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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 04/01/2015. Class II FOMC - Restricted (FR) Part 1 April 22, 2009 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Summary and Outlook Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Class II FOMC - Restricted (FR) April 22, 2009 Summary and Outlook Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Class II FOMC—Restricted (FR) Domestic Developments The hints of stabilization in the incoming spending data as well as some favorable financial developments since the time of the March Greenbook offer some support to our view that the rate of decline in real GDP is slowing, although the evidence on this issue is by no means decisive. Consumer spending appears to have leveled off, and there are tentative signs that the steep decline in housing activity may be abating. At the same time, labor markets and industrial production have continued to deteriorate sharply. Such crosscurrents highlight the uncertainty attending the near-term projection. Nonetheless, we anticipate that final demand will fall less rapidly this quarter and that real GDP will decline at an annual rate of 1½ percent, much less than the 6¼ percent decline that we estimate occurred in the first quarter. Many of the key determinants of the longer-run outlook for economic activity have evolved more favorably than we had expected in the March Greenbook. Most importantly, conditions in financial markets have improved more than we had assumed: Private borrowing rates have moved lower, in part because of the FOMC’s decision to undertake additional large-scale asset purchases; stock prices have moved higher; and the measures of financial stress that we monitor have improved more than had been anticipated in the March Greenbook forecast. In addition, the foreign exchange value of the dollar has declined. Higher oil prices provide a partial offset to these positive developments. In light of these less restrictive conditions, we now expect the decline in real activity to end sooner and the recovery to be somewhat less anemic than we had assumed in the March Greenbook. Even so, unusually tight credit conditions and the adjustment of consumer and business spending to the large decline in asset prices over the past year are expected to continue to weigh heavily on activity over the medium term. We expect real GDP to edge up at an annual rate of only ¾ percent in the second half of this year before rising 2½ percent in 2010; both figures are about 1 percentage point higher than our projection in the March Greenbook. Given the still tepid recovery, we expect the unemployment rate to continue to rise further and average 9¼ percent in the second half of the year. As real output is anticipated to expand slightly faster than potential next year, the unemployment rate is projected to move gradually lower, ending the year at about 9 percent, nearly ½ percentage point below our assumption in the March Greenbook. _____________________________ Note: A list of abbreviations is available at the end of Part 1: Summary and Outlook. I-1 I-2 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 Recent data on core consumer prices have come in a bit higher than we had anticipated in the March Greenbook, and we have marked up our near-term estimate of core PCE inflation in response. Beyond the near term, we still expect the low level of resource utilization over the projection period, reduced cost pressures from oil and other commodity prices, and a gradual decline in inflation expectations to lead to a deceleration in core PCE prices. These prices are projected to increase 1¼ percent this year and ¾ percent in 2010. Both figures are ¼ percentage point higher than our projection in the March Greenbook, reflecting the higher incoming data on price inflation and the current forecast’s assumption of tighter resource utilization, a weaker dollar, and higher oil prices. Key Background Factors As in the March Greenbook, we assume that the FOMC will hold the target federal funds rate in the current range of 0 to ¼ percent over the next several years. In contrast to the staff’s assumed trajectory, the path of the federal funds rate that is implied by futures quotes slopes upward beginning late this year (although the amount and timing of tightening expected by market participants is difficult to gauge because term premiums in these markets could well be higher than usual). Regarding nontraditional policy, we assume the Federal Reserve will purchase $1.25 trillion of agency mortgage-backed securities (MBS), $200 billion of agency debt, and $300 billion of Treasury securities. (In the March Greenbook, we assumed that the Federal Reserve would buy only the $600 billion in combined agency debt and MBS that had already been announced.) We have not assumed any further nontraditional policy actions beyond those already announced, and we are assuming that the Federal Reserve will allow its holdings of longterm assets to begin passively running off in 2010. (For further discussion, see the box entitled “Large-Scale Asset Purchases and the Economic Outlook.”) Longer-term Treasury yields have decreased about 15 basis points, on net, since the time of the March Greenbook. These yields dropped on the FOMC’s announcement of its plans to expand the scale and scope of the Federal Reserve’s asset purchase program but moved up subsequently on a perceived improvement in the economic outlook and a reduction in safe-haven demands. As in the March forecast, we assume that the 10-year rate will edge higher over the forecast horizon, as the 10-year window for the Treasury rate moves through the period of very low short-term rates that are anticipated for the next few years. As noted above, we had conditioned the March Greenbook projection on an assumption that the FOMC, in contrast to market expectations, would not announce a further expansion of its planned purchases of long-term assets, and that the market’s Domestic Developments Class II FOMC—Restricted (FR) I-3 Large-Scale Asset Purchases and the Economic Outlook The Federal Reserve has announced plans to purchase $1.75 trillion in long-term Treasury securities, agency debt, and agency MBS by the end of this year. As indicated by the black line in the chart at the bottom left, we have incorporated no additional purchases into the baseline outlook. In addition, we have assumed that the FOMC will let these assets run off gradually as the securities mature and as home mortgages in MBS pools are refinanced. Under this assumption, at the end of 2013 the Federal Reserve holds $625 billion more in long-term assets than it otherwise would; the runoff is completed by 2015. As illustrated in the chart to the bottom right, we judge that these purchases will help to reduce unemployment modestly over the next several years. As discussed in a recent memo to the FOMC, designing an “optimal” large-scale asset purchase (LSAP) program is complex, in part because of uncertainty about the costs associated with buying and selling these assets.* The costs may include such things as disruptions to market functioning, exposure of the Federal Reserve to large capital losses, and impaired management of our balance sheet. Designing an LSAP program is also complicated by uncertainty about its effects on interest rates, real activity, and inflation. As a consequence, we suggest that these simulations be taken with an even largerthan-usual grain of salt and with the reminder that the alternatives are “optimal” only within the very narrow terms of this exercise. That said, the optimal-control exercises suggest that a path similar to the baseline assumption would be appropriate if policymakers judge the costs of buying and selling these assets as fairly high (the green lines). However, if policymakers judge the costs of an LSAP program as less substantial, then an expansion of the current program might be desirable (the red lines). Holdings of Long-Term Treasury and Agency Securities+ 5,000 $ billions Effect of LSAP Programs on the Unemployment Rate++ 0.2 Percentage point 0.0 4,000 -0.2 -0.4 3,000 -0.6 2,000 -0.8 -1.0 1,000 Greenbook baseline Optimal path (lower cost) Optimal path (higher cost) Greenbook baseline Optimal path (lower cost) Optimal path (higher cost) -1.2 0 -1.4 2008 2009 2010 2011 + Net of usual Federal Reserve holdings 2012 2013 2008 2009 2010 2011 2012 2013 ++ Reported as changes from a path with no LSAP program _______________ *Eileen Mauskopf and Jae Sim, “Optimal Paths for Large-Scale Asset Purchases,” FOMC memo (April 20, 2009). I-4 Class II FOMC − Restricted (FR) Key Background Factors Underlying the Baseline Staff Projection Federal Funds Rate Long-Term Interest Rates Percent Percent 8 Quarterly average 10 Quarterly average 7 Current Greenbook March Greenbook Market forecast 9 BBB corporate rate 6 8 5 7 4 6 Conforming mortgage rate 3 5 10-year Treasury rate 2 4 1 2005 2006 2007 2008 2009 2010 0 Equity Prices 3 2005 2006 2007 2008 2009 2010 2 House Prices 2005:Q1 = 100, ratio scale 2005:Q1 = 100, ratio scale 150 140 130 120 Quarter-end 110 Dow Jones Total Stock Market Index 120 Quarterly 110 LoanPerformance index 100 100 90 90 80 80 70 70 60 2005 2006 2007 2008 2009 2010 50 2005 2006 2007 2008 2009 2010 60 Note: The projection period begins in 2009:Q1. Crude Oil Prices Broad Real Dollar Dollars per barrel 2005:Q1 = 100 130 Quarterly average 110 Quarterly average 110 90 2006 2007 2008 2009 2010 95 50 2005 100 70 West Texas intermediate 105 90 30 2005 2006 2007 2008 2009 2010 Note: In each panel, shading represents the projection period, which begins in 2009:Q2, except where noted. In the upper-left panel that reports the federal funds rate, the dashed line is not apparent because the paths of the federal funds rate in the March and current Greenbooks are the same. 85 Domestic Developments Class II FOMC—Restricted (FR) I-5 eventual recognition of the FOMC’s intentions would also tend to push up long-term rates. We now assume that market expectations about asset purchases are reasonably well aligned with those of the staff, resulting in a less pronounced upward tilt to 10-year Treasury rates over the projection period. Yields on investment-grade corporate bonds have moved down, on net, about 50 basis points since the close of the March Greenbook, resulting in somewhat narrower spreads to longer-term Treasury yields. As before, we expect corporate bond spreads, which remain unusually elevated, to continue to decrease over the remainder of this year and next year. In all, the path of the BBB-rated corporate bond yield is about ½ percentage point lower than in the last Greenbook.1 The conforming fixed 30-year mortgage rate has moved down about 20 basis points since the March Greenbook to just under 5 percent, and the spread between this mortgage rate and the yield on 10-year Treasury notes has edged down, on net. We expect the mortgage rate to remain at about its current level over the medium term, as the projected rise in the 10-year Treasury rate is roughly offset by the slight downward pressure on the spread from gradually improving economic conditions. This path for the mortgage rate averages about 35 basis points lower than we assumed in March. Equity prices have increased 18 percent since the March Greenbook, and we have raised the projected path for stock prices by a similar amount throughout the forecast period. Earnings reports from some major banks were better than expected, and market participants appear to view the downside risks to the economic outlook as having diminished recently. As in prior forecasts, we assume that the equity risk premium, which remains very high by historical standards, will moderate gradually, implying that stock prices will rise at an annual rate of about 15 percent over the medium term. Regarding house prices, we assume that the LoanPerformance house price index will decrease about 12 percent this year and 3 percent next year, similar to the forecast in the March Greenbook. 1 In this Greenbook, we switched from using Moody’s series for yields on Baa-rated corporate bonds to the series constructed by Board staff for yields on BBB-rated corporate bonds that is presented elsewhere in the Greenbook and the Blucbook. The staff series is calculated from the universe of BBB-rated bonds issued by domestic firms and thus provides a better summary measure of yields at this rating level than the Moody’s series, which is based on a relatively small number of bonds. In the current forecast round, we have also begun projecting the off-the-run 10-year Treasury yield rather than the on-the-run yield. I-6 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 Our estimates of the effects of the fiscal stimulus package are unchanged from the March Greenbook. We estimate that the tax and spending initiatives contained in this legislation will add 1.1 percentage points to the change in real GDP in 2009 and 0.8 percentage point in 2010. The combination of the fiscal stimulus legislation, the costs of financial stabilization programs, and the weak economic outlook lead to large projected federal deficits in the next two years. In particular, we expect the federal deficit to be $1.6 trillion (12 percent of GDP) in fiscal 2009 and $1.5 trillion (10 percent of GDP) in fiscal 2010.2 The foreign exchange value of the dollar has declined around 3½ percent since the time of the March Greenbook, and we have revised down the path for the dollar nearly 3 percent, on average, over the medium term. We assume that the broad real dollar will edge down ¼ percent at an annual rate over the remainder of this year and then fall about 2 percent in 2010. The incoming data continue to point to a broad-based contraction in economic activity in most of the advanced and emerging foreign economies over the first half of this year. As in the United States, some indicators of economic activity show faint signs of stabilization, and we expect a gradual recovery in activity abroad to begin at the end of this year. All told, after a projected drop of 2 percent this year, real foreign GDP is anticipated to rise 2¾ percent in 2010. The spot price of West Texas intermediate (WTI) crude oil currently stands at $47 per barrel, up about $4 per barrel from the time of the March Greenbook. In accord with futures prices, we have revised up our projection of the average level of oil prices over the second half of this year by about $6 per barrel and the average level of prices over 2010 by about $8 per barrel. The upward shift in the path of oil prices since the March Greenbook likely reflects further reductions in OPEC supply and, perhaps, market participants’ views that the global economic outlook has improved somewhat. Crude prices are expected to increase as global economic activity recovers, with the price of WTI anticipated to reach $57 per barrel by the end of this year and $64 per barrel by the end of 2010. 2 Relative to our assumption in the March Greenbook, the projected deficit is somewhat lower in fiscal year 2009 and somewhat higher in fiscal year 2010. These revisions reflect our view that $250 billion of TARP funds will be dispersed in fiscal 2010, rather than fiscal 2009 as we had assumed in the last Greenbook. Domestic Developments Class II FOMC—Restricted (FR) I-7 Recent Developments and the Near-Term Outlook We estimate that real GDP dropped at an annual rate of 6¼ percent in the first quarter, as final sales fell steeply and the pace of inventory liquidation quickened. In the current quarter, with fiscal stimulus kicking in, defense spending rebounding, and motor vehicle production stepping up, we are projecting that real GDP will decline at a more moderate annual rate of 1½ percent. The severe contraction in the labor market continued into March. Private nonfarm payrolls shrank another 660,000 last month, and the unemployment rate jumped to 8.5 percent. With initial claims for unemployment insurance remaining extremely elevated in April, we expect private employment to fall 600,000 further this month. Thereafter, we anticipate some moderation in the pace of job loss, with private payrolls dropping 400,000 in May and 300,000 in June. These job cuts are projected to push the unemployment rate up to 9.1 percent by June. Industrial production has continued to fall sharply. Manufacturing production declined at an annual rate of 23 percent last quarter, and the factory utilization rate dropped to a new postwar low of 65.8 percent in March. As in the last Greenbook, we anticipate a slower pace of decline in the second quarter. After plummeting to a historically low level last Summary of the Near-Term Outlook (Percent change at annual rate except as noted) 2009:Q1 Measure Real GDP Private domestic final purchases Personal consumption expenditures Residential investment Business fixed investment Government outlays for consumption and investment 2009:Q2 March April March April Greenbook Greenbook Greenbook Greenbook -6.5 -5.3 .4 -41.2 -27.3 -6.3 -5.0 1.1 -38.2 -30.1 -2.0 -4.3 .0 -34.3 -23.4 -1.5 -4.0 -.5 -27.4 -20.8 -.2 -5.3 5.5 6.7 Contribution to growth (percentage points) Inventory investment Net exports -2.2 .1 -2.2 1.0 .5 .0 -.1 .6 I-8 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 quarter, motor vehicle production is expected to move up this quarter, a pattern of activity that contributes 2½ percentage points to the moderation in the rate of decline in real GDP between the first and second quarters. For the balance of the manufacturing sector, forward-looking indicators have improved a bit of late and suggest some slackening in the pace of production cuts in the current quarter. All told, we project manufacturing IP to decline at an annual rate of about 9 percent in the second quarter. Consumption expenditures appear, on balance, to have steadied after a sharp drop last summer and autumn. Although widespread job losses, weak consumer sentiment, and the drag from previous large declines in household wealth should continue to weigh down consumption going forward, we expect spending to be supported by the boost to household incomes from the recently enacted fiscal stimulus package. On average, real PCE is expected to edge up at an annual rate of ¼ percent over the first half of the year, the same as in the March Greenbook. The incoming data on housing activity have been somewhat firmer than we were anticipating. Sales of new single-family homes moved higher in February after several months of large declines. Single-family housing starts—after falling precipitously around the turn of the year—leveled off at an annual pace of around 360,000 units in February and March. We expect single-family starts to hold at around a 350,000 unit pace in the second quarter, an upward revision of about 70,000 units from our assumption in the March Greenbook. Because of the usual lag between starts and overall building activity, the projected flattening out of starts does not show through to residential investment until the second half of the year, and we expect real residential investment to contract at an annual rate of 27 percent this quarter after a nearly 40 percent drop in the first quarter. The broad-based decline in equipment and software (E&S) investment continued into the first quarter, with spending estimated to have fallen at an annual rate of more than 30 percent. In the current quarter, investment in transportation equipment is expected to get a boost, as fleet sales of motor vehicles reverse part of their unusually large first-quarter decline. In addition, some recent indicators of business sentiment—though still at very low levels—have improved a little. However, declining sales and rapidly shrinking backlogs of unfilled orders, along with tight credit conditions, suggest that investment outside of transportation equipment will continue to move sharply lower. All told, we project E&S spending to fall at an annual rate of nearly 14 percent in the second quarter. Domestic Developments Class II FOMC—Restricted (FR) I-9 Following a large decline in the first quarter, nonresidential investment is projected to drop at an annual rate of more than 30 percent in the second quarter, as tight financing conditions, rising vacancy rates, and falling property prices push down construction of nonresidential buildings. For drilling and mining structures, the sharp drop in energy prices over the second half of last year is expected to reduce investment further this quarter. Businesses appear to have reacted to the abrupt rise in inventory-sales ratios at the end of last year by running off inventories more rapidly in the first quarter. We estimate that total nonfarm inventories decreased at an annual rate of about $100 billion last quarter, with much of the liquidation occurring in the motor vehicle sector. With automakers planning to move production up from the exceptionally low first-quarter pace, we expect the runoff in motor vehicle inventories to diminish this quarter. However, firms outside the motor vehicle sector are anticipated to make larger cuts to stocks that continue to be elevated relative to sales. In total, the pace of liquidation this quarter is projected to be similar to that in the first quarter. In the government sector, information in the March Monthly Treasury Statement suggests that federal expenditures in the first quarter were much weaker than we had expected in the previous Greenbook; in particular, defense spending appears to have dropped back significantly. The estimated level of first-quarter defense expenditures is well below that implied by the Congressional Budget Office’s projection of spending for fiscal year 2009, suggesting that outlays for defense should increase at an above-trend rate in coming months. Accordingly, after falling at an estimated annual rate of more than 9 percent in the first quarter, real federal purchases are projected to rebound at a rate of nearly 15 percent in the second quarter. In the state and local sector, we estimate that real outlays decreased at an annual rate of 2½ percent in the first quarter—somewhat weaker than we had projected in the March Greenbook—as budgetary pressures appear to have caused larger cutbacks in spending than we had earlier anticipated. The grants included in the fiscal stimulus legislation should ease budgetary restraint somewhat, and we expect real state and local purchases to increase at an annual rate of 2 percent in the second quarter. In response to the ongoing deterioration in foreign and domestic demand, both real imports and real exports are expected to contract further in the near term. With the incoming data on real imports considerably weaker than we had anticipated at the time of the March Greenbook, we have steepened the expected decline in imports over the first I-10 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 half of the year; the drop in the level of imports is now anticipated to be considerably larger than that of exports. As a result, net exports are expected to contribute 1 percentage point to the annual rate of change in real GDP in the first quarter and about ½ percentage point in the second quarter, as compared with negligible contributions in the March Greenbook. Core consumer prices have been increasing a bit faster than we had expected at the time of the last Greenbook. In March, core PCE prices are estimated to have increased 0.2 percent for a third consecutive month; this increase follows three months in which core prices were about unchanged. The pickup in core inflation largely reflects a snapback in prices for goods that were reportedly heavily discounted at the end of last year and an increase in the federal excise tax on cigarettes.3 The nonmarket component of PCE prices has also posted larger increases after being especially soft late last year. We now estimate that core PCE prices increased at an annual rate of 1¾ percent in the first quarter and expect them to increase at a similar rate in the current quarter. These figures are up ¾ percentage point and ¼ percentage point, respectively, from the March Greenbook. Consumer energy prices have flattened out, on balance, so far this year following their sharp drops late in 2008 (which imply a large drop on a quarterly-average basis in the first quarter). After small increases early in the year, retail gasoline prices in April appear to have declined for a second month despite the upturn in the cost of crude since mid-February. With high inventories holding down margins, we expect energy prices to change relatively little in the remaining two months of the quarter before rising more noticeably over the summer. Meanwhile, food prices—responding to the downturn in agricultural commodity prices late last year—have continued to show considerable moderation. In all, we estimate that total PCE prices declined at an annual rate of 1 percent in the first quarter and will rise ¾ percent in the current quarter. The Medium-Term Outlook After falling rapidly in the first half of this year, real GDP is projected to edge higher in the second half and then increase moderately next year. The key factors driving the acceleration in activity are the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from sharp liquidation to modest 3 The rise in tobacco-product prices in response to the increase in the federal excise tax appears to have happened earlier and to have been somewhat larger than we had anticipated in the March Greenbook. Domestic Developments Class II FOMC—Restricted (FR) I-11 Projections of Real GDP (Percent change at annual rate from end of preceding period except as noted) 2009 Measure 2010 H1 H2 -3.9 -4.2 .8 -.3 2.6 1.5 -2.8 -3.4 -.6 -1.5 2.4 1.4 Personal consumption expenditures Previous Greenbook .3 .2 .8 .6 2.7 1.9 Residential investment Previous Greenbook -33.0 -37.9 -.9 -9.5 11.0 6.7 Business fixed investment Previous Greenbook -25.6 -25.4 -15.5 -19.7 3.4 -.9 Government purchases Previous Greenbook .5 2.6 4.9 4.3 1.9 1.8 Exports Previous Greenbook -18.6 -15.1 -.7 -2.3 2.3 1.0 Imports Previous Greenbook -20.1 -12.5 4.1 3.2 5.1 3.8 Real GDP Previous Greenbook Final sales Previous Greenbook Inventory change Previous Greenbook Net exports Previous Greenbook Contribution to growth (percentage points) -1.1 1.4 -.8 1.2 .9 .1 -.6 -.7 .3 .1 -.5 -.4 accumulation, and a gradual repair of financial markets. Relative to the last Greenbook, lower borrowing rates and higher equity prices boost our forecast through the usual channels. Moreover, given that measures of financial market stress appear to have eased somewhat more than we had assumed, we have also reduced our judgmental estimate of the restraint on spending from financial channels that are outside those that are routinely captured by our models. (See the box entitled “Judgmental Effects of Financial Market Turmoil in the Staff Projection” for more details.) I-12 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 Judgmental Effects of Financial Market Turmoil in the Staff Projection As discussed last fall in the September and October Greenbooks, our standard models probably do not capture all the effects of financial turmoil on real activity, such as those associated with tighter lending standards and other factors that influence spending outside of conventional cost-of-capital and wealth channels. For this reason, we continue to use supplementary analyses to inform our judgmental estimates of these effects. As before, we use two types of financial data to quantify the extent of financial turmoil: indicators of capital market stress derived from risk spreads and volatility measures, and indicators of bank lending conditions from the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). We then gauge the implications of this stress for the economic outlook using two empirical methods: one that exploits the historical correlation between stress and errors in FRB/US spending equations to project the path of these errors forward, and another that incorporates indicators of stress within small-scale VAR models. As shown in the chart and table below, measures of stress have improved somewhat since last fall, especially in recent weeks. Accordingly, our various econometric estimates of the fallout from financial turmoil—shown in the table on the facing page—are now smaller than they were in March. In particular, estimated effects on the level of real GDP have revised up ½ percent in 2009 and about ¾ percent in 2010, averaging across all the models. In updating the staff projection in response to the recent easing in financial stress, we have had to wrestle with several issues. First, each estimate reported in the table has its own merits and drawbacks, and all are subject to considerable coefficient and model uncertainty. Second, each of the approaches poses significant identification challenges that have been exacerbated as the economy has experienced other contractionary shocks. Third, the estimates are sensitive to the projected speed at which financial stress fades away over time. Finally, the econometric Recent Movements in Measures of Financial Turmoil SLOOS index October 2008 survey January 2009 survey April 2009 survey Financial stress index October 2008 average March 2009 average Early April 2009 average 87.0 76.0 51.9 124.0 124.2 119.1 Domestic Developments Class II FOMC—Restricted (FR) I-13 estimates do not fully account for the likely ameliorative effects of the various traditional and nontraditional policy actions taken in recent months by the Federal Reserve and the federal government to mitigate the effects of the current crisis. After weighing these considerations, we have marked up the forecast from the last Greenbook to account for the diminished financial stress by an amount towards the low end of the range suggested by the model results. As shown in the bottom portion of the table, our judgmental adjustments (which include the effects of recession dynamics as well as financial turmoil) now cut about 5 percent off the level of real GDP by the end of this year and 3½ percent by the end of 2010, over and above the restraint imposed by traditional cost-of-capital and wealth effects. As can be seen, these effects are somewhat smaller than what we assumed in March. Beyond 2010, we expect the unusual restraint from financial turmoil and recession dynamics to continue to abate as financial institutions repair their balance sheets, credit availability improves further, and households and firms become more confident about the permanence of the economic recovery. Selected Econometric Estimates of the Effects of Financial Turmoil on Real GDP Percent deviation from Q4 baseline level Date of Estimate and Data Source Methodology 2007 2008 2009 2010 Senior Loan Officer Opinion Survey Index of survey responses Commercial loan credit standards Change in bank credit standards3 FRB/US1 VAR2 VAR2 -.4 -.1 -.1 -2.9 -2.8 -1.2 -1.8 -4.4 -2.3 -0.1 -3.1 -1.5 Capital markets data 9-variable stress index 9-variable stress index 9-variable stress index FRB/US2 FRB/US1 VAR2 -.1 -.4 .0 -1.1 -1.7 -.1 -2.0 -4.6 -1.6 -1.3 -4.5 -2.6 .5 (.1, .9) .8 (.1, 1.5) -5.2 -5.4 .2 -3.5 -4.0 .5 Revision in estimates since March Greenbook Average Range Memo item: Staff judgmental projection adjustments4 April Greenbook March Greenbook Revision 1. 2. 3. 4. -.3 -.3 .0 -3.5 -3.5 .0 Stress treated as exogenous and phased out over four quarters. Stress treated as endogenous and simulated as part of a system of equations. Series shown as the dashed line in the chart; includes both business and consumer lending standards. Includes the effects of financial stress and adjustments for recession dynamics. I-14 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 Household sector. We expect real PCE to accelerate over the projection period, as fiscal stimulus bolsters household incomes, uncertainty about job and income prospects lessens, and the terms and availability of consumer credit begin to ease. Even so, the large net reduction in wealth over the past year and still tight markets for consumer finance should restrain household consumption over the projection period and cause the saving rate to remain well above its level in recent years. Our projection calls for real PCE to increase at an annual rate of ¾ percent in the second half of this year and 2¾ percent in 2010. The saving rate is projected to average about 5 percent this year and in 2010. Residential investment. The incoming data suggest that housing activity stabilizes sooner, and at a somewhat higher level, than we had projected in the March Greenbook. However, the general contour of residential investment, and the forces shaping it, remain largely the same. Lower mortgage rates, a temporary tax credit for first-time homebuyers, and large reductions in home prices are making housing increasingly affordable. And as uncertainties over job and income prospects abate and the expected rate of decline in house prices lessens, potential homebuyers should become increasingly willing to enter the housing market. Accordingly, we anticipate that housing demand will turn up over the second half of this year. Even the very modest recovery in sales that we are anticipating results in a downturn in the months’ supply of new homes for sale in the second half of this year, leading to an increase in construction activity next year. After a projected decline of nearly 20 percent this year, residential investment is expected to rise 11 percent in 2010. Business investment. We expect real business outlays for E&S to fall a little over 10 percent at an annual rate in the second half of this year, as firms continue to adjust investment spending downward in response to declining sales, considerable uncertainty about the economic outlook, tight credit conditions, and very low rates of capital utilization. In response to the resumption of the expansion in business sales and some improvement in financial conditions, real E&S expenditures are anticipated to turn around next year and rise 10 percent. The downturn in spending for nonresidential structures is expected to be more protracted, as the substantial planning and implementation lags in this sector cause outlays to trail aggregate economic activity. As a result, we expect construction of nonresidential buildings to continue falling through next year. Because the expected increase in oil prices over the medium term reverses only a small part of the dramatic drop in prices in the second half of last year, we anticipate that investment in drilling and mining structures will remain subdued in 2010, Domestic Developments Class II FOMC—Restricted (FR) I-15 after falling sharply this year. All told, real expenditures for nonresidential structures are projected to fall about 26 percent this year and 9 percent in 2010. We expect the pace of inventory reductions to slow over the second half of 2009, as the large runoff in stocks in the first half of this year leads to a better alignment of inventories to final sales. The projected slowing in the pace of inventory liquidation contributes importantly to the bottoming out and the small upturn in real GDP that occurs over the second half of this year. Firms are expected to begin accumulating inventories in 2010, providing a small boost to real GDP growth. Government spending. We continue to assume that the grants provided in the fiscal stimulus package will allow state and local governments to raise spending at a moderate pace over the medium term despite weak revenues. Our projection calls for state and local spending to increase at an average annual rate of roughly 2 percent in the second half of this year and in 2010. At the federal level, we expect the rate of increase in real purchases to slow markedly, from 8¼ percent in 2008 to 5½ percent in 2009 and 2 percent in 2010, led by a deceleration in defense purchases. Net exports. After collapsing in the fourth and first quarters, real exports are projected to stabilize by the end of this year and then rise modestly in 2010—a trajectory largely shaped by the expected evolution of foreign demand. Real imports follow a similar contour in response to the pattern of domestic activity, although both the decline in the level of imports this year and the expected rise next year are more pronounced than the projected movements in exports. As a result, net exports contribute ¼ percentage point to the change in real GDP this year and subtract about ½ percentage point in 2010. (The International Developments section provides more detail on the outlook for the external sector.) Aggregate Supply, the Labor Market, and Inflation In this forecast, we have made no revisions to our estimates of structural productivity and potential output growth. We assume that structural productivity will increase 1½ percent in 2009 and 2010 and that potential GDP will rise 2 percent in both years. By the end of next year, the projected level of output is below potential by 6½ percent; in the March Greenbook, the projected shortfall was 8¼ percent. Productivity and the labor market. Productivity moved lower in the fourth and first quarters, as firms’ workforce adjustments lagged the rapid deterioration in demand. I-16 Part 1: Summary and Outlook, April 22, 2009 Class II FOMC—Restricted (FR) Decomposition of Structural Labor Productivity Nonfarm Business Sector (Percent change, Q4 to Q4, except as noted) 1974- 1996- 200195 2000 06 Measure Structural labor productivity Previous Greenbook Contributions1 Capital deepening Previous Greenbook Multifactor productivity Previous Greenbook Labor composition MEMO Potential GDP Previous Greenbook 2007 2008 2009 2010 1.5 1.5 2.5 2.5 2.6 2.6 2.1 2.1 1.9 1.9 1.6 1.6 1.6 1.5 .7 .7 .5 .5 .3 1.4 1.4 .7 .7 .3 .7 .7 1.6 1.6 .3 .6 .6 1.2 1.2 .2 .4 .4 1.3 1.3 .2 -.3 -.3 1.6 1.7 .2 -.2 -.3 1.6 1.7 .1 3.0 3.0 3.4 3.4 2.6 2.6 2.5 2.5 2.5 2.5 2.0 2.0 2.0 2.0 Note: Components may not sum to totals because of rounding. For multiyear periods, the percent change is the annual average from Q4 of the year preceding the first year shown to Q4 of the last year shown. 1. Percentage points. The Outlook for the Labor Market (Percent change, Q4 to Q4, except as noted) Measure Output per hour, nonfarm business Previous Greenbook Nonfarm private payroll employment Previous Greenbook Household survey employment Previous Greenbook Labor force participation rate1 Previous Greenbook Civilian unemployment rate1 Previous Greenbook MEMO GDP gap2 Previous Greenbook 2007 2008 2009 2010 2.6 2.6 .8 .8 .4 .4 66.0 66.0 4.8 4.8 2.2 2.1 -2.1 -2.1 -1.5 -1.5 65.9 65.9 6.9 6.9 1.3 .9 -3.7 -3.8 -2.7 -2.6 65.3 65.3 9.3 9.2 2.1 2.0 1.2 -.1 1.0 .4 65.1 65.1 9.1 9.5 -.4 -.4 -3.6 -3.7 -7.0 -7.7 -6.4 -8.2 1. Percent, average for the fourth quarter. 2. Actual less potential GDP in the fourth quarter of the year indicated as a percent of potential GDP. A negative number thus indicates that the economy is operating below potential. Domestic Developments Class II FOMC—Restricted (FR) I-17 We expect aggressive job cutting this quarter to bring labor input back in accord with firms’ reduced production levels and result in a significant increase in productivity. Over the remainder of the medium term, productivity is expected to increase at roughly its structural rate, with firms adjusting their workforces in line with the expected gradual increase in aggregate demand. As a result, the stabilization of real GDP in the second half of this year produces a marked slowing in the pace of employment losses, and next year’s increase in economic activity leads firms to begin hiring again. Specifically, after a sizable decline in the second quarter, private payroll employment is expected to fall only 40,000 per month in the second half of the year and then rise about 100,000 per month in 2010. Reflecting the brighter economic outlook, employment changes beyond the near term are higher, on average, than we had written down in the March Greenbook and are sufficient next year to begin to reduce the unemployment rate. Wages and prices. Given the stronger outlook for economic activity, the higher path for oil prices, and the weaker dollar, we are projecting somewhat less deceleration in core consumer prices than in the March Greenbook. Nevertheless, low levels of resource utilization, reduced cost pressures from earlier declines in the prices of oil and other key commodities, and a gradual decline in inflation expectations are expected to push core PCE inflation appreciably lower over the projection period. The projected decline in inflation over the forecast period is limited by our judgment that inflation expectations will respond only slowly to these disinflationary forces. In addition, we believe that the large-scale disruption to existing employment relationships that result from this recession’s very high rates of permanent job loss will raise the level of frictional unemployment (and thus the “effective NAIRU”) for a time. In all, we expect core inflation to slow from 1.9 percent in 2008 to 1.2 percent in 2009 and 0.7 percent in 2010. Reflecting falling energy prices, headline PCE prices are projected to rise ¾ percent in 2009—somewhat slower than core prices. In 2010, energy prices turn back up, and the projected 1 percent increase in total PCE prices is a bit above the increase in core prices. As in the March Greenbook, we expect falling price inflation and weak labor markets to combine to slow the rise in labor compensation over the medium term, although we have attenuated the projected decline in wage inflation to account for our previously noted assumption of an increase in the level of frictional unemployment. We project that compensation per hour in the nonfarm business sector will rise 2¼ percent in 2009 and 1¼ percent in 2010. Similarly, the change in the employment cost index is projected to slow from 1¾ percent in 2009 to 1¼ percent in 2010. I-18 Part 1: Summary and Outlook, April 22, 2009 Class II FOMC—Restricted (FR) Inflation Projections (Percent change, Q4 to Q4, except as noted) Measure 2007 2008 2009 2010 3.5 3.5 1.9 1.9 .7 .4 1.0 .8 Food and beverages Previous Greenbook 4.5 4.5 6.3 6.3 1.7 1.9 1.2 1.2 Energy Previous Greenbook 19.1 19.1 -8.5 -8.6 -8.9 -11.3 6.1 4.5 2.2 2.2 1.9 1.9 1.2 1.0 .7 .5 4.0 4.0 1.5 1.5 .4 .3 1.3 1.1 Excluding food and energy Previous Greenbook 2.3 2.3 2.0 2.0 1.3 1.3 .9 .7 GDP chain-weighted price index Previous Greenbook 2.6 2.6 2.0 2.0 1.6 1.6 .9 .8 ECI for compensation of private industry workers1 Previous Greenbook 3.0 3.0 2.4 2.4 1.8 1.8 1.3 1.1 Compensation per hour, nonfarm business sector Previous Greenbook 3.6 3.6 4.1 4.1 2.3 2.2 1.3 1.1 Prices of core goods imports2 Previous Greenbook 3.4 3.4 3.5 3.6 -3.3 -4.2 1.1 1.1 PCE chain-weighted price index Previous Greenbook Excluding food and energy Previous Greenbook Consumer price index Previous Greenbook 1. December to December. 2. Core goods imports exclude computers, semiconductors, oil, and natural gas. The Long-Term Outlook We have extended the staff forecast to 2013 using the FRB/US model, which was adjusted to incorporate staff assessments of long-run potential output growth, fiscal policy, and foreign economic conditions. The contour of the long-run outlook depends on the following key assumptions: • Monetary policy aims to stabilize PCE inflation at 2 percent in the long run, consistent with the longer-term inflation projections provided by FOMC participants in January. We have made no provision for further nontraditional policy actions in the construction of this extension beyond those that have already been announced. Domestic Developments Class II FOMC—Restricted (FR) I-19 The Long-Term Outlook (Percent change, Q4 to Q4, except as noted) Measure 2008 2009 2010 2011 2012 2013 Real GDP Civilian unemployment rate1 -0.8 6.9 -1.6 9.3 2.6 9.1 4.8 7.7 5.4 5.9 5.2 4.7 PCE prices, total Core PCE prices 1.9 1.9 0.7 1.2 1.0 0.7 0.8 0.7 0.9 0.8 1.1 1.1 Federal funds rate1 0.5 0.1 0.1 0.1 0.1 2.0 1. Percent, average for the final quarter of the period. • • • • • • Federal Reserve holdings of long-term Treasury securities, agency debt, and agency MBS are allowed to run off gradually as the securities mature and mortgages in MBS pools are refinanced. This strategy causes term premiums on Treasury bonds to gradually move back up to their historical averages after 2010. Risk premiums on corporate bonds, mortgages, and corporate equity continue to fall back toward historically more normal levels beyond 2010. The fiscal stimulus package continues to boost government spending beyond 2010, reflecting the staff’s assumptions about the rate at which state and local governments respond to increased grants. However, the level of government spending from this source gradually fades and is small by 2013. Government budget deficits narrow after 2010. This improvement mostly reflects the effects of the economic recovery on tax receipts and transfer payments. Beyond 2010, foreign real GDP expands 5 percent per year, on average, as the economic recovery picks up speed abroad. The dollar is assumed to depreciate about 2¾ percent per year in real terms. Nominal WTI crude oil prices rise gradually from recent levels to a bit more than $70 per barrel by the end of 2013, consistent with futures prices. Under these assumptions, movements in prices of energy and imports have only minor implications for domestic inflation. The NAIRU remains flat at 4¾ percent, and potential GDP expands 2½ percent per year, on average, over the 2011-13 period. The unemployment rate enters 2011 at a very high level, and inflation is well below the assumed long-run target. Under the assumptions used to construct the baseline extension, the federal funds rate remains at the effective lower bound through 2012. The lingering effects of financial upheaval continue to fade after 2010, and the recovery in residential construction gains momentum; coupled with stimulative monetary policy, these factors I-20 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 propel real GDP to increases of about 5 percent per year, on average, from 2011 through 2013. With actual output increasing faster than its potential rate by a wide margin, the unemployment rate declines steadily over this period and reaches the NAIRU in 2013. Core PCE inflation moves up modestly after 2011 as economic activity recovers and long-run inflation expectations are assumed to remain relatively well anchored. Financial Flows and Conditions We expect domestic nonfinancial debt to rise 4¼ percent in the current quarter after increasing by a similar amount in the first quarter. We forecast that the level of nonfederal debt will decrease in the second quarter as households pay down debt, on net, and as borrowing by nonfinancial businesses remains weak. We project that borrowing by households and nonfinancial businesses will remain extremely light by historical standards through 2010, but that federal debt will continue to expand at a rapid pace over this period. We estimate that household debt contracted at an annual rate of about 2¼ percent last quarter and expect a 1¾ percent rate of decline this quarter. Mortgage borrowing and consumer credit have been sharply curtailed in response to falling home prices, very weak household spending, and tight terms and standards for bank loans. With these conditions expected to persist for some time, we expect household debt to contract in 2009 as a whole and to rise only slightly in 2010. Nonfinancial business debt is expected to be about flat this quarter, after having expanded at an annual rate of 2¼ percent last quarter. The projected slowdown in borrowing reflects in large part a drop in net bond issuance, which surged last quarter as a number of investment-grade firms chose to lock in longer-term financing and pay down some bank loans and commercial paper. Although we expect the pace of business borrowing to pick up somewhat in the third quarter, it is anticipated to remain sluggish through the end of the forecast period, reflecting weak investment spending, borrowing costs that remain relatively high, and tight terms and standards for bank loans. Federal government debt is expected to climb 24 percent in 2009 and 16 percent in 2010 because of cyclical shortfalls in tax receipts, the large fiscal stimulus package, and outlays by the Treasury associated with the GSEs and the TARP. State and local government debt increased at an annual rate of 4½ percent in the first quarter as retirements decreased and strains in the municipal bond market eased somewhat. We project that state and local government borrowing will moderate this quarter and stay Domestic Developments Class II FOMC—Restricted (FR) I-21 sluggish for the remainder of 2009 and in 2010, reflecting subdued capital spending and a weak fiscal outlook for this sector. M2 expanded at an average annual rate of about 13 percent during the first quarter of 2009, about the same as in the fourth quarter of last year. M2 is expected to decelerate over the rest of this year, although the 3½ percent increase for the year as a whole is sizable given the lack of growth in nominal GDP. In 2010, M2 is forecast to increase less rapidly than nominal GDP, as demand for the safety of M2 assets abates as a result of improvements in economic and financial market conditions. Alternative Scenarios In this section, we illustrate risks to the staff forecast using simulations of the FRB/US model. In the first scenario, the recent easing in financial conditions and scattered signs of stabilization in demand turn out to be short-lived, and both financial stress and the economic downturn intensify rather than abate. By contrast, the second scenario considers the consequences of a rapid recovery beginning later this year that is more typical of the postwar experience. The third scenario considers the possibility that this recession will have persistent adverse effects on labor market efficiency. The final two scenarios examine opposing inflation risks—that long-run inflation expectations will remain more solidly anchored than we anticipate, or, alternatively, that we have underestimated deflationary forces. In each of these scenarios, we assume that the federal funds rate follows the prescriptions of a version of the Taylor rule, subject to an effective lower bound of 12½ basis points.4 Furthermore, these simulations extend the baseline assumption of a passive runoff of the assets acquired in the course of this year’s large-scale asset purchase program. False dawn. With employment and production continuing to contract and the financial system remaining quite fragile, the hopeful signs provided by some recent financial and spending indicators could reverse themselves quickly. In this scenario, such a reversal comes to pass. The stock market falls 25 percent below baseline by midyear. Corporate bond yields and mortgage rates increase 50 basis points over the next several months and banks tighten lending terms and standards sharply. Consumer confidence and business sentiment falter rather than gradually improve as in the baseline. In response, household and business spending continues to contract markedly through the end of the year. The rule is it = ρt + πt + 0.5(πt – π*) + 1.0yt , where it is the nominal funds rate, ρt is a weighted moving average of past values of the real federal funds rate, πt is the four-quarter rate of core PCE inflation, π* is the inflation target (assumed to equal 2 percent), and yt is the output gap. 4 I-22 Part 1: Summary and Outlook, April 22, 2009 Class II FOMC—Restricted (FR) Alternative Scenarios (Percent change, annual rate, from end of preceding period except as noted) 2009 Measure and scenario 2010 2011 201213 H1 H2 Real GDP Extended Greenbook baseline False dawn Typical recovery Labor market damage Anchored inflation expectations Deflation -3.9 -5.8 -3.9 -3.9 -3.9 -3.9 .8 -3.5 6.2 .1 .8 .8 2.6 1.5 3.6 2.2 2.7 2.5 4.8 4.6 4.6 4.8 5.0 4.6 5.3 5.3 4.2 5.0 5.4 4.9 Unemployment rate1 Extended Greenbook baseline False dawn Typical recovery Labor market damage Anchored inflation expectations Deflation 9.0 9.2 9.0 9.2 9.0 9.0 9.3 10.1 8.7 9.9 9.3 9.3 9.1 10.5 7.9 9.9 9.1 9.1 7.7 9.1 6.6 8.5 7.6 7.8 4.7 5.7 4.5 5.8 4.5 5.0 Core PCE inflation Extended Greenbook baseline False dawn Typical recovery Labor market damage Anchored inflation expectations Deflation 1.7 1.7 1.7 1.8 1.7 1.1 .8 .7 .8 .8 .9 -.4 .7 .4 .9 .7 .9 -.4 .7 .4 .9 .8 1.1 -.6 .9 .5 1.1 1.0 1.4 -.3 Federal funds rate1 Extended Greenbook baseline False dawn Typical recovery Labor market damage Anchored inflation expectations Deflation .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 2.0 .1 2.2 2.0 3.0 .2 1. Percent, average for the final quarter of the period. Economic activity abroad also falters, depressing demand for U.S. exports. Buffeted by these shocks, real GDP contracts at an annual rate of 5¾ percent in the first half of this year and 3½ percent in the second half. In 2010, the economic recovery begins, but at a pace noticeably below its potential. The unemployment rate peaks at 10½ percent next year, and core PCE inflation edges below ½ percent. Beyond 2010, the recovery Domestic Developments Class II FOMC—Restricted (FR) I-23 becomes more firmly established as financial stress gradually abates, credit availability improves, and households and firms become more optimistic about future prospects. Nonetheless, the unemployment rate is still more than 1 percentage point above the NAIRU at the end of 2013, and in response to so much persistent slack, inflation stays close to ½ percent. Weak real activity and low inflation in turn keep the federal funds rate close to zero through the end of 2013. Typical recovery. Despite the many factors that we currently anticipate will persistently weigh on economic activity, financial markets and spending indicators may continue to surprise us to the upside. In this scenario, a robust recovery in demand starts this year that returns real output to its pre-recession peak at a rate comparable to that seen in previous postwar episodes. Accompanying and supporting the stronger rebound in real activity are more-pronounced declines in risk spreads on private securities and mortgages than assumed in the Greenbook baseline; credit availability also improves more rapidly. All told, real GDP expands at an annual rate of 6¼ percent in the second half of this year and increases 3½ percent in 2010; beyond 2010, aggregate output expands at an average rate of close to 4 percent for several years. This rebound puts unemployment on a pronounced downward trajectory: The unemployment rate reaches 8 percent by the end of 2010, and then continues to move steadily down towards the NAIRU. With less slack in this scenario, inflation is a little higher than in the baseline and the federal funds rate begins moving noticeably above zero in late 2012, about one year earlier than in the baseline. Labor market damage. The unusual depth and breadth of the downturn may impair labor market efficiency, perhaps through unusually large intersectoral adjustments or the adverse effects of prolonged unemployment on workers’ skills. In this scenario, we assume that such factors have raised the NAIRU by about ½ percentage point over the past two years, to about 5¼ percent today. We further assume that the NAIRU will rise to 6 percent by the end of 2009 and then remain at this level through the middle of 2012 before starting to drift back down. Because these unfavorable supply-side developments have adverse implications for household income and corporate profits, consumption and investment are weaker than in the baseline. As a result, real GDP is roughly flat in the second half of this year and rises only 2 percent next year, and the unemployment rate climbs to 10 percent by the end of this year. Nevertheless, the declines in potential output relative to baseline are even more pronounced, and so inflationary pressures are somewhat greater than in the staff forecast. I-24 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 Anchored inflation expectations. In the baseline forecast, core inflation remains at ¾ percent through 2011 and increases only slowly thereafter, as the impetus to prices from an improving economy is roughly offset by our projection that long-term inflation expectations will slowly drift down in light of persistently low inflation and high unemployment. In this scenario, long-run inflation expectations remain near their current level of about 2 percent, which is more than ½ percentage point above the projected baseline level in 2013. Actual inflation thus proves more resistant to deteriorating economic conditions in the first few years of the scenario and turns upward earlier than in the baseline. By late this year, core inflation dips below 1 percent later this year and in 2010, and the federal funds rate remains near zero until late 2012. The implied reduction in real interest rates provides a small boost to real activity. Deflation. Although inflation falls substantially in the staff projection, we may have understated the extent to which pronounced economic weakness will force firms, domestic and foreign, to continue to reduce prices in an increasingly competitive environment. In turn, persistently lower prices might then become built into inflation expectations more quickly than we currently assume in the baseline. FRB/US and many of our other price models in fact point to a more pronounced decline in inflation than we are projecting and, in this scenario, we allow inflation to follow a path more consistent with these models. Late this year, core inflation falls to negative ½ percent and remains below zero through 2013. With the nominal federal funds rate already near zero, the greater disinflation implies higher real interest rates. At the same time, the increasing real burden of nominal debt obligations boosts corporate bond spreads. Over time, these factors work to restrain aggregate spending more than in the staff forecast, resulting in a somewhat slower recovery in real activity after 2010. Assessment of Forecast Uncertainty In response to the events of the past two years, we have reassessed our estimates of forecast uncertainty. We are no longer basing our uncertainty estimates on the relative tranquility of the “Great Moderation” conditions that have prevailed during the past 20 years or so, but instead are deriving them using information from a longer and more volatile sample period. These changes result in noticeably wider confidence intervals than those reported in recent Greenbooks.5 5 For more information, see Robert Tetlow and Peter Tulip (2009), “Changes in Macroeconomic Uncertainty,” memo to the FOMC, April 20. Domestic Developments Class II FOMC—Restricted (FR) I-25 Despite the widening in our estimates of average forecast uncertainty, we still see the risks associated with the staff outlook at this juncture as elevated relative to historical experience. The disruptions to credit market functioning and to the stability of many financial institutions have been extraordinary, and the potential for conditions either to deteriorate markedly or to improve faster than expected is considerable. These developments, combined with unprecedented policy responses, limit the applicability of the historical analyses and models used to guide our projections, and so we see the range of plausible outcomes for real GDP and unemployment as being wider than usual. In addition, we still see the risks as being skewed to the downside. We also view the price outlook as more uncertain than usual. In particular, our standard inflation forecasting tools may be of limited usefulness under the extreme conditions we project, with the economy in deep recession, monetary policy unable to provide further stimulus through conventional means, and the size of the Federal Reserve’s balance sheet expanding rapidly. For this reason, we suspect that our history-based confidence intervals probably understate the risks on both sides of our inflation forecast. We judge the risks to our price forecast as roughly balanced. I-26 Part 1: Summary and Outlook, April 22, 2009 Class II FOMC—Restricted (FR) Selected Greenbook Projections and 70 Percent Confidence Intervals Derived from Historical Greenbook Forecast Errors and FRB/US Simulations Measure Real GDP (percent change, Q4 to Q4) Projection Confidence interval Greenbook forecast errors FRB/US stochastic simulations Civilian unemployment rate (percent, Q4) Projection Confidence interval Greenbook forecast errors FRB/US stochastic simulations PCE prices, total (percent change, Q4 to Q4) Projection Confidence interval Greenbook forecast errors FRB/US stochastic simulations PCE prices excluding food and energy (percent change, Q4 to Q4) Projection Confidence interval Greenbook forecast errors FRB/US stochastic simulations Federal funds rate (percent, Q4) Projection Confidence interval FRB/US stochastic simulations 2009 2010 2011 2012 2013 -1.6 2.6 4.8 5.4 5.2 -2.8– -.3 -2.6– -.5 1.0–4.3 1.3–4.2 ... 3.3–6.5 ... 3.7–7.2 ... 3.0–6.8 9.3 9.1 7.7 5.9 4.7 8.8–9.8 8.8–9.7 8.3–9.8 8.3–9.7 ... 6.7–8.5 ... 4.8–6.8 ... 3.8–5.7 0.7 1.0 0.8 0.9 1.1 .0–1.4 .2–1.3 -.2–2.2 .2–1.9 ... -.1–1.8 ... .0–1.9 ... .2–2.0 1.2 0.7 0.7 0.8 1.1 .8–1.7 .8–1.7 -.1–1.4 .0–1.4 ... -.1–1.5 ... .0–1.7 ... .2–1.8 0.1 0.1 0.1 0.1 2.0 .1–.1 .1–.1 .1–.1 .1–2.9 .1–5.2 Notes: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969-2008 set of model equation residuals. Intervals derived from Greenbook forecast errors are based on projections made from 1979-2008, except for PCE prices excluding food and energy, where the sample is 1981-2008. . . . Not applicable. The Greenbook forecast horizon has typically extended about two years. I-27 Class II FOMC − Restricted (FR) Forecast Confidence Intervals and Alternative Scenarios Confidence Intervals Based on FRB/US Stochastic Simulations Extended Greenbook baseline False dawn Typical recovery Labor market damage Real GDP Anchored inflation expectations Deflation Unemployment Rate 4-quarter percent change Percent 9 8 9.5 6 9.0 5 8.5 4 8.0 3 7.5 2 7.0 1 6.5 0 6.0 −1 5.5 −2 5.0 −3 4.5 −4 4.0 −5 70 percent interval 10.0 7 90 percent interval 10.5 3.5 −6 2007 2008 2009 2010 2011 2012 2013 3.0 2007 2008 2009 2010 2011 2012 2013 PCE Prices excluding Food and Energy Federal Funds Rate 4-quarter percent change Percent 2.5 7 2.0 6 5 1.5 4 1.0 3 0.5 2 0.0 1 −0.5 0 −1.0 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 I-28 Class II FOMC - Restricted (FR) Evolution of the Staff Forecast Change in Real GDP Percent, Q4/Q4 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 2010 2009 2008 1/24 3/14 5/2 6/20 8/2 9/12 10/24 12/5 1/23 3/13 4/23 2007 6/18 7/30 9/10 10/22 12/10 1/22 3/12 4/22 2008 6/17 8/5 9/16 10/29 12/9 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 2009 Greenbook publication date Unemployment Rate Percent, fourth quarter 10.0 10.0 9.5 9.5 9.0 9.0 8.5 8.5 8.0 8.0 7.5 7.5 7.0 7.0 6.5 6.5 6.0 6.0 2010 5.5 4.5 1/24 3/14 5/2 6/20 5.5 2009 2008 5.0 5.0 8/2 9/12 10/24 12/5 1/23 3/13 4/23 2007 6/18 7/30 9/10 10/22 12/10 1/22 3/12 4/22 2008 6/17 8/5 9/16 10/29 12/9 4.5 2009 Greenbook publication date Change in PCE Prices excluding Food and Energy Percent, Q4/Q4 3.0 3.0 2.5 2.5 2.0 2.0 2008 2009 1.5 1.5 2010 1.0 1.0 0.5 0.5 0.0 1/24 3/14 5/2 6/20 8/2 2007 9/12 10/24 12/5 1/23 3/13 4/23 6/18 7/30 9/10 10/22 12/10 1/22 2008 Greenbook publication date 3/12 4/22 6/17 8/5 2009 9/16 10/29 12/9 0.0 3.8 -1.6 -2.2 .7 1.9 2.7 4.9 1.1 -.8 2.3 4.8 3.3 -1.5 1.5 Two-quarter2 2008:Q2 Q4 2009:Q2 Q4 2010:Q2 Q4 Four-quarter3 2007:Q4 2008:Q4 2009:Q4 2010:Q4 Annual 2007 2008 2009 2010 4.8 3.3 -1.0 2.7 4.9 1.2 .0 3.6 3.8 -1.3 -2.0 2.1 3.2 4.0 3.5 4.1 3.4 -5.8 -3.1 -1.0 1.9 2.3 2.9 3.5 3.9 4.1 4/22/09 2.0 1.1 -3.2 .6 2.3 -.9 -2.3 1.5 1.8 -3.6 -4.2 -.3 1.1 2.0 .9 2.8 -.5 -6.7 -6.5 -2.0 -.5 -.1 .7 1.4 1.9 2.1 3/12/09 2.0 1.1 -2.8 1.7 2.3 -.8 -1.6 2.6 1.8 -3.5 -3.9 .8 2.2 3.1 .9 2.8 -.5 -6.3 -6.3 -1.5 .4 1.2 1.9 2.5 3.0 3.3 4/22/09 Real GDP 2.6 3.3 -.1 .9 3.5 1.9 .4 .8 3.9 -.1 -.2 1.0 .8 .7 3.6 4.3 5.0 -5.0 -1.4 1.0 1.1 1.0 .9 .8 .7 .7 3/12/09 2.6 3.3 .1 1.2 3.5 1.9 .7 1.0 3.9 .0 -.1 1.5 1.1 .9 3.6 4.3 5.0 -4.9 -.9 .8 1.6 1.4 1.2 1.1 1.0 .8 4/22/09 PCE price index April 22, 2009 2.2 2.2 1.2 .7 2.2 1.9 1.0 .5 2.2 1.6 1.2 .8 .5 .4 2.3 2.2 2.4 .8 .9 1.4 .9 .7 .6 .5 .5 .4 3/12/09 2.2 2.2 1.5 .8 2.2 1.9 1.2 .7 2.2 1.7 1.7 .8 .7 .6 2.3 2.2 2.4 .9 1.7 1.7 .9 .7 .7 .7 .7 .6 4/22/09 4.6 5.8 8.7 9.5 .4 2.1 2.3 .3 .6 1.5 1.8 .5 .3 .0 4.9 5.4 6.0 6.9 8.0 8.7 9.0 9.2 9.4 9.5 9.5 9.5 3/12/09 4.6 5.8 8.9 9.2 .4 2.1 2.4 -.2 .6 1.5 2.1 .3 -.1 -.1 4.9 5.4 6.0 6.9 8.1 9.0 9.2 9.3 9.3 9.2 9.1 9.1 4/22/09 Core PCE price index Unemployment rate1 Changes in GDP, Prices, and Unemployment (Percent, annual rate except as noted) 1. Level, except for two-quarter and four-quarter intervals. 2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points. 3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points. 3.5 4.1 3.4 -6.3 -3.3 -1.1 .6 .8 1.6 2.2 2.6 2.8 3/12/09 Nominal GDP Quarterly 2008:Q1 Q2 Q3 Q4 2009:Q1 Q2 Q3 Q4 2010:Q1 Q2 Q3 Q4 Interval Class II FOMC Restricted (FR) I-29 Q1 -10 -10 -18 6 -51 -51 -55 2 3.9 3.9 6.6 7.3 5.0 2.5 -381 -381 12.3 -7.3 2.5 2.5 -5.0 -5.0 18.5 18.5 -13.3 -13.3 1.2 1.2 -2.8 3.9 .7 4.4 4.4 .7 .7 2.8 2.8 Q2 -.5 -.5 Q3 -30 -30 -33 2 5.8 5.8 13.8 18.0 5.1 1.3 -353 -353 3.0 -3.5 -1.7 -1.7 -7.5 -7.5 9.7 9.7 -16.0 -16.0 -3.8 -3.8 -14.8 -7.1 -.1 -1.3 -1.3 -4.1 -4.1 2008 -26 -31 -31 4 1.3 1.2 7.0 3.4 15.3 -2.0 -364 -373 -23.6 -17.5 -21.7 -21.6 -28.1 -28.1 -9.4 -9.0 -22.8 -23.4 -4.3 -4.3 -22.1 -9.4 1.5 -6.2 -6.5 -7.5 -7.5 -6.3 -6.7 Q4 -93 -101 -96 3 -5.3 -.2 -9.4 -13.8 .7 -2.6 -333 -370 -31.4 -31.1 -30.1 -27.3 -32.4 -26.6 -26.4 -28.4 -38.2 -41.2 1.1 .4 6.0 1.1 .4 -4.1 -4.3 -5.0 -5.3 -6.3 -6.5 Q1 -97 -87 -99 3 6.7 5.5 14.8 19.8 4.9 2.0 -314 -369 -3.4 -7.2 -20.8 -23.4 -13.6 -17.9 -31.6 -31.9 -27.4 -34.3 -.5 .0 -6.0 -.1 .2 -1.4 -2.5 -4.0 -4.3 -1.5 -2.0 Q2 -66 -46 -70 3 6.1 5.5 12.5 15.5 6.5 2.2 -325 -384 -1.5 1.4 -17.4 -21.7 -12.5 -17.4 -25.4 -28.8 -1.7 -13.4 .4 .0 .8 .3 .3 -.6 -1.9 -1.8 -3.0 .4 -.5 Q3 2009 -16 -16 -19 3 3.7 3.1 5.7 3.9 9.6 2.4 -351 -411 .2 6.9 -13.6 -17.8 -8.9 -13.6 -21.5 -24.9 .0 -5.5 1.2 1.2 3.9 1.1 .8 -.5 -1.2 -.5 -1.2 1.2 -.1 Q4 18 13 15 3 3.1 2.6 5.3 1.9 12.9 1.7 -383 -438 1.2 8.9 -5.3 -11.1 -1.1 -8.3 -13.0 -16.1 8.2 2.5 1.9 1.3 6.9 1.8 1.2 .7 -.3 1.3 .1 1.9 .7 Q1 Changes in Real Gross Domestic Product and Related Items (Percent, annual rate except as noted) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Billions of chained (2000) dollars. Change in bus. inventories2 Previous Greenbook2 Nonfarm2 Farm2 1.9 1.9 5.8 7.3 2.9 -.3 Gov’t. cons. & invest. Previous Greenbook Federal Defense Nondefense State & local Residential investment Previous Greenbook -462 -462 5.1 -.8 -25.1 -25.1 Personal cons. expend. Previous Greenbook Durables Nondurables Services Net exports2 Previous Greenbook2 Exports Imports .9 .9 -4.3 -.4 2.4 Final sales Previous Greenbook Priv. dom. final purch. Previous Greenbook 2.4 2.4 -.6 -.6 8.6 8.6 .9 .9 -.3 -.3 Real GDP Previous Greenbook Business fixed invest. Previous Greenbook Equipment & software Previous Greenbook Nonres. structures Previous Greenbook .9 .9 Item Class II FOMC Restricted (FR) 4 0 1 3 2.4 2.1 3.2 1.8 6.0 2.0 -378 -436 2.1 .3 2.1 -1.6 9.2 5.2 -10.5 -13.4 13.8 9.0 2.5 1.8 7.6 2.2 1.8 3.0 1.9 2.8 1.7 2.5 1.4 Q2 3.0 2.1 6.5 2.7 2.6 3.0 2.1 3.6 2.4 3.0 1.9 Q3 3 -6 -1 3 1.3 1.5 -.2 .6 -1.7 2.2 -383 -442 2.7 3.3 6.8 3.2 14.8 11.1 -7.9 -11.0 11.3 8.7 2010 14 0 11 3 .9 1.2 -.4 .2 -1.7 1.8 -407 -464 3.2 8.2 10.8 6.6 19.1 14.3 -5.4 -8.1 10.7 6.8 3.3 2.4 6.1 3.0 3.0 2.9 1.9 4.3 2.9 3.3 2.1 Q4 -29 -30 -34 4 3.2 3.2 8.2 8.9 6.9 .4 -390 -392 -1.8 -7.5 -5.2 -5.2 -11.0 -11.0 6.3 6.4 -19.4 -19.6 -1.5 -1.5 -11.4 -3.4 1.1 -.7 -.7 -2.8 -2.8 -.8 -.9 20081 -68 -62 -71 3 2.7 3.4 5.5 5.5 5.3 1.0 -331 -383 -10.1 -8.8 -20.7 -22.6 -17.4 -19.0 -26.3 -28.5 -18.5 -25.0 .5 .4 1.1 .6 .4 -1.7 -2.5 -2.9 -3.5 -1.6 -2.3 20091 10 2 6 3 1.9 1.8 2.0 1.1 3.7 1.9 -388 -445 2.3 5.1 3.4 -.9 10.2 5.2 -9.2 -12.2 11.0 6.7 2.7 1.9 6.8 2.4 2.2 2.4 1.4 3.0 1.8 2.6 1.5 20101 April 22, 2009 I-30 1. Billions of chained (2000) dollars. 12 12 15 -2 4.0 4.0 7.8 8.4 6.8 2.1 Gov’t. cons. & invest. Previous Greenbook Federal Defense Nondefense State & local Change in bus. inventories1 Previous Greenbook1 Nonfarm1 Farm1 -471 -471 3.8 9.7 7.0 7.0 Residential investment Previous Greenbook Net exports1 Previous Greenbook1 Exports Imports 1.9 1.9 1.2 2.1 1.9 Personal cons. expend. Previous Greenbook Durables Nondurables Services -6.5 -6.5 -3.4 -3.4 -14.9 -14.9 .8 .8 1.1 1.1 Final sales Previous Greenbook Priv. dom. final purch. Previous Greenbook Business fixed invest. Previous Greenbook Equipment & software Previous Greenbook Nonres. structures Previous Greenbook 1.9 1.9 2002 14 14 14 0 1.7 1.7 5.5 7.5 1.9 -.4 -519 -519 5.8 4.8 4.9 4.9 6.6 6.6 .2 .2 11.7 11.7 3.4 3.4 8.3 3.9 2.2 3.7 3.7 4.1 4.1 3.7 3.7 2003 54 54 48 6 .7 .7 2.4 2.5 2.3 -.4 -594 -594 7.4 11.5 7.5 7.5 9.4 9.4 2.3 2.3 6.7 6.7 3.7 3.7 5.6 3.5 3.3 2.8 2.8 4.3 4.3 3.1 3.1 2004 39 39 39 0 .6 .6 1.0 .8 1.4 .3 -617 -617 7.0 4.8 4.9 4.9 7.0 7.0 -.5 -.5 5.4 5.4 2.6 2.6 1.2 3.6 2.4 2.7 2.7 3.1 3.1 2.7 2.7 2005 42 42 46 -3 2.1 2.1 2.9 4.1 .5 1.6 -616 -616 10.1 3.8 6.5 6.5 4.2 4.2 12.8 12.8 -15.5 -15.5 3.2 3.2 6.9 3.2 2.6 2.8 2.8 2.3 2.3 2.4 2.4 2006 -2 -2 -4 1 2.4 2.4 2.3 2.7 1.5 2.4 -547 -547 8.9 1.1 6.4 6.4 2.8 2.8 14.5 14.5 -19.0 -19.0 2.2 2.2 4.2 1.7 2.1 2.5 2.5 1.4 1.4 2.3 2.3 2007 -29 -30 -34 4 3.2 3.2 8.2 8.9 6.9 .4 -390 -392 -1.8 -7.5 -5.2 -5.2 -11.0 -11.0 6.3 6.4 -19.4 -19.6 -1.5 -1.5 -11.4 -3.4 1.1 -.7 -.7 -2.8 -2.8 -.8 -.9 2008 -68 -62 -71 3 2.7 3.4 5.5 5.5 5.3 1.0 -331 -383 -10.1 -8.8 -20.7 -22.6 -17.4 -19.0 -26.3 -28.5 -18.5 -25.0 .5 .4 1.1 .6 .4 -1.7 -2.5 -2.9 -3.5 -1.6 -2.3 2009 Changes in Real Gross Domestic Product and Related Items (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Real GDP Previous Greenbook Item Class II FOMC Restricted (FR) 10 2 6 3 1.9 1.8 2.0 1.1 3.7 1.9 -388 -445 2.3 5.1 3.4 -.9 10.2 5.2 -9.2 -12.2 11.0 6.7 2.7 1.9 6.8 2.4 2.2 2.4 1.4 3.0 1.8 2.6 1.5 2010 April 22, 2009 I-31 Q1 .0 .0 .2 -.2 -1.5 -1.5 -1.4 -.1 .8 .8 .5 .4 .1 .3 2.9 2.9 1.5 1.4 .3 .3 -.4 -.4 .6 .6 -.5 -.5 .9 .9 -.2 .8 .3 4.3 4.3 .6 .6 2.8 2.8 Q2 -.5 -.5 Q3 .8 .8 .8 .0 1.1 1.1 1.0 .9 .1 .2 1.1 1.1 .4 .7 -.2 -.2 -.6 -.6 .4 .4 -.6 -.6 -2.8 -2.8 -1.2 -1.6 .0 -1.4 -1.4 -3.5 -3.5 2008 -.1 -.1 -.2 .1 .3 .3 .5 .2 .3 -.3 -.2 -.6 -3.4 3.3 -2.6 -2.6 -2.2 -2.2 -.4 -.4 -.8 -.9 -3.0 -3.0 -1.7 -2.0 .7 -6.2 -6.6 -6.4 -6.4 -6.3 -6.7 Q4 -2.2 -2.2 -2.2 .0 -1.1 .0 -.7 -.8 .0 -.3 1.0 .1 -4.4 5.3 -3.6 -3.2 -2.4 -2.0 -1.2 -1.3 -1.4 -1.5 .9 .4 .4 .2 .2 -4.0 -4.2 -4.1 -4.4 -6.3 -6.5 Q1 -.1 .5 -.1 .0 1.3 1.1 1.1 1.0 .1 .3 .6 .0 -.4 1.0 -2.2 -2.6 -.9 -1.2 -1.3 -1.4 -.8 -1.1 -.3 .0 -.4 .0 .1 -1.4 -2.5 -3.4 -3.6 -1.5 -2.0 Q2 .4 -.5 Q3 1.0 1.4 1.0 .0 1.2 1.1 1.0 .8 .2 .3 -.4 -.5 -.2 -.2 -1.7 -2.2 -.8 -1.1 -1.0 -1.1 .0 -.3 .3 .0 .1 .1 .1 -.6 -1.9 -1.5 -2.5 2009 1.7 1.1 1.7 .0 .8 .7 .5 .2 .2 .3 -.9 -.9 .0 -.9 -1.3 -1.7 -.5 -.8 -.7 -.9 .0 -.1 .8 .8 .3 .2 .4 -.5 -1.2 -.4 -1.0 1.2 -.1 Q4 1.1 1.0 1.2 .0 .7 .6 .4 .1 .3 .2 -1.1 -.9 .1 -1.2 -.5 -1.0 -.1 -.5 -.4 -.5 .2 .1 1.4 1.0 .4 .4 .6 .7 -.3 1.1 .1 1.9 .7 Q1 -.5 -.4 -.5 .0 .5 .5 .3 .1 .2 .3 .2 .0 .2 .0 .2 -.1 .5 .3 -.3 -.4 .3 .2 1.7 1.3 .5 .4 .8 2.9 1.9 2.2 1.4 2.5 1.4 -.1 -.2 -.1 .0 .3 .3 .0 .0 .0 .3 -.2 -.2 .3 -.5 .5 .3 .8 .6 -.2 -.3 .3 .2 2.1 1.5 .4 .5 1.1 3.0 2.1 2.9 2.0 3.0 1.9 Q3 2010 Q2 Contributions to Changes in Real Gross Domestic Product (Percentage points, annual rate except as noted) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. Change in bus. inventories Previous Greenbook Nonfarm Farm .4 .4 .4 .3 .1 .0 Gov’t. cons. & invest. Previous Greenbook Federal Defense Nondefense State & local Residential investment Previous Greenbook .8 .8 .6 .1 -1.1 -1.1 Personal cons. expend. Previous Greenbook Durables Nondurables Services Net exports Previous Greenbook Exports Imports .6 .6 -.3 -.1 1.0 Final sales Previous Greenbook Priv. dom. final purch. Previous Greenbook .3 .3 .0 .0 .3 .3 .9 .9 -.3 -.3 Real GDP Previous Greenbook Business fixed invest. Previous Greenbook Equipment & software Previous Greenbook Nonres. structures Previous Greenbook .9 .9 Item Class II FOMC Restricted (FR) .4 .2 .4 .0 .2 .3 .0 .0 .0 .2 -.8 -.7 .3 -1.1 .9 .5 1.0 .7 -.1 -.2 .3 .2 2.3 1.7 .4 .6 1.3 2.9 1.9 3.5 2.4 3.3 2.1 Q4 -.2 -.2 -.1 -.1 .6 .6 .6 .4 .2 .0 1.1 1.0 -.2 1.3 -.6 -.6 -.8 -.8 .2 .2 -.8 -.8 -1.1 -1.1 -.9 -.7 .5 -.7 -.7 -2.4 -2.4 -.8 -.9 20081 .1 .2 .1 .0 .5 .7 .4 .3 .1 .1 .1 -.3 -1.2 1.3 -2.2 -2.4 -1.1 -1.2 -1.0 -1.1 -.6 -.8 .4 .3 .1 .1 .2 -1.7 -2.5 -2.4 -2.9 -1.6 -2.3 20091 .3 .1 .3 .0 .4 .4 .2 .1 .1 .3 -.5 -.4 .2 -.7 .3 -.1 .6 .3 -.3 -.4 .3 .2 1.9 1.4 .4 .5 1.0 2.4 1.4 2.4 1.4 2.6 1.5 20101 April 22, 2009 I-32 Q1 3.6 3.6 19.0 19.0 4.9 4.9 2.3 2.3 4.5 4.5 2.5 2.5 GDP chain-wt. price index Previous Greenbook PCE chain-wt. price index Previous Greenbook Energy Previous Greenbook Food Previous Greenbook Ex. food & energy Previous Greenbook CPI 2.6 2.6 3.7 3.7 1.1 1.1 8.5 8.5 Nonfarm business sector Output per hour Previous Greenbook Compensation per hour Previous Greenbook Unit labor costs Previous Greenbook Core goods imports chain-wt price index3 Previous Greenbook3 10.6 10.6 4.7 4.7 1.7 1.7 -2.8 -2.8 2.3 2.3 4.5 4.5 2.0 2.0 4.3 4.3 27.4 27.4 6.4 6.4 2.2 2.2 1.1 1.1 Q2 4.6 4.6 2.2 2.2 5.7 5.7 3.5 3.5 2.6 2.6 6.2 6.2 2.8 2.8 5.0 5.0 31.7 31.7 8.5 8.5 2.4 2.4 3.9 3.9 Q3 2008 -8.5 -8.3 -.5 -.9 5.2 5.2 5.7 6.2 1.9 1.9 -8.3 -8.3 .6 .6 -4.9 -5.0 -65.0 -65.1 5.6 5.6 .9 .8 .5 .3 Q4 -9.7 -10.0 -1.0 -1.1 3.2 2.5 4.3 3.7 2.0 2.0 -2.4 -2.4 1.5 1.3 -.9 -1.4 -36.0 -36.0 .9 1.8 1.7 .9 3.3 3.4 Q1 -3.0 -4.7 3.1 2.4 2.9 2.7 -.2 .3 1.9 1.9 .3 .9 1.5 1.6 .8 1.0 -13.1 -7.8 1.0 1.8 1.7 1.4 .5 .9 Q2 1.5 1.1 Q3 -.7 -2.1 1.6 1.3 1.9 2.1 .3 .8 1.8 1.8 2.1 1.4 1.2 1.2 1.6 1.1 12.2 1.9 2.5 2.1 .9 .9 2009 Changes in Prices and Costs (Percent, annual rate except as noted) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Private-industry workers. 3. Core goods imports exclude computers, semiconductors, oil, and natural gas. 3.0 3.0 ECI, hourly compensation2 Previous Greenbook2 Previous Greenbook Ex. food & energy Previous Greenbook 2.6 2.6 Item Class II FOMC Restricted (FR) .5 .4 1.6 1.2 1.4 1.5 -.3 .3 1.5 1.5 1.8 1.3 1.0 1.0 1.4 1.0 10.5 2.6 2.2 1.9 .7 .7 1.1 .9 Q4 1.0 1.0 2.2 2.1 1.4 1.3 -.8 -.8 1.4 1.3 1.6 1.2 .9 .8 1.2 .9 8.2 4.4 1.6 1.3 .7 .6 1.0 .8 Q1 1.1 1.2 2.1 2.0 1.4 1.2 -.7 -.8 1.3 1.2 1.4 1.1 .9 .7 1.1 .8 6.6 4.8 1.3 1.2 .7 .5 1.0 .8 Q2 1.1 1.1 2.0 1.9 1.3 1.1 -.7 -.8 1.3 1.1 1.2 1.0 .9 .7 1.0 .7 5.2 4.4 1.0 1.1 .7 .5 .9 .7 Q3 2010 1.0 1.1 1.9 1.8 1.3 1.0 -.7 -.7 1.2 1.0 1.1 1.0 .8 .6 .8 .7 4.4 4.3 .8 1.1 .6 .4 .8 .6 Q4 3.5 3.6 2.2 2.1 4.1 4.1 1.8 1.9 2.4 2.4 1.5 1.5 2.0 2.0 1.9 1.9 -8.5 -8.6 6.3 6.3 1.9 1.9 2.0 2.0 20081 -3.3 -4.2 1.3 .9 2.3 2.2 1.0 1.3 1.8 1.8 .4 .3 1.3 1.3 .7 .4 -8.9 -11.3 1.7 1.9 1.2 1.0 1.6 1.6 20091 1.1 1.1 2.1 2.0 1.3 1.1 -.7 -.8 1.3 1.1 1.3 1.1 .9 .7 1.0 .8 6.1 4.5 1.2 1.2 .7 .5 .9 .8 20101 April 22, 2009 I-33 1.8 1.8 7.7 7.7 1.3 1.3 1.6 1.6 2.3 2.3 2.1 2.1 PCE chain-wt price index Previous Greenbook Energy Previous Greenbook Food Previous Greenbook Ex. food & energy Previous Greenbook CPI 2.9 2.9 3.2 3.2 .2 .2 .1 .1 Nonfarm business sector Output per hour Previous Greenbook Compensation per hour Previous Greenbook Unit labor costs Previous Greenbook Core goods imports chain-wt. price index2 Previous Greenbook2 1.6 1.6 4.7 4.7 5.3 5.3 .5 .5 4.0 4.0 2.0 2.0 1.2 1.2 1.9 1.9 7.6 7.6 2.6 2.6 1.4 1.4 2.2 2.2 2003 3.6 3.6 1.8 1.8 3.9 3.9 2.1 2.1 3.8 3.8 3.4 3.4 2.2 2.2 3.1 3.1 18.3 18.3 2.9 2.9 2.2 2.2 3.2 3.2 2004 1. Private-industry workers. 2. Core goods imports exclude computers, semiconductors, oil and natural gas. 3.1 3.1 ECI, hourly compensation1 Previous Greenbook1 Previous Greenbook Ex. food & energy Previous Greenbook 1.7 1.7 2002 2.2 2.2 1.5 1.5 3.6 3.6 2.1 2.1 2.9 2.9 3.8 3.8 2.1 2.1 3.3 3.3 23.1 23.1 2.1 2.1 2.2 2.2 3.5 3.5 2005 2.4 2.4 .6 .6 4.2 4.2 3.7 3.7 3.2 3.2 1.9 1.9 2.7 2.7 1.9 1.9 -4.0 -4.0 2.3 2.3 2.3 2.3 2.8 2.8 2006 3.4 3.4 2.6 2.6 3.6 3.6 .9 .9 3.0 3.0 4.0 4.0 2.3 2.3 3.5 3.5 19.1 19.1 4.5 4.5 2.2 2.2 2.6 2.6 2007 3.5 3.6 2.2 2.1 4.1 4.1 1.8 1.9 2.4 2.4 1.5 1.5 2.0 2.0 1.9 1.9 -8.5 -8.6 6.3 6.3 1.9 1.9 2.0 2.0 2008 -3.3 -4.2 1.3 .9 2.3 2.2 1.0 1.3 1.8 1.8 .4 .3 1.3 1.3 .7 .4 -8.9 -11.3 1.7 1.9 1.2 1.0 1.6 1.6 1.1 1.1 2.1 2.0 1.3 1.1 -.7 -.8 1.3 1.1 1.3 1.1 .9 .7 1.0 .8 6.1 4.5 1.2 1.2 .7 .5 .9 .8 2010 April 22, 2009 2009 Changes in Prices and Costs (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) GDP chain-wt price index Previous Greenbook Item Class II FOMC Restricted (FR) I-34 1.1 15.2 3.5 -.7 -.7 .2 .2 -4.3 -14.3 -4.7 -51.5 11.2 10.6 10.4 8.8 -331 -52 12.4 .0 Income and saving Nominal GDP5 Real disposable pers. income5 Previous Greenbook5 Personal saving rate3 Previous Greenbook3 Corporate profits7 Profit share of GNP3 Net federal saving8 Net state & local saving8 Gross national saving rate3 Net national saving rate3 3.4 -8.5 -8.5 1.3 1.3 12.0 -1.0 -561 -97 -5.8 2.7 3.3 3.2 3.2 .7 10.3 -6.5 8.4 -1.0 6.6 4.3 5.6 5.6 .5 9.9 -9.2 -9.3 -8.9 -9.9 65.3 65.8 -1.6 9.0 8.7 -6.4 -6.7 Q2 -3.3 8.3 1.9 -1.5 -1.6 5.1 5.3 .6 10.1 .5 -2.6 1.5 -2.0 65.8 65.6 -.4 9.2 9.0 -6.8 -7.3 Q3 -5.0 8.1 2.3 1.6 1.5 5.3 5.4 .6 10.5 2.0 -.2 2.5 .3 66.5 65.8 .0 9.3 9.2 -7.0 -7.7 Q4 11.1 -2.4 10.5 -3.3 9.9 -4.1 9.6 -4.5 -803 -1,030 -1,097 -1,146 -15 -67 -42 -42 -18.9 8.5 -3.1 3.9 6.4 3.9 4.6 .5 9.5 -20.0 -18.3 -22.5 -21.7 66.7 67.4 -2.0 8.1 8.0 -5.6 -5.7 Q1 2009 Other Macroeconomic Indicators 6.7 8.6 3.5 1.5 1.1 4.9 5.4 .7 12.0 3.5 3.0 3.4 2.9 68.5 67.5 .5 9.2 9.5 -6.9 -8.2 Q2 6.8 8.6 3.9 2.1 1.4 4.7 5.2 .8 12.5 4.7 3.1 4.4 2.9 69.7 68.3 .3 9.1 9.5 -6.7 -8.2 Q3 8.3 8.7 4.1 2.2 1.3 4.5 5.0 .9 13.0 4.4 3.5 4.2 3.1 70.8 69.2 .5 9.1 9.5 -6.4 -8.2 Q4 9.5 -4.6 9.6 -4.5 9.4 -4.8 9.4 -4.7 -1,138 -1,116 -1,157 -1,138 -36 -42 -29 -28 24.5 8.5 2.9 .9 1.7 5.1 5.5 .7 11.2 3.9 2.7 3.9 2.5 67.5 66.6 .2 9.3 9.4 -7.0 -8.0 Q1 2010 1. Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise indicated. 2. Change, millions. 3. Percent, annual values are for the fourth quarter of the year indicated. 4. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Annual values are for the fourth quarter of the year indicated. 5. Percent change, annual rate. 6. Level, millions, annual values are annual averages. 7. Percent change, annual rate, with inventory valuation and capital consumption adjustments. 8. Billions of dollars, annual values are annual averages. 11.3 11.5 -1.3 -1.8 -650 -544 -67 -104 4.1 10.7 10.7 2.5 2.5 1.0 .9 14.1 12.9 -12.7 -12.1 -17.7 -17.4 71.0 71.7 -1.3 6.9 6.9 -3.6 -3.7 Housing starts6 Light motor vehicle sales6 -4.6 -9.0 -3.4 -8.9 -5.4 -9.3 -4.1 -8.7 76.7 74.6 77.5 75.5 -.5 6.0 6.0 -1.4 -1.4 .2 .4 -1.2 -1.0 78.1 78.7 -.4 5.4 5.4 -.7 -.7 Industrial production5 Previous Greenbook5 Manufacturing industr. prod.5 Previous Greenbook5 Capacity utilization rate - mfg.3 Previous Greenbook3 Q4 -.1 4.9 4.9 -.8 -.8 Q3 Employment and production Nonfarm payroll employment2 Unemployment rate3 Previous Greenbook3 GDP gap4 Previous Greenbook4 Q2 Q1 2008 Item Class II FOMC Restricted (FR) -8.7 8.1 .0 2.6 2.6 5.3 5.4 .5 10.0 -7.1 -7.9 -7.4 -8.7 66.5 65.8 -4.1 9.3 9.2 -7.0 -7.7 20091 11.3 8.7 3.6 1.7 1.4 4.5 5.0 .8 12.2 4.1 3.1 4.0 2.9 70.8 69.2 1.5 9.1 9.5 -6.4 -8.2 20101 12.0 -1.0 9.6 -4.5 9.4 -4.7 -521 -1,019 -1,137 -80 -42 -34 -21.5 8.8 1.2 .8 1.0 3.2 3.2 .9 13.1 -6.7 -6.1 -8.6 -8.0 71.0 71.7 -2.3 6.9 6.9 -3.6 -3.7 20081 April 22, 2009 I-35 -248 -34 13.6 1.5 Net federal saving7 Net state & local saving7 Gross national saving rate2 Net national saving rate2 13.7 1.9 -372 -20 12.6 9.5 5.9 3.7 3.7 2.2 2.2 1.8 16.6 1.6 1.5 1.8 1.7 74.6 74.8 -.1 5.8 5.8 -1.8 -1.8 2003 13.8 2.1 -371 2 20.3 10.8 6.5 4.1 4.1 2.5 2.5 2.0 16.8 3.0 3.1 3.6 3.7 77.3 77.5 2.0 5.4 5.4 -.8 -.8 2004 15.0 2.8 -292 29 18.8 12.0 6.3 .9 .9 .8 .8 2.1 16.9 2.6 2.6 3.8 3.7 79.2 79.2 2.4 4.9 4.9 -.3 -.3 2005 15.5 3.4 -201 46 6.9 12.2 5.3 3.6 3.6 .9 .9 1.8 16.5 1.8 1.7 1.2 1.1 79.0 79.0 2.1 4.4 4.4 -.2 -.2 2006 13.4 1.2 -229 10 -2.0 11.3 4.9 1.8 1.8 .4 .4 1.4 16.1 1.8 2.1 1.9 2.3 78.7 79.3 1.2 4.8 4.8 -.4 -.4 2007 12.0 -1.0 -521 -80 -21.5 8.8 1.2 .8 1.0 3.2 3.2 .9 13.1 -6.7 -6.1 -8.6 -8.0 71.0 71.7 -2.3 6.9 6.9 -3.6 -3.7 2008 9.6 -4.5 -1019 -42 -8.7 8.1 .0 2.6 2.6 5.3 5.4 .5 10.0 -7.1 -7.9 -7.4 -8.7 66.5 65.8 -4.1 9.3 9.2 -7.0 -7.7 2009 9.4 -4.7 -1137 -34 11.3 8.7 3.6 1.7 1.4 4.5 5.0 .8 12.2 4.1 3.1 4.0 2.9 70.8 69.2 1.5 9.1 9.5 -6.4 -8.2 1. Change, millions. 2. Percent, values are for the fourth quarter of the year indicated. 3. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Values are for the fourth quarter of the year indicated. 4. Percent change. 5. Level, millions, values are annual averages. 6. Percent change, with inventory valuation and capital consumption adjustments. 7. Billions of dollars,values are annual averages. 20.6 9.0 1.7 16.7 Housing starts5 Light motor vehicle sales5 Corporate profits6 Profit share of GNP2 2.5 2.6 2.5 2.6 73.0 73.2 Industrial production4 Previous Greenbook4 Manufacturing industr. prod.4 Previous Greenbook4 Capacity utilization rate - mfg.2 Previous Greenbook2 3.6 2.9 2.9 1.8 1.8 -.7 5.8 5.8 -2.6 -2.6 Employment and production Nonfarm payroll employment1 Unemployment rate2 Previous Greenbook2 GDP gap3 Previous Greenbook3 Income and saving Nominal GDP4 Real disposable pers. income4 Previous Greenbook4 Personal saving rate2 Previous Greenbook2 2002 Item 2010 April 22, 2009 Other Macroeconomic Indicators (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Class II FOMC Restricted (FR) I-36 2607 3047 910 624 286 2136 -440 134 372 768 -296 -17 2524 2978 -455 -455 -638 183 -426 1.3 0.8 0.8 -222 -458 -221 -0.3 0.2 0.2 0.8 0.9 1.4 -654 -899 2425 3298 975 664 311 2323 -873 149 260 1770 111 -235 2185 3832 -1647 -1915 -1779 132 2009 Fiscal year 2008a 2624 2832 842 569 273 1990 -209 123 75 206 -23 -22 2568 2729 -162 -162 -343 181 2007a 0.9 0.9 0.9 -810 -1169 2469 3609 1055 710 345 2554 -1139 160 50 1283 210 -20 2292 3766 -1473 -1221 -1607 134 2010 0.1 0.1 0.6 -322 -344 2673 3003 898 614 284 2105 -331 129 46 200 11 -5 540 746 -206 -206 -237 31 Q1a 0.5 0.5 2.2 -641 -671 2479 3128 918 629 289 2210 -650 138 53 -48 -7 29 788 761 27 27 -64 91 Q2a 372 526 -318 -39 590 759 -169 -169 -171 2 Q3a 0.7 0.7 -1.0 -502 -569 2596 3140 954 660 295 2186 -544 144 2008 -0.3 -0.3 -0.4 -447 -590 2544 3106 957 657 301 2148 -561 150 367 561 5 -81 547 1033 -485 -485 -538 53 Q4a 2009 Q2 Q3 245 263 24 -27 640 899 -259 -494 -325 66 260 481 -15 -35 555 986 -431 -416 -425 -6 35 340 225 -5 524 1084 -561 -408 -616 55 Q4 -0.2 0.0 1.0 -599 -822 0.8 0.6 1.1 -771 -1055 0.3 0.2 0.1 -799 -1128 0.2 0.2 0.1 -824 -1177 Seasonally adjusted annual rates 2418 2370 2366 2389 3222 3400 3463 3535 948 981 1013 1031 641 668 692 701 308 313 321 331 2273 2418 2450 2504 -803 -1030 -1097 -1146 141 149 156 158 269 465 98 -92 442 914 -472 -520 -490 19 Not seasonally adjusted Q1 Staff Projections of Federal Sector Accounts and Related Items (Billions of dollars except as noted) 0.3 0.3 -0.1 -809 -1168 2470 3608 1053 708 345 2555 -1138 159 20 471 15 -5 506 987 -481 -346 -486 5 Q1 0.1 0.2 -0.2 -783 -1146 2505 3621 1066 714 352 2555 -1116 160 40 197 -20 -5 689 861 -172 -194 -253 81 Q2 50 275 -10 -5 574 834 -260 -273 -252 -8 Q3 0.1 0.1 0.2 -826 -1186 2513 3670 1069 718 352 2601 -1157 161 2010 -0.0 0.0 -0.1 -813 -1166 2554 3692 1072 721 351 2620 -1138 161 35 328 15 -5 562 899 -338 -348 -392 55 Q4 April 22, 2009 1. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus and the Postal Service surplus are excluded from the on-budget surplus and shown separately as off-budget, as classified under current law. 2. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities. 3. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises. 4. HEB is gross saving less gross investment (NIPA) of the federal government in current dollars, with cyclically sensitive receipts and outlays adjusted to the staff’s measure of potential output and the NAIRU. Quarterly figures for change in HEB and FI are not at annual rates. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. FI is the weighted difference of discretionary changes in federal spending and taxes in chained (2000) dollars, scaled by real GDP. The annual FI estimates are on a calendar year basis. Also, for FI and the change in HEB, positive values indicate aggregate demand stimulus. a--Actual Fiscal indicators4 High-employment (HEB) surplus/deficit Change in HEB, percent of potential GDP Fiscal impetus (FI), percent of GDP Previous Greenbook NIPA federal sector Receipts Expenditures Consumption expenditures Defense Nondefense Other spending Current account surplus Gross investment Gross saving less gross investment3 Cash operating balance, end of period Means of financing Borrowing Cash decrease Other2 Unified budget Receipts1 Outlays1 Surplus/deficit1 Previous Greenbook On-budget Off-budget Item Class II FOMC Restricted (FR) I-37 6.6 .4 -1.3 1.4 8.6 5.8 4.8 5.0 5.2 3.1 8.1 6.3 4.5 4.2 6.0 4.3 5.3 4.9 4.4 5.1 2007 2008 2009 2010 Quarter 2008:1 2 3 4 2009:1 2 3 4 2010:1 2 3 4 2.4 -.3 -2.3 -1.5 -2.7 -2.0 -1.1 -.6 .1 .5 .9 1.4 6.6 -.4 -1.6 .7 14.2 13.6 13.3 10.9 Home mortgages Households 4.7 3.9 1.4 -2.9 -2.0 -2.2 -1.6 -.5 1.2 2.5 3.4 4.2 5.5 1.8 -1.5 2.8 5.2 5.5 4.3 4.5 Consumer credit 7.2 5.8 4.1 1.7 2.2 .3 1.9 1.7 1.9 2.0 2.0 2.4 13.1 4.8 1.5 2.1 2.5 6.2 8.7 10.5 Business 3.5 .9 3.2 -.4 4.6 2.4 3.1 3.0 2.9 2.8 2.5 2.5 9.3 1.8 3.3 2.7 8.3 7.4 10.2 8.2 State and local governments Change in Debt of the Domestic Nonfinancial Sectors (Percent) 8.1 5.9 39.2 37.0 23.2 23.1 26.7 16.8 18.9 15.6 12.4 13.8 4.9 24.2 24.4 16.1 10.9 9.0 7.0 3.9 Federal government 3.5 4.1 3.4 -5.8 -3.1 -1.0 1.9 2.3 2.9 3.5 3.9 4.1 2.6.3 FOF 4.9 1.2 .0 3.6 5.9 6.5 6.3 5.3 Memo: Nominal GDP April 22, 2009 Note. Quarterly data are at seasonally adjusted annual rates. 1. Data after 2008:Q4 are staff projections. Changes are measured from end of the preceding period to end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4. 3.0 .3 .2 -1.9 -2.2 -1.7 -.9 -.4 .6 1.1 1.6 2.1 11.6 11.2 11.1 10.0 Total 8.1 8.9 9.5 8.9 Total Year 2003 2004 2005 2006 Period 1 Class II FOMC Restricted (FR) I-38 422.6 1239.2 1239.2 833.2 40.1 171.9 181.3 -395.1 507.1 53.5 -43.7 45.0 129.6 228.5 12.9 1444.9 -395.1 1840.0 2008 79.2 1549.7 1549.7 1722.4 74.1 174.9 -65.8 -214.3 168.6 -179.6 -168.9 -40.1 126.2 243.1 11.4 1398.6 -214.3 1612.9 2009 309.4 1270.4 1270.4 1250.4 61.7 188.2 -33.7 -160.0 238.7 184.4 73.5 72.3 123.0 248.3 12.1 1595.2 -160.0 1755.2 2010 549.5 2078.5 526.5 168.9 71.6 153.1 127.9 -393.2 451.4 26.7 -238.1 35.4 129.8 226.7 18.2 2235.0 -393.2 2628.2 Q3 Q4 503.4 2155.2 560.9 485.2 -7.9 118.5 110.0 -450.0 169.3 -265.7 -155.9 -77.1 130.3 234.2 14.4 1600.8 -450.0 2050.9 2008 -498.1 1473.4 465.4 471.6 103.0 199.5 -37.6 -297.0 242.6 -308.6 -287.2 -51.1 128.6 239.2 10.7 1213.5 -297.0 1510.5 Q1 -117.5 1554.4 262.6 259.3 54.1 148.8 -86.7 -200.0 28.2 -230.2 -203.8 -56.0 125.7 242.4 10.0 1206.5 -200.0 1406.5 2.6.4 FOF Q2 Q3 544.4 1898.0 481.4 431.0 69.7 175.3 -89.7 -180.0 208.4 -129.7 -118.5 -40.5 125.3 244.3 14.5 1866.4 -180.0 2046.4 2009 Flow of Funds Projections: Highlights (Billions of dollars at seasonally adjusted annual rates except as noted) Note. Data after 2008:Q4 are staff projections. 1. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP. 2. Includes change in liabilities not shown in home mortgages and consumer credit. 3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income. 4. For corporations, excess of capital expenditures over U.S. internal funds. 5. NIPA state and local government saving plus consumption of fixed capital and net capital transfers. n.s.a. Not seasonally adjusted. 858.7 237.1 237.1 187.9 Federal government Net borrowing Net borrowing (n.s.a.) Unified deficit (n.s.a.) Depository institutions Funds supplied 185.9 246.6 State and local governments Net borrowing Current surplus 5 848.7 651.5 133.6 131.2 Households Net borrowing 2 Home mortgages Consumer credit Debt/DPI (percent) 3 185.6 -831.2 1228.4 220.3 18.1 Borrowing indicators Debt (percent of GDP) 1 Borrowing (percent of GDP) Business Financing gap 4 Net equity issuance Credit market borrowing 1668.9 -831.2 2500.1 2007 Domestic nonfinancial sectors Net funds raised Total Net equity issuance Net debt issuance Category Class II FOMC Restricted (FR) 388.0 1272.8 340.3 560.6 69.7 176.1 -49.2 -180.0 195.3 -49.7 -66.3 -12.6 124.2 246.0 10.5 1308.2 -180.0 1488.2 Q4 293.0 1496.0 471.1 481.1 65.7 184.0 -20.2 -160.0 217.2 76.5 9.5 30.3 123.5 247.2 13.0 1695.5 -160.0 1855.5 Q1 406.0 1292.6 197.1 172.1 65.7 179.5 -43.4 -160.0 229.2 148.5 47.4 63.5 123.0 248.2 12.0 1576.1 -160.0 1736.1 Q2 Q3 373.7 1071.1 274.6 259.6 57.7 193.3 -48.0 -160.0 228.7 220.8 94.8 87.0 122.5 248.7 10.8 1418.3 -160.0 1578.3 2010 164.9 1221.9 327.6 337.6 57.7 195.9 -22.9 -160.0 279.9 291.6 142.2 108.4 122.2 249.1 12.6 1691.1 -160.0 1851.1 Q4 April 22, 2009 I-39 (Page I-40 is intentionally blank.) Class II FOMC—Restricted (FR) International Developments Following the substantial macroeconomic and financial policy actions of the last several months, the decline in foreign economic activity appears to be moderating and investor sentiment and financial market functioning have improved somewhat. Industrial production has started to move up in some emerging market economies, such as China, Korea, and Brazil, but more widespread indications of stabilization abroad remain tenuous. After dropping sharply in the first quarter, foreign economic activity through the remainder of 2009 is projected to evolve at rates a bit above those in the March Greenbook, still contracting in the second quarter and becoming slightly positive in the latter half of the year. We see the risks to this projection as being a bit less skewed to the downside than in March, but the outlook remains very uncertain. Summary of Staff Projections (Percent change from end of previous period except as noted, annual rate) 2008 Projection Indicator 2009 H1 H2 2010 Q1 Q2 H2 Foreign output Previous GB 1.7 1.7 -3.5 -3.4 -7.2 -6.7 -2.4 -2.9 .8 .3 2.8 2.3 Foreign CPI Previous GB 5.0 1.8 -.8 1.5 1.6 1.6 5.0 1.7 -1.5 1.1 1.5 1.5 Contribution to growth (percentage points) U.S. net exports Previous GB 1.8 1.8 .4 .2 1.0 .1 .6 .0 -.6 -.7 -.5 -.4 NOTE. Changes for years are measured as Q4/Q4; half-years are Q2/Q4 or Q4/Q2. Commodity prices have started to turn up some, but with output below potential in most foreign economies, consumer price inflation abroad remains subdued. We estimate that foreign consumer prices dropped ¾ percent at an annual rate in the first quarter and project that prices will rise at roughly a 1½ percent pace over the remainder of 2009 and 2010, about the same as in the March Greenbook. Spot oil prices moved up about I-41 I-42 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 10 percent since the time of our last forecast to around $47 per barrel, and futures prices point to a further rise to $64 per barrel by the end of 2010. Prices for most nonfuel primary commodities are slightly higher on net. The dollar has depreciated against most other currencies since the time of the March Greenbook, and we have revised down our forecast accordingly. With the monthly trade data for January and February in hand, we estimate that real net exports added 1 percentage point to U.S. GDP growth in the first quarter, as a substantial fall in exports was more than offset by a surprisingly steep decline in imports. This estimate is about 1 percentage point higher than projected in the March Greenbook. In the current quarter, we forecast that net exports will contribute just over ½ percentage point to GDP growth, as imports are projected to decline at a more rapid pace than exports. This projection is up about ½ percentage point from the previous Greenbook. For the remainder of the forecast period, we expect net exports to subtract, on average, about ½ percentage point from GDP growth as the U.S. recovery prompts import growth to resume. This is little changed from the March Greenbook, as the stimulus from the weaker dollar and slightly higher foreign GDP growth is just offset by the effect of higher U.S. growth on imports. International Financial Markets Stock markets around the world have risen substantially since the time of the last Greenbook. In Europe and the United Kingdom, much of the rise can be attributed to the strong performance of the financial sector, with banking sector indexes having gained over 45 percent. Several major U.K. banks reported a strong start to the year, and HSBC raised $19 billion in the largest-ever U.K. rights issue. In interbank funding markets, spreads between Libor and OIS rates have narrowed by roughly 30 basis points for funding denominated in both euro and sterling. The intervening period saw continued unconventional monetary policy actions and new moves by the IMF. The Bank of England has so far purchased close to £30 billion in assets as part of its announced £75 billion program of asset purchases. The Bank of Japan has expanded its regular purchases of Japanese government bonds and has announced that it will expand eligible collateral to include municipal debt. The European Central Bank (ECB) reduced its policy rate by a less-than-expected 25 basis points to 1.25 percent and deferred a decision regarding any new policy tools until its meeting in May. Many emerging market economies (EMEs) eased monetary policy as well, and Mexico drew $3.2 billion on its swap line with the Federal Reserve, its first drawing on International Developments Class II FOMC—Restricted (FR) I-43 the $30 billion line. Mexico, Poland, and Colombia have (or soon will have) access to the IMF’s recently established Flexible Credit Line, and IMF loan packages for Romania and Serbia were announced. The dollar depreciated against most other currencies, particularly against currencies of some EMEs, consistent with an increase in investor risk appetite and greater confidence in EMEs. The major currencies index declined 2 percent, with the dollar falling 4½ percent against sterling and 1¼ percent against the euro, but the dollar was flat against the yen. The dollar fell about 4 percent against the currencies of our other important trading partners, including a double-digit decline against the Mexican peso. The starting point for the projected path of the staff’s broad real index of the dollar is 3½ percent lower compared with the March Greenbook. We project that the broad real value of the dollar will depreciate at an annual rate of about 1½ percent over the forecast period, consistent with a decline at some point in investor willingness to finance U.S. current account deficits. The pace of the dollar’s projected decline is slightly more modest than in the previous Greenbook. Advanced Foreign Economies We estimate that real GDP in the advanced foreign economies contracted at a 7¾ percent annual rate in the first quarter, with weakness widespread across private expenditure components. Japanese GDP is estimated to have fallen almost 18 percent, driven by a collapse in exports and investment. Indicators continue to point to significant weakness in all the advanced foreign economies. However, purchasing managers’ indexes edged up from record-low levels in March, suggesting some deceleration in the pace of contraction. Real GDP in the advanced foreign economies is projected to fall 3¾ percent in the second quarter and bottom out in the second half of 2009. Growth subsequently increases to 2 percent by the end of the forecast period, supported by improving financial conditions, recovery in the United States, and monetary and fiscal stimulus. Our estimate for growth in the first quarter is ¾ percentage point lower than in the March Greenbook, reflecting weaker-than-expected data in Canada, Japan, and the United Kingdom, as well as a reassessment of the depth of the inventory cycle in the euro area. The outlook is unchanged in the second quarter and is up about ¼ percentage point on average through the rest of the forecast period, mainly supported by the upward revision to the path of U.S. GDP. I-44 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 Previous declines in food and energy prices continued to hold down consumer price inflation in the first quarter. Average inflation in the advanced foreign economies is projected to remain near 1 percent through next year, as substantial output gaps weigh on prices. We continue to project that Japanese inflation will be negative throughout the forecast period. The outlook for inflation in advanced foreign economies in 2009 is up about ½ percentage point from the March Greenbook, in line with recent data and the higher path for oil and other commodity prices. We assume that the major foreign central banks will not remove policy accommodation during the forecast period and that unconventional monetary policy measures will continue. Our projections for policy in Canada, Japan, and the United Kingdom are unchanged from the March Greenbook. In the euro area, we now project that the main refinancing rate will bottom out at ¾ percent, although the effective rate for overnight euro funding likely will remain below the refinancing rate. We continue to expect that fiscal stimulus will add roughly 1 percentage point to GDP growth in the advanced foreign economies in 2009 and provide little impetus in 2010. Emerging Market Economies Real GDP dropped an estimated 6¼ percent at an annual rate in the first quarter in the EMEs, about unchanged from the March Greenbook. The pace of the overall decline, albeit still large, is actually a moderation compared with the fourth quarter’s 9½ percent fall. In China, the government’s aggressive fiscal and monetary policies appear to be stimulating economic activity. Chinese GDP grew a surprisingly strong 6½ percent in the first quarter, and the PMI climbed above 50 in March for the first time since September. In Korea, industrial production and business confidence improved in January and February. Boosted by government stimulus, Brazilian auto production and sales rebounded strongly from their steep declines late last year. In Mexico, the manufacturing PMI began moving up during the February-March period, and auto production declines abated over the course of the first quarter. In Singapore, however, the flash real GDP release pointed to an unexpectedly large contraction of 20 percent in the first quarter. Activity was also weaker than had been expected in Chile, Indonesia, and Thailand. We expect growth in the EMEs to be slightly negative in the current quarter, up a little from the March Greenbook. Output growth is projected to recover to 2 percent in the second half of this year and to move up further thereafter. This forecast has been revised International Developments Class II FOMC—Restricted (FR) I-45 up about 1 percentage point, on average, over the forecast period. Our projected recovery depends on a pickup in the advanced economies, a resumption of capital flows to EMEs, and some support from expansionary fiscal and monetary policies. The downside risks to the outlook for EME growth appear to have diminished somewhat after the introduction of the IMF’s new Flexible Credit Line and the recent G-20 commitment to increase the IMF’s lending capacity. Consumer prices in EMEs have softened in recent months, driving down our estimate of four-quarter inflation to about 1½ percent for the current quarter. The fall in inflation has been concentrated in emerging Asia and largely reflects weak economic activity and lower prices for food and other commodities. Inflation pressures have also begun to moderate in Latin America, albeit to a lesser extent. Four-quarter inflation in the EMEs is projected to fall further to about 1 percent in the third quarter, before increasing to around 2¼ percent next year, a forecast path that is a touch higher than we had projected in the March Greenbook. Commodity Prices Oil prices have moved higher since the March Greenbook, with the spot price of West Texas intermediate (WTI) crude oil rising over $4 to close on April 21 at $46.51 per barrel. The prices of futures contracts dated for delivery further out moved up more, steepening the upward slope of the futures curve. Recent upward price pressure reflects, in part, further reductions in OPEC supply as well as an apparent improvement in sentiment regarding the global economic outlook. Consistent with this path of futures prices, we currently project that the spot price of WTI will rise to $64 per barrel by the end of next year. Relative to the March Greenbook, this projection averages nearly $6 per barrel higher over the remainder of 2009 and $8 per barrel higher next year. Average nonfuel commodity prices have started to edge up recently after having declined precipitously at the end of last year. Going forward, we expect further small increases in commodity prices, consistent with readings from futures markets. Our projection is slightly higher than in the March Greenbook. Prices of Internationally Traded Goods We estimate that core import prices declined at an annual rate of 9¾ percent in the first quarter of this year, pulled down by continued steep declines in prices for materialintensive goods. We project core import prices to fall at an annual rate of 3 percent in the I-46 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 current quarter and to begin rising by the fourth quarter of this year, as commodity prices increase at a moderate pace and the dollar depreciates. We estimate that core export prices declined at an annual rate of 10 percent in the first quarter of this year. Prices for exported finished goods moved down a bit, joining the large declines in prices of agricultural products and industrial supplies that started in the fourth quarter of last year. With the flattening of commodity prices, core export prices are expected to bottom out around the middle of the year and then to increase moderately over the remainder of the forecast period. Trade in Goods and Services We estimate that real exports of goods and services plummeted at an annual rate of 31 percent in the first quarter, about 8 percentage points more than previously projected. The downward revision is largely in response to the weakness of the January trade data, which were released immediately after the close of the March Greenbook but before the March FOMC meeting. In the current quarter, we expect the decline in real exports to moderate to about 3½ percent; exports rose a bit in February, other trade indicators look less gloomy, and foreign GDP is projected to decline more slowly. We project real exports to flatten out in the second half of 2009 before increasing 2¼ percent in 2010, in line with the projected recovery in foreign GDP growth. Relative to the March Greenbook, our export growth projection is somewhat stronger, reflecting the weaker dollar and slightly stronger foreign growth in this forecast. We estimate that real imports of goods and services decreased at an annual rate of 31 percent in the first quarter, more than 10 percentage points weaker than projected in the March Greenbook, on account of larger-than-expected drops in the January and February trade data. Although February’s decline was widespread across categories, some of the weakness owes to disruptions related to the Chinese New Year holidays in January. For the current quarter, we expect imports to decline by 7¼ percent, 2½ percentage points more than previously projected, on continued weak U.S. demand and lower projected oil imports. For the remainder of the forecast period, we project import growth to pick up to an annual rate of 4¾ percent on average. This is about 1¼ percentage point higher than in the March Greenbook, in line with the higher growth path for the U.S. economy. Class II FOMC—Restricted (FR) I-47 International Developments Staff Projections of Selected Trade Prices (Percent change from end of previous period, annual rate, excepted as noted) 2008 Projection Trade category 2009 H1 H2 2010 Q1 Imports Core goods Previous GB Oil (dollars per barrel) Previous GB 9.5 9.5 108.65 108.65 Exports Core goods Previous GB 13.0 13.0 -2.2 -2.0 68.74 68.74 Q2 H2 -3.0 -4.7 47.32 43.09 -.1 -.8 51.32 44.79 1.1 1.1 58.86 50.51 -10.1 -10.9 -12.0 -10.9 -9.7 -10.0 43.40 41.46 -2.3 -5.2 .7 -.3 1.2 1.2 Note: Prices for core exports exclude computers and semiconductors. Prices for core imports exclude computers, semiconductors, oil, and natural gas. Both prices are on a national income and product account chain-weighted basis. The price of imported oil for multi-quarter periods is the price for the final quarter of the period. Imported oil includes both crude oil and refined products. Staff Projections for Trade in Goods and Services (Percent change from end of previous period, annual rate) 2008 Projection Measure 2009 H1 H2 2010 Q1 Q2 H2 Real imports Previous GB -4.1 -4.1 -10.8 -10.0 -31.1 -19.7 -7.2 -4.7 4.1 3.2 5.1 3.8 Real exports Previous GB 8.6 8.6 -11.3 -11.3 -31.4 -23.6 -3.4 -5.6 -.7 -2.3 2.3 1.0 Note: Changes for years are measured as Q4/Q4; half-years are measured as Q2/Q4 or Q4/Q2. I-48 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 Alternative Simulation Although our baseline forecast assumes that major foreign economies will begin to recover in the second half of this year, there is considerable downside risk to our outlook. One risk is that emerging market economies may experience deeper-than-expected recessions that are accompanied by capital outflows and large depreciations of their currencies. We use the SIGMA model to examine the implications of a demand-induced weakening in foreign activity coupled with risk premium shocks that cause the dollar to appreciate substantially. Such risk premium shocks may be interpreted as reflecting a flight to higher quality assets denominated in dollars. 1 The foreign demand shock begins in the current quarter and is calibrated to reduce overall foreign growth 1 percentage point below baseline in early 2010 before gradually receding. The demand shock by itself would induce a small appreciation of the dollar, but the risk premium shocks are calibrated so that the broad real dollar appreciates about 10 percent above baseline in 2010 before slowly returning to baseline. The broad real dollar appreciated by a similar magnitude during the Asian crisis. In the simulation, U.S. real net exports decline in response to the weaker foreign activity and the appreciation of the dollar. As discussed in more detail in the accompanying box, the contractionary effect on U.S. real activity is amplified because the federal funds rate is constrained by the zero bound from declining. Expected inflation falls in response to the negative shock and, accordingly, real interest rates rise substantially relative to baseline, causing U.S. domestic demand to fall. Declines in stock prices and associated reductions in collateral values work through the financial accelerator channel to boost corporate bond spreads about 0.9 percentage point relative to baseline, deepening the decline in private demand. U.S. GDP growth declines 1.7 percentage points relative to baseline in the second half of 2009 and in 2010. Weaker U.S. growth and lower import price inflation cause core PCE price inflation to fall 0.7 and 0.5 percentage point below baseline in 2009:H2 and 2010, respectively. 1 Due to technical considerations associated with imposing a zero bound constraint, we use a twocountry version of the model that includes the United States and an aggregate foreign sector. Class II FOMC—Restricted (FR) I-49 International Developments Alternative Simulation: Weaker Foreign GDP and Stronger Dollar (Percent change from previous period, annual rate, except as noted) 2009 Indicator and simulation 2010 2011 201213 H1 H2 H1 H2 U.S. real GDP Baseline Weaker foreign GDP and stronger dollar -3.9 -4.2 .8 -.9 2.2 .0 3.1 1.9 4.8 4.5 5.3 5.6 U.S. PCE prices excluding food and energy Baseline Weaker foreign GDP and stronger dollar 1.7 1.4 .8 .1 .7 .0 .6 .2 .7 .5 .9 .9 U.S federal funds rate (percent) Baseline Weaker foreign GDP and stronger dollar .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 2.0 1.6 U.S. trade balance (percent share of GDP) Baseline Weaker foreign GDP and stronger dollar -2.7 -3.1 -2.9 -4.0 -3.3 -4.8 -3.4 -4.8 -3.6 -4.7 -3.9 -4.0 NOTE. H1 is Q2/Q4; H2 is Q4/Q2. U.S. real GDP and U.S. PCE prices are the average rates over the period. The federal funds rate and the trade balance are the values for the final quarter of the period. I-50 Class II FOMC—Restricted (FR) Part 1: Summary and Outlook, April 22, 2009 The Role of the Zero Lower Bound in Amplifying Foreign Shocks In this box, we show that external disturbances can pose a much greater risk to domestic economic activity when monetary policy is constrained by the zero lower bound than when policy is unconstrained. The solid lines in Figure 1 reproduce the previously discussed alternative simulation, showing the effects of foreign demand and risk premium shocks on key U.S. variables. In this scenario, the federal funds rate responds according to a Taylor rule but is constrained by the zero lower bound over the period shown. All simulation results are reported as deviations from baseline. The dashed lines show the response to the same shocks in a different scenario, in which the federal funds rate is unconstrained and allowed to fall below the zero lower bound. In this case, the shocks have a depressing effect on U.S. real net exports through both weaker foreign activity and an appreciation of the dollar. This fall in external demand causes the level of U.S. GDP to decline more than 1 percent below baseline in 2010, while core PCE price inflation declines 0.4 percentage point. However, the contractionary effects of the shock are alleviated by the impact of a decline in the real interest rate on private absorption, reflecting an easing of monetary policy. When policy is constrained by the zero bound, the shocks have nearly the same effect on U.S. net exports, but the decline in U.S. GDP is about three times larger. The zero bound constraint keeps nominal interest rates from declining in the face of lower expected inflation, inducing a pronounced rise in the real interest rate. As a result, U.S. domestic absorption falls sharply, reinforcing the deflationary effects of the shocks. The constrained simulation assumes that U.S. monetary policymakers do not engage in unconventional forms of stimulus. Such policies would bring the effects of the shocks closer to those seen when the federal funds rate is unconstrained. Class II FOMC—Restricted (FR) I-51 International Developments Figure 1 (Deviation from Baseline) I-52 Class II FOMC -- Restricted (FR) Evolution of the Staff Forecast Current Account Balance Percent of GDP -2.0 -2.5 -3.0 2010 -3.5 2009 -4.0 -4.5 -5.0 2008 -5.5 -6.0 -6.5 1/24 3/14 5/2 6/20 8/2 9/12 10/24 12/5 1/23 2007 3/13 4/23 6/18 7/30 9/10 10/22 12/10 1/22 3/12 4/22 2008 Greenbook publication date 6/17 8/5 9/16 10/29 12/9 -7.0 2009 Foreign Real GDP Percent change, Q4/Q4 4 2009 2010 3 2008 2 1 0 -1 -2 1/24 3/14 5/2 6/20 8/2 9/12 10/24 12/5 1/23 2007 3/13 4/23 6/18 7/30 9/10 10/22 12/10 1/22 3/12 4/22 2008 Greenbook publication date 6/17 8/5 9/16 10/29 12/9 -3 2009 Core Import Prices* Percent change, Q4/Q4 2008 2010 2009 1/24 3/14 5/2 6/20 2007 8/2 9/12 10/24 12/5 1/23 3/13 4/23 6/18 7/30 9/10 10/22 12/10 1/22 2008 Greenbook publication date *Prices for merchandise imports excluding computers, semiconductors, oil, and natural gas. 3/12 4/22 6/17 2009 8/5 9/16 10/29 12/9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 April 22, 2009 4.3 7.0 4.4 10.3 1.4 1.2 6.7 Emerging Market Economies Asia Korea China Latin America Mexico Brazil -5.4 -7.3 -9.6 -10.6 -18.8 1.6 -9.4 -10.3 -13.6 -6.3 -4.7 -5.3 6.5 -8.5 -10.0 -4.0 -6.4 -17.8 -7.0 -6.5 -7.0 -7.8 -7.2 -0.5 0.6 -4.1 6.9 -1.8 -2.0 -0.5 -3.8 -5.7 -2.8 -3.6 -3.8 -3.8 -2.4 1.7 2.7 1.6 7.4 0.6 0.6 1.0 -0.0 -2.1 -1.0 -1.0 -1.1 -0.6 0.4 2.4 3.6 2.3 8.0 1.2 1.0 2.3 0.7 -0.3 1.0 0.2 0.0 0.5 1.3 3.5 4.5 3.3 8.3 2.3 2.0 3.2 1.0 0.7 1.0 1.1 1.0 1.0 2.1 4.3 5.3 4.2 8.8 3.2 3.2 3.2 2.1 1.0 1.3 1.5 1.4 1.7 2.8 4.8 5.8 4.2 9.2 3.8 4.0 3.2 2.3 1.3 2.2 1.8 1.5 2.0 3.2 4.9 6.0 4.2 9.2 3.9 4.2 3.2 2.4 1.3 2.3 1.8 1.7 2.1 3.3 2.7 2.3 1.4 3.4 3.6 3.0 1.9 1.0 2.4 3.4 3.1 4.7 2.3 4.1 3.4 2.2 4.8 3.8 3.2 3.4 4.8 1.9 1.0 3.9 2.3 1.7 2.0 3.3 1.1 0.4 3.0 1.0 0.8 1.0 1.9 0.4 -0.3 2.2 0.7 0.6 0.5 1.0 -0.4 -1.2 0.9 0.4 0.2 -0.2 0.4 0.8 -0.7 1.2 0.9 0.7 0.5 0.9 1.3 -0.6 2.0 1.6 1.0 1.1 1.6 1.3 -0.4 1.6 1.3 1.0 1.0 1.6 1.2 -0.5 1.7 1.3 1.0 0.9 1.6 1.2 -0.5 1.6 1.2 1.1 0.9 1.6 --------------------------- Four-quarter changes -------------------------- 1.4 0.7 1.0 5.3 2.1 1.6 6.9 0.9 -3.4 -1.4 -12.1 -2.8 -6.1 -1.0 -6.3 -2.1 -8.2 -0.3 0.4 1. 2. 3. 4. Foreign GDP aggregates calculated using shares of U.S. exports. Harmonized data for euro area from Eurostat. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. CPI excluding mortgage interest payments, which is the targeted inflation rate. Emerging Market Economies 6.0 6.6 6.1 4.7 2.8 1.6 1.0 1.4 2.1 2.2 2.2 2.2 Asia 6.6 7.0 6.0 3.7 1.1 -0.2 -0.7 0.3 1.4 1.7 1.8 1.8 Korea 3.8 4.8 5.5 4.5 3.9 2.5 1.7 1.8 1.8 1.8 1.8 1.8 China 8.1 7.7 5.1 2.7 -0.6 -1.5 -1.3 -0.4 1.0 1.3 1.4 1.4 Latin America 4.5 5.5 6.1 6.6 6.4 5.5 4.5 3.6 3.3 3.1 3.1 3.0 Mexico 3.9 4.9 5.5 6.2 6.2 5.4 4.4 3.4 2.9 2.6 2.6 2.6 Brazil 4.6 5.5 6.3 6.2 5.9 5.0 4.1 4.0 3.7 3.7 3.7 3.7 ______________________________________________________________________________________________________________ Advanced Foreign Economies of which: Canada Japan United Kingdom (4) Euro Area (2) Germany CONSUMER PRICES (3) ------------------Total Foreign 0.6 -4.5 -0.1 -1.0 -2.0 -0.9 1.4 1.2 2.7 6.2 3.3 3.5 1.7 10.9 2.9 1.3 6.5 -0.5 1.1 0.7 2.2 -------------------- Quarterly changes at an annual rate ------------------ Advanced Foreign Economies of which: Canada Japan United Kingdom Euro Area (2) Germany REAL GDP (1) -----------Total Foreign ----------------- Projected --------------------2008 2009 2010 ------------------------------------------------------------------Measure and country Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ______________________________________________________________________________________________________________ OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES (Percent changes) ______________________________________________________________________________________________________________ Class II FOMC Restricted (FR) I-53 April 22, 2009 1.3 1.7 -0.3 1.3 2.0 1.1 2.1 3.8 -0.5 1.5 2.3 1.2 2.1 2.3 0.5 1.4 2.3 2.1 1.8 2.8 5.5 6.0 2.5 9.9 5.0 4.5 4.7 3.7 1.1 2.3 1.7 0.2 2.6 3.8 2.3 -1.0 2.1 2.3 2.2 1.6 2.3 5.9 7.7 5.2 10.3 4.1 3.6 3.7 3.0 2.9 2.0 2.1 1.6 2.7 4.0 1.4 0.3 2.7 1.8 1.3 1.4 2.1 5.9 7.2 4.6 10.8 4.7 4.0 4.6 2.2 2.2 3.2 3.4 4.1 2.7 4.1 2.5 0.5 2.1 2.9 3.1 2.2 3.6 6.3 8.1 5.7 12.3 4.5 3.7 6.1 2.8 2.1 3.2 2.1 1.7 2.6 4.2 1.9 1.0 3.9 2.3 1.7 2.0 3.3 -0.3 -0.1 -3.4 6.9 -0.9 -1.7 1.2 -0.7 -4.3 -2.0 -1.5 -1.6 -1.4 -0.9 0.8 -0.7 1.2 0.9 0.7 0.5 0.9 -0.7 0.5 -1.4 7.2 -2.2 -2.7 -0.3 -2.4 -6.7 -2.5 -2.8 -3.0 -3.0 -2.0 1.2 -0.5 1.6 1.2 1.1 0.9 1.6 4.4 5.4 4.0 8.9 3.3 3.3 3.2 1.9 1.0 1.7 1.6 1.4 1.7 2.8 1. 2. 3. 4. Foreign GDP aggregates calculated using shares of U.S. exports. Harmonized data for euro area from Eurostat. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. CPI excluding mortgage interest payments, which is the targeted inflation rate. Emerging Market Economies 2.9 3.1 3.9 3.0 2.9 5.1 4.7 1.4 2.2 Asia 0.8 2.3 3.2 2.6 2.4 5.4 3.7 0.3 1.8 Korea 3.3 3.5 3.4 2.5 2.1 3.4 4.5 1.8 1.8 China -0.6 2.7 3.3 1.4 2.1 6.7 2.7 -0.4 1.4 Latin America 6.4 4.9 5.6 3.8 4.1 4.3 6.6 3.6 3.0 Mexico 5.2 3.9 5.3 3.1 4.1 3.8 6.2 3.4 2.6 Brazil 10.7 11.5 7.2 6.1 3.2 4.3 6.2 4.0 3.7 ___________________________________________________________________________________________________ Advanced Foreign Economies of which: Canada Japan United Kingdom (4) Euro Area (2) Germany 2.5 3.9 6.4 7.5 8.6 1.6 2.0 4.9 Emerging Market Economies Asia Korea China Latin America Mexico Brazil CONSUMER PRICES (3) ------------------Total Foreign 1.5 2.4 3.2 1.2 0.2 3.5 2.1 2.4 1.1 0.0 4.6 6.9 3.7 10.3 2.0 1.5 1.0 1.8 2.9 2.5 3.0 Advanced Foreign Economies of which: Canada Japan United Kingdom Euro Area (2) Germany REAL GDP (1) -----------Total Foreign Projected Measure and country 2002 2003 2004 2005 2006 2007 2008 2009 2010 ___________________________________________________________________________________________________ OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES (Percent, Q4 to Q4) ___________________________________________________________________________________________________ Class II FOMC Restricted (FR) I-54 April 22, 2009 3.8 10.2 -1.1 10.1 0.6 9.7 8.8 3.8 19.5 13.2 11.0 10.0 Exports of G&S Services Computers Semiconductors Core Goods 1/ Imports of G&S Services Oil Natural Gas Computers Semiconductors Core Goods 2/ -0.9 0.7 -1.7 -0.1 0.7 -0.8 11.5 9.3 10.8 4.9 23.2 9.8 11.4 7.4 8.3 5.8 -6.0 8.0 4.8 -0.1 1.0 13.7 12.5 7.5 5.9 7.0 4.0 14.2 17.6 7.4 3.8 8.0 -9.2 -12.6 13.8 -0.3 5.7 10.1 11.5 8.1 2.9 10.0 0.4 1.1 -0.6 Billions of Chained 2000 Dollars 4.8 2.2 1.2 1.3 17.0 -0.1 5.2 5.8 3.0 11.3 38.3 4.9 Percentage change, Q4/Q4 -0.1 0.6 -0.7 1.1 1.8 0.6 12.1 8.4 3.8 0.1 8.9 9.3 0.9 29.3 8.2 0.8 1.0 -0.2 -7.5 -1.7 -1.1 -27.3 -11.6 -10.0 -9.8 -1.8 2.5 -2.2 -13.8 -3.4 1.1 -0.2 1.3 -8.8 -3.1 -13.5 11.4 1.6 -15.0 -10.9 -10.1 -7.0 3.2 -13.1 -12.0 0.1 -1.2 1.3 5.1 3.6 -0.0 2.0 15.5 5.0 6.0 2.3 2.2 9.5 11.1 1.7 -0.5 0.2 -0.7 33.0 102.4 -69.4 -423.7 -461.3 -4.4 51.0 112.7 -61.7 -496.9 -523.4 -4.8 73.4 150.9 -77.5 -607.7 -625.0 -5.3 78.8 173.2 -94.4 -711.6 -729.0 -5.9 63.8 184.1 -120.3 -753.3 -788.1 -6.0 88.8 233.9 -145.1 -700.3 -731.2 -5.3 134.8 267.9 -133.1 -681.1 -673.3 -4.7 46.8 172.1 -125.2 -393.8 -478.9 -3.4 64.2 197.0 -132.8 -486.5 -552.3 -3.8 1. Merchandise exports excluding computers and semiconductors. 2. Merchandise imports excluding oil, natural gas, computers, and semiconductors. Other Income & Transfers,Net -70.5 -77.5 -90.6 -96.2 -98.6 -119.7 -127.0 -132.0 -130.0 ________________________________________________________________________________________________________________ Investment Income, Net Direct, Net Portfolio, Net Net Goods & Services (BOP) US CURRENT ACCOUNT BALANCE Current Acct as Percent of GDP Billions of dollars Net Goods & Services -471.3 -518.9 -593.8 -616.6 -615.7 -546.5 -390.2 -330.8 -387.7 Exports of G&S 1013.3 1026.1 1126.1 1205.3 1314.8 1425.9 1514.1 1313.2 1324.2 Imports of G&S 1484.6 1545.0 1719.9 1821.9 1930.5 1972.4 1904.3 1644.0 1711.9 ________________________________________________________________________________________________________________ -0.9 0.4 -1.3 Percentage point contribution to GDP growth, Q4/Q4 Net Goods & Services Exports of G&S Imports of G&S NIPA REAL EXPORTS and IMPORTS Projected 2002 2003 2004 2005 2006 2007 2008 2009 2010 ________________________________________________________________________________________________________________ OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS ________________________________________________________________________________________________________________ Class II FOMC Restricted (FR) I-55 April 22, 2009 0.3 0.8 -0.5 3.2 -5.7 5.1 58.6 3.2 -9.2 4.8 Exports of G&S Services Computers Semiconductors Core Goods 1/ Imports of G&S Services Oil Natural Gas Computers Semiconductors Core Goods 2/ -0.1 0.0 -0.1 -1.3 1.1 -2.4 0.1 1.7 -1.6 0.6 0.6 0.0 -0.1 0.4 -0.5 0.8 -1.0 -11.6 111.1 20.4 14.0 0.3 0.4 3.2 8.3 30.7 -2.9 15.3 6.8 53.6 -41.9 15.4 20.0 12.7 10.9 5.7 5.2 38.0 12.4 10.3 17.7 -2.8 -50.7 20.7 0.2 13.7 16.7 13.4 12.0 20.3 18.3 0.1 -2.0 -27.1 91.9 21.1 -0.5 4.9 5.5 2.7 17.5 16.1 5.6 3.1 -0.3 7.5 26.6 19.7 17.7 1.2 3.5 3.2 -7.9 -5.6 4.8 Billions of Chained 2000 Dollars, s.a.a.r. 0.6 -0.0 -27.1 -14.1 11.6 7.7 6.1 8.8 -2.8 27.9 11.7 13.8 1.3 1.7 -0.3 2.0 18.4 -10.6 -51.2 -4.3 -15.8 3.2 15.6 28.6 12.7 -15.0 11.8 Percentage change from previous period, s.a.a.r. 0.8 0.9 -0.1 Percentage point contribution to GDP growth 7.7 4.2 30.9 70.8 34.9 1.2 2.2 0.6 -2.7 3.9 15.9 1.3 -1.2 0.1 -1.2 -3.7 -2.0 -22.3 74.2 -6.5 6.7 -1.1 8.8 13.3 -4.0 23.7 6.6 1.7 1.0 0.7 3.0 6.3 -13.5 28.2 -0.2 1.0 5.8 23.0 25.9 14.4 20.5 22.1 2.0 2.5 -0.5 -2.3 -0.9 16.5 -58.6 9.7 6.4 -6.0 4.4 2.7 -9.2 61.7 3.7 0.9 0.5 0.4 77.8 168.5 -90.7 88.7 187.8 -99.0 -721.4 -675.6 -5.4 59.9 166.3 -106.5 -778.0 -832.9 -6.6 65.2 177.2 -112.0 -756.4 -783.8 -6.0 70.7 189.2 -118.5 -767.4 -799.6 -6.1 51.7 171.9 -120.3 -789.9 -843.6 -6.4 67.7 198.2 -130.5 -699.5 -725.4 -5.4 57.8 201.1 -143.2 -718.2 -787.7 -5.8 45.8 196.2 -150.4 -715.3 -776.4 -5.7 98.9 238.8 -139.9 -672.5 -691.8 -5.0 152.6 299.3 -146.7 -695.1 -669.0 -4.8 1. Merchandise exports excluding computers and semiconductors. 2. Merchandise imports excluding oil, natural gas, computers, and semiconductors. Other Inc. & Transfers, Net-120.9 -106.2 -42.9 -114.8 -92.6 -103.0 -105.4 -93.6 -127.4 -106.9 -118.3 -126.4 ___________________________________________________________________________________________________________________________ 88.6 170.2 -81.6 -682.9 Net Goods & Services (BOP) -664.0 Investment Income, Net Direct, Net Portfolio, Net -711.3 -5.8 -696.2 -5.7 US CURRENT ACCOUNT BALANCE Current Account as % of GDP Billions of dollars, s.a.a.r. Net Goods & Services -623.7 -601.3 -603.6 -637.8 -636.0 -619.4 -623.0 -584.2 -618.6 -571.2 -511.8 -484.5 Exports of G&S 1177.9 1203.1 1204.3 1235.7 1284.3 1301.4 1312.6 1361.1 1363.2 1392.2 1466.2 1482.1 Imports of G&S 1801.7 1804.4 1807.9 1873.6 1920.2 1920.9 1935.7 1945.3 1981.8 1963.4 1978.0 1966.5 ___________________________________________________________________________________________________________________________ 8.1 10.2 16.8 -5.2 7.3 Net Goods & Services Exports of G&S Imports of G&S NIPA REAL EXPORTS and IMPORTS 2005 2006 2007 --------------------------------------------------------------------------------Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ___________________________________________________________________________________________________________________________ OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS ___________________________________________________________________________________________________________________________ Class II FOMC Restricted (FR) I-56 April 22, 2009 0.8 0.6 0.1 -0.8 5.5 17.6 -40.5 6.3 -3.3 -6.4 Exports of G&S Services Computers Semiconductors Core Goods 1/ Imports of G&S Services Oil Natural Gas Computers Semiconductors Core Goods 2/ 1.1 0.4 0.7 -0.2 -3.4 3.3 1.0 -4.4 5.3 0.6 -0.4 1.0 -0.4 -0.2 -0.2 -3.5 3.3 -6.6 -38.0 -13.1 -4.5 -2.5 3.0 1.4 5.4 21.3 2.9 -17.5 -6.7 40.7 -27.2 -47.4 -37.9 -29.2 -23.6 -1.5 -45.2 -53.4 -30.4 -31.1 -15.7 7.6 81.6 -26.4 -55.0 -41.8 -31.4 -14.4 -18.5 -64.8 -38.1 -7.2 0.5 -52.5 -1.0 8.6 5.0 -0.0 -3.4 -7.8 15.8 31.2 -2.6 1.4 2.2 -15.8 37.1 15.5 5.0 2.8 -1.5 -3.8 9.5 11.1 -1.1 Billions of Chained 2000 Dollars, s.a.a.r. -7.3 -8.0 -38.1 3.7 26.0 14.4 2.4 12.3 3.8 57.4 -6.8 16.1 0.2 -1.6 9.5 11.1 0.6 -0.9 0.0 -0.9 6.9 1.8 30.3 -37.4 15.5 5.0 5.2 Percentage change from previous period, s.a.a.r. 2.9 1.5 1.4 Percentage point contribution to GDP growth 8.9 6.7 29.9 15.6 15.5 5.0 5.7 1.2 0.1 9.5 11.1 1.1 -1.1 0.1 -1.2 0.3 -0.8 -28.5 11.8 15.5 5.0 6.0 2.1 1.7 9.5 11.1 1.7 0.2 0.2 0.0 3.3 4.1 -17.7 27.0 15.5 5.0 6.1 2.7 3.2 9.5 11.1 1.9 -0.2 0.3 -0.5 8.2 4.6 30.9 -34.1 15.5 5.0 6.1 3.2 3.9 9.5 11.1 2.2 -0.8 0.3 -1.1 -725.7 120.0 259.7 -139.7 Net Goods & Services (BOP) -713.8 Investment Income, Net Direct, Net Portfolio, Net 125.5 256.3 -130.8 -723.5 -725.2 -5.0 153.5 274.2 -120.7 -561.5 -531.3 -3.7 59.1 171.1 -112.0 -389.2 -470.2 -3.3 41.3 167.0 -125.7 -374.7 -462.7 -3.3 41.0 171.7 -130.7 -386.4 -474.7 -3.4 46.0 178.4 -132.4 -424.9 -508.2 -3.6 52.1 185.7 -133.6 -473.3 -550.5 -3.8 59.6 193.7 -134.1 -472.4 -542.1 -3.8 68.1 201.3 -133.2 -483.4 -544.6 -3.7 77.1 207.2 -130.2 -516.7 -571.9 -3.9 1. Merchandise exports excluding computers and semiconductors. 2. Merchandise imports excluding oil, natural gas, computers, and semiconductors. Other Inc. & Transfers, Net-134.1 -123.3 -127.2 -123.2 -140.1 -129.3 -129.3 -129.3 -129.3 -129.3 -129.3 -132.3 ___________________________________________________________________________________________________________________________ 140.3 281.3 -141.1 -728.9 -5.1 -707.6 -5.0 US CURRENT ACCOUNT BALANCE Current Account as % of GDP Billions of dollars, s.a.a.r. Net Goods & Services -462.0 -381.3 -353.0 -364.5 -333.4 -314.0 -324.7 -351.2 -383.3 -377.9 -382.9 -406.5 Exports of G&S 1500.6 1544.7 1556.1 1454.9 1324.1 1312.7 1307.6 1308.4 1312.2 1318.9 1327.7 1338.1 Imports of G&S 1962.6 1926.0 1909.1 1819.4 1657.5 1626.7 1632.3 1659.6 1695.5 1696.7 1710.6 1744.7 ___________________________________________________________________________________________________________________________ 5.1 6.4 0.4 4.6 4.7 Net Goods & Services Exports of G&S Imports of G&S NIPA REAL EXPORTS and IMPORTS ---------------------- Projected ------------------------2008 2009 2010 --------------------------------------------------------------------------------Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ___________________________________________________________________________________________________________________________ OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS ___________________________________________________________________________________________________________________________ Class II FOMC Restricted (FR) I-57 (Page I-58 is intentionally blank.) Class II FOMC—Restricted (FR) Abbreviations E&S equipment and software FOMC Federal Open Market Committee; also, the Committee GDP gross domestic product GSE government-sponsored enterprise IP industrial production MBS mortgage-backed securities NAIRU nonaccelerating-inflation rate of unemployment OPEC Organization of the Petroleum Exporting Countries PCE personal consumption expenditures TARP Troubled Asset Relief Program WTI West Texas intermediate I-59 Last page of Part 1
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