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Class III FOMC - Internal (FR)

Part 2

April 21, 2010

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System

Class III FOMC - Internal (FR)

April 21, 2010

Recent Developments

Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
Economic activity appears to have expanded at a moderate rate in the first quarter, as
private final demand has strengthened further and the pace of inventory liquidation has
greatly diminished. Consumer spending has increased solidly since the beginning of the
year, and business investment in equipment and software appears to have posted another
sizable gain last quarter. On the downside, activity in the housing market has remained
lackluster since the middle of last year, and conditions in the nonresidential construction
sector generally remain bleak. In addition, budgetary pressures led to a further
significant contraction in state and local expenditures last quarter. Turning to other
indicators of economic activity, industrial production advanced briskly again in the first
quarter, and labor market conditions improved, on net. Meanwhile, both headline and
core consumer price inflation have been soft in recent months.
Labor Market Developments
The labor market is showing signs of a nascent recovery. After falling steeply through
most of 2009, private nonfarm payroll employment increased about 50,000 per month, on
average, over the first quarter of 2010—the first quarterly increase since the onset of the
recession.1 With the average workweek also up last quarter, aggregate hours of all
employees increased at an annual rate of about 2 percent for the quarter, after declining
6 percent in 2009.2 The upturn in private employment has been widespread across
industries, as the three-month diffusion index in March moved above 50 for the first time
since January 2008.
Data from the household survey also point to a firming in labor market conditions.3 The
unemployment rate held steady at 9.7 percent throughout the first quarter—

Note: A list of abbreviations is available at the end of Part 2.
1

Government employment was little changed in the first quarter, as declines in state and local
employment were offset by hiring for the decennial census. Temporary census hiring totaled 87,000
through March, similar to the average pace seen for the 1990 and 2000 censuses. In the 2000 census, the
temporary workforce rose to 530,000 in May.
2
We estimate that the February snowstorms depressed the change in private payroll employment in
February by about 75,000 and boosted the change in March by a similar amount. We also think that the
0.1 hour decline in the average workweek for all employees in February—and its subsequent reversal in
March—were due to the snowstorms.
3
In the first quarter of this year, employment increases in the household survey (adjusted for updates
to population estimates) averaged 450,000 per month, about 400,000 per month more than the employment
gains in the establishment survey. Large discrepancies are common; in the fourth quarter of last year, for
example, employment in the household survey fell by 235,000 per month more, on average, than
employment in the establishment survey. We tend to view the establishment survey as the more reliable
indicator of changes in employment at quarterly frequencies.

II-1

II-2

Changes in Employment
(Thousands of employees; seasonally adjusted)
2009
Measure and sector

2009

2010
Q4

Jan.

Average monthly change
Nonfarm payroll employment
(establishment survey)
Private
Natural resources and mining
Manufacturing
Ex. motor vehicles
Construction
Residential
Nonresidential
Wholesale trade
Retail trade
Financial activities
Temporary help services
Nonbusiness services 1
Total government
Federal government
Total employment (household survey)
Memo:
Aggregate hours (percent change)2
All employees
Production workers
Average workweek (hours)3
All employees
Production workers
Manufacturing

Feb.

Mar.

Monthly change

-395
-388
-8
-107
-97
-84
-32
-52
-19
-42
-29
-12
-6
-7
4
-450

-261
-233
-5
-49
-59
-72
-22
-50
-11
-39
-20
-11
18
-28
3
-423

-90
-90
0
-33
-33
-39
-6
-33
-5
-23
-9
62
-12
0
2
-325

54
49
8
15
9
-35
-13
-22
2
24
-19
42
47
5
29
371

14
16
8
22
-5
-60
-17
-43
-8
49
-22
49
35
-2
33
541

-14
8
6
6
16
-59
-12
-46
4
8
-15
37
34
-22
6
308

162
123
9
17
15
15
-10
25
9
15
-21
40
73
39
48
264

-6.1
-5.6

-4.1
-2.9

-1.5
-1.4

2.1
1.8

.7
.3

-.3
-.5

.4
.7

33.9
33.1
39.8

33.8
33.1
39.9

33.8
33.1
40.3

34.0
33.2
40.8

34.0
33.3
40.9

33.9
33.1
40.5

34.0
33.3
41.0

1. Nonbusiness services comprises education and health, leisure and hospitality, and ‘‘other.’’
2. Establishment survey. Annual data are percent changes from Q4 to Q4. Quarterly data are percent changes from preceding
quarter at an annual rate. Monthly data are percent changes from preceding month.
3. Establishment survey.

Changes in Private
Payroll Employment
400

Aggregate Hours and Workweek
Thousands

3-month moving average

400

36.0

Hours

Index, 2007 = 100
Production workers
All workers

200

200
Mar.

35.5

100

Aggregate
hours
(right scale)

98
96

35.0
0

94
34.5

Mar.

-200

Workweek
(left scale)

34.0

88
33.5

-600

92
90

-400

102

86
84

33.0
82

-800

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

2010
2010

-800

32.5

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

2010
2010

Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical lines
represent the last business cycle peak as defined by the NBER.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

II-3

Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2009
Rate and group

2009

Jan.

Feb.

Mar.

Civilian unemployment rate
Total
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

9.3
24.3
14.8
8.8
6.9

9.7
25.4
15.1
9.4
7.1

10.0
27.2
15.7
9.5
7.5

9.7
25.8
15.9
9.0
7.4

9.7
26.4
15.8
9.0
7.3

9.7
25.0
16.0
9.1
7.4

9.7
26.1
15.8
9.0
7.5

Labor force participation rate
Total
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

65.4
37.5
73.0
74.7
59.9

65.3
37.4
72.8
74.8
59.8

64.9
35.8
71.4
74.3
59.6

64.8
35.4
71.1
73.9
59.8

64.7
35.2
70.7
73.7
59.8

64.8
35.1
71.3
74.0
59.7

64.9
35.8
71.4
74.1
59.8

Unemployment Rate and Persons Working
Part Time for Economic Reasons
11

2010

Percent of household employment

Percent of labor force

Labor Force Participation Rate
11
10

Percent

67.5

67.0

66.5

66.0

65.5

Mar.

9
8

Unemployment rate (right scale)

Persons working part
time for economic
reasons (left scale)

3
2002

2004

65.5
Mar.

65.0

3
2

2006

2008

2010

64.5
64.0

64.5
2002

2004

2006

2008

2010

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

Duration of Unemployment

Job Losers Unemployed
Less Than 5 Weeks

Weeks

Percent of unemployed
Mar.

45
40

Percent of household employment

1.8

64.0

1.8

1.6

1.4

1.2

35
25

30
Mean (left scale)

25
20

15
10
5

10
2004

2006

1.0

Long-term unemployed*
(right scale)

2002

Mar.

1.0

2008

2010

*Unemployed more than 26 weeks.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

0.8
0.6

0.8

2002

2004

2006

2008

2010

Note: Thick line is the 3-month moving average.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

0.6

II-4

Labor Market Indicators

Layoffs and Initial Claims
3.0

Insured Unemployment

Percent of private employment

Thousands

2.5

650

600

550
Apr.
10 500

Layoffs and discharges
(left scale)

2.0

700

400
Feb.

1.5

350
Initial claims
(right scale)

120

2000

2002

2004

2006

2008

2010

7
6

Incl. extended and
emergency benefits

5
Apr.
3

4
3

300

250

2000

2002

2004

2006

2
2008

2010

Note: 4-week moving averages.
Source: U.S. Dept. of Labor, Employment and Training
Administration.

Job Openings

Hires and Hiring Plans
Percent

110
100

Job openings*
(right scale)

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

-5

0.5

-10

Percent

Percent of private employment

Feb.
Composite
Help Wanted
Index** (left scale)

60
50

2000

2002

2004

2006

2008

2010

*Percent of private employment plus job openings.
**Index of staff composite help-wanted advertising as a percent
of payroll employment.
Source: For job openings, Job Openings and Labor Turnover
Survey; for Composite Help Wanted Index, Conference Board
and staff calculations.

Job Availability and Hard-to-Fill Positions
45

Percent

4.0

Index

150
130

Job availability*
(right scale)

110

3.5

3.0

2000
2002
2004
2006
2008
2010
*Percent planning an increase in employment minus
percent planning a reduction. Seasonally adjusted by
FRB staff.
Source: For hires, Job Openings and Labor Turnover Survey;
for hiring plans, National Federation of Independent Business.

Index

Conference Board (left scale)

2.5

50
Mar.

2000
2002
2004
2006
2008
2010
*Proportion of households believing jobs are plentiful, minus
the proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one
‘‘hard-to-fill’’ job opening. Seasonally adjusted by FRB staff.
Source: For job availability, Conference Board; for hardto-fill, National Federation of Independent Business.

40
30
10

90
Apr.
(p)

80
70

Thomson Reuters/Michigan
(right scale)

60
50
40

30
20

110
100

60
50

130
120

Mar.

120

110

Hard-to-fill**
(left scale, 3-month moving average)

Feb.

Mar.

100

Hiring plans*
(left scale)

Expected Labor Market Conditions

40
35

5.0

4.5

Mar.

Hires
(right scale)

80
70

4
3

Regular state programs

Note: Data for initial claims are 4-week moving averages.
Source: For layoffs and discharges, Job Openings and
Labor Turnover Survey; for initial claims, U.S. Dept.
of Labor, Employment and Training Administration.

Index, 1980=100

10
Mar.
27
9

6
450

1.0

Millions

2006
2008
2010
2000
2002
2004
Note: The proportion of households expecting labor
market conditions to improve, minus the proportion expecting
conditions to worsen, plus 100.
p Preliminary.
Source: Conference Board; Thomson Reuters/University of
Michigan Surveys of Consumers.

II-5

0.3 percentage point lower than the fourth-quarter average.4 Furthermore, the number of
new job losers as a percent of household employment continued to drop, and the fraction
of workers on part-time schedules for economic reasons has moved down, on net, since
the end of last year. In addition, the labor force participation rate has increased over the
past few months following sharp declines over the second half of last year. Nonetheless,
finding a job remains very difficult, and unemployment durations—as gauged by the
mean duration of unemployment and by the share of the unemployed out of work for
more than 26 weeks—continued to rise.
Other labor market indicators have improved somewhat in recent months. The layoff rate
from JOLTS remained on a downward trajectory in February. And, although initial UI
claims moved up over the first half of April, we think that at least part of that rise
reflected seasonal adjustment difficulties and the four-week average still remains
modestly lower than at the end of 2009. Vacancies, as measured by the job openings rate
from JOLTS and the help-wanted advertising index, have moved noticeably above their
end-of-year levels. In addition, alternative measures of labor market slack, namely the
number of small firms with hard-to-fill positions and households’ perceptions of job
availability, have improved slightly, on balance, since the beginning of 2010. To be sure,
the hiring rate in the JOLTS has yet to show clear evidence of a rebound. However, the
signal from hiring plans in the March NFIB survey was more optimistic than the one
suggested by the hiring rate, as the fraction of small firms planning to increase
employment in the next three months exceeded the fraction planning to decrease
employment for the first time since fall 2008. Finally, households’ expectations of future
labor market conditions, though only moving sideways in recent months, remained well
above recession lows.
Industrial Production
Industrial production (IP) continued to expand at a brisk pace last quarter. Despite only
modest gains in February and March, total IP increased at an annual rate of nearly
8 percent in the first quarter, while manufacturing output rose more than 6½ percent.5 In
addition, the production gains were widespread across industries, with the March
diffusion index of three-month changes in manufacturing IP reaching its highest level in
almost seven years. According to the staff’s flow-of-goods system, both foreign demand
and a mild restocking of inventories contributed positively to output gains last quarter.

We estimate that the government’s hiring of census workers had minimal effects on the
unemployment and participation rates in March.
5
The snowstorms that hit the East Coast held down production in February, and the swing from a cold
February to a warm March was a large drag on utilities output last month.

II-6
Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2009

Component

20091

(percent)

2009

2010

2010
Jan.

Annual rate
Total
Previous

Feb.

Mar.

Monthly rate

100.0
100.0

-4.7
-4.7

6.9
6.6

7.8
...

1.0
.9

.3
.1

.1
...

Manufacturing
Ex. motor veh. and parts

79.8
76.0

-5.0
-4.9

5.6
4.6

6.6
6.2

.9
.7

.2
.4

.9
.8

Mining
Utilities

8.4
11.9

-6.2
-1.4

5.8
17.2

17.6
9.3

2.2
.4

1.7
.0

2.3
-6.4

Selected industries
Energy

22.7

-2.9

12.8

8.8

-2.5

High technology
Computers
Communications equipment
Semiconductors2

3.7
.8
1.4
1.4

-2.2
-5.1
-3.6
.8

9.5
20.7
6.9
5.9

26.5
12.5
21.6
40.1

2.4
.9
1.4
4.1

3.0
.8
2.2
5.1

1.9
1.1
1.7
2.4

Motor vehicles and parts

3.7

-7.3

24.2

14.4

4.8

-3.9

2.2

Aircraft and parts

2.7

8.4

-4.2

-10.3

-1.5

-.8

67.2

-5.9

4.4

6.9

1.0

23.0
3.4
19.5

-2.2
-9.9
-.7

4.5
-.8
5.5

4.4
2.4
4.7

.8
.6
.9

.2
-.3
.3

.5
1.8
.2

Business equipment
Defense and space equipment

6.7
1.3

-11.2
1.6

4.9
-5.9

16.5
12.9

1.9
2.7

1.0
.7

1.2
2.3

Construction supplies
Business supplies

4.7
7.4

-14.1
-8.5

-9.2
3.9

4.7
.4

1.6
.3

-.2
-.7

2.3
.2

24.1
11.2
12.9

-5.5
-13.0
2.0

7.9
9.4
6.6

8.9
14.8
4.0

.8
1.6
.1

.7
.6
.7

.8
1.8
.0

Excluding selected industries
Total3
Consumer goods
Durables
Nondurables

Materials
Durables
Nondurables

1. From fourth quarter of preceding year to fourth quarter of year shown.
2. Includes related electronic components.
3. Includes manufactured homes (not shown separately).
... Not applicable.
Source: Federal Reserve, G.17 Statistical Release, "Industrial Production and Capacity Utilization."

Capacity Utilization
(Percent of capacity)

Sector

1972
2009
average

1994
95
high

2001
02
low

2009

2010

Feb.

Mar.

Total industry

80.6

84.9

73.5

70.0

71.4

73.0

73.2

Manufacturing
Mining
Utilities

79.2
87.5
86.6

84.5
89.1
93.3

71.4
84.9
84.2

67.0
83.2
78.1

68.2
84.7
80.9

69.5
88.3
82.3

69.4
88.2
84.1

70.0
90.2
78.6

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.5
81.6
77.5

89.9
87.9
80.3

81.7
74.3
70.0

82.4
67.0
68.5

83.9
68.5
69.8

86.4
69.7
71.4

86.3
70.0
71.2

87.4
69.5
71.8

Source: Federal Reserve, G.17 Statistical Release, "Industrial Production and Capacity Utilization."

II-7

Capacity utilization in manufacturing, at 70.0 percent in March, stood nearly
5 percentage points above the trough recorded last June but was still more than
9 percentage points below its 1972–2009 average. With the exception of the aerospace
product and parts and the food industries, most major industry groups continue to operate
at rates of utilization well below their historical averages.
The production of light motor vehicles stepped up to an annual rate of 7.4 million units in
March after being held down in February by a recall-related suspension of production at
Toyota.6 For the first quarter as a whole, light vehicle assemblies were at a pace of
7.4 million units, 400,000 units above the fourth-quarter average, as automakers
cautiously began to rebuild dealers’ inventories. Indeed, the overall stock-sales ratio—at
59 days in the first quarter—was well below the industry target of 65 days. Moreover,
initial assembly plans for the second quarter indicate that light motor vehicle production
will hold steady at first-quarter levels.
Production in high-tech industries increased solidly in the first quarter. The output of
semiconductors rose briskly, and gains were widespread across chip types. The
production of communications equipment accelerated substantially, with export demand
surging early this year. By contrast, the rate of increase in computer output slowed
somewhat last quarter following a fourth-quarter leap in output fueled by consumer
demand.
Looking ahead, the available indicators point to a further expansion in the high-tech
sector in the near term. Orders received by North American factories for circuit boards—
a key input into electronics of all kinds—stood well above shipments in February,
suggesting that further production gains are in train. In addition, Intel recently noted
clear signs of improving business demand for personal computers, as corporate customers
have moved to replace their aging stocks. Capital expenditure plans announced by major
telecommunications service providers for this year also suggest further support for
computer and communications equipment production in coming quarters.
Energy output rose at an annual rate of nearly 9 percent in the first quarter, reflecting
increases in utilities output and in drilling activity. Available weekly product data
indicate that energy output will contribute little to IP growth this month.
Production outside of energy, motor vehicles and parts, aircraft and parts, and high-tech
industries—which accounts for roughly two-thirds of total IP—accelerated in the first

Toyota suspended production at four U.S. assembly plants for one week at the beginning of February;
a more limited production downtime occurred in late February and the middle of April.

II-8

Indicators of Industrial Activity

Manufacturing IP Diffusion Index

Manufacturing Capacity Utilization
Index
Mar.

Percent
70

75
Mar.

30
20

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: The diffusion index equals the percentage of series
that increased relative to 3 months earlier plus one-half the
percentage that were unchanged.
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Motor Vehicle Assemblies

1998
2000
2002
2004
2006
2008
2010
Note: Horizontal line is 1972-2009 average.
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Millions of units

1.0

2002 = 100
125

0.9

12
115

0.8
0.6

Autos and light trucks
(right scale)

0.5

0.0

+ Apr.

8
Mar.

Apr.

0.3
0.1

Electricity

0.4
0.2

Utilities Output

Millions of units

0.7

4
Medium and heavy trucks
(left scale)

2002 2003 2004 2005 2006 2007 2008 2009 2010
+ April values are based on latest industry schedules.
Source: Ward’s Communications.

Natural gas

ISM Diffusion Index and Average of
Regional New Orders Diffusion Indexes

95
85

2
0

105

2002 2003 2004 2005 2006 2007 2008 2009 2010
+ April value for electricity generation is based on weekly
generation data from the Edison Electrical Institute (EEI).
Source: EEI; Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Change in Real Adjusted Durable Goods Orders

Diffusion index

Percent
80

ISM
Mar.
Apr.

60
50

Feb.

Regional average
40

-2

-4

20
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Regional average consists of new orders indexes from the
Chicago, Dallas, Kansas City, New York, Philadelphia, and Richmond
surveys. The April value for the regional average is based on data
from the New York and Philadelphia surveys.
Source: Institute for Supply Management (ISM); Federal Reserve.

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: 3-month moving average.
Source: Staff calculation based on data from the U.S. Census
Bureau and the Bureau of Labor Statistics.

Note: The shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical
line represents the last business cycle peak as defined by the NBER.

-6

II-9
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2009
Item

2010
Q4

2009
Q2

Dec.

2010
Jan.

Feb.

Mar.

U.S. production1
Autos
Light trucks

6.4
2.5
3.9

7.0
2.8
4.2

7.4
2.9
4.5

7.4
3.2
4.2

7.0
2.8
4.2

7.7
2.9
4.8

7.2
3.0
4.3

7.4
2.9
4.5

Days’ supply2
Autos
Light trucks

50
46
55

53
51
55

59
55
63

n.a.
n.a.
n.a.

51
48
55

58
54
61

63
58
66

55
51
58

1.38
.63
.75

1.43
.65
.79

1.60
.71
.90

n.a.
n.a.
n.a.

1.43
.65
.79

1.53
.67
.86

1.60
.71
.89

1.60
.71
.90

6.5

7.2

7.6

7.2

7.8

7.3

7.6

Inventories3
Autos
Light trucks
Memo: U.S. production,
total motor vehicles4

Note: FRB seasonals. Components may not sum to totals because of rounding.
1. Production rates for the second quarter of 2010 reflect the latest industry schedules.
2. Quarterly values are calculated with end-of-period stocks and average reported sales.
3. End-of-period stocks.
4. Includes medium and heavy trucks.
n.a. Not available.
Source: Ward’s Communications.

Inventories of Light Vehicles
Millions of units
3.5
3.0
2.5
2.0
Mar.

1.5
1.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.5

2010

Source: Ward’s Communications. Adjusted using FRB seasonals.

Days’ Supply of Light Vehicles
Days
110
100
90
80
70
Mar.

60
50
40
30

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: Constructed from Ward’s Communications data. Adjusted using FRB seasonals.

2007

2008

2009

2010

II-10

Indicators of High-Tech Manufacturing Activity

Industrial Production in the High-Tech Sector

U.S. Personal Computer and Server Absorption

2002 = 100, ratio scale

Millions of units, ratio scale
350

0.80

300

0.75

250

Semiconductors
Mar.

Computers

Servers (left scale)
Q1

0.65
200
180
160
120

2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

0.70

100
90
80

0.60
0.55

140
Communications equipment

Millions of units, ratio scale

PCs (right scale)

20
19
18
17
16
15
14
13

0.50

12
0.45
0.40

11
2002 2003 2004 2005
Note: FRB seasonals.
Source: IDC.

2006 2007

2008 2009

2010

Capital Expenditures by Selected
Telecommunications Service Providers

High-Tech Exports
Billions of dollars, annual rate

Billions of dollars, ratio scale
160

3-month moving average
Annual average
2010 guidance

150

Feb.

140

130

55
50

120

110

100
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Includes semiconductors and related equipment,
communications equipment, and computers and peripherals.
Source: U.S. International Trade Commission.

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. Includes 11 North American service
providers. 2010 outlook based on guidance from companies
representing 89 percent of total capital expenditures in 2009.
Source: Dell’Oro Group.

Semiconductor Manufacturing Equipment
Orders and Shipments

Circuit Board Orders and Shipments
Billions of dollars

Billions of dollars, annual rate
140

Orders
130

120

Shipments
Mar.

110
100
Feb.
Shipments

12
8

80
70

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: U.S. and Canadian orders and shipments of bare and
loaded circuit boards.
Source: IPC.

Orders

4
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. North American headquartered manufacturers.
Source: SEMI’s Book-to-Bill Report.

II-11

quarter. Indeed, the nearly 7 percent annual rate of increase was the largest since late
1999, and gains were widespread across all major market groups. In particular, the
production of business equipment increased 16½ percent last quarter.
On balance, the available indicators of near-term manufacturing activity remain quite
positive. The new orders diffusion index from the national ISM survey and the average
of the new orders indexes from the regional surveys moved up in March to levels
consistent with brisk increases in manufacturing output in the second quarter. Moreover,
the first readings on new orders for April, from the New York and Philadelphia surveys,
both increased. In contrast, the three-month moving average of the staff’s series on real
orders for durable goods (adjusted to exclude industries for which reported orders have
little information content for predicting shipments) flattened out in February and suggests
only moderate gains in the near future.
Motor Vehicle Sales
Sales of light motor vehicles jumped in March to an annual rate of 11.8 million units after
falling for two consecutive months. This increase was likely due, in large part, to
Toyota’s aggressive incentive program and the quick matching of these incentives by
other automakers.7 J.D. Power and Associates estimates that sales this month have been
running below the March pace despite the recent improvement in consumer attitudes
toward car-buying conditions and the continuation of automakers’ generous financing
incentives.
For the first quarter as a whole, sales of light motor vehicles averaged about
200,000 units above their fourth-quarter level.

. Orders for medium
and heavy trucks fell sharply, on net, in the first quarter, likely because of the new
environmental regulations on diesel engines that took effect at the start of the year. Even
so, truck sales in the first quarter were little changed from their modest fourth-quarter
level.
Consumer Spending
Consumer spending has continued to rise at a solid pace so far this year. Real PCE
increased at an average monthly rate of 0.4 percent in January and February, and nominal
7

After its major safety recall in late January and early February, Toyota ratcheted up financing and
leasing incentives in March, and other automakers quickly followed suit. More recently, several
automakers extended and expanded these incentives for an additional month.

II-12
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2009
Category

2009

Total

2010
Q4

Jan.

Feb.

Mar.

10.3

11.5

10.8

11.0

10.8

10.3

11.8

Autos
Light trucks

5.4
4.9

6.4
5.1

5.7
5.2

5.7
5.3

5.7
5.1

5.4
4.9

6.0
5.8

North American1
Autos
Light trucks

7.6
3.6
4.0

8.4
4.2
4.2

8.2
3.9
4.4

8.3
3.9
4.4

8.1
3.8
4.3

7.9
3.7
4.1

9.0
4.3
4.7

Foreign-produced
Autos
Light trucks

2.7
1.8
.9

3.1
2.1
.9

2.6
1.8
.8

2.6
1.8
.9

2.6
1.9
.8

2.5
1.7
.8

2.8
1.7
1.0

44.7

43.1

45.0

45.1

45.7

46.3

43.5

Memo:
Detroit Three
market share (percent)2

Note: Components may not sum to totals because of rounding.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.
2. Includes domestic and foreign brands affiliated with the Detroit Three.
Source: Ward’s Communications. Adjusted using FRB seasonals.

Content redacted.

Medium and Heavy Trucks

Car-Buying Attitudes
Percent

Index

110

Thousands of units, ratio scale
180

Appraisal of car-buying conditions (right scale)
100

160

Apr.
(p)

1300
1100
900

Net new orders
of class 5-8 trucks

140

700

120

500

70
100
60

Good time to buy: low prices
(left scale)

Apr.
(p)

Sales of class 4-8 trucks
Mar.

30
20

300
80

2002

2004

2006

2008

2010

p Preliminary.
Source: Thomson Reuters/University of Michigan Surveys
of Consumers.

2002

2004

2006

2008

2010

Note: Annual rate, FRB seasonals.
Source: For sales, Ward’s Communications; for orders,
ACT Research.

100

II-13
Real Personal Consumption Expenditures
(Percent change from preceding comparable period)
Category

2009
Q3

2010
Q1e

Jan.e

Annual rate
Total real PCE
Motor vehicles
Goods ex. motor vehicles
Services
Ex. energy
Memo:
Real PCE control1
Nominal retail control2

2010
Feb.e

Mar.e

Monthly rate

2.8

1.6

n.a.

53.7
3.8
.8
.8

-23.7
5.6
1.0
.5

-7.4
7.4
n.a.
n.a.

-5.2
.9
.2
.1

-3.8
1.0
.4
.2

11.7
.5
n.a.
n.a.

3.2
1.4

6.0
5.4

7.7
7.4

.6
.7

1.4
1.2

.5
.5

1. Durables excluding motor vehicles, nondurables excluding gasoline, and food services.
2. Total sales less outlays at building material and supply stores, automobile and other
motor vehicle dealers, and gasoline stations.
e Staff estimate.
n.a. Not available.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Goods
Percent

0.8

2.8

0.6

2.0

0.4

0.2

-0.0

0.8

-0.2

Mar.

-0.2

6-month moving average

1.2

Percent

6-month
moving average

2.0
Mar.

0.4

-1.2

-0.4

-0.6

-2.0

-0.8

-2.8

1.2
0.4

-0.4

2.8

-0.4
Monthly

-1.2
-2.0

-2.8
2006 2007 2008 2009 2010
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical line
represents the last business cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Services
Percent

0.5

0.4

0.3

0.3
Feb.

0.2
0.1

6-month moving average

0.2

0.1

0.0

-0.1

-0.2

6-month
moving average

0.4

0.2

0.0

Percent

0.6

-0.2

0.6
0.4

Feb.

0.2
0.0

Monthly

-0.2

-0.4
-0.4
-0.2
2006 2007 2008 2009 2010
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical line
represents the last business cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

II-14

Fundamentals of Household Spending
Household Net Worth
and Dow Jones Total Market Index
18000

15400

Change in Real Disposable Personal Income

Index

Ratio

7.0
6.5

Ratio of household
net worth to DPI*
(right scale)
Apr. 20

12800

6.0
5.5

10200

5000

5.0
4.5

2000
2002
2004
2006
2008
2010
* The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.
Source: Federal Reserve Board; U.S. Department of
Commerce, Bureau of Economic Analysis; Wall Street Journal.

4.0

Percent

3
Feb.

-1

-2

-3

-3
2000
2002
2004
2006
2008
2010
Note: Values for December 2004 and December 2005
exclude the effect on income of the one-time Microsoft dividend
in December 2004.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

4
Feb.

7
6

Treasury
yield

3
2
2

-1

2000
2002
2004
2006
2008
2010
Note: The value for December 2004 excludes the effect
on income of the one-time Microsoft dividend in that month.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

Percent

Target Federal Funds Rate
and 10-Year Treasury Yield

Personal Saving Rate
7

Total Market Index
(left scale)

7600

12-month percent change

2
Federal
funds
rate

1
Apr. 20

0
-1

2000
2002
2004
2006
Source: Federal Reserve Board.

2008

2010

Consumer Confidence
1985 = 100

1966 = 100

170

115

Thomson Reuters/
Michigan
(right scale)

150

105

130

110

90
70
50

Conference Board
(left scale)

Apr.
(p)
Mar.

75
65
55

35
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical line
represents the last business cycle peak as defined by the NBER.
p Preliminary.
Source: Thomson Reuters/University of Michigan Surveys of Consumers; Conference Board.

II-15

sales at establishments in the retail control category—which the BEA uses to estimate
expenditures on most non-auto goods and food services—moved up robustly again in
March. Together, these data suggest that spending for the first quarter as a whole
increased noticeably faster than the 2¼ percent annual rate in the second half of last year.
The recent spending gains have been especially pronounced for most non-auto goods and
food services. Factoring in our estimate of prices in March, increases in real spending in
the control category averaged about ¾ percent per month in the first three months of this
year—stronger than the already solid increases in the second half of last year. Real
spending on services continued to increase at a moderate pace early this year, abstracting
from the weather-related pickup in energy services through February. In contrast, outlays
on new and used motor vehicles fell again in the first quarter.8
Although the usual determinants of spending have shown some signs of improvement
recently, they remain at generally lackluster levels. For example, while equity prices
have risen strongly since the start of the year, household net worth remains well below its
pre-recession level and is likely a continued source of restraint on spending. Similarly,
although wages and salaries picked up earlier this year with the apparent stabilization in
the labor market, real disposable income was flat in February after a ½ percent decline in
January that reflected a one-time jump in personal taxes. Furthermore, banks have
indicated somewhat greater willingness to lend to consumers in recent months, which has
likely provided some support to spending increases, but terms and standards on consumer
loans remain restrictive. (For more information, see the appendix on SLOOS at the end
of the financial section.) Finally, as a sign that households are still anxious about their
economic prospects, consumer sentiment dropped back in early April and has changed
little, on net, since the beginning of the year.
Housing
The recovery in the housing market remains stalled. Single-family housing starts edged
up, on net, over February and March, but much of this gain likely reflected delayed
projects getting under way as weather conditions returned to normal. The small positive
gap between adjusted permits and starts in March suggests that we might see some
further pickup in starts in April. Weather effects aside, new construction has not moved
up much since last summer. Activity has likely been held down by builders’ difficulties
in obtaining construction financing, by new homes selling below construction costs, and
by the large number of distressed properties on the market. Multifamily starts have also

While real outlays on motor vehicles surged in March, the recent increase in this category followed
two months of sizable declines that reflected weaker spending on both new and used motor vehicles.

II-16
Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2009
2010
Sector

2009

All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
New homes
Sales
Months’ supply2
Existing homes
Sales
Months’ supply2
Multifamily units
Starts
Built for rent
Built for sale
Permits
Condos and co-ops
Existing home sales

Jan.

Feb.

Mar.

.55
.57

.59
.57

.56
.60

.62
.65

.61
.62

.62
.64

.63
.69

.45
.44
.44

.50
.46
.48

.48
.47
.49

.53
.52
.53

.51
.50
.52

.54
.51
.52

.53
.54
.56

.37
9.12

.41
7.72

.37
7.72

n.a.
n.a.

.32
8.88

.31
9.19

n.a.
n.a.

4.57
8.34

4.65
8.07

5.23
6.90

n.a.
n.a.

4.43
8.20

4.37
8.48

n.a.
n.a.

.11
.09
.02
.14

.09
.08
.01
.11

.08
.06
.02
.12

.09
n.a.
n.a.
.13

.10
n.a.
n.a.
.12

.08
n.a.
n.a.
.12

.10
n.a.
n.a.
.14

.59

.63

.73

n.a.

.62

.65

n.a.

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
2. At current sales rate; expressed as the ratio of seasonally adjusted inventories to seasonally adjusted
sales. Quarterly and annual figures are averages of monthly figures.
n.a. Not available.
Source: Census Bureau.

Private Housing Starts and Permits
(Seasonally adjusted annual rate)
Millions of units
2.0

2.0

1.8

1.8
Single-family starts

1.6

1.4

1.2

1.2
Single-family adjusted permits

1.0

Mar.

.6
.4

Multifamily starts

.2
Mar.

1999

2000

2001

2002

2003

2004

2005

2006

2007

Note: Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
Source: Census Bureau.

2008

2009

2010

Content partially redacted.

II-18
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2009
Category

2010
Dec.

Annual rate

Jan.

Feb.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories 1

3.8
2.2
.1
33.5
-.2

9.0
8.7
22.0
-5.0
8.8

4.1
2.3
2.2
-3.0
2.8

-4.4
-1.9
4.0
1.4
-2.8

.1
.6
-6.9
-2.6
1.8

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories 1

28.6
14.1
5.5
31.2
13.4

1.6
13.5
26.4
-10.4
14.9

2.2
3.0
.4
3.7
3.3

3.9
-4.4
-10.6
-3.9
-3.7

6.0
2.0
3.1
-1.2
2.1

Memo:
Shipments of complete aircraft2

36.4

39.8

48.3

31.7

31.5

1. Excludes most terrestrial transportation equipment.
2. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.
Source: Census Bureau.

Communications Equipment
20
17
14

Non-High-Tech,
Nontransportation Equipment

Billions of chained (2005) dollars, ratio scale
Shipments
Orders

20
17
14

8
Feb.

Billions of chained (2005) dollars, ratio scale

59
54

54
Orders

Shipments

36
Feb.

2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
2000
Note: Shipments and orders are deflated by a price index
that is derived from the quality-adjusted price indexes of the
Bureau of Economic Analysis and uses the producer price
index for communications equipment for monthly interpolation.
Source: Census Bureau.

Computers and Peripherals
240
210
190

2000 = 100

100

21
19

Feb.

170
Mar.

150

Real M3
shipments
(right scale)

Diffusion index

100

80
Feb.

130
110

Shipments Diffusion Index

Billions of chained (2005) dollars, ratio scale
24
Industrial production
(left scale)

2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
2000
Note: Shipments and orders are deflated by the staff
price indexes for the individual equipment types included
in this category. Indexes are derived from the quality-adjusted
price indexes of the Bureau of Economic Analysis.
Source: Census Bureau.

2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
2000
Note: Shipments are deflated by the staff price index for
computers and peripheral equipment, which is derived from
the quality-adjusted price indexes of the Bureau of Economic
Analysis.
Source: Census Bureau; FRB Industrial Production.

2000
2002
2004
2006
2008
2010
Note: 3-month moving average. The diffusion index equals
the percentage of 26 nontransportation equipment categories
that experienced an increase in shipments relative to 3
months prior.
Source: Census Bureau.

II-19

remained at a low level due to elevated vacancy rates and tight credit conditions for
builders.
The demand for new homes has been especially weak in recent months. The Census
Bureau’s measure of new home sales agreements inched down further in February
following a sizable decline in January.

. 9 As the pace of sales has slowed, the inventory of unsold new homes has edged
up after sharp declines last year. Consequently, the months’ supply of new homes moved
back up above nine months in February—only about three months below its peak in
January 2009. Sales of existing homes, which are recorded at closing, also ticked down
in February, but the increase in pending home sales in February suggests that resales
might move up some as the homebuyer tax credit expiration deadline approaches.10
The softness in housing demand has persisted despite a favorable level of housing
affordability and an apparent stabilization of residential real estate values. Interest rates
for conforming 30-year fixed-rate mortgages have changed little in recent months and
remain at levels that are very low by historical standards. And, while the repeat-sales
price index for existing single-family homes calculated by LoanPerformance edged down
in February, its current level is 3 percent above its trough in April 2009. Looking
forward, the early April reading of the diffusion index for year-ahead house price
expectations constructed from the Thomson Reuters/University of Michigan Surveys of
Consumers remained markedly more positive than it was last spring, with the number of
respondents who expect house prices to increase about the same as the number of
respondents who expect prices to decrease.
Equipment and Software
Real spending on equipment and software continued to rebound in the first quarter.
Investment in both high-tech and transportation equipment advanced further, and the
gains now appear to be spreading to other categories of capital goods as well.
Real spending on high-tech equipment and software appears to have increased at a solid
pace so far this year, albeit less than the gain of over 30 percent (annual rate) posted in
the fourth quarter. The recent increases in high-tech investment continue to be
concentrated in computers and software. The average level of nominal shipments of
9

.
In order to qualify for the homebuyer tax credit, purchasers must sign by April and close by June.

II-20

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change

2
Q4

-2

-4

-6

1991 1992 1993
1993 1994 1995
1995 1996 1997
1997 1998 1999
1999 2000 2001
2001 2002 2003
2003 2004 2005
2005 2006 2007
2007 2008 2009
2009 2010
1990 1991
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

User Cost of Capital

Corporate Bond Yields
4-quarter percent change

20
15

Non-high-tech

-5

-5
Q4

-10

10-year high-yield

1990
2000
2010
1991 1993 1995
1995 1997 1999
2001 2003 2005
2005 2007 2009

-10

-15

High-tech

Source: Staff calculation.

Percent

8
6

10-year BBB

4
1990
19951996 19982000
20052006 20082010
1990 1992 1994
2000 2002 2004
2010

Surveys of Business Conditions
Percent

Credit expected to be tighter (right scale)

Apr.

Note: End of month. April value as of April 20.
Source: Merrill Lynch.

NFIB: Survey on Loan Availability

Percent

-15

-6

Mar.

18
14
10
6

Diffusion index

80
70

ISM (left scale)
Philadelphia Fed (right scale)

Mar.

2
8

-2

70
Apr.

-6
4

-10
-14

0
Credit more difficult to obtain (left scale)
-4

1990
19951996 19982000
20052006 20082010
1990 1992 1994
2000 2002 2004
2010
Note: Of borrowers who sought credit in the past 3 months,
the proportion that reported or expected more difficulty in
obtaining credit less the proportion that reported or expected
more ease in obtaining credit. Seasonally adjusted.
Source: National Federation of Independent Business (NFIB).

-18
-22

1990
19951996 19982000
20052006 20082010
1990 1992 1994
2000 2002 2004
2010
Source: Institute for Supply Management (ISM),
Manufacturing ISM Report on Business; Philadelphia Fed
Business Outlook Survey.

Note: Shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical
lines represent the last business cycle peak as defined by the NBER.

II-21

computers and peripheral equipment in January and February was well above the fourthquarter level, which combined with falling prices implies strong real increases. In
addition, imports of computers increased briskly in February, and IP for this category
registered a solid gain last quarter. Moreover, Adobe, Oracle, and IBM reported
substantial revenue gains in the first quarter, which, together with upbeat revenue
estimates for other major software companies, indicates another large increase in business
spending on software last quarter. In contrast, shipments of communications equipment
in January and February were below their fourth-quarter average, suggesting that the
recovery in domestic business outlays on communications equipment may have paused in
the first quarter. Looking ahead, a number of major high-tech companies have reported
that business demand appears to be picking up further, as firms continue to replace aging
equipment and are starting to expand capacity with the construction of new data centers
and the buildup of wireless networks.
Real investment in equipment other than high-tech and transportation, a broad category
of capital goods that accounts for nearly half of the total outlays on equipment and
software, appears to have turned up sharply in the first quarter after falling for more than
a year. Excluding the volatile engines and turbines category, average orders and
shipments of other equipment in January and February were each more than 2 percent
above their fourth-quarter average. This, together with the recent increase in the
diffusion index for shipments of nondefense capital goods excluding aircraft, suggests
that the recovery in spending has now become more broadly based.
The recovery in investment spending is consistent with the strengthening in many
indicators of business activity. Business output likely posted its third consecutive gain in
the first quarter, and the recent readings of the ISM and Philadelphia Fed indicators of
business conditions have now moved above the levels that prevailed during the recovery
that followed the prior recession. Furthermore, the cost of capital has fallen sharply over
the past year, as corporate bond yields returned to levels seen before the recession, and
the April SLOOS reported that, for the first time in about three years, a majority of banks
eased standards and some terms on loans to large businesses. In contrast, small
businesses, which are more likely to depend on bank credit for funds, continue to face
difficult credit conditions: A relatively high fraction of respondents in the March NFIB
survey still reported tighter credit conditions, while the April SLOOS indicated that, on
net, banks continued to tighten terms on loans to small businesses.
Nonresidential Construction
The nonresidential construction sector remains on a downward track. Real outlays on
structures outside drilling and mining plunged throughout last year, and recent data on

II-22

Nonresidential Construction and Indicators
(All spending series are seasonally adjusted at an annual rate; nominal CPIP deflated by
BEA prices through Q4 and by staff projection thereafter)

Office, Commercial,
Communication, and Other

Total Structures
Billions of chained (2005) dollars

380

Billions of chained (2005) dollars

120
110

360
340
320

360

100

340

90
80

320

100

300
280

280
260
240

Feb.
2000

2002

2004

2006

2008

2010

260

80
70

20
0

Feb.

70
65

55
50

Power

Feb.

40
35

2004

2006

2008

2010

45
40
35

20
15

2008

2010

Number

Footage drilled
(left scale)

Drilling rigs
in operation
(right scale)

Apr.

Percent

3.0
2.5

Office

15
Q1(p)
Industrial

1400
1200
1000
800

2000
2002
2004
2006
2008
2010
Note: The April readings for drilling rigs are based on
data through April 16, 2010. Both series are seasonally
adjusted by FRB staff.
Source: For footage drilled, U.S. Department of Energy,
Energy Information Agency; for drilling rigs, Baker Hughes.

Percent

Diffusion index

400

2.0
50

1.5
12

1.0

Mar.

Retail

-0.5
-1.0

Change in
employment (left scale)

35
Mar.

2008

2010

Note: Industrial space includes both manufacturing
structures and warehouses.
p Preliminary.
Source: CB Richard Ellis Economic Advisors.

-1.5
25

-2.0
2006

45
40

0.0
9

Billings (right scale)

0.5

2004

1600

Architectural Billings and
Nonresidential Construction Employment

Vacancy Rates

2002

2000

600

Source: Census Bureau.

2000

2600
2200

Feb.

20
15

2006

Millions of feet

1800
20

2002

10
2000

2400

2004

10
240

Drilling and Mining Indicators

Manufacturing

2002

Feb.
Communication

Note: Other consists of structures for religious organizations,
education, lodging, amusement and recreation, transportation,
and health care.
Source: Census Bureau.

Billions of chained (2005) dollars

2000

50
40

Office

Manufacturing and Power

70
65

Commercial

50
40

Source: Census Bureau.

Other

60
300

120
110

-2.5

2000
2002
2004
2006
2008
2010
Note: Both series are 3-month moving averages.
Employment consists of industrial, commercial, and specialty
trade construction.
Source: For billings, American Institute of Architects; for
employment, U.S. Department of Labor, Bureau of Labor
Statistics.

II-23
Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2009
Measure and sector

2010

-163.1
-48.1
-115.1

-141.4
-4.6
-136.9

Manufacturing and trade ex. wholesale
and retail motor vehicles and parts
-110.9
Manufacturing
-39.8
Wholesale trade ex. motor vehicles & parts -52.5
Retail trade ex. motor vehicles & parts � �� ������
-18.6

-129.3
-55.3
-51.9
-22.1

Real inventory investment
(chained 2005 dollars)
Total nonfarm business
Motor vehicles
Nonfarm ex. motor vehicles

Book-value inventory investment
(current dollars)
Manufacturing and trade ex. wholesale
and retail motor vehicles and parts
Manufacturing
Wholesale trade ex. motor vehicles & parts
Retail trade ex. motor vehicles & parts

-146.3
-66.0
-56.5
-23.7

-121.8
-49.8
-47.8
-24.2

�

Dec.

Jan.

Feb.

-13.7
21.0
-34.7

...
...
...

-16.4
-6.1
-1.4
-8.8

-57.4
-22.1
-42.3
6.9

e
-19.8
e
-4.6
e
-1.9
-13.3 e

20.5
7.5
13.9
-.9

-18.7
-10.0
-25.5
16.7

19.2
16.1
11.7
-8.6

n.a.
n.a.
n.a.
n.a.

54.5
30.2
28.4
-4.2

n.a. Not available.
... Not applicable.
e Staff estimate of real inventory investment based on revised book-value data.
Source: For real inventory investment, U.S. Dept. of Commerce, Bureau of Economic Analysis;
for book-value data, Census Bureau.

ISM Customers’ Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.9
1.8

1.9

Index

1.8

Staff flow-of-goods system

1.7

1.6

Mar.
1.5

1.5

1.4

1.3

Feb.

Mar.

35
1.2

1.2
Census book-value data
1.1

2000
2000 20012002
2002 20032004
2004 20052006
2006 20072008
2008 20092010
2010
Note: Flow-of-goods system covers total industry ex.
motor vehicles and parts, and inventories are relative
to consumption. Census data cover manufacturing and
trade ex. motor vehicles and parts, and inventories are
relative to sales.
Source: Census Bureau; staff calculation.

1.1

2000
2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
Note: A number below 50 indicates inventories are "too low."
Source: Institute for Supply Management (ISM),
Manufacturing ISM Report on Business.

II-24

Federal Government Indicators
Total Real Federal Purchases

Real Defense Spending

Percent change, annual rate

Current
4-quarter moving average

Billions of chained (2005) dollars

700
Unified (monthly)
NIPA (quarterly)

Mar.

700

650

600

550

500

-5

450

-10

400

400
2004
2005
2006
2007
2008
2009
2010
Note: Nominal unified defense spending is seasonally adjusted
and deflated by BEA prices. NIPA defense purchases exclude
consumption of fixed capital; Q1 is an estimate.
Source: Monthly Treasury Statement; U.S. Department of
Commerce, Bureau of Economic Analysis.

15
10
5

650
600

-10

2004
2005
2006
2007
2008
2009
Note: National income and product accounts measure.
Source: U.S. Department of Commerce, Bureau of Economic
Analysis.

Unified Budget Deficit
4

Percent of GDP

Federal Debt Held by the Public
Billions of dollars

Billions of dollars (right scale)
Percent of GDP (left scale)

600
300

-2

-300

-4

-600

-6

-900

-8

Mar.

-1200
-1500

-10
2000
2002
2004
2006
2008
2010
Note: Adjusted for payment-timing shifts; cumulative deficit
over the previous 12 months.
Source: Monthly Treasury Statement.

-1800

Percent change from year earlier

2000
2002
2004
2006
Source: Monthly Treasury Statement.

2008

2010

Recent Unified Federal Outlays and Receipts

Unified Outlays and Receipts

Mar.
0

-12

Percent of GDP

Outlays
Receipts

Jan.-Mar. 2010
20
15
10

5
Mar.
0

-5

-10

-15

-20

-20
2000
2002
2004
2006
2008
2010
Note: Adjusted for payment-timing shifts; based on cumulative
outlays or receipts over the previous 12 months.
Source: Monthly Treasury Statement.

Function or source

Billions
of dollars

Outlays
National defense
Major transfers1
Other primary spending
Net interest

835
169
562
50
53

-7.4
9.5
11.2
-74.9
33.2

Receipts
Individual income and
payroll taxes
Corporate income taxes
Other

466
391

5.4
-1.5

20
55

241.5
39.7

-369

-19.6

Deficit (-)

Percent
change*

Note: Adjusted for payment-timing shifts.
* Relative to same year-earlier period. Percent change in
deficit is calculated on an absolute-value basis.
1. Includes Social Security, Medicare, Medicaid, and income
security programs.
Source: Monthly Treasury Statement.

II-25

nominal expenditures through February suggest a further decline in the first quarter. The
weakness has been widespread across categories and likely reflects the drag from
elevated vacancy rates, low levels of property prices, and difficult financing conditions
for new projects.11 In addition, the most recent reading from the architectural billings
index edged up but remained at a level consistent with further declines in spending over
the near term, and, smoothing through weather-induced swings, nonresidential
construction employment continued to decline, though at a slower pace compared with
the sharp falls early last year.
In contrast, real spending on drilling and mining structures picked up strongly over the
second half of last year in response to the rebound in oil and natural gas prices. And
increases in the number of drilling rigs in operation and in footage drilled suggest that
spending continued to rise rapidly in the first quarter, likely returning to levels posted
prior to the large swings in energy prices over the past four years.
Business Inventories
The data in hand for the nonfarm business sector excluding motor vehicles suggest that
the pace of inventory liquidation moderated further in the first quarter after slowing
sharply in the fourth quarter of last year. Moreover, information from the motor vehicle
sector indicates that auto dealers added to their stocks in the first quarter.
The staff’s flow-of-goods system also suggests that large-scale liquidations have
substantially subsided, and indeed, it shows a small uptick in inventories over the past
three months. Inventories appear to be approaching comfortable levels relative to sales in
the aggregate, although there is some divergence in inventory positions across industries.
Months’ supply remains elevated (when measured at the current pace of sales) for
equipment, materials, and, to a lesser degree, construction supplies. By contrast,
inventories of consumer goods (particularly motor vehicles), business supplies, and hightech goods appear low relative to demand. Finally, the ISM index on customers’
inventories remained at a very low level in March, despite increasing from its record low
in January; this reading implies that supply managers in manufacturing continue to expect
their customers to do some restocking in the coming months.
Federal Government Sector
Real federal government purchases appear likely to hold steady in the first quarter. Data
from the Monthly Treasury Statements through March suggest that real defense spending
edged down last quarter, reflecting a temporarily slow rate of spend-out from the hefty
11

According to the latest SLOOS, banks continued to report that they tightened policies further on
commercial real estate loans.

II-26

State and Local Indicators

Real Spending on Consumption and Investment
Percent change, annual rate
12

12
Spending
4-quarter moving average

0
Q4

-3
-6

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-3
-6

2009

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; national income and product accounts.

Net Change in Employment

Real Construction
Billions of chained (2005) dollars, annual rate

Thousands of jobs, monthly average
50

-10

-20

-20
Q1

-30
-40

-30

250

240

230

220

220
Q1

210

200

-40

-50

2000

2002

2004

2006

2008

2010

-50

190

2000

2002

State Revenues
30

25
20

Individual and
corporate income
taxes

Total
revenues

-5

-5
-10

-15

-20

-25

-25
1999

2001

2003

2010

2005

2007

2009

Source: Census Bureau, Quarterly Summary of State
and Local Government Tax Revenue.

190

Property taxes

15
Total revenues

-10

-30

2008

Percent change from year earlier

2006

Local Revenues

Percent change from year earlier

2004

Note: Nominal CPIP deflated by BEA prices through
Q4 and by a staff projection thereafter. Observation for
Q1 is the average of January and February.
Source: Census Bureau, Construction Spending.

Source: U.S. Dept. of Labor, Bureau of Labor Statistics,
Employment Situation.

-30

Q4
5

-5

-10

1999

2001

2003

2005

2007

2009

Source: Census Bureau, Quarterly Summary of State
and Local Government Tax Revenue.

-10

II-27

amount of budget authority available for these programs. Meanwhile, nondefense
purchases should be bolstered in the first quarter by stimulus-related spending.
Although federal debt continues to climb steeply, the deficit in the federal budget may be
starting to stabilize following its significant deterioration over the last year or so: The
budget deficit in the first half of fiscal year 2010 was a little narrower than in the first half
of fiscal year 2009. In particular, receipts in the first quarter were up nearly 5½ percent
relative to the same year-earlier period, even though last year’s stimulus policies appear
to have held down tax receipts this year more than last year; indeed, we think that the
revenues excluding the effects of stimulus tax cuts may have increased at a double-digit
pace in the first quarter. Total federal spending fell roughly $100 billion in the first
quarter relative to a year earlier, reflecting lower outlays associated with the Troubled
Asset Relief Program (TARP).12 However, outlays excluding financial transactions rose
15 percent compared with a year ago, due both to the effects of the weak labor market on
low-income support programs and to the spending associated with the American
Recovery and Reinvestment Act (ARRA). Through the end of March, the ARRA had
boosted spending and had reduced taxes by a combined amount of about $370 billion,
still less than half of the total $862 billion stimulus package.
State and Local Government Sector
State and local governments continue to struggle with significant budgetary pressures,
and incoming data point to a sharp decline in real expenditures by these governments in
the first quarter. Real outlays on construction plunged at an average annual rate of
18 percent in January and February. Moreover, state and local hiring continued to
contract, as employment decreased at an average of about 25,000 per month in the first
quarter.
Nonetheless, there are some tentative signs that the fiscal stress faced by states and
localities may have begun to ease a bit. The Census Bureau’s Quarterly Summary of
State and Local Government Tax Revenue indicates that local government tax receipts
posted a strong increase in the fourth quarter relative to the same period a year earlier
because of rising property tax collections. Furthermore, at the state level, the pace of
revenue declines moderated noticeably.13 For the sector as a whole, total tax collections
by state and local governments increased almost 1 percent over the four quarters of 2009,
the first four-quarter increase in their total revenues since the third quarter of 2008.
12

The Treasury now estimates that the expected losses from last year’s TARP transactions were less
than originally anticipated, and, in March, it recorded a downward adjustment of $115 billion in outlays.
13
Preliminary data collected by the Rockefeller Institute, based on a sample of 45 states, suggest that
the decline in state revenues lessened even further in January and February.

II-28
Consumer Price Measures
(Percent change)
12-month change

Measures

Mar.
2009

3-month change

1-month change

Annual rate

Monthly rate

Mar.
2010

Dec.
2009

Mar.
2010

Feb.
2010

Mar.
2010

CPI
Total
Food
Energy
Ex. food and energy
Core goods
Core services
Housing services
Other services
Memo: Trimmed mean
Chained CPI (n.s.a.) 1
Ex. food and energy 1

-.4
4.4
-23.0
1.8
.4
2.3
1.5
3.5
2.3
-.1
1.7

2.3
.2
18.3
1.1
1.9
.8
-.7
2.8
1.0
2.5
.8

2.5
1.0
15.3
1.3
2.9
.7
-.6
2.6
1.2
...
...

.9
2.3
9.2
-.2
-.1
-.2
-2.3
2.5
.6
...
...

.0
.1
-.5
.1
-.1
.1
.0
.3
.0
...
...

.1
.2
.0
.0
-.1
.1
-.1
.3
.0
...
...

PCE prices 2
Total
Food and bev. at home
Energy
Ex. food and energy
Core goods
Core services
Housing services
Other services
Memo: Trimmed mean
Core market-based
Core non-market-based

.2
4.6
-24.8
1.7
.7
2.0
2.4
1.9
2.3
2.1
-.9

2.0
-.5
18.5
1.3
.1
1.7
.0
2.2
...
1.1
2.5

2.5
1.4
16.1
1.8
-.7
2.6
-.4
3.5
1.4
1.0
6.4

1.0
2.3
8.6
.4
-1.6
1.1
-.5
1.6
...
.4
.8

.0
.1
-.6
.0
-.1
.1
.0
.1
.0
.1
-.1

.1
.3
-.1
.1
-.1
.2
-.1
.2
...
.1
.2

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted (n.s.a).
2. PCE prices in March are staff estimates.
... Not applicable.
Source: For consumer price index (CPI), U.S. Dept. of Labor, Bureau of Labor Statistics; for
personal consumption expenditures (PCE), U.S. Dept. of Commerce, Bureau of Economic Analysis.

Producer Price Measures
(Percent change)
12-month change

Measures
PPI
Total finished goods
Food
Energy
Ex. food and energy
Core consumer goods
Capital equipment
Intermediate materials
Ex. food and energy
Crude materials
Ex. food and energy

Feb.
2009
-1.4
.8
-18.5
3.8
4.0
3.6
-5.2
-.2
-34.5
-29.7

3-month change

1-month change

Annual rate

Monthly rate

Feb.
2010

Nov.
2009

Feb.
2010

Jan.
2010

Feb.
2010

4.4
3.4
16.6
1.0
1.7
.1
5.6
2.8
28.6
34.9

5.9
8.0
24.7
-.5
.0
-1.3
7.3
4.0
41.4
13.6

5.1
8.6
11.7
1.6
2.7
.5
9.9
7.8
28.9
50.4

1.4
.4
5.1
.3
.4
.3
1.7
.5
9.6
6.6

-.6
.4
-2.9
.1
.2
-.1
.1
.9
-3.5
-.6

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

II-29

Looking forward, the National Conference of State Legislatures reports that 42 states
project revenues in fiscal 2011—which will begin on July 1 in most states—to rise above
their level in the current fiscal year. In addition, federal stimulus funds for states and
localities continue to ramp up, and municipal borrowing for new capital projects has
remained solid at relatively low interest rates.
Prices
Consumer price inflation has been soft recently. Both headline and core PCE prices are
estimated to have inched up 0.1 percent in March after no change in February. This
increase would put the rise in core PCE prices over the past three months at an annual
rate of only ½ percent. Taking a longer view, core consumer price inflation slowed to an
estimated 1¼ percent over the 12 months ending in March, compared with 1¾ percent
over the year-earlier period. In contrast, the 12-month change in the headline index
moved up noticeably over the past year, to 2 percent in March, as energy prices
rebounded. Survey measures of long-run inflation expectations have been fairly stable in
recent months at levels slightly lower than those posted a year ago.
After rising sharply into the beginning of this year, PCE energy prices are estimated to
have edged down in both February and March. Retail prices for gasoline declined again
last month, and consumer prices for natural gas moved down after being boosted by
unusually cold weather in January and February. However, these price declines were
mostly offset by a sizable jump in consumer electricity prices in March.14 Survey data
through mid-April suggest that consumer prices for gasoline have declined again this
month. The spot price of crude oil has swung widely since the March Greenbook but
ended up slightly, on balance. However, the spot price of natural gas has declined more
than 10 percent since the time of the March Greenbook, and this will probably push down
retail rates for natural gas somewhat further in coming months.
The PCE price index for food and beverages is estimated to have risen 0.3 percent in
March, reflecting a jump in the prices for fruits and vegetables. Nonetheless, food prices
in March remained nearly ½ percentage point below their year-earlier level. So far this
year, spot prices of farm commodities are up a bit, as small declines in crop prices have
only partly offset increases in prices for livestock products.
As noted, PCE prices excluding food and energy decelerated over the past year, with the
12-month change ending in March estimated to be ½ percentage point less than in the
14

Although roughly one-third of the March increase in consumer electricity prices reflected a rebound
in rates in the mid-Atlantic region following a February rebate, consumer electricity prices were up in all
reporting regions last month.

II-30

Consumer Prices
(12-month change except as noted; PCE prices in March are staff estimates)

PCE Prices

Measures of Core PCE
Percent

Percent

Trimmed mean
4

4
Total PCE

Mar.

2
1

Ex. food
and energy

Core PCE

-1

-2

2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-2

CPI and PCE excluding Food and Energy
Percent

Mar.
Market-based
components

2003 2004 2005 2006 2007 2008 2009 2010
Source: For trimmed mean, Federal Reserve Bank of
Dallas; for all else, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

PCE Goods and Services
3

Percent

CPI
3

3
Services ex. energy

PCE
2

1
CPI
chained

Mar.
1

Mar.

-1

-1
Goods ex.
food and energy

-2
0

2003 2004 2005 2006 2007 2008 2009 2010
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor
Statistics; for PCE, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

-3

Total PCE

-2

2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-3

PCE excluding Food and Energy
Percent

Percent

3-month change, annual rate
6

3
Mar.

-3

-6

3-month change, annual rate
3

-9

2003

2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-9

Mar.
0

2003

2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

II-31

Energy and Food Price Indicators
(Data from U.S. Department of Energy, Energy Information Administration, except as noted)

Total Gasoline Margin
180

Gasoline Price Decomposition
Cents per gallon

Retail price less average spot crude price*

180

160

140

Cents per gallon

450
400

Retail price*

400

350

120

100

100
Apr. 19

80
60

2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff,
less average spot crude price: 60% West Texas Intermediate,
40% Maya heavy crude. Includes gasoline taxes.

300

450

350
Rack price

300
Apr. 19

250

200

150

100
50

Gasoline Inventories

100

Average spot crude price**
2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff.
** 60% West Texas Intermediate, 40% Maya heavy crude.

Natural Gas Prices
Millions of barrels

250

Dollars per million BTU

Adjusted for ethanol use*

Futures price

240

230

Apr. 16

230

Apr. 20

220

210

200

190

180

2006
2007
2008
2009
2010
Note: Bounds are defined as the monthly mean over the
preceding five years, plus or minus the standard deviation
for each month. Monthly data through December 2009,
weekly data thereafter.
* The RBOB component of total motor gasoline inventories
is adjusted for ethanol use after 2006, boosting reported
stocks; estimated by FRB staff.

12-month percent change

8
6

Food and beverages

4
Mar.*

16
14
12

2009

2010

Dollars per bushel

Corn (left scale)
Soybeans (right scale)
Wheat (right scale)
Futures price

Apr. 20

-4

10
8

-2

2005
2006
2007
2008
2009
2010
*Staff estimate.
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

10
2
0

-2

Ex. food and energy
0

Spot Prices of Agricultural Commodities

PCE: Food at Home and Core Prices
8

2005
2006
2007
2008
Note: National average spot price.
Source: Bloomberg.

-4

2005
2006
2007
2008
Source: Commodity Research Bureau.

2009

2010

II-32
Broad Measures of Inflation
(Percent change, Q4 to Q4)
Measure

2006

2007

2008

2009

Product prices
GDP price index
Less food and energy

2.9
3.0

2.7
2.8

1.9
1.7

.7
.8

Nonfarm business chain price index

2.3

2.2

1.6

Expenditure prices
Gross domestic purchases price index
Less food and energy

2.6
2.9

3.5
2.8

1.9
2.0

.6
.7

PCE price index
Less food and energy

1.9
2.3

3.6
2.5

1.7
2.0

1.2
1.5

PCE price index, market-based components
Less food and energy

1.8
2.2

3.5
2.2

1.9
2.3

1.3
1.7

CPI
Less food and energy

1.9
2.7

4.0
2.3

1.6
2.0

1.5
1.7

Chained CPI
Less food and energy

1.7
2.3

3.6
1.9

1.8
1.9

1.6
1.3

Median CPI
Trimmed mean CPI

3.0
2.6

3.1
2.8

2.9
2.9

1.2
1.2

Trimmed mean PCE

2.7

2.5

1.4

Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for median and trimmed mean CPI,
Federal Reserve Bank of Cleveland; for all else, U.S. Dept. of Commerce, Bureau of Economic Analysis.

Surveys of Inflation Expectations
(Percent)
Thomson Reuters/Michigan Survey

Period

Actual
CPI
inflation 1

1 year 2

Professional
forecasters
(10 years) 4

5 to 10 years 3

Mean

Median

Mean

Median

CPI

PCE

2008:Q2
Q3
Q4

4.4
5.3
1.6

6.4
5.4
3.0

5.0
4.7
2.8

3.8
3.6
2.9

3.3
3.1
2.8

2.5
2.5
2.5

2.2
2.2
2.2

2009:Q1
Q2
Q3
Q4

.0
-1.2
-1.6
1.4

2.4
3.4
3.1
3.1

2.0
2.9
2.6
2.7

3.3
3.1
3.2
3.1

2.9
2.9
2.9
2.9

2.4
2.5
2.5
2.3

2.2
2.3
2.2
2.1

2010:Q1

2.4

3.5

2.7

3.2

2.8

2.4

2.1

2009:Dec.
2010:Jan.
Feb.
Mar.
Apr.

2.7
2.6
2.1
2.3
n.a.

3.0
3.4
3.6
3.4
3.8

2.5
2.8
2.7
2.7
2.9

3.0
3.3
3.3
3.1
3.2

2.7
2.9
2.7
2.7
2.7

...
...
2.4
...
...

...
...
2.1
...
...

1. Percent change from the same period in the preceding year.
2. Responses to the question, By about what percent do you expect prices to go up, on
average, during the next 12 months?
3. Responses to the question, By about what percent per year do you expect prices to go up,
on average, during the next 5 to 10 years?
4. Median CPI and PCE price projections.
... Not applicable.
n.a. Not available.
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for Thomson Reuters/Michigan Survey,
Thomson Reuters/University of Michigan Surveys of Consumers; for professional forecasters, the Federal Reserve
Bank of Philadelphia.

II-33

Measures of Expected Inflation
Survey Measures (Thomson Reuters/University of Michigan)
12

Percent

Quarterly

10
8

Percent
12

Monthly

5
4
Apr.

Median, next 5 to 10 years
6
4

Q1
2
0

Median, next 12 months

1985
1990 199319951997 2000
2005
197319751977 1980
1981
1985
1989
2001
2005
Source: Thomson Reuters/University of Michigan Surveys of Consumers.

Inputs to Models of Inflation
12

2010
2009

2006

Percent

Quarterly

8
FRB/US long-run expectations measure
for PCE inflation

6
2

4
Distributed lag of
core PCE inflation

2
0

2010

Percent

2008

0
0
0
2005 2006 2007 2008 2009 2010
1985
1990 199319951997 2000
2005
2010
197319751977 1980
1981
1985
1989
2001
2005
2009
Note: The distributed lag of core PCE inflation is derived from one of the reduced-form Phillips curves used by Board staff.
Source: For the distributed lag of core PCE inflation, FRB staff calculations; for the FRB/US measure, for 2007 forward, the median
projection for PCE inflation over the next 10 years from the Survey of Professional Forecasters (SPF); for 1990 to 2006, the equivalent
SPF projection for the CPI; for 1981 to 1989, a related survey for the CPI conducted by Richard Hoey; and for the period preceding 1981,
a model-based estimate constructed by Board staff. The survey data before 2007 are adjusted down 0.5 percentage point to put the CPI
projections approximately on a PCE basis.

Inflation Compensation from TIPS
Percent
4
3

Quarterly
5 to 10 years ahead

Percent
4

4 Weekly

3
Apr. 20

Q1
2

-1

-2

Next 5 years

-2
-2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2006
2008
2010
Note: Based on a comparison of an estimated TIPS (Treasury inflation-protected securities) yield curve with an estimated nominal
off-the-run Treasury yield curve, with an adjustment for the indexation-lag effect.
Source: FRB staff calculations.

-2

II-34

Commodity Price Indexes
Journal of Commerce

Ratio scale, 2006 = 100
180
Apr. 20 140

100

100
Industrials
60

Metals
1992
1992

1994
1994

1996
1996

1998
1998

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

2010
2010

Note: The Journal of Commerce (JOC) industrial price index is based almost entirely on industrial commodities, with a small
weight given to energy commodities. Copyright for JOC data is held by CIBCR, 1994.

Commodity Research Bureau
Ratio scale, 1967 = 100
650
Apr. 20 600
550
500

600
500

450
400

400
Spot industrials

350
300

300

250
200

Futures

200

1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Note: The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial commodities, excluding
energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals.

Selected Commodity Price Indexes
(Percent change)

Index
JOC industrials
JOC metals
CRB spot industrials
CRB spot foodstuffs
CRB futures

2009 1

12/29/09
to
3/9/10 2

65.1
86.6
50.9
16.9
38.4

8.2
10.9
2.2
4.9
-2.6

3/9/10
52-week
to
change to
4/20/10 2 4/20/10
7.0
4.4
2.8
1.0
.3

1. From the last week of the preceding year to the last week of the year indicated.
2. March 9, 2010, is the Tuesday preceding publication of the March Greenbook.

75.0
76.1
47.6
18.3
29.3

150

II-35

Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)

Category

2007:Q4 2008:Q4
to
to
2008:Q4 2009:Q4e

2009
Q1

Q4 e

Compensation per hour
Nonfarm business

3.1

-4.2

7.7

-.4

Output per hour
Nonfarm business

1.4

5.6

7.6

7.8

6.3

Unit labor costs
Nonfarm business

1.7

-4.6

-5.0

-7.6

-5.5

e Staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Compensation per Hour

Unit Labor Costs

(Percent change from year-earlier period)

(Percent change from year-earlier period)
Percent
10

10
8

8
Productivity and costs*

Percent

6
4

-2
2

ECI

2
Q4

199619971998199920002001200220032004200520062007200820092010
*Value for 2009:Q4 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-2
Q4

-4
-6

Average Hourly Earnings

-4
199619971998199920002001200220032004200520062007200820092010
Note: Value for 2009:Q4 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-6

Markup, Nonfarm Business

(Percent change from year-earlier period)
Percent

6
5

Production workers
All employees

6
5

2
1

Mar.

1996 1998 2000 2002 2004 2006 2008 2010
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

2
1

Ratio

1.76

1.72

1.76
1.72

1.68

1.64

1.60

1.56
1.52

Average,
1968-present
199619971998199920002001200220032004200520062007200820092010
Note: The markup is the ratio of output price to unit
labor costs. Value for 2009:Q4 is a staff estimate.
Source: For output price, U.S. Dept. of Commerce, Bureau
of Economic Analysis; for unit labor costs, U.S. Dept. of Labor,
Bureau of Labor Statistics.

1.56
1.52

II-36

previous 12 months. Market-based core prices decelerated even more noticeably,
increasing only about 1 percent over the 12 months ending in March, down 1 percentage
point from the increase over the year-earlier period. Furthermore, this deceleration has
been widespread, with the 12-month changes in prices for housing services, market-based
services excluding energy and housing, core nondurable goods, and durable goods
excluding motor vehicles all down relative to the year-earlier period.
Measures of inflation expectations have held fairly steady in recent months. In the
Thomson Reuters/University of Michigan preliminary survey for April, median yearahead inflation expectations edged up to 2.9 percent, while median 5-to-10-years-ahead
inflation expectations were unchanged at 2.7 percent—a reading that is near the low end
of the range observed over the past few years. Meanwhile, the TIPS-based measures of
inflation compensation for both 5 years and 5-to-10 years ahead have both edged up
slightly since the March Greenbook.
Cost pressures from rising commodity prices are showing through to prices at earlier
stages of processing. The PPI for core intermediate materials continued to rise at a brisk
pace through February, and the 12-month change in this index was nearly 3 percent,
compared with a small decline posted over the year-earlier period. Commodity prices
have also extended their sizable rebound following their collapse in 2008. Since the
March Greenbook, the Commodity Research Bureau spot price index of industrial
materials has increased about 3 percent, while the Journal of Commerce index of
industrial materials has moved up 7 percent; commodity prices increases were
widespread but especially pronounced for wood products.
Labor Costs
Measures of labor costs decelerated sharply over the past year. Compensation per hour in
the nonfarm business sector increased only ¾ percent over the four quarters of 2009,
down from a 3 percent increase over the four quarters of 2008. As a result of this small
increase in compensation and the outsized gain in productivity last year, unit labor costs
fell 4½ percent in 2009 after rising 1¾ percent in 2008.
Average hourly earnings of all employees also decelerated during the past year. Over the
12 months ending in March, this wage measure increased 1¾ percent, down from an
increase of 3 percent over the year-earlier period. In the first three months of this year,
the average monthly increase in average hourly earnings was only 0.1 percent.

Last page of Domestic Nonfinancial Developments

Domestic Financial
Developments

Domestic Financial Developments
Overview
Market participants appeared to become more optimistic about economic conditions over
the intermeeting period. Better-than-expected news about the economy and generally
favorable earnings reports pushed stock prices higher while corporate bond spreads
narrowed amid improved credit quality. Yields on Treasury securities moved up a bit,
but the expected path of the federal funds rate edged down, on net, largely reflecting
FOMC communications. The end of the Federal Reserve’s programs to purchase agency
debt and agency mortgage-backed securities (MBS) elicited little response in financial
markets.
Indicators of credit flow were mixed over the intermeeting period. Corporate bond
issuance was extraordinarily strong, and commercial paper outstanding increased.
However, bank loans to businesses and households continued to contract significantly.
Respondents to the April Senior Loan Officer Opinion Survey on Bank Lending Practices
indicated that, on balance, lending standards were little changed in the first quarter, but
some terms on loans to businesses and households were tightened further and loan
demand continued to weaken broadly.
Policy Expectations and Treasury Yields
Although investors seemed to read the incoming economic data as pointing to continued
firming in economic activity, expectations for the path of monetary policy fell slightly, on
net, over the intermeeting period, largely in response to Federal Reserve communications.
Some market participants reportedly interpreted the retention of the “extended period”
language and the lack of a comment on an exit strategy in the March FOMC statement as
indications that the federal funds rate might stay in a low range for a longer period than
was previously expected. Policy expectations also decreased in response to other official
communications during the intermeeting period, including the minutes of the March
FOMC meeting and testimony by the Chairman, which were generally perceived to be
somewhat less upbeat about the overall economic situation than had been expected.
Futures quotes continue to suggest that investors expect the federal funds rate to exceed
25 basis points in the fourth quarter of this year and to reach 1½ percent by the end of
2011. Market quotes for interest rate caps provide information on the anticipated
distribution of the federal funds rate at future dates, and these distributions suggest that
investors’ assessment of the most likely level of the federal funds rate does not move
above 25 basis points until 2011. Results from the Desk's primary dealer survey suggest
that dealers on average see about a 40 percent chance that the first policy tightening will
III-1

III-2
Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2008

Change to Apr. 20 from
selected dates (percentage points)

2010

Instrument
Sept. 12

Jan. 26

Mar. 15

Apr. 20

2008
Sept. 12

2010
Jan. 26

2010
Mar. 15

2.00

.13

-1.87

.00

1.46
1.80

.07
.14

.17
.24

.16
.24

-1.30
-1.56

.09
.10

-.01
.00

Commercial paper (A1/P1 rates)2
1-month
3-month

2.39
2.75

.14
.20

.21
.20

.23
.28

-2.16
-2.47

.09
.08

.02
.08

Large negotiable CDs1
3-month
6-month

2.79
3.09

.20
.29

.23
.34

.30
.41

-2.49
-2.68

.10
.12

.07
.07

Eurodollar deposits3
1-month
3-month

2.60
3.00

.28
.40

.30
.40

-2.30
-2.60

.02
.00

Bank prime rate

5.00

3.25

-1.75

.00

Intermediate- and long-term
U.S. Treasury4
2-year
5-year
10-year

2.24
2.97
3.93

.85
2.38
3.80

.95
2.42
3.84

1.02
2.56
3.91

-1.22
-.41
-.02

.17
.18
.11

.07
.14
.07

U.S. Treasury indexed notes5
5-year
10-year

1.33
1.77

.38
1.37

.56
1.56

.65
1.53

-.68
-.24

.27
.16

.09
-.03

Municipal general obligations (Bond Buyer)6

4.54

4.30

4.33

4.43

-.11

.13

.10

4.26
4.36
6.62
7.22
10.66

3.72
4.14
5.04
5.74
8.76

3.77
4.18
5.02
5.72
8.64

3.80
4.27
4.92
5.70
8.34

-.46
-.09
-1.70
-1.52
-2.32

.08
.13
-.12
-.04
-.42

.03
.09
-.10
-.02
-.30

5.78
5.03

4.98
4.29

4.96
4.12

5.07
4.13

-.71
-.90

.09
-.16

.11
.01

Short-term
FOMC intended federal funds rate
Treasury bills1
3-month
6-month

Private instruments
10-year swap
10-year FNMA 7
10-year AA 8
10-year BBB 8
10-year high yield 8
Home mortgages (FHLMC survey rate)
30-year fixed
1-year adjustable

Record high

Change to Apr. 20
from selected dates (percent)

2010

Stock exchange index
Dow Jones Industrial
S&P 500 Composite
Nasdaq
Russell 2000
D.J. Total Stock Index

Level

Date

Jan. 26

Mar. 15

Apr. 20

Record
high

2010
Jan. 26

2010
Mar. 15

14,165
1,565
5,049
856
15,807

10-9-07
10-9-07
3-10-00
7-13-07
10-9-07

10,194
1,092
2,204
612
11,282

10,642
1,151
2,362
674
11,980

11,117
1,207
2,500
722
12,600

-21.51
-22.87
-50.48
-15.68
-20.29

9.05
10.53
13.46
17.87
11.69

4.46
4.92
5.85
6.99
5.18

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect.
6. Most recent Thursday quote.
7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
_______________________________________________________________________
NOTES:
September 12, 2008, is the last business day before Lehman Brothers Holdings filed for bankruptcy.
January 26, 2010, is the day before the January 2010 FOMC monetary policy announcement.
March 15, 2010, is the day before the most recent FOMC monetary policy announcement.
_______________________________________________________________________

III-3

Policy Expectations, Treasury Yields, and Liquidity Facilities
Interest Rates
Percent

4.1

Percent

March FOMC

1.1

Employment FOMC minutes
report
10-year Treasury
yield (left scale)

4.0

1.0

3.9

0.9

3.8

0.8

3.7

0.7

December 2010
Eurodollar (right scale)

3.6
Mar. 16

Mar. 22

Mar. 26

Apr. 1

Apr. 6

Apr. 9

Apr. 15

Apr. 20

0.6

Note: 5-minute intervals. 8:00 a.m. to 4:00 p.m. No adjustments for term premiums.
Source: Bloomberg.

Implied Federal Funds Rate

Treasury Yield Curve
Percent

Percent
2.5

5.0

April 20, 2010

Most recent
Day before last FOMC

4.5

2.0

4.0

March 15, 2010
Expected

3.5

1.5

3.0
2.5

1.0

2.0
1.5

0.5

Modal

1.0
0.5

0.0
Apr.

0.0

Aug.
Dec.
Apr.
Aug.
Dec.
Apr.
Aug.
2010
2011
2012
Note: Expected rate is estimated from federal funds and
Eurodollar futures. Mode is estimated from interest rate caps. Both
include an allowance for term premiums and other adjustments.
Source: CME Group; Bloomberg.

Note: Smoothed yield curve estimated from off-the-run Treasury
coupon securities. Yields shown are those on notional par Treasury
securities with semiannual coupons.
Source: Federal Reserve Board.

Inflation Compensation

10-Year Swap Spread

Years ahead

Percent

Daily
5 to 10 years ahead

Mar.
FOMC

Apr.
20

Basis points
Mar.
FOMC

5
Daily
4

100
80

2
40
1

Next 5 years*

0
Apr.
20

-1
-2

Jan.

May Sept. Jan.
2008

May Sept. Jan.
2009
2010

Note: Estimates based on smoothed nominal and inflationindexed Treasury yields.
*Adjusted for lagged indexation of Treasury inflation-protected
securities.
Source: Federal Reserve Board.

0
-20

2006

2007

2008

2009

2010

Note: Spread over 10-year Treasury yield estimated from
off-the-run curve.
Source: JPMorgan.

III-4

Corporate Yields, Risk Spreads, and Stock Prices
Selected Stock Price Indexes

Implied Volatility on S&P 500 (VIX)
Mar. 15, 2010 = 100

Daily Lehman failure

March
FOMC

Percent
160

Daily

March
FOMC

135
Apr.
20

110

S&P 500

100
85
70

25
60

Apr.
20

S&P Financial

35
2008

2009

2010

2007

Source: Standard & Poor’s.

2008

2009

2010

Source: Chicago Board of Exchange.

Expected Real Equity Return and
Long-Run Treasury Yield

Corporate Bond Yields
Percent

Percent
14

Monthly

Daily

March
FOMC

19
17

Expected 10-year real equity return

13
6
Apr.
20

10-year high-yield

11
4

Apr.
20

Expected real yield on 10-year Treasury*

10-year BBB

-2

1992 1995 1998 2001 2004 2007 2010

2007

2008

2009

2010

* Off-the-run 10-year Treasury yield less Philadelphia Fed 10-year
expected inflation.
+ Denotes the latest observation using daily interest rates and
stock prices and latest earnings data from I/B/E/S.
Source: Thomson Financial.

Source: Staff estimates of smoothed yield curves based on Merrill
Lynch bond data.

Far-Term and Near-Term Forward High-Yield
Corporate Bond Spreads
Basis points

30-Day Commercial Paper Spreads

Daily

March
FOMC

Basis points
2000
1800

Daily
A2/P2

March
FOMC

700
600

1600
500

1400
1200

400

1000

300

800
200

600

Near-term*
Apr.
20

Far-term**

400

100

200

Apr.
20

ABCP

0
2006

2007

2008

* Forward spread between years 2 and 3.
** Forward spread between years 9 and 10.
Source: Staff estimates.

2009

2010

2007

2008

2009

2010

Note: The ABCP spread is the AA ABCP rate minus the AA
nonfinancial rate. The A2/P2 spread is the A2/P2 nonfinancial rate
minus the AA nonfinancial rate.
Source: Depository Trust & Clearing Corporation.

III-5

occur before year-end, which is not inconsistent with our interpretation of the March
survey.
Yields on nominal Treasury securities increased slightly over the intermeeting period,
with the 2-year and 10-year yields up 7 basis points. Yields were apparently boosted by
greater confidence in the economic recovery as well as increased concerns about the
fiscal outlook; but these gains were tempered, in part, by reactions to FOMC
communications. TIPS-based inflation compensation also moved up slightly over the
intermeeting period; however, survey-based measures of longer-term inflation
expectations were little changed.
The spread of the 10-year swap rate to the 10-year Treasury yield, which narrowed
sharply in the fall of 2008 and has continued to trend down since then, dipped into
negative territory during the intermeeting period. Several factors appear to have
contributed to the downward trend in the swap spread over recent quarters, including
projections of elevated federal deficits, reduced demands for hedging private holdings of
agency MBS, and declining risk premiums embedded in Libor rates.
Federal Reserve Purchase Programs and Facilities
Over the intermeeting period, the legacy CMBS TALF program expired with little effect
on related markets. The Federal Reserve Bank of New York requested term sheets by
April 19 for any new-issue CMBS deal proposed for TALF financing; no term sheets
were received. AAA CMBS spreads to Treasury yields dropped substantially, on net,
over the period but remain elevated relative to pre-crisis levels. Also of note, the first
multiborrower CMBS offering since 2008 was scheduled to be issued on April 22. The
deal was not designed as TALF-eligible, and, indeed, the AAA tranche priced below the
TALF lending rate.
The Federal Reserve’s programs to purchase agency debt and agency MBS came to an
end in late March, with little apparent effect on markets. Agency debt spreads and the
Fannie Mae 30-year current coupon spread were little changed, on net, over the
intermeeting period. Failures to deliver in the agency MBS repo market have continued
to come down, reportedly reflecting decreased purchases by the Federal Reserve, which
has increased the supply of securities available to market participants.
Stock Prices and Corporate Interest Rates
Broad stock price indexes rose about 5 percent, on net, over the intermeeting period,
boosted by generally better-than-expected economic data and surprisingly strong first

III-6

Corporate Earnings and Credit Quality
S&P 500 Earnings Per Share

Revisions to Expected S&P 500 Earnings
Dollars per share

Percent
24

Quarterly

Monthly

22
e

MidApr.

-1

18
16

-3

-5

-7

-9

-11

4
2000

2002

2004

2006

2008

2010

2000

2002

2004

2006

2008

-13
2010

Note: Data are seasonally adjusted by Board staff.
e Staff estimate based on earnings reports of firms that have
reported earnings for Q1 and Wall Street analyst forecasts.
Source: Thomson Financial.

Note: Index is a weighted average of the percent change in the
consensus forecasts of current-year and following-year earnings per
share for a fixed sample.
* Revision in Feb. 2009 was -17.2%.
Source: Thomson Financial.

Financial Ratios for Nonfinancial Corporations

Bond Ratings Changes of Nonfinancial Companies

Ratio

0.36

0.33

Percent of outstandings
0.13

Debt over
total assets
(left scale)

Liquid assets over
total assets
(right scale)

40
Annual rate

Upgrades

0.11

Q1
H1

0.30

0.09

0.07

0.27

0.05

Downgrades

0.24
0.03
1991 1994 1997 2000 2003 2006 2009

1992

1995

1998

2001

2004

2007

2010

Source: Calculated using data from Moody’s Investors Service.

Note: Data are annual through 1999 and quarterly thereafter.
p Preliminary.
Source: Compustat.

Selected Default and Delinquency Rates

Expected Nonfinancial Year-Ahead Defaults

Percent of outstandings

Percent of liabilities
8

Nonfinancial bond
default rate*

Monthly

C&I loan
delinquency rate

2
Apr.

1
Mar.

0
0

1992 1995 1998 2001 2004 2007 2010
* 6-month trailing defaults divided by beginning-of-period
outstandings, at an annual rate.
Source: For default rate, Moody’s Investors Service; for
delinquency rate, Call Report data.

1995

1998

2001

2004

2007

2010

Note: Firm-level estimates of default weighted by firm liabilities as
a percent of total liabilities, excluding defaulted firms.
Source: Calculated using firm-level data from Moody’s KMV.

III-7

quarter earnings reports. Leading up to the earnings announcements, financial sector
share prices outperformed the broader equity markets, but they retraced some of those
gains following the SEC announcement of legal action against Goldman Sachs. Optionimplied volatility on the S&P 500 index generally trended down over the intermeeting
period but spiked on the SEC announcement. The spread between the staff’s estimate of
the expected real equity return over the next 10 years for S&P 500 firms and an estimate
of the expected real return on a 10-year nominal Treasury note—a measure of the equity
risk premium—narrowed a bit but remained above its longer-run average.
Over the intermeeting period, yields on BBB-rated corporate bonds were little changed,
leaving their spreads to yields on comparable-maturity Treasury securities slightly lower.
Yields on speculative-grade corporate bonds declined about 30 basis points, and their
spreads narrowed about 35 basis points. The term structure of corporate bond spreads
suggests that investors are expecting continued higher-than-average default risk in the
near term, but that the required compensation for risk-taking, a dominant influence in the
movement of far-term spreads, now stands near the lower end of its historical range.
Spreads on A2/P2-rated commercial paper and AA-rated ABCP remained low.
Corporate Earnings and Credit Quality
Based on the initial spate of earnings reports and Wall Street analyst forecasts, the staff
estimates that profits for firms in the S&P 500 index rose about 10 percent at a quarterly
rate in the first quarter. This growth reflects both a continuation of strong gains for firms
in nonfinancial industries and an upturn in financial sector profits from recent rockbottom levels. The first-quarter earnings of banking institutions have been well above
analysts’ forecasts, on balance, with the largest banks posting strong capital markets
revenue and banks of all sizes reporting a decrease in loss provisioning. Leading up to
the earnings reporting season, revisions to analysts’ forecasts of year-ahead earnings for
S&P 500 firms were, on balance, positive.
The credit quality of nonfinancial firms improved further over the past few months. The
ratio of aggregate liquid assets to total assets for nonfinancial corporations moved further
into record-high territory in the fourth quarter, while the aggregate debt-to-asset ratio
declined somewhat. Upgrades by Moody’s of nonfinancial corporate bonds in the first
quarter significantly outpaced downgrades, with more than one-third of the dollar value
of upgrades coming from the auto sector. With no bonds defaulting last month, the sixmonth trailing default rate for bonds issued by nonfinancial firms edged down a bit more
in March to the low end of its historical range. Earnings reports for some of the largest
early-reporting banks suggest that delinquency rates on loans held by those banks

III-8

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2009
Type of security
Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings
Bonds2
Investment grade
Speculative grade
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3
Financial corporations
Stocks1
Bonds2

2010
Mar.

Apr. p

4.2
.7
3.5

7.0
1.2
5.8

6.2
.8
5.4

31.1
13.9
7.8
9.5

40.2
16.3
6.4
17.5

64.8
23.5
8.4
32.9

45.0
18.0
9.0
18.0

-12.4

-1.9

4.5

17.2

6.4

11.2

-22.2

-28.6

-25.9

-32.2

n.a.

13.5
45.4

15.9
44.5

12.6
33.9

6.3
36.2

9.0
52.7

6.7
35.0

2006

2007

2008

4.7
1.8
2.9

5.5
1.6
3.8

3.7
.3
3.4

5.3
.2
5.1

5.2
1.1
4.1

29.3
13.1
6.2
10.1

35.1
17.5
7.5
10.0

27.7
19.5
1.8
6.4

50.1
32.6
5.3
12.2

2.4

-.4

1.6

11.8

21.8

5.3
180.6

8.6
151.7

Note: Components may not sum to totals because of rounding.
1. Excludes private placements and equity-for-equity swaps that occur in restructurings.
2. Data include regular and 144a private placements. Bond totals reflect gross proceeds rather than par value of original discount
bonds. Bonds are categorized according to Moody’s bond ratings or to Standard & Poor’s if unrated by Moody’s.
3. For all nonfinancial firms; period-end basis, seasonally adjusted.
n.a. Not available.
p Forecast based on preliminary data.
Source: Depository Trust & Clearing Corporation; Thomson Financial; Federal Reserve Board.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

Billions of dollars
80

Monthly rate, nonfinancial firms

80
Monthly rate, nonfinancial firms

60
H1

Public issuance
Private issuance
Repurchases
Cash mergers

60
40

Total

H1 Q3

Q4 Q1 p

20
0
0
-20

Commercial paper*
C&I loans*
Bonds

-20
-40

Total

-40

2006

2007

2008

2009

2010

* Seasonally adjusted, period-end basis.
Source: Depository Trust & Clearing Corporation; Thomson
Financial; Federal Reserve Board.

-60

-80

-100
2005

2006

2007

2008

2009

2010

p Preliminary.
Source: Thomson Financial, Investment Benchmark Report;
Money Tree Report by PricewaterhouseCoopers, National
Venture Capital Association, and Venture Economics.

III-9

declined in the first quarter. The expected default rate for nonfinancial firms from the
Moody’s KMV model ticked down but remained elevated relative to its typical levels in
expansionary periods.
Business Finance
Overall, net debt financing by nonfinancial corporations turned positive in the first
quarter after being negative in the second half of last year. Gross bond issuance by
nonfinancial corporations surged in March and remained robust in early April, and
nonfinancial commercial paper increased significantly as well. In contrast, C&I loans
outstanding contracted again in March, reflecting both subdued demand and lending
standards that only recently appear to have ceased becoming tighter.
Gross public equity issuance by nonfinancial firms picked up in March, boosted by strong
seasoned equity offerings, and has continued to be solid in April. In the first quarter,
equity retirements from share repurchases are estimated to have picked up, and equity
retirements from cash-financed mergers decreased to still- robust levels, leaving net
equity issuance negative in the first quarter.
Gross issuance of corporate bonds by financial firms was very strong in March and has
been solid again in April. Gross equity issuance by financial firms has also picked up,
but remained below its robust pace in 2008 and the first half of 2009.

Commercial Real Estate Finance
Credit quality in commercial real estate markets continued to deteriorate over the
intermeeting period. The delinquency rate for securitized commercial mortgages jumped
in March, although one large loan accounted for most of the increase; excluding that loan,
the increase in the delinquency rate last month was close to that in previous months. The
decline in outstanding commercial mortgage debt in the fourth quarter of last year, nearly
9 percent at an annual rate, was the largest in the roughly 60-year history of the series,
and the available indicators suggest that another contraction in the first quarter is likely.
The volume of commercial property sales remained low, with roughly one-half of sellers
incurring a nominal loss. Commercial real estate prices continued to fall in the fourth
quarter, while the Moody’s index of commercial real estate prices ticked up in December
and January before falling again in February. Nonetheless, indexes of commercial
mortgage CDS prices ticked up noticeably over the intermeeting period, putting AAArated tranches at their highest levels since mid-2008, in line with the overall reduction in
financial market risk premiums.

III-10

Commercial Real Estate
Commercial Mortgage Debt

Commercial Real Estate Sales

Percent change, annual rate

Billions of dollars
24

Quarterly

21
18
15
12
9

120
Mar.
Share of properties sold
at nominal loss (right scale)

100

3
0
-3
-6
Q4
2003

2005

2007

40
30

Value of sales (left scale)

-9
-12

2001

Percent

140

Mar.
0

2009

2002

2004

2006

2008

2010

Note: 3-month moving averages.
Source: Real Capital Analytics.

Source: Federal Reserve.

Prices of Commercial Real Estate
Index, 2001:Q1=100
225

Delinquency Rates on Commercial Mortgages
Percent
on Existing Properties

Mar.
7

200

At life insurance companies
CMBS
At commercial banks*

175
Moody’s index

6
Q4

150
NCREIF
TBI

Q4
Feb.

5
4

125

100

25
1996

1998

2000

2002

2004

2006

2008

2010

1996

Delinquency Rates on Construction Loans at Banks
Percent

2000

2002

2004

2006

2008

2010

Commercial Mortgage CDS Index Prices
CMBX

Quarterly

1998

Note: CMBS are commercial mortgage-backed securities.
* Excluding farmland.
Source: Citigroup; Call Report data; ACLI.

Note: NCREIF TBI series re-weighted by staff to exclude
multifamily.
Source: NCREIF; MIT Center for Real Estate; Moody’s Investors
Service.

Percent
Mar.
FOMC

Daily, by rating

Senior AAA

120
100

Apr.
15

20
Junior AAA
Q4

Residential
construction

10
Commercial
construction

15
BBB20

5
0

2007

2008

Note: Data series begin in 2007:Q1.
Source: Call Report data.

2009

0
2007

2008

2009

Note: Each index corresponds to pools of mortgages
securitized in 2006:H1.
Source: JPMorgan Chase & Co.

2010

III-11

Residential Mortgages
Spread of Fixed Mortgage Rate to 10-year
Treasury Yield
Basis points

Mortgage Rate and MBS Yield
Percent
Mar.
FOMC

Weekly
30-year conforming
fixed mortgage rate

8.0

Mar.
FOMC

Weekly

7.5

300

250

7.0
6.5

200

6.0
Apr.
14

MBS yield

Apr.
20

5.5
150

5.0
4.5

Apr.
14

4.0

100

3.5
50
Apr.

Oct.
2007

Apr.
Oct.
2008

Apr.
Oct.
2009

Apr.
2010

Apr.

Note: For MBS yield, Fannie Mae 30-year current coupon rate.
Source: For mortgage rate, Freddie Mac; for MBS yield,
Bloomberg.

Oct.
2007

Apr.
Oct.
2008

Apr.
Oct.
2009

Apr.
2010

Note: Treasury yield estimated from off-the-run curve.
Source: Bloomberg; Freddie Mac.

Residential Mortgage Debt

Prices of Existing Homes

Percent change from year earlier

Index peaks normalized to 100
18

Quarterly

110

Monthly

16
14

100

12
10

Jan.

6
80

FHFA price index
LP price index
20-city S&P/Case-Shiller
price index

4
2

Feb.
Jan.

0
Q4

-2
-4

2001

2003

2005

2007

2009

2005

Source: Federal Reserve Board.

2006

2007

2008

2009

2010

Source: For FHFA, Federal Housing Finance Agency; for
LP, LoanPerformance, a division of First American CoreLogic;
for S&P/Case-Shiller, Standard & Poor’s.

Delinquencies on Subprime and FHA-Backed
Mortgages

Delinquencies on Prime Mortgages
Percent of loans

Number of loans (thousands)
20

Monthly
Feb.

Variable-rate
Fixed-rate

600

Percent of loans
45

Monthly
Feb.
Jan.

500

40
35
30

Subprime (right scale)

400

Feb.

300

10
FHA (left scale)

0
2002

2004

2006

2008

Note: Percent of loans 90 or more days past due or in
foreclosure. Prime includes near-prime mortgages.
Source: McDash Analytics.

2010

200

5
0

2004

2006

2008

2010

Note: Percent of loans 90 or more days past due or in foreclosure.
For subprime mortgages, rates are for securitized loans.
Source: For FHA-backed mortgages, U.S. Department of Housing
and Urban Development; for subprime mortgages, LoanPerformance,
a division of First American CoreLogic.

III-12

Consumer Credit and Mutual Funds
Consumer Credit

Gross Consumer ABS Issuance

Percent change, annual rate
16

3-month change

Monthly rate

TALF eligible
Non-TALF

Nonrevolving

-8

Revolving

2007

2008

2009

2010

8
A*

-16
2006

F. M.
J.

-12
2005

-4

2004

Feb.

Billions of dollars

2006

2007

2008

2009

2010

* Through April 16.
Note: Credit card, auto, and student loan ABS.
Source: Inside MBS & ABS; Merrill Lynch; Bloomberg; Federal
Reserve Board.

Source: Federal Reserve Board.

Spread of Consumer Interest Rates to Treasury Yield

Delinquencies on Consumer Loans

Percent

Percent
16

Feb.

Credit card loans
in securitized pools

6
Feb.

Credit cards (offer rate)

10
Nonrevolving
consumer loans at
commercial banks

8
6

New auto loans (transaction rate)
Apr.
11

4
Q4
Feb.

2004

2006

2008

Auto loans at captive
finance companies

2010

1
1998

2000

2002

2004

2006

2008

2010

Source: For auto loans, Federal Reserve Board; for credit cards,
Moody’s Investors Service; for nonrevolving consumer loans, Call
Report.

Note: Spreads are relative to 2-year Treasury yields. For
credit cards, monthly; for auto loans, weekly.
Source: For credit cards, Mintel; for auto loans, PIN.

Net Flows into Mutual Funds
(Billions of dollars, monthly rate)
Fund type

Total long-term funds
Equity funds
Domestic
International
Hybrid funds
Bond funds
High-yield
Other taxable
Municipals
Money market funds

2008

-18.8
-19.4
-12.6
-6.9
-1.7
2.3
-0.1
1.7
0.7
57.9

Note: Excludes reinvested dividends.
e Staff estimate.
Source: Investment Company Institute.

0
2002

2009
Q3

Jan.

2010
Feb.

Mar.e

Assets
Feb.

23.3
-0.1
0.9
-1.0
-0.3
23.7
2.8
16.2
4.8
-27.3

47.9
0.9
-3.7
4.6
5.2
41.8
1.4
31.8
8.7
-81.1

34.0
-4.4
-10.8
6.4
2.8
35.7
0.5
30.4
4.8
-43.0

47.7
16.9
6.8
10.1
3.5
27.3
0.7
22.1
4.5
-83.0

29.0
0.1
-5.0
5.1
2.3
26.5
-2.8
24.4
4.9
-68.9

49.3
8.7
1.1
7.6
3.9
36.7
2.3
30.3
4.1
-167.7

7,831
4,891
3,656
1,234
645
2,296
187
1,636
472
3,151

III-13

Household Finance
The average interest rate on 30-year conforming fixed-rate mortgages rose about 10 basis
points, on net, over the intermeeting period. That increase was roughly in line with
changes in yields on Treasury securities, suggesting that the completion of the Federal
Reserve’s large-scale asset purchase program has not triggered a notable increase in
mortgage funding costs.
House price index changes were mixed but slightly negative, on balance, in January and
February. Delinquency rates for prime and subprime mortgages climbed further in
January, while the number of delinquent FHA-backed mortgages topped 550,000 again in
February, up from 350,000 a year earlier.
Consumer credit, particularly revolving credit, remained weak in recent months, and
consumer credit ABS issuance slowed in the first quarter, reflecting the persistently weak
loan originations. Consumer credit quality, however, continued to improve, with the
latest data and anecdotes indicating slight declines in the delinquency rates of most types
of consumer credit. Spreads of yields on high-quality credit card and auto loan ABS over
yields on comparable-maturity Treasury securities edged down to levels last seen in
2007. Spreads on new auto loans also declined appreciably over the intermeeting period.
However, the spreads of credit card interest rates edged up again in February.
Long-term mutual funds, particularly bond funds, received large net inflows in March,
while net flows to equity funds remained moderate. In contrast, money market funds
continued to experience sizable net outflows in the same month, as yields paid by these
funds remained extremely low.
Treasury Finance
During the intermeeting period, the Treasury issued about $200 billion of nominal
coupon securities across the maturity spectrum. Some of the auctions held before the end
of the quarter, particularly those for 5- and 7-year notes, saw somewhat weak demand,
and stop-out rates in these auctions were noticeably above when-issued rates. However,
the 3-year, 10-year, and 30-year auctions in the week of April 5 were better received,
with strong bid-to-cover ratios and stop-out rates closer to when-issued rates. The
Treasury also conducted a 10-year TIPS reopening of $8 billion on April 5, which was
met with robust demand. The Treasury continued to ramp up its issuance of bills to
finance increases in balances at the Federal Reserve under the Supplementary Financing
Program; those balances reached the targeted level of $200 billion on April 15.

III-14

Treasury Finance
Foreign Participation in Treasury Auctions

Treasury Auction Amounts
Billions of dollars

Percent of total issue
140

Quarterly

2-year
3-year
5-year
10-year

120
100

Mar.
FOMC

6-month moving average

Indirect bids
Apr.
15

80
60

Apr.
15

40
20

2006

2007

2008

2009

2010

2005

2007

Note: Indirect bids and actual allotment are a percentage of
the total amount accepted, including the amount tendered to
the Federal Reserve. Moving averages include 2-, 5-, and 10
year original auctions and reopenings.
Source: Federal Reserve Board.

Daily Treasury Market Volume

Average Absolute Nominal Yield Curve
Basis points
Fitting Error

Mar.
FOMC

250

30
20

2009

Note: No 3-year issuance occurred between 2007:Q3
and 2008:Q3.
Source: U.S. Treasury.

Monthly average

0
2003

Billions of dollars

Actual foreign allotment

0
2005

Mar.
FOMC

Daily

200

150

100

Apr.

Apr.
20

0
2004

2005

2006

2007

2008

2009

2010

2001

Note: April observation is the month-to-date average.
Source: Bloomberg.

2003

2005

2007

Treasury On-the-Run Premium

Fails-to-Deliver of Treasury Securities
Basis points
Mar.
FOMC

Monthly average

2009

Note: Calculated from securities with 2 to 10 years until maturity,
excluding on-the-run and first off-the-run securities.
Source: Federal Reserve Board.

Billions of dollars
70

Mar.
FOMC

Weekly

3000
2500

60
50

2000

1500

1000

10-year note
20
Apr.

Apr.
7

0
2001

2003

2005

2007

2009

Note: Computed as the spread of the yield read from an estimated
off-the-run yield curve over the on-the-run Treasury yield. March
observation is the month-to-date average.
Source: Federal Reserve Board.

500

Q3
2007

Q3
2008

Q3
2009

Q1
2010

Source: Federal Reserve Board, FR 2004, Government Securities
Dealers Reports.

III-15

State and Local Government Finance
The municipal bond market remained receptive to issuers, despite continued concerns
over the financial health of state and local governments. Gross issuance of long-term
municipal bonds remained solid, helped by continued strength in new capital issuance
under the Build America Bonds program. The pace of short-term issuance was
seasonally slow. Yields on long-term municipal bonds moved in line with those on
comparable-maturity Treasury securities, leaving their ratios to long-term Treasury yields
little changed.
Money and Bank Credit
M2 contracted moderately in March as the growth of liquid deposits slowed significantly,
and retail money market mutual funds and small time deposits continued to contract
sharply. Currency growth moved up to an annual rate of 6 percent, and staff estimates
suggest that this reflects solid domestic demand and a pickup in overseas demand. The
monetary base contracted at an annual rate of 19 percent because of a drain in reserves
associated with the increase in the Treasury’s balances under the Supplementary
Financing Program.
After the adoption of Financial Accounting Standards (FAS) 166 and 167, loans held on
banks’ balance sheets increased about $450 billion, or 7 percent, at the end of the first
quarter. 1 This amount was substantially less than initial industry estimates (some as high
as $1 trillion), in part because FASB indefinitely deferred the date by which banks would
need to consolidate certain bank-sponsored investment funds. According to the results of
a special question on the April Senior Loan Officer Opinion Survey, banks did not
tighten their lending standards or terms in response to these accounting changes.
After adjusting to remove the effects of the FAS 166/167 consolidations, bank credit fell
about 5 percent at an annual rate in March. The principal driver behind the decrease was
core loans, which dropped 9 percent, with all major components of core loans
contributing to the decline. Commercial and industrial loans fell sharply again in March,
continuing the streak of monthly declines that began in October 2008. Commercial real
1

The new accounting standards make it more difficult for U.S. banks to hold assets off balance sheet.
Banks adopted the standards in the fourth and first quarters, and the cumulative effects were folded into the
bank balance sheet data published by the Federal Reserve as of March 31. While all major loan categories
were affected to some degree by banks’ adoption of FAS 166/167, the largest effect was on credit card
loans on commercial bank balance sheets, which nearly doubled as a result. The largest 25 banks brought
all of their previously securitized credit card loans (nearly $300 billion) back on balance sheet, while
smaller reporting banks returned all but $16 billion to their balance sheets. Banks also consolidated
significant amounts of other consumer loans ($41 billion), C&I loans ($33 billion), and residential real
estate loans ($27 billion). In addition, the allowance for loan and lease losses increased $36 billion.

III-16

State and Local Government Finance
Gross Offerings of Municipal Securities
(Billions of dollars; monthly rate, not seasonally adjusted)

2009
Type of security

2006

2007

2008

36.1
32.5
10.6
21.9
3.7

40.4
35.5
12.6
22.9
4.9

2.5

2.4

Total
Long-term1
Refundings2
New capital
Short-term
Memo: Long-term taxable

2010
Mar.

Apr. p

36.2
34.4
11.9
22.4
1.8

46.0
43.5
13.4
30.1
2.5

37.0
34.0
11.0
23.0
3.0

11.3

14.6

10.0

37.6
32.6
14.6
17.9
5.0

36.6
33.0
11.6
21.3
3.6

42.7
35.5
13.1
22.5
7.2

2.3

4.5

9.9

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.
p Forecast based on preliminary data through April 15, 2010.
Source: Thomson Financial.

Ratings Changes
Number of ratings changes
1200
Annual rate

Upgrades

900
600

H1 H2

300
0
300
600
Downgrades

900
1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

1200

2009

Source: Moody’s Credit Trends.

Municipal Bond Yields

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
6.5

Weekly

March
FOMC

Ratio
* March
FOMC

Weekly

6.0

1.2

20-year general
obligation

5.0
1.1

20-year
Apr.
15

4.5

1.0
Apr.
15

4.0
3.5
2006

2007

1.4
1.3

5.5

2005

1.5

2008

2009

Source: Municipal Market Advisors; Bond Buyer.

2010

0.9
0.8

2002

2004

2006

2008

* Yield ratio peak is at 1.87 on December 15, 2008.
Source: Bond Buyer.

2010

III-17

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)

Aggregate and components

Level
(billions
of dollars)

2008

2009

8.5

5.1

-8.2

7.8

-4.0

8,513

Components
Currency
Liquid deposits3
Small time deposits
Retail money market funds

5.8
6.9
12.3
13.4

7.0
17.2
-15.9
-21.6

-1.4
-1.6
-28.8
-31.3

8.5
17.5
-18.4
-23.6

6.1
3.9
-21.8
-47.8

872
5,771
1,105
760

Memo:
Institutional money market funds
Monetary base

24.6
70.3

-2.1
41.6

-22.8
-18.4

-39.4
74.0

-47.8
-19.3

2,021
2,075

Jan.

2010
Feb.

Mar.
(p)

1. For years, Q4 to Q4; for quarters and months, calculated from corresponding average levels.
2. Nonbank traveler’s checks are not listed.
3. Sum of demand deposits, other checkable deposits, and savings deposits.
p Preliminary.
Source: Federal Reserve Board.

III-18

Commercial Bank Credit
(Percent change, annual rate, except as noted; seasonally adjusted)
Type of credit

Total

Q3
2009

Q4
2009

Q1
2010

Mar.
2010

Level1
Mar. 2010

2008

2009

H1
2009

4.2

-7.1

-5.5

-8.7

-9.3

-6.8

-5.3

9,308

Loans2
Total
Core
To businesses
Commercial and industrial
Commercial real estate

4.2
4.6

-10.2
-8.3

-7.5
-4.6

-14.4
-12.4

-12.7
-12.5

-10.1
-11.5

-6.3
-9.1

6,983
6,201

14.6
6.4

-18.6
-4.4

-14.7
-1.4

-26.2
-6.1

-23.8
-8.9

-20.6
-9.5

-17.9
-8.1

1,284
1,609

To households
Residential real estate
Revolving home equity
Closed-end mortgages
Consumer
Memo: Originated3
Other

-3.9
12.8
-8.8
7.2
7.0
1.6

-6.2
.5
-8.5
-3.7
-3.9
-23.4

-1.7
6.0
-4.5
-.6
-1.0
-28.1

-11.3
-4.9
-13.7
-5.6
-5.7
-30.3

-10.4
-4.8
-12.5
-8.1
-8.0
-14.3

-6.6
-3.3
-7.9
-12.8
-12.8
1.8

-6.1
-2.0
-7.9
-6.1
-9.2
16.6

2,120
605
1,515
1,187
1,216
783

4.1
16.2
-9.5

4.1
9.2
-3.3

1.8
1.9
1.6

10.7
23.9
-8.3

1.9
8.4
-8.1

3.5
8.5
-4.5

-2.3
4.3
-13.5

2,325
1,463
862

Securities
Total
Treasury and agency
Other4

Note: Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data have been
adjusted to remove the effects of mark-to-market accounting rules (FAS 115) and the initial consolidation of certain variable
interest entities (FIN 46) and off-balance-sheet vehicles (FAS 166 and 167). Data also account for the effects of nonbank
structure activity of $5 billion or more.
1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels.
2. Excludes interbank loans.
3. Includes an estimate of outstanding loans securitized by commercial banks that retained recourse or servicing rights.
4. Includes private mortgage-backed securities; securities of corporations, state and local governments, and foreign governments;
and any trading account securities that are not Treasury or agency securities.
Source: Federal Reserve Board.

Loans and Leases in Bank Credit

Survey Measures of Standards and Demand for Loans
Billions of dollars

Monthly, SA

Net percent
8200

NBER
peak

Quarterly

Standards
Demand

8000

100

NBER
peak

80
60
40

7800

20
7600

0
Q2

Mar. 31*

-20
7400

-40
-60

7200

-80
7000
2007

2008

2009

2010

*Data for March 31, 2010, reflect banks adoptions of FAS166/167.
Source: Federal Reserve.

-100
1990

1993

1996

1999

2002

2005

2008

Note: The aggregate indexes of changes can be interpreted as the net
percentage of core loans on SLOOS respondents’ balance sheets each
quarter that were in categories for which banks reported a tightening in
standards or strengthening in loan demand.
Source: Senior Loan Officer Opinion Survey.

Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER).

III-19

estate loans contracted again in March, at roughly the same rate as in recent months.
Residential real estate loans also decreased further, though their rate of decline in the first
quarter as a whole was somewhat less than the rate posted in the second half of 2009.
Both credit card loans and other consumer loans declined in March. Banks’ holdings of
securities also contracted, as continued strong purchases of Treasury and agency debt
securities were more than offset by sales and maturities of MBS and other securities.
The steep decline in core loans during the first quarter is consistent with the further
widespread weakening of loan demand and the continued tight supply conditions reported
in the Senior Loan Officer Opinion Survey conducted in April. Although most banks
reported that lending standards were little changed over the previous three months, if the
responses are weighted by the share of outstanding loans each respondent has in each
category, the survey implies a small net easing of bank lending standards during the first
quarter, the first such net easing in more than three years. However, this change likely
reversed only a small amount of the previous cumulative tightening of standards, and
banks continued to tighten some terms on loans to both households and businesses, on
balance.

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices
The April 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that
most banks kept their lending standards unchanged in the first quarter, but that moderate net
fractions of banks further tightened many terms on loans to businesses and households. However,
when each response is weighted by the bank’s share of outstanding loan balances in each major
loan category, the April survey implied a small overall easing of lending standards in the first
quarter, the first such easing in about three years. Moreover, for almost all loan categories for
which the survey did indicate a further net tightening of credit standards, the fraction of banks
that reported having done so edged down. On balance, the April survey points to a small
improvement in credit availability from banks, although the improvement generally appears to be
limited to higher-quality borrowers. The survey also indicated that loan demand generally
weakened further. 1
Most of the banks that reported having eased some lending policies in the April survey were large
banks. 2 A number of large domestic banks eased standards and some terms on commercial and
industrial (C&I) loans to large and middle-market firms. Branches and agencies of foreign banks,
which tend to lend to relatively large firms, also reported easing standards and terms on C&I
loans, on net. However, standards on C&I loans to small firms were roughly unchanged, and
terms on such loans were tightened further over the past three months. Turning to lending to
households, three of the respondent panel’s largest residential real estate lenders, which account
for 40 percent of such loans on the books of domestic banks, reported that they had eased
standards on residential mortgages for prime borrowers or home equity lines of credit. On net,
large banks also accounted for an easing of standards on non-credit card consumer loans. In
contrast, modest net fractions of large and other domestic banks continued to tighten standards
and terms on credit card loans over the past three months.
Domestic survey respondents indicated that demand weakened further for all loan types. A
decline in demand for residential real estate loans was reported by a larger net fraction of
domestic banks than in the January survey, but for other types of loans the net fractions of banks
1

The April 2010 survey addressed changes in the supply of, and demand for, loans to businesses and
households over the past three months. The survey also included three sets of special questions. The first
set asked banks about lending policies regarding business credit card accounts for use by small firms. The
second set queried banks about the use of loan extensions on commercial real estate loans. The last set
asked banks about the effects of new statements issued by the Financial Accounting Standards Board on
standards and terms. This appendix is based on responses from 56 domestic banks and 23 U.S. branches
and agencies of foreign banks. Respondent banks received the survey on or after March 30, 2010, and
responses were due by April 13, 2010.
2
Large banks are institutions with more than $20 billion in total assets as reported on the December
31, 2009, Call Report.

III-A-1

III-A-2

Measures of Supply and Demand for Commercial and Industrial Loans,
by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for Commercial and Industrial Loans
Percent

Jan.
survey

100
80

Loans to large and medium-sized firms
Loans to small firms

60
40
20
0
-20
-40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks’ Costs of Funds
Percent
100
80
60
40
20
0
-20
-40
-60
-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial and Industrial Loans
Percent
60
40
20
0
-20
-40
-60
-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

III-A-3

that reported weaker demand continued to wane. Indeed, branches and agencies of foreign banks
reported an increase in demand for C&I loans, on net, over the past three months.
Lending to Businesses
Questions on commercial and industrial lending. On balance, a small net fraction of banks
reported easing their lending standards on C&I loans to large and medium-sized firms. The
previous survey in January showed the first net easing of standards on such loans since the onset
of the financial crisis in the summer of 2007. While the net fraction of banks that eased standards
on these loans in the April survey increased only slightly, the latest survey marked the first time
since 2006 that banks reportedly eased standards in two consecutive quarters. However,
standards likely remain quite stringent following the prolonged and widespread tightening that
took place over the past few years.
Among domestic institutions, large banks were responsible for the reported easing of standards to
larger C&I borrowers. None of the smaller banks, which compose roughly half of the respondent
panel, indicated that they had eased their standards on C&I loans to large firms over the past three
months. On net, a small fraction of branches and agencies of foreign banks participating in the
survey reported easing standards on C&I loans. These respondents tend to be subsidiaries of
large global institutions and concentrate on lending to relatively large firms. Large domestic
banks also eased some terms on C&I loans for large and middle-market firms, on net, as did the
foreign branches and agencies. On balance, the large domestic institutions mostly trimmed their
pricing terms, including the cost of credit lines and the spreads of loan rates over their costs of
funds, while the branches and agencies eased each of the seven surveyed C&I lending terms, on
net.
When asked about changes in standards on C&I loans to smaller firms, almost all domestic banks,
regardless of size, reported little change. However, significant net fractions of domestic
institutions reported tightening terms on C&I loans extended to smaller firms. This reported
tightening of terms was more prevalent at smaller banks. Notably, the net fraction of banks that
had increased premiums on loans to riskier borrowers remained fairly elevated in the April
survey.
According to the survey, competitive pressures, the economic outlook, and tolerance for risk in
the C&I loan market were the three factors that exerted the greatest influence on banks’ C&I
lending policies over the past three months. In particular, domestic banks that eased their C&I
lending standards pointed to increased competition from other banks or nonbank sources of credit
as an important factor in their decision, a response consistent with the receptive financing
conditions in the corporate bond market and reported changes in the lending stance of foreign
institutions. Also, about two-thirds of such banks cited a more favorable or less uncertain
economic outlook. Only a few banks reported having eased lending policies in response to an
increased tolerance for risk. By contrast, banks that tightened standards or terms on C&I loans

III-A-4

Measures of Supply and Demand for Commercial Real Estate Loans

Net Percentage of Domestic Respondents Tightening Standards for Commercial Real Estate Loans
Percent

Jan.
survey

100

-20

-40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial Real Estate Loans
Percent
60

-20

-40

-60

-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

III-A-5

generally indicated that they viewed the economic outlook as less favorable or more uncertain
and also reported further reductions in their tolerance for risk.
Small net fractions of banks reported that demand for C&I loans from large and middle-market
firms and from small firms weakened further over the past three months. The reported weakness
in loan demand was concentrated at smaller domestic banks, while large domestic banks reported
little change in demand on net. A moderate net fraction of foreign banks indicated that demand
for C&I loans strengthened over the same period. Nearly all of the domestic respondents that
reported weaker demand cited borrowers’ reduced need to finance plant and equipment
investment, and large majorities also indicated that demand for inventory and accounts receivable
financing declined. Among the domestic banks that reported increased demand for C&I loans,
the most commonly cited reasons were increased needs to finance inventories and accounts
receivable, as well as a pickup in mergers and acquisitions. About half of those banks also
reported having seen a shift of demand to their bank from other sources of external finance.
Special questions on credit card loans to small firms. The April survey included a set of
special questions that asked domestic banks about standards and terms on credit cards for use by
small firms. A majority of respondents indicated that their standards for approving such business
credit card accounts are currently tighter than the longer-run average level that prevailed before
the crisis. In addition, significant net fractions of respondents to these special questions indicated
that their banks had tightened their terms on business credit card loans to small firms—for both
new and existing accounts—over the past six months.
Questions on commercial real estate lending. With fundamentals in the commercial real estate
(CRE) sector remaining weak, a significant number of domestic banks, on balance, continued to
report having tightened standards on CRE loans. However, this net fraction was considerably
smaller than in the January survey. As in the previous survey, domestic banks reported weaker
demand for CRE loans, on net. However, in the latest survey, the net fraction of banks reporting
weaker demand moved below 10 percent for the first time since the financial crisis began. In
contrast, branches and agencies of foreign banks reported no change in CRE lending standards,
on balance, and a small net fraction of these respondents experienced an increase in demand for
CRE loans.
Special question on the use of CRE loan extensions. In response to a special question, sizable
fractions of both domestic and foreign respondents reported having increased their use of CRE
loan extensions over the previous six months. 3 A few banks reported having reduced their use of
loan extensions during that period. The beginning of the six-month period that this special
3

Survey respondents were instructed that for the purposes of the special question, a loan extension was
to be defined as a modification of a loan at or near the end of the original term that extends the term of the
loan, as opposed to a newly underwritten loan used to refinance a maturing loan.

III-A-6

Measures of Supply and Demand for Residential Mortgage Loans

Net Percentage of Domestic Respondents Tightening Standards for Residential Mortgage Loans
Percent

Percent

100

All residential
20

Prime
Nontraditional

-20

Subprime
1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

2008

2009

Q2
2010

Note: For data starting in 2007:Q2, changes in standards for prime, nontraditional, and subprime mortgage loans are reported separately.
Series are not reported when the number of respondents is 3 or fewer.

Net Percentage of Domestic Respondents Reporting Stronger Demand for Residential Mortgage Loans
Percent

Percent

Prime

All residential

Nontraditional
Subprime

-20

-40

-60

-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

Q2
2007

Q2
2008

Q2
2009

Q2
2010

Note: For data starting in 2007:Q2, changes in demand for prime, nontraditional, and subprime mortgage loans are reported separately.
Series are not reported when the number of respondents is 3 or fewer.

III-A-7

question referenced roughly coincides with guidance that the Board and other financial regulators
issued at the end of October that addressed CRE loan workouts. 4
Lending to Households
Questions on residential real estate lending. With regard to loans secured by residential real
estate, most banks reported essentially no change in their standards on prime and nontraditional
mortgages over the past three months. A few of the largest banks eased standards for prime
mortgages, while a roughly comparable number of the remaining banks indicated that they had
tightened standards on such loans. A handful of large banks also contributed to the first net
easing of standards on home equity lines of credit since the question was first asked in January
2008, a change that may reflect the stabilization in home prices since the middle of last year.
Compared with the January survey, a more sizable fraction of banks indicated that demand for
prime mortgages weakened over the past three months, a result that is consistent with the weaker
than-expected readings on home sales during the first quarter. Fairly large net fractions of banks
also reported that demand for home equity loans weakened over the survey period.
Questions on consumer lending. On balance, domestic banks reported tightening their lending
standards and terms for credit cards, but their lending stance toward other consumer loans eased.
A small net fraction of banks reported having tightened standards for credit cards, and moderate
fractions reported having reduced credit limits and increased spreads of interest rates charged on
outstanding credit card balances. The further tightening of standards and terms on credit card
loans, however, did not carry over into other consumer loans, as small net fractions of banks
reported having eased standards and reduced spreads for such loans. Moreover, the net fraction
of banks that reported an increased willingness to make consumer installment loans increased
again, putting this indicator of credit availability near the upper end of its range over the past
decade. As in recent quarters, a moderate net fraction of respondents reported weaker demand for
consumer loans of all types.
Special question on Statements of Financial Accounting Standards Nos. 166 and 167 (FAS
166 and 167). A final special question on the April survey asked banks whether their lending
policies for businesses and households had changed in response to FAS 166 and 167, new

For complete text of the policy statement, see Board of Governors of the Federal Reserve System,
Division of Banking Supervision and Regulation (2009), Supervision and Regulation Letter SR 09-7
(October 30), “Prudent Commercial Real Estate Loan Workouts,”
www.federalreserve.gov/boarddocs/srletters/2009/SR0907.htm.

III-A-8

Measures of Supply and Demand for Consumer Loans

Net Percentage of Domestic Respondents Tightening Standards for Consumer Loans
Percent

Jan.
survey

100
80
60

Credit card loans
Other consumer loans

40
20
0
-20

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Net Percentage of Domestic Respondents Reporting Increased Willingness to Make Consumer Installment Loans
Percent
40

-20

-40
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Net Percentage of Domestic Respondents Reporting Stronger Demand for Consumer Loans
Percent
60
40
20
0
-20
-40
-60
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

III-A-9

accounting rules that most banking institutions adopted with their first-quarter financial
statements.5 No respondents to this question indicated that their banks’ lending standards and
terms had changed as a result of the new rules.
Last page of Domestic Financial Developments

Published by the Financial Accounting Standards Board in June 2009, FAS 166 and 167 eliminated
the concept of a “qualifying special-purpose entity” and made achieving off-balance-sheet treatment of
assets much more difficult. For more information on FAS 166 and 167, please see Financial Accounting
Standards Board (2009) “FASB Issues Statements 166 and 167 Pertaining to Special Purpose Entities,”
news release, June 12,
www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB/FASBContent_C/NewsPage&cid=
1176156240834.

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to $39.7 billion in February, from $37 billion
in January, as a rise in nominal imports outpaced a small increase in exports.

The value of exports of goods and services moved up 0.2 percent in February after
decreasing by about the same amount in January. The February increase was fairly broad
based across product categories with the exception of agricultural goods and consumer
goods, both of which fell back slightly. Capital goods rose in spite of falling aircraft and
computer sales, driven by a large increase in machinery and semiconductors. Automotive
products moved up, though only partially reversing a sizable decline in January.
On average in January and February, nominal exports increased 10¼ percent at an annual
rate. The increase reflects the quarterly arithmetic of a sharp jump in December, as the
level of exports in February was almost unchanged from the December level.

IV-1

IV-2

IV-3

IV-4

The value of imports of goods and services increased 1.7 percent in February, undoing a
similar sized decrease in January. Imports of oil accounted for more than one-third of the
January decline, reflecting lower volumes, but only about a tenth of the February uptick,
as volumes rebounded but prices fell. Services imports recorded a large increase
reflecting royalty payments associated with broadcast rights for the winter Olympic
games. Capital goods rose as strong computer imports more than offset falling aircraft
sales, and industrial supplies and consumer goods also moved up. There was a notable
decline in automotive products driven by sharply falling imports from outside of North
America.
For the first quarter, nominal imports rose 13 percent at an annual rate. However, as with
exports, the increase is wholly reflected in the quarterly arithmetic of a sharp increase in
December, with the level of imports in February actually coming in lower than that
recorded in December.
Prices of Internationally Traded Goods
Non-oil imports. Prices for imported non-oil goods fell 0.2 percent in March because of
a sharp drop in natural gas prices, while core import prices rose 0.3 percent. Within core
imports, prices for material-intensive goods rose 0.7 percent in March, the same pace as
in February. After declining in February, prices for finished goods were little changed in
March, as falling prices for automotive products and capitals goods (excluding computers
and semiconductors) offset rising prices for consumer goods.
As measured by the Bureau of Labor Statistics (BLS), core import prices rose 5 percent at
an annual rate in the first quarter, as prices for material-intensive goods rose almost
16 percent at an annual rate. Overall, prices for finished goods were little changed, as
slightly higher prices for consumer goods were offset by lower prices for automotive
products.
Oil. The BLS price index of imported oil rose 4 percent in March after a decrease of
1.4 percent in February. The spot price of West Texas Intermediate (WTI) crude oil
followed a broadly similar pattern, dropping 2½ percent in February before increasing
about 6 percent to average just over $81 per barrel in March. Thus far in April, spot WTI
has continued to edge higher, closing most recently on April 20 at over $83. The
modestly higher oil prices may reflect a more optimistic outlook regarding the global
economic activity and, in particular, the prospects for stronger oil demand in developed
economies.

IV-5

Exports. Prices of exported core goods rose 0.9 percent in March following February’s
0.5 percent decline. This pattern largely reflects movements in prices for agricultural
products, which fell 3.8 percent in February and increased 2.1 percent in March. In
addition, after a 0.4 percent drop in February, prices for industrial supplies increased
1.6 percent. As in February, prices for finished goods were flat.
In the BLS data, prices of exported core goods rose 7½ percent at an annual rate in the
first quarter, largely because of higher prices for material-intensive goods. Non
agricultural industrial supplies experienced the largest increase. Prices for all major
categories of finished goods were also up in the first quarter.

IV-6

IV-7

IV-8

U.S. Current Account
The U.S. current account deficit was $462 billion at an annual rate in the fourth quarter of
2009, $53 billion wider than in the third quarter (revised) and the second consecutive
quarter of widening deficits since the low reached in the second quarter of 2009. The
widening resulted primarily from an increase in the trade deficit. In addition, the surplus
on investment income decreased as profits earned on foreign direct investment in the
United States recovered strongly from a dip in the third quarter and increased more than
those on U.S. direct investment abroad.
U.S. Current Account

Period

(Billions of dollars, seasonally adjusted annual rate)
Current
Other
Goods and
Investment
account
income and
services,
income,
balance
transfers, net
net
net

Current
account/
GDP

Annual
2008
2009

-695.9
-378.6

125.6
96.1

-135.7
-137.3

-706.1
-419.9

-4.9
-2.9

Quarterly
2009:Q1
Q2
Q3
Q4

-368.9
-324.3
-385.5
-435.8

80.1
73.4
123.3
107.6

-128.0
-140.0
-147.2
-134.2

-416.7
-391.0
-409.4
-462.4

-2.9
-2.8
-2.9
-3.2

209.1
44.6
-61.2
-50.3

-12.0
-6.8
50.0
-15.7

5.7
-12.1
-7.1
13.0

202.8
25.8
-18.4
-53.0

1.4
0.2
-0.1
-0.3

Change
Q1-Q4
Q2-Q1
Q3-Q2
Q4-Q3

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

IV-9

U.S. International Financial Transactions
Since the March Greenbook, we have received balance of payments data for the fourth
quarter of 2009, Treasury (TIC) data on U.S. international financial transactions for
February, and partial and confidential data on custody accounts at the Federal Reserve
Bank of New York (FRBNY) through mid-April. The data show that acquisitions of U.S.
Treasury securities by foreign official institutions remain strong and that foreign official
net purchases continue to provide the major share of net financial inflows.
In February, foreign official net purchases of U.S. Treasuries picked up to nearly $30
billion following two months of relatively small inflows (see lines 1a and 1b of the table
“Summary of U.S. International Transactions”).
. Custody data from FRBNY suggest
particularly strong official inflows for March, including the largest acquisition of U.S.
agency securities since mid-2008, and similar strength thus far in April. This strength
runs counter to news reports in recent months of slowing official inflows. Such reports
often point to the unadjusted TIC data, particularly for December and January, and the
lower share of foreign participation in Treasury auctions in February and March (not
shown). However, official institutions often use private foreign entities to purchase
securities, and these purchases would not be recorded as foreign official in the published
TIC data. Confidential adjustments to TIC data for this effect using daily custody data
from FRBNY yield the stronger inflows reported here. Furthermore, while foreign
participation in Treasury auctions has declined, the FRBNY custody data confirm that
foreign officials are nonetheless acquiring substantial amounts of Treasury securities.
Foreign private net purchases of U.S. securities continue to be mixed, although stronger
overall in February than in January. Private foreign investors, mainly in Asia, made
unusually large purchases of Treasury securities in February (line 4a). In addition,
foreign purchases of equities returned to a strong pace in February after a somewhat
slower January (line 4b). But private foreign acquisitions of agency securities remained
fairly flat, and foreigners continued to sell U.S. corporate bonds, on net, as discussed in
the previous Greenbook (lines 4b and 4c). In banking, strong growth in gross positions,
led by continued recovery in the RP market, netted to a small outflow (line 3).
U.S. investors slowed their pace of acquiring foreign stocks and long-term bonds in
February (line 5). For foreign stocks, this is a continuation of a slowdown from the
fourth quarter. However, we also received additional data for the fourth quarter of 2009
showing that U.S. investors purchased almost $100 billion of foreign negotiable CDs and

IV-10

other short-term securities (included in line 10). Therefore, the slowdown in long-term
securities purchases may reflect more of a shift in instrument preference rather than an
overall decline in U.S. demand for foreign assets.
Turning to the fourth quarter-balance of payments data, U.S. direct investment abroad
(line 6) was healthy, driven by strong retained earnings. Retained earnings also boosted
foreign direct investment in the United States (line 7), although they were offset by
declining inflows from intercompany debt. But most strikingly, recorded net financial
inflows fell far short of the recorded current account, resulting in a sizable $70 billion
statistical discrepancy for the quarter and a $225 billion discrepancy for 2009. This
positive statistical discrepancy indicates some combination of under recorded net
financial inflows or over recorded net imports of goods and services and other
transactions measured in the current account balance.

Since the balance of payments data were published, we also received derivatives data for
the fourth quarter. They show a decline in gross outstandings and a record net inflow of
$21 billion (line 8). (By convention, we show the headline numbers of the published
balance of payments in the attached table, but all else equal, the derivatives data should
narrow the fourth-quarter statistical discrepancy by $21 billion).

IV-11

IV-12

IV-13

IV-14

Foreign Financial Markets
Asset prices in most foreign financial markets appeared to reflect growing confidence
that the global recovery is gaining momentum, particularly in emerging market
economies. Equity indexes rose in most countries, implied volatilities remained low, and
emerging-market risk spreads generally declined. However, despite the European
Union’s announcement that it was negotiating a substantial package of financial
assistance for Greece, Greek sovereign debt remained under severe pressure.
The trade-weighted value of the dollar, as measured by the staff’s broad nominal index,
has declined ¾ percent since the March Greenbook, as gains against the euro and yen
were more than offset by declines against the Canadian dollar and most emerging market
currencies. The dollar appreciated 1 percent versus the euro, which was buffeted daily by
news about Greece, and nearly 4 percent against the yen. But the dollar depreciated
2½ percent against the Canadian dollar, which was supported by Canada’s solid recovery
and by rising commodity prices. Late in the period, the Bank of Canada dropped its
“conditional commitment” to keep policy rates unchanged until July, which supported the
Canadian dollar. Chinese authorities did not allow the renminbi spot exchange rate to
fluctuate meaningfully against the dollar. There are, however, widespread expectations
among market participants that China will soon let the renminbi appreciate, particularly
in light of China’s very strong GDP data for the first quarter, and the dollar depreciated
against most other currencies in emerging Asia. Of some note, the Monetary Authority
of Singapore revalued its currency about 1½ percent after strong first-quarter GDP data.
The dollar depreciated more than 2 percent against the Mexican peso and the Brazilian
real.
Despite promises of financial support by euro-area countries, spreads of Greek sovereign
debt over German debt began to rise again in the second half of March. In early April,
ten-year spreads rose above 400 basis points, and one-year Greek government bond
yields shot up to more than 7 percent. These spreads fell after the April 11
announcement by the European Union of a potential assistance package of up to

IV-15

€45 billion to be funded by bilateral loans from euro-area countries and by the IMF.
However, as it became clear that parliamentary approval for the aid would be required in
several potential donor countries, including Germany, spreads on Greek sovereign debt
rose again, reaching record highs as the period ended. On net since the March
Greenbook, the ten-year spread of Greek debt over German debt has risen 210 basis
points. The debt spreads of most other “peripheral” euro-area countries only showed a
modest response to the gyrations in Greek debt, with the exception of Portuguese debt
spreads, which rose 80 basis points over the period. Fitch cut Portugal’s sovereign rating
and the EU warned that the Portuguese government may need to enact further fiscal cuts
to meet its deficit goals.
Reflecting widespread optimism that the global recovery is well under way, headline
equity indexes rose in many industrial countries (Greece was one exception). Equity
prices also generally rose in Latin America, emerging Asia, and, particularly, in Eastern
Europe. Share prices in China declined slightly, likely affected by the Chinese
authorities’ efforts to slow the growth of credit. EMBI spreads declined in all regions:
the Greek situation did not lead to a widespread pullback from risk. Ten-year sovereign
yields in Germany and other “core” euro-area countries were little changed on balance, as
were U.K. and Japanese yields. However Canadian and Australian ten-year yields rose
about 20 and 30 basis points, respectively, reflecting stronger economic growth and
firming expectations of future policy tightening.

IV-16

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Developments in Advanced Foreign Economies
Recent indicators in the advanced foreign economies suggest a continued divergence in
the pace of recovery, with a strong performance in Canada, a moderate expansion in
Japan, and a more sedate rebound in Europe. Canadian household spending continues to
grow at a solid pace, and the contribution of external demand is positive. Japanese trade
is rebounding further and business confidence is improving, but other recent indicators
have been mixed. In Europe, PMIs and other indicators point to a pickup in the pace of
manufacturing production; however, household spending is lagging markedly, and
consumer sentiment remains subdued. The Greek debt crisis intensified during the
intermeeting period and, in mid-April, euro-area member states announced a plan to
provide financing aid to Greece if necessary, in coordination with the International
Monetary Fund.
The recent increase in commodity prices is pushing up 12-month headline inflation rates
across the advanced foreign economies. However, core inflation performance has
remained more subdued, with the exception of the United Kingdom. All major foreign
central banks kept their policy rates unchanged since the time of the March Greenbook.
In addition, the Bank of Japan doubled the size of its three-month fixed-rate loan facility,
and the European Central Bank announced that it would extend its special collateral rules
beyond the end of 2010. In contrast, in its April 20 meeting, the Bank of Canada dropped
its conditional commitment to keep policy rates unchanged through the end of this
quarter.

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In Japan, real GDP rose 3.8 percent in the fourth quarter, 0.8 percentage point lower than
reported in the preliminary release. Incoming indicators suggest that the recovery
continued in the first quarter, led by exports. In February, real exports rose at a robust
1.1 percent monthly pace, just marginally below the fourth-quarter average; however, real
imports continued to accelerate, rising 1.8 percent, indicating that the recovery is
gradually spilling over to the domestic sector. In addition, consumer sentiment continued
to improve, car sales reached a five-year peak in March, and the ratio in February of
active job openings to applications edged up further. The Bank of Japan (BOJ) Tankan
index, an important measure of business confidence, improved in March for the fourth
consecutive quarter. According to the BOJ Senior Loan Officer Opinion Survey, demand
for bank loans by individuals and firms increased in the first quarter. Others indicators,
however, have softened. In February, the monthly index of real consumer spending was
flat, industrial production fell, and machinery orders declined.

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The 12-month inflation rate edged up in February, to negative 1.1 percent, and core
inflation (excluding food and energy prices) also increased. On a monthly seasonally
adjusted basis, headline prices rose 0.4 percent and core prices edged up 0.1 percent, the
first monthly increase since September 2008. Yet, much of February’s outcome in
headline inflation was attributable to an increase in gasoline and other retail energy
prices, and preliminary data for the month of March, available only for the Tokyo
metropolitan area, suggest that prices resumed declining, although at a more moderate
pace than throughout 2009. In addition, the government’s decision to eliminate public
high school tuition fees is estimated to shave about 1/3 percentage point off the 12-month
inflation rate in the current quarter.
On March 17, the BOJ took some modest steps to extend monetary policy easing out the
yield curve, by doubling the size of a loan facility to 20 trillion yen ($222 billion).
Financial market reaction to the news was negligible. Thus far, the facility, which was
set up in December and makes available three-month loans at a fixed interest rate of
0.1 percent against a broad range of collateral, has contributed to slightly lower shortterm interest rates. On March 24, the Japanese parliament approved the budget for the
2010 fiscal year, in line with the government proposal announced last December, with
spending of 92.3 trillion yen ($1 trillion). This new budget, which calls for increased
transfers to households and local governments but also for substantial cuts to public
investment, is expected to result into a moderate increase in the deficit and to provide
further stimulus to the economy.

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In the euro area, real GDP growth in the fourth quarter was revised down to an annual
rate of 0.2 percent. Private investment fell 5¼ percent, and both private and government
consumption also declined. Import growth slowed more than export growth, allowing net
exports to make a 1 percentage point contribution to GDP growth. Inventory adjustment
contributed ½ percentage point to growth.
Recent economic indicators show strength in manufacturing but suggest a subdued pace
of overall activity. In January, euro-area industrial production posted an impressive gain
of 1.6 percent, and it surpassed expectations again in February, growing 0.9 percent. In
February, the trade balance of the euro area registered a €2.6 billion surplus, compared
with a €9 billion deficit in January, as seasonally adjusted exports rose 2.7 percent while
imports rose 1.5 percent. The composite PMI rose above expectations in March,
reflecting ongoing improvement in the manufacturing PMI and a recovery in the services
PMI, which had edged down in February. In contrast, real retail sales fell in both January
and February, consistent with continued weak household demand. Moreover, while the
business climate index and overall economic sentiment index continued to improve in
March, the consumer sentiment index was flat after retreating in February. Labor market

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conditions remain weak. In February, the unemployment rate ticked up to 10 percent,
compared with a low of 7.2 percent in early 2008.
Twelve-month euro-area headline inflation moved up to 1.4 percent in March, from
0.9 percent in February. Core inflation, excluding all food and energy, edged up to
1 percent in March. Energy inflation accelerated in March to 7.2 percent, from
3.3 percent in February.
The European Central Bank (ECB) has kept its benchmark policy rate unchanged at
1 percent since May 2009. The ECB has continued to implement plans to buy €60 billion
worth of covered bonds; by mid-April, it had purchased €46.4 billion in such bonds. On
March 25, the ECB announced that it would continue to accept bonds as collateral with
ratings as low as BBB- beyond the end of 2010. Details released following the April 8
policy meeting indicate that the ECB will implement a graduated schedule of haircuts to
the value of assets rated in the BBB+ to BBB- range, and that this schedule will replace
the uniform haircut of 5 percent currently applied to those assets.
The Greek debt crisis intensified during the intermeeting period. In light of worsening
market sentiment regarding the Greek turmoil, euro-area member states announced on
April 11 a plan to provide financing to Greece via bilateral loans as part of a package
co-financed by the International Monetary Fund (IMF). The program would cover a
three-year period, with member states contributing up to €30 billion in the first year, in
addition to potential IMF financing of €10-15 billion. The plan is expected to allow
Greece to borrow at lower rates than in private capital markets; if fully implemented, this
funding would probably be sufficient to meet Greece’s financing needs for this year. In a
letter to the European Union, the IMF, and the ECB, Greek Finance Minister George
Papaconstantinou on April 15 asked to begin discussions on “a multi-year program of
economic policies.” The letter stopped short of asking to activate the aid package
discussed above, but Papaconstantinou wrote that the program of economic policies
“could be supported with financial assistance from the euro-area member states and the
IMF, if the Greek authorities were to decide to request such assistance.” Currently, teams
from the IMF, the European Union, and the ECB are set to begin talks in Athens on
April 21.

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In the United Kingdom, fourth-quarter real GDP growth was revised up to an annual rate
of 1.8 percent. Inventories made a larger positive contribution to growth than initially
estimated, as the moderation in the pace of inventory decumulation was revised up. Final
domestic demand growth was flat, as increases in private and public consumption were
offset by large cutbacks in investment.

First-quarter data on real activity have been mixed. The unemployment rate edged up to
8 percent in February, but the number of job seekers receiving unemployment benefits
posted declines in February and March. The volume of retail sales grew 2.1 percent in
February after a sharp drop in January, a pattern likely reflecting a temporary drag from
the 2.5 percentage point hike in the value-added tax at the turn of the year. Industrial
production firmed in February but remained near its nadir.
Forward-looking indicators continue to send conflicting signals about the strength of the
recovery. March PMIs were consistent with the output of services and manufacturing
industries expanding at their historical average. Confidence indicators and most
components of the Bank of England’s (BOE) Agents’ Summary of Business Conditions
posted gains in March, although they typically remained below their pre-recession levels.

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By contrast, a survey conducted by the British Chamber of Commerce late in the first
quarter pointed to further stagnation in domestic sales and orders.
Rising commodity and energy prices continued to exert pressure on producer and tradable
prices. A rise in gasoline prices pushed up headline inflation to 3.4 percent in March.
However, the large amount of economic slack also had moderating effects on wages and
services price growth. The 12-month change in average earnings excluding bonuses
remained near a series record low in February.
In early April, the BOE voted to keep Bank Rate at 50 basis points and maintain at its
current level (£200 billion) the stock of assets purchased through the issuance of central
bank reserves.
On March 24, the government released its budget for the 2010–11 fiscal year (which runs
from April to March). The deficit is projected to edge down from 12.2 percent of GDP in
2009–10, to 11.2 percent in the current fiscal year, before declining to 4.2 percent by
2014–2015. Gross debt, currently at about 70 percent of GDP, is expected to peak near
90 percent of GDP in 2013–14. The budget provided few details about how the
government intended to achieve its deficit path. On April 6, the Queen of England
dissolved the U.K. parliament following a request from Prime Minister Gordon Brown to
hold a general election on May 6.

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In Canada, indicators for the first quarter point to robust near-term growth. In January,
monthly GDP rose at an annual rate of 7.9 percent, exceeding the 5 percent growth rate in
the fourth quarter by a sizable margin. Recent gains have been widespread across
industries. Real exports continued to expand through February, as real import growth has
remained tepid, setting the stage for a large positive net export contribution in the first
quarter.

The growth rate of business and household credit, which dipped but remained solidly
positive throughout the downturn, rose to 4¼ percent in January, well above its low point
in August 2009. Amid this solid credit growth, the Canadian housing market has
continued to rebound forcefully. Building permits rose more than 50 percent over the
12 months ending in February, remaining in line with the average level of the boom years
of 2006 and 2007. Prices for new houses are increasing.
The recovery in the business sector continues to lag behind the household sector but is
starting to pick up steam. Over the six months ending in January, manufacturing
industrial production rose more than 10 percent at an annual rate. Combined with the
positive results from the Bank of Canada’s Business Outlook Survey, the surge may
indicate a rebound in business investment later this year. The recent rise in investment
reported in the National Income Accounts primarily reflects the rebound in residential

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investment. Nonresidential structures and equipment investment fell 8.8 percent at an
annual rate in the fourth quarter.
Labor market conditions continue to improve. Employment rose 1.2 percent at an annual
rate over the six months ending in March, just below the 1.6 percent 10-year average
annual growth rate. The unemployment rate has continued to decline so far this year,
reaching 8.2 percent in February, from 8.7 percent in August 2009.
Consumer prices rose 1.6 percent over the 12 months ending in February, down slightly
from January. Excluding food and energy, inflation was 1.5 percent.
The Bank of Canada maintained its policy rate at 0.25 percent at its April meeting.
However, the Bank removed its conditional commitment, introduced in April 2009, to
keep interest rates at this rate through the end of this quarter. In response, markets
increased odds of a near-term policy-rate increase.

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Economic Situation in Other Countries
Economic activity in the emerging market economies (EMEs) continued to expand
robustly in the first quarter and appears to be supported by both domestic demand and
external demand. Activity picked up in China, and incoming data point to a strong
bounceback in growth in the first quarter in India, Singapore, and South Korea, which
experienced anemic or negative growth in the fourth quarter. The expansion in the
ASEAN-4 1 and Latin America remains strong, although it appears to be moderating to a
more sustainable pace. Despite the strength of exports, merchandise trade balances
declined for some countries where strong domestic demand caused imports to outpace
exports, most notably in China. Although inflation has declined a bit in some key
countries of emerging Asia, it has moved up in Mexico and Brazil. Food price increases
remain a key driver of inflation in many EMEs.
In China, real GDP increased at a higher-than-expected annual rate of 11.3 percent in the
first quarter. The economic recovery remained broad based, with industrial production,
fixed asset investment, and domestic demand remaining robust. Auto sales in the first
quarter reached 4.6 million units, up 72 percent from last year. With imports growing
faster than exports, the trade surplus fell in the first quarter to its lowest level since 2005.
Trade in March was essentially balanced on a seasonally adjusted basis, although
commentators have been highlighting the headline nonseasonally adjusted number, which
shows a trade deficit for the first time in six years.
Headline consumer price inflation came in at an annual rate of 3 percent in the first
quarter, down from the fourth quarter on waning food price inflation, but 4-quarter
inflation in March edged higher owing to deflation early last year. Bank lending slowed
in March, but, for the quarter as a whole, outstanding loans rose 26 percent from a year
earlier, owing to a large increase in January. Likely in response to the earlier pickup in
lending, and as part of a general tightening in monetary policy, the People’s Bank of
China increased its issuance of bonds in the first quarter, draining liquidity from the
banking sector.

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In India, after a contraction of GDP in the fourth quarter, available indicators point to
strong growth in the first quarter. The average level of industrial production over January
and February was 3 percent above its fourth-quarter average. The PMI for manufacturing
hovered around 58 throughout the first quarter, suggesting a vigorous pace of expansion,
and was up significantly from the previous quarter. Despite a sharp rise in exports,
strong demand for imports caused the trade deficit to widen in February. Favorable
weather conditions point to a rebound in agricultural output in the first and second
quarters, following the drought-related contraction in the fourth quarter of 2009.
Inflationary pressures have continued to mount. Twelve-month wholesale price inflation,
which had been rising in recent months, nearly reached a double-digit pace in February
and March, despite some signs of moderating food price inflation. In mid-March, the
Reserve Bank of India (RBI) unexpectedly hiked the repo and reverse repo policy rates
by 25 basis points each (to 5 and 3.5 percent, respectively) in an intermeeting decision. It
followed up with an additional 25 basis points hike at its quarterly monetary policy
meeting in mid-April. The RBI noted that the strong rebound in economic activity had
raised the risk that inflationary pressures would spill over from food to other sectors of
the economy and unhinge inflation expectations.

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In the newly industrialized economies (NIEs), 2 economic activity appears to have
accelerated in the first quarter, driven largely by an outsized gain of 32 percent at an
annual rate in Singapore’s GDP, according to the advance release; if this release is
confirmed, this would be the highest quarterly growth rate on record. The strong
performance reflected continued strength in exports and manufacturing, as well as a
rebound in the volatile biomedical industry, which had contracted in the fourth quarter.
Recent readings for industrial production and export orders in Taiwan, and robust retail
sales and improving labor market conditions in Hong Kong, suggest continued strength in
the first quarter. In Korea, where growth was anemic in the fourth quarter, the average
level of industrial production in January and February was above the fourth quarter;
confidence indicators, exports, and retail sales in recent months also suggest an upward
trend in activity.
Headline inflation in the NIEs has generally risen this year from low levels, largely
reflecting food price increases. Inflation appears to have peaked in Korea and Taiwan in
January and February, respectively, and is now declining. To date, central banks in the
region have kept policy rates on hold. The Monetary Authority of Singapore effectively
tightened monetary policy at its semi-annual policy meeting by recentering its exchange
rate target band, shifting it up by about 1 percent, thus allowing for more appreciation of
the currency.

The NIEs are Hong Kong, South Korea, Singapore, and Taiwan.

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In the Association of Southeast Asian Nations (ASEAN-4), growth appears to have
remained robust in the first quarter, although it moderated in some cases from the very
rapid pace of the fourth quarter. The average level of industrial production in January
and February was 3 percent above and 1½ percent above its fourth-quarter level in
Thailand and Malaysia, respectively. In Indonesia and the Philippines, industrial
production in January also improved over the previous quarter. Exports from the region
continued to increase, causing the trade surplus to expand in Malaysia in the first quarter.
However, spurred by strong domestic demand, imports outpaced exports in the
Philippines, leading to a narrowing of the trade surplus.
With the exception of the Philippines, headline 12-month inflation has moderated in the
region relative to earlier in the year, partly reflecting a decline in food price pressures at
the outset of a better-than-expected rice harvest season. With inflation still below the
target ranges of the central banks in Indonesia, the Philippines and Thailand, policy rates
have remained unchanged.
Political tensions have intensified in Thailand. After four weeks of antigovernment
protests in Bangkok, the government declared a state of emergency, and violent clashes
between protesters and troops erupted in early April, leading to a declaration of a state of
emergency by the government. Protesters claim that Prime Minister Abhisit Vejjajiva was
not democratically elected (he was appointed by the parliament in 2008) and are
demanding new elections.

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In Mexico, indicators suggest that economic activity continued to expand in the first
quarter, albeit at a slower pace than in the fourth quarter, when activity was boosted by
the reversal of the effects of H1N1. Industrial production growth has slowed, after a
rapid expansion in the fourth quarter. The PMIs for both the manufacturing and service
sectors moved higher in March, and exports continued to gain strength in January and
February. Domestic demand has been boosted by falling unemployment, and the trade
balance turned to a deficit in the first quarter as imports rose more than exports.
Headline consumer price inflation on a 12-month basis remained elevated at about
5 percent in March, still above the Bank of Mexico's (BOM) target range of 2 percent to
4 percent. In addition to the effects of hikes in taxes and administered prices, a surge in
prices of fruits and vegetables and an increase in air fares and vacation packages related
to the Easter holiday period appear to have contributed to inflation remaining relatively
high. In early April, the Foreign Exchange Commission—formed by the Ministry of
Finance and BOM—announced the suspension of its daily dollar auctions, which were
established in October 2008 to provide dollar liquidity to financial institutions. The
BOM had sold nearly $8.4 billion through this mechanism.

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In Brazil, data releases since the March Greenbook indicate that growth remained robust
in the first quarter. In February, industrial production climbed further and retail sales
continued to be strong. The March manufacturing PMI remained in expansion territory.
In the first quarter, exports were boosted by higher commodity prices, but the trade
surplus narrowed further, as import growth surged. Strong aggregate demand has
strained capacity in several areas, fueling inflationary pressures. Headline inflation has
climbed in recent months and came in at 5.2 percent on a 12-month basis in March, up
from 4.3 percent in December. Finance Minister Mantega has suggested reducing tariffs
to “combat abusive price increases.”
In March, the central bank voted 5 to 3 to maintain its policy rate at 8.75 percent, with
three governors preferring an increase of 50 basis points, which the market now expects
at the late April meeting. Central Bank President Henrique Meirelles announced that he
will not run for office in the October elections, but he suggested that he may leave his
central bank position early.

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Last page of International Developments

Abbreviations–Part 2

Abbreviations—Part 2
ABCP

asset-backed commercial paper

ABS

asset-backed securities

ARRA

American Recovery and Reinvestment Act

ASEAN-4

Association of Southeast Asian Nations (Indonesia, Malaysia,
the Philippines, and Thailand)

BEA

Bureau of Economic Analysis, Department of Commerce

BLS

Bureau of Labor Statistics, Department of Labor

BOE

Bank of England

BOM

Bank of Mexico

certificate of deposit

CDS

credit default swap

C&I

commercial and industrial

CMBS

commercial mortgage-backed securities

CRE

commercial real estate

ECB

European Central Bank

EMBI

emerging markets bond index

European Union

FAS

Financial Accounting Standards

FASB

Financial Accounting Standards Board

FHA

Federal Housing Administration, Department of Housing and Urban
Development

FOMC

Federal Open Market Committee; also, the Committee

FRBNY

Federal Reserve Bank of New York

GDP

gross domestic product

IMF

International Monetary Fund

industrial production

ISM

Institute for Supply Management

JOLTS

Job Openings and Labor Turnover Survey

MBS

mortgage-backed securities
V-1

V-2

NFIB

National Federation of Independent Business

NIEs

newly industrialized economies (Hong Kong, Singapore, South Korea,
and Taiwan)

PCE

personal consumption expenditures

PMI

purchasing managers index

PPI

producer price index

RBI

Reserve Bank of India

repurchase agreement

SEC

Securities and Exchange Commission

SLOOS

Senior Loan Officer Opinion Survey on Bank Lending Practices

TALF

Term Asset-Backed Securities Loan Facility

TARP

Troubled Asset Relief Program

TIC

Treasury International Capital

TIPS

Treasury inflation-protected securities

unemployment insurance

WTI

West Texas Intermediate

Last page of Part 2

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, April 27-28, 2010 : Greenbook Part 2

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