percentage
points to real GDP growth. Given reports of weakness in the foreign sector and the recent reversal of
the dollar’s slide, the kick from net exports seems
likely to fade in the coming quarters.
Another component that seems likely to weaken
over the rest of the year is consumption. Personal
consumption growth has been falling since 2006.
While consumption growth in the second quarter
outpaced the ﬁrst, 1.2 percent to 0.9 percent, that
was likely due to the ﬁscal stimulus rebate checks.
18

Real Personal Consumption Expenditures
Annualized percent change
4.0
Final estimate
Preliminary estimate
3.5
Advance estimate
3.0
2.5
2.0
1.5
1.0
0.5
0.0

2006 (Q4/Q4)

2007(Q4/Q4)

2008:Q1

2008:Q2

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

Real Personal Consumption Expenditures

The most recent monthly data suggest that third–
quarter consumption growth will be negative once
the distribution of those checks ceases. In July, consumption fell 5.8 percent (annualized rate) and was
followed by a gain of zero in August. In fact, the
12–month growth rate in personal consumption
expenditures has fallen to 0.1 percent, its lowest
growth rate since August 1991.
Reﬂective of the somewhat pessimistic incoming
data, the consensus estimate for the second half of
the year from the Blue Chip panel of forecasters
has fallen once again, to 1.0 percent GDP growth
in the third quarter and 0.2 percent in the fourth.
However, their consensus estimate for 2009 has
remained at 1.5 percent, with growth returning to
near trend by the end of that year.

12-month percent change
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Note: Shaded bars indicate recessions.
Source: Bureau of Economic Analysis

Real GDP Growth
Annualized quarterly percent change
6
5
4

Final estimate
Blue Chip consensus forecast
Average GDP growth
(1978Q3-2008Q2)

3
2
1
0
-1
Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008
2007
2009
2006
Source: Blue Chip Economic Indicators, September 2008; Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Banking and Financial Institutions

Housing and the Banking Industry
10.07.08
O. Emre Ergungor and Kent Cherny

Housing Price Indexes
Percent change, year over year
20
15
10
OFHEO
5
0
-5
-10
-15
-20
1995

1997

1999

2001

2003

2005

2007

Note: Shaded bar indicates a recession.
Source: OFHEO; S&P, Fiserv, and Macromarkets, LLC.

Thrift Industry Earnings
Billions of U.S. dollars
6

The deterioration of the housing market shows few
signs of nearing an end. The S&P/Case–Shiller
home price index registered year–over–year quarterly declines of −14.2 percent and −15.4 percent in
the ﬁrst half of 2008, extending its record drop.
OFHEO’s price index has also remained in negative
territory after dipping below zero for the ﬁrst time
in its 17–year history in the fourth quarter of last
year. While both indexes show downward pressure on home prices, the magnitude of the declines
diﬀers signiﬁcantly across the two. The reason is
that OFHEO tracks only homes with mortgages
below Fannie Mae and Freddie Mac’s conforming
loan limit, which was set at $417,000 in 2006 and
2007. (That limit has been temporarily raised to
$729,000 or 125 percent of an area’s median home
price, whichever is lower). The S&P/Case-Shiller
index tracks home sales in all price ranges and is
therefore more aﬀected by the pricey housing of the
coastal areas.
As housing-market conditions continue to worsen,
mortgage-related losses are taking a big bite out of
mortgage lenders’ proﬁts. Thrifts—FDIC-insured
depository institutions that specialize in mortgage
lending—began to record losses in the fourth
quarter of 2007. The industry’s aggregate proﬁts—
which were around $4 billion a year ago—fell to
−$5.3 billion in the second quarter of this year.

4
2
0
-2
-4
-6
-8
-10
6/06

9/06

12/06 3/07

6/07

9/07

12/07

3/08

Source: Office of Thrift Supervision.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

6/08

Increasingly, the deterioration in earnings is aﬀecting more than a few large institutions and becoming a widespread problem. Evidence of this can
be seen in the share of the industry’s assets that is
owned by unproﬁtable institutions. This share was
high in 1990, fell to much lower levels thereafter,
and has been shooting back up since 2005. In
1990, for example, almost 50 percent of the assets owned by large thrifts those whose total assets
exceed $1 billion—were owned by large thrifts that
were unproﬁtable. This share fell to 3.5 in the ﬁrst
quarter of 2007 and to 1.8 percent in the second
quarter. But by the second quarter of 2008, 56
20

Assets of Unprofitable Thrifts

percent of these institutions’ assets were owned by
large thrifts that were unproﬁtable—a higher share
than during the thrift crisis of the late 1980s. Note
that we have not adjusted asset sizes for inﬂation,
so a $1 billion thrift in 1990 was an economically
bigger institution than a $1 billion thrift today.

Percent of total assets
70
Assets under $300 million
Assets between $300 million and $1 billion
Assets over $1 billion

60
50
40
30
20
10
0
1985

1990

1995

2000

2005

2008

Source: Federal Reserve Board.

Unprofitable Thrifts
Percent of total number
70
As s ets under $300 million
Assets between $300 million and $1 billion
Assets over $1 billion

60
50
40
30
20
10
0
1985

1990

1995

2000

2005

2008

Source: Federal Reserve Board.

Unprofitable BHCs And FHCs
Percent of total number
60
As s ets under $1 billion
Assets between $300 million and $1 billion
Assets over $1 billion

50
40
30
20
10
0
1985

1990

1995

2000

2005

2008

Source: Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

Further evidence of the spreading eﬀects of the
housing situation is the growing number of unproﬁtable institutions. In the ﬁrst quarter of 2007,
about 20 percent of thrifts with assets less than
$300 million and 10 percent of thrifts with assets
greater than $1 billion were unproﬁtable. Those
numbers jumped to 28 percent and 29 percent, respectively, by the ﬁrst half of 2008. The proportions
of unproﬁtable institutions in each size category
are well below the levels they reached in late 1980s,
but their increases now suggest that proﬁtability is
being squeezed across thrift institutions of all sizes
as home prices fall.
Bank holding companies and ﬁnancial holding
companies (BHCs and FHCs) seem to have fared
slightly better in these diﬃcult times, but their luck
might be changing. These holding companies own
a diverse set of ﬁnancial institutions, ranging from
depository institutions to insurance companies and
investment banks. Although total holding company
proﬁts remained barely positive at $5.5 billion last
quarter, the number of companies reporting losses
has been steadily increasing over the past year. In
the second quarter of 2008, about 15 percent of
holding companies of all sizes were unproﬁtable.
As thrift and other ﬁnancial institutions’ proﬁts
have been pressured by housing declines, insured
deposits across the banking system have continued
to rise, reaching $4.4 trillion by the end of the ﬁrst
half of 2008. Bank failures during early 2008 have
contributed to a depletion of the Federal Deposit
Insurance Corporation’s reserves, which have fallen
below the target range of previous years to 1.01
percent of total insured deposits as of June 2008.
What’s more, the FDIC’s data are current only as
of the second quarter of this year, so they do not
include the seizure of IndyMac in July. The largest thrift failure in U.S. history, IndyMac will cost
the insurance fund an estimated $4 billion to $8
billion to cover. Nor does the FDIC’s data include
21

the recently enacted increase in the limit of insured
deposits from $100,000 to $250,000.

BHC and FHC Earnings
Billions of U.S. dollars
200
180
160
140
120
100
80
60
40
20
0
6/06

9/06

12/06

3/07

6/07

9/07

12/07 3/08

6/08

FDIC data on troubled banks and recent failures,
like the home price indexes detailed earlier, provide
little assurance that pressures on ﬁnancial institutions will ease in the near future. While the number
of failed institutions remained modest up through
June, the size of these banks with regard to assets is
already at or near levels last seen following the 2001
recession. Before the failure of IndyMac, the number of troubled institutions nearly doubled from 61
in 2007 to 117 this year.

Source: Federal Reserve Board.

FDIC-Insured Deposits

Fund Reserve Ratio

Billions of dollars

Percent of insured deposits

4,800

2.00

4,400

1.75
Targets

4,000

1.50

3,600

1.25

3,200

1.00

2,800

0.75

2,400

0.50

2,000

0.25
0.00

1,600
1995

1997

1999

2001

2003

2005

2007

Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile,
Second Quarter 2008.

Federal Reserve Bank of Cleveland, Economic Trends | October 2008

1995

1997

1999

2001

2003

2005

2007

Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile,
Second Quarter 2008

Failed Institutions
Number of institutions
11

Total assets, billions of dollars
5.0

4.5

4.0

3.5

3.0

6
2.5

2.0

1.5

3
2

1.0

0.5

0.0
1995

1998

2001

2004

2007

Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile,
Second Quarter 2008.

Problem Institutions
Number of institutions
180

Total assets, billions of dollars
90

160

140

120

100

0
1995

1997

1999

2001

2003

2005

2007

Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile,
Second Quarter 2008.

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Federal Reserve Bank of Cleveland, Economic Trends | October 2008

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