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Class III FOMC - Internal (FR)

Part 2

April 23, 2008

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

April 23, 2008

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
The incoming data continue to suggest that the economy has stalled so far this year.
Labor market conditions have deteriorated further, housing activity remains on a steady
descent, and nonresidential construction now appears to have turned down as well.
Consumer spending has been anemic, with sentiment tumbling further. Investment in
business equipment looks to have flattened out in the first quarter. And although
manufacturing activity rose in March, it has nevertheless been soft for the year to date.
Meanwhile, core consumer price inflation has slowed in recent months, but overall
inflation remains elevated.
Labor Market Developments
Labor demand continued to weaken in March. Private payroll employment fell 98,000
following similar declines in January and February. Once again, the declines were
widespread by industry, with the exception of nonbusiness services.1 The workweek
ticked up 0.1 hour in March, to 33.8 hours, and aggregate hours of production or
nonsupervisory workers on private nonfarm payrolls rose 0.2 percent. Nevertheless,
aggregate hours fell at an annual rate of 1.2 percent for the first quarter as a whole.
In the household survey, the unemployment rate rose 0.3 percentage point in March, to
5.1 percent. The unemployment rate averaged 4.9 percent in the first quarter, up from
4.8 percent in the fourth quarter and 4.5 percent in the first half of 2007. Job losers
accounted for most of the increase in March, as they have over the past year. The labor
force participation rate stood at 66.0 percent in March and has changed little, on net, over
the past year.
By and large, other indicators of labor demand have also continued to weaken. Initial
claims for unemployment insurance, the level of insured unemployment, and the
household survey’s measure of job losers unemployed less than five weeks as a percent
of employment have all risen further this year. Moreover, the most recent readings on
net hiring plans from both the Manpower and National Federation of Independent
Business (NFIB) surveys moved down, and the vacancy rate (job openings as a percent of
private employment) in the Job Openings and Labor Turnover (JOLT) survey fell further
in February (the latest available data). In contrast, the hiring rate in the JOLT survey was
flat from December to February after declining since the middle of 2006, while the rate of

On February 26, about 3,600 UAW employees at American Axle & Manufacturing, a motor vehicle
parts supplier for General Motors, went on strike. Shutdowns of auto plants directly and indirectly affected
by the strike likely account for a substantial proportion of the 24,000 jobs lost in the motor vehicle sector in
March; even excluding motor vehicles, however, manufacturing employment fell 24,000.

II-1

II-2
Changes in Employment
(Thousands of employees; seasonally adjusted)
2007
Measure and sector

2006

2008
H2

Jan.

Average monthly change
Nonfarm payroll employment
(establishment survey)
Private
Natural resources and mining
Manufacturing
Ex. motor vehicles
Construction
Residential
Nonresidential
Wholesale trade
Retail trade
Financial activities
Professional and business services
Temporary help services
Nonbusiness services1
Total government
Total employment (household survey)
Memo:
Aggregate hours of private production
workers (percent change)2
Average workweek (hours)3
Manufacturing (hours)

Feb.

Mar.

Monthly change

175
159
5
-14
-11
13
-5
18
12
5
9
46
1
76
16
264

107
87
3
-24
-16
-7
-11
4
10
12
-7
19
-9
80
20
23

76
54
3
-20
-14
-32
-29
-3
7
1
-11
33
-4
73
22
21

-76
-79
5
-35
-29
-39
-35
-4
-6
-16
-8
-30
-4
59
3
37

-76
-109
1
-46
-39
-37
-25
-12
-9
-47
-11
-30
-34
67
33
-255

-80
-98
6
-48
-24
-51
-31
-21
-5
-12
-5
-35
-22
61
18
-24

2.4
33.9
41.1

1.4
33.8
41.1

1.1
33.8
41.3

-.4
33.7
41.1

-.1
33.7
41.2

.2
33.8
41.3

1. Nonbusiness services comprises education and health, leisure and hospitality, and "other."
2. Establishment survey. Annual data are percent changes from Q4 to Q4. Semiannual data are Q2/Q4 or Q4/Q2
percent changes at an annual rate. Monthly data are percent changes from preceding month.
3. Establishment survey.

Aggregate Hours and Workweek of
Production or Nonsupervisory Workers

Changes in Private
Payroll Employment
Thousands

400

35.0

Hours

2002 = 100

110

3-month moving average
300

300

200

100

-100

108

Aggregate
hours
(right scale)

34.5

106

Mar.
34.0

102

-100

100

Mar.
-200

-200

-300

Workweek
(left scale)

33.5

-300

-400

2000

2002

2004

2006

2008

-400

104

98
96

33.0

2000

2002

2004

2006

2008

II-3
Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2007
Rate and group

2008

2007

Jan.

Feb.

Mar.

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

4.6
15.7
8.2
3.6
3.6

4.7
15.8
8.6
3.6
3.7

4.8
16.4
8.6
3.7
3.8

4.9
16.8
9.0
3.8
3.9

4.9
18.0
8.7
3.8
3.8

4.8
16.6
8.9
3.7
3.8

5.1
15.8
9.3
4.0
4.1

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

66.0
41.3
74.4
75.6
59.7

66.0
40.7
74.4
75.6
59.8

66.0
41.0
74.0
75.5
59.7

66.0
40.3
73.9
75.5
59.9

66.1
41.0
74.4
75.6
59.9

65.9
40.0
73.5
75.5
59.8

66.0
39.8
73.9
75.4
60.1

Percent

Labor Force Participation Rate
and Unemployment Rate

Persons Working Part Time
for Economic Reasons

Percent

67.6

6.5

4.0

Percent of household employment

4.0

67.4
6.0

67.2
Unemployment rate
(right scale)

67.0
66.8

3.6

5.5

Mar.
3.2

3.2

2.8

2.4

5.0

2.4

66.6
66.4

Mar.

66.2
66.0
65.8
65.6

4.5
4.0

Participation
rate (left scale)

3.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

3.0

2.0

Job Losers Unemployed
Less Than 5 Weeks
Percent

2.0

Unemployed Due to Job Loss

(as a percent of household employment)
1.4

2000 2001 2002 2003 2004 2005 2006 2007 2008

(as a percent of the labor force)
1.4

4.0

Percent

4.0

3-month moving average (thick line)
3.5
1.2

3.5

1.2
3.0

Mar.
1.0

1.0

0.8

Mar.

3.0

0.8

0.6

2.0

1.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

2.5

2.0

0.6

2.5

1.5

1.0

2000 2001 2002 2003 2004 2005 2006 2007 2008

1.0

II-4
Labor Market Indicators

Unemployment Insurance
4.0

Layoffs and Job Cuts

Millions

Thousands
Insured unemployment
(left scale)

3.5

300

500

1.5

Apr. 12
2000

2002

150
100

300

250

1.6
Feb.

1.4

1.2

Initial claims
(right scale)

2.0

1.8

Layoffs and discharges
(monthly, right scale)

200

350

2.5

450

Percent of private employment

Thousands

250

400

Apr. 5

3.0

1.0

550

2004

2006

2008

Note. 4-week moving averages.

Mar.

Announced job cuts
(left scale)
2000

2002

2004

2006

2008

1.0

0.8

Note. Both series are seasonally adjusted by FRB staff.
Source. For layoffs and discharges, Job Openings and
Labor Turnover Survey; for job cuts, Challenger, Gray,
and Christmas, Inc.

Net Hiring Plans

Job Openings and Hires
Percent

Percent of private employment

4.5

Hires (monthly)

Manpower, Inc.
25

4.0

3.5

3.5
Feb.

3.0

2.5

Q2
10
5
0

Mar.

National Federation of
Independent Business*
(3-month moving average)
2000

2002

2004

2006

2008

2.0

1.5

Note. Percent planning an increase in employment
minus percent planning a reduction.
*Seasonally adjusted by FRB staff.

2.0

2000

2002

2004

2006

2008

1.5

Source. Job Openings and Labor Turnover Survey.

Expected Labor Market Conditions

Job Availability and Hard-to-Fill Positions
Index

120

2.5
Job openings

120

Percent

Index

150

Conference Board
40
100

100

130
Job availability*
(right scale)

110

30
80

Mar.

Mar.
25

Reuters/Michigan

2000

2002

2004

2006

Apr.
(p)
40
2008

Note. The proportion of households expecting labor
market conditions to improve, minus the proportion expecting
conditions to worsen, plus 100.
p Preliminary.

20
15

50
Hard-to-fill**
(left scale, 3-month moving average)
2000
2002
2004
2006
2008
*Proportion of households believing jobs are plentiful, minus
the proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one
"hard-to-fill" job opening. Seasonally adjusted by FRB staff.
Source. For job availability, Conference Board; for hardto-fill, National Federation of Independent Business.

30
10

II-5

Output per Hour
(Percent change from preceding period at an annual rate;
seasonally adjusted)

Sector
Nonfarm business
All persons
All employees2
Nonfinancial corporations3

2005:Q4 2006:Q4
to
to
2006:Q4 2007:Q4
.9
1.1
1.4

2.91
2.21
n.a.

2007
Q1

1.0
.7
1.2

2.6
2.9
2.1

6.3
5.2
2.9

1.91
.11
n.a.

1. Staff estimates.
2. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of employees.
3. All corporations doing business in the United States except banks, stock and commodity brokers,
and finance and insurance companies. The sector accounts for about two-thirds of business employment.
Nonfinancial corporate output is calculated as an income-side measure.
n.a. Not available.

layoffs and discharges in the JOLT survey has changed little recently, on net, after rising
last year.
Meanwhile, perceptions of labor market tightness in the Conference Board and NFIB
surveys eroded further last month, and the fraction of workers who are working part time
for economic reasons rose again. Households’ expectations for labor market conditions
in the Reuters/University of Michigan and Conference Board surveys also continued to
worsen in March, and the Reuters/Michigan measure slid further in the first half of April.
Industrial Production
Industrial production (IP) has essentially moved sideways since August, with robust
export demand providing some offset to the direct and upstream effects on production
from weak residential construction and soft demand for motor vehicles. In March, total
IP rose 0.3 percent after a 0.7 percent decline in February, reflecting sizable swings in the
output of utilities and manufacturing. Factory output last month was damped by a sharp
drop in motor vehicle and parts production, the result of the strike at American Axle.
Outside of motor vehicles and parts, manufacturing output rose 0.4 percent in March after
falling 0.5 percent in February. The factory operating rate stood at 78.5 percent last
month, a level 1.6 percentage points below the recent high reached in July and
1.2 percentage points below its 1972-2007 average.
Motor vehicle production plunged to an annual rate of 9.4 million units in March, a
decline of 700,000 units from the previous month. A drop in assemblies at General
Motors (GM), where the disruption in the supply of auto parts idled several assembly

II-6

Selected Components of Industrial Production
(Percent change from preceding comparable period)

Component

Proportion
2007
(percent)

20071

2007

2008

Jan.

Annual rate
Total
Previous

Feb.

Mar.

Monthly rate

100.0
100.0

2.2
1.8

.4
-1.0

-.1
...

.1
.1

-.7
-.5

.3
...

Manufacturing
Ex. motor veh. and parts
Ex. high-tech industries

78.7
73.6
69.3

2.3
2.6
1.3

-.6
.3
-1.5

-.5
.5
-.3

.1
.2
.2

-.5
-.5
-.6

.1
.4
.3

Mining
Utilities

11.6
9.7

.4
3.1

6.3
2.2

1.6
1.2

-1.4
2.4

.3
-3.6

.9
1.9

Selected industries
Energy

24.7

2.3

4.8

3.4

1.0

-1.3

High technology
Computers
Communications equipment
Semiconductors2

4.3
1.0
1.3
2.0

22.1
16.4
20.5
25.7

28.5
18.4
30.0
32.6

14.3
15.6
15.6
12.9

.1
1.1
1.0
-.9

2.0
1.2
1.3
2.8

2.6
1.3
1.5
3.9

Motor vehicles and parts

5.1

-2.1

-12.7

-15.0

-1.7

-1.3

-5.4

65.9
19.9
3.6
16.3

1.1
.3
-2.5
.9

-1.8
-3.1
-7.2
-2.2

-1.1
-.4
-9.0
1.6

-.1
-.1
-1.4
.2

-.6
-.3
-.8
-.2

.4
.8
.2
.9

Business equipment
Defense and space equipment

7.3
1.7

2.8
4.2

.2
3.3

3.6
2.0

.5
.8

-.2
-.9

.7
.1

Construction supplies
Business supplies

4.2
7.4

-1.8
-.1

-8.2
-1.4

-7.1
-4.0

-.6
-.6

-1.3
-1.1

-.3
.6

25.4
13.6
11.7

1.9
3.0
.5

-.6
-.1
-1.2

-1.5
-.9
-2.2

.0
.1
-.2

-.7
-.3
-1.3

.1
-.3
.6

Total ex. selected industries
Consumer goods
Durables
Nondurables

Materials
Durables
Nondurables

1. From fourth quarter of preceding year to fourth quarter of year shown.
2. Includes related electronic components.
... Not applicable.

Capacity Utilization
(Percent of capacity)
19722007
average

199495
high

200102
low

Feb.

Mar.

Total industry

81.0

85.1

73.6

81.3

81.0

80.6

80.3

80.5

Manufacturing
Ex. motor veh. and parts
Mining
Utilities

79.7
79.9
87.5
86.8

84.6
84.3
88.7
93.9

71.5
71.2
84.8
84.6

79.8
80.2
89.0
85.9

79.3
79.8
90.2
85.9

78.8
79.5
90.2
85.7

78.6
79.2
90.1
84.1

78.5
79.4
90.8
85.5

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.6
82.2
77.7

89.5
88.2
80.4

81.9
74.6
69.9

88.3
81.9
78.0

89.3
81.3
77.6

89.3
80.6
77.4

89.0
80.2
77.2

89.8
80.1
77.4

Sector

2007

2008

II-7

plants, more than accounted for last month’s decline.2 Most of the affected assembly
lines produce full-size pickups and sport-utility vehicles, the vehicles for which demand
has slowed considerably in recent months. On the whole, days’ supply of light vehicles
was at comfortable levels through the end of last quarter. For the current quarter, the
automakers’ announced production schedules, which do not incorporate strike-related
plant shutdowns (even for April), call for assemblies to move up to a rate of 10.3 million
units. However, because demand remains soft and the labor dispute is ongoing,
production this quarter may be a good bit lower than the official industry schedules.3
After slowing abruptly at the end of last year, civilian aircraft production was little
changed last quarter. Boeing recently announced a further six-month delay for its
787 Dreamliner, pushing the expected first deliveries back to the third quarter of next
year. This development will likely cause civilian aircraft output this year to increase at
its slowest pace since 2004.
Although high-tech output rose briskly in March, it slowed in the first quarter as a whole
to a pace well below the average over the 2003-07 expansion. The deceleration was most
pronounced for semiconductors: Demand for chips other than microprocessor units
(MPU) has been especially soft, and downstream demand from cell phone manufacturers
reportedly has been weak. However, chip inventories do not appear to be excessive and
should not be an impediment to further production gains. For computers, unit absorption
data from the International Data Corporation suggest that production of personal
computers declined in the first quarter, with particular softness in the consumer market.
In contrast, anecdotal reports from Intel and IBM suggest that U.S. demand for servers
has been relatively robust. Elsewhere in high-tech, the pace of output gains for
communications equipment slowed considerably in the first quarter after a relatively
strong fourth quarter.
On balance, the available forward-looking indicators suggest that high-tech output will
continue to increase at a modest pace over the next few months. For semiconductors,
Intel’s initial guidance for the second quarter points to a solid rise in MPU production. In
contrast, a contact at a major manufacturer of data networking equipment noted that
global orders appear to be the weakest since 2003, with widespread softness in the United
2

The strike at American Axle has halted or severely reduced production at eight GM assembly plants
and about two dozen auto parts plants in the United States; the affected assembly plants account for about
900,000 units (annual rate) of production.
3
In addition to the strike at American Axle, local labor disputes halted production in April at an auto
parts plant supplying GM and at a GM assembly plant.

II-8
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2007

2008

Item

U.S. production1
Autos
Light trucks

10.7
3.9
6.8

10.3
4.0
6.3

9.7
4.0
5.7

Days’ supply2
Autos
Light trucks

69
59
75

64
51
76

Inventories3
Autos
Light trucks

2.75
.99
1.76

Memo: U.S. production,
total motor vehicles4

10.9

Feb.

Mar.

Apr.

May

10.0
4.0
6.0

9.9
3.9
6.0

9.2
4.2
5.0

9.5
3.8
5.7

10.3
4.2
6.1

65
51
76

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

68
54
79

67
52
80

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

2.59
.90
1.69

2.45
.84
1.61

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

2.59
.88
1.70

2.45
.84
1.61

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

10.5

9.9

10.3

10.1

9.4

9.7

10.5

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

Inventories of Light Vehicles
Millions of units
3.6
3.4
3.2
3.0
2.8
2.6
Mar.

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2.4
2.2

2008

Days’ Supply of Light Vehicles
Days
90
Using sales in current month
Using 3-month moving average of sales

80
Mar.

70
60
50
40

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

II-9
Indicators of High-Tech Manufacturing Activity

Rate of Change in Semiconductor
Industrial Production

MPU Shipments and Intel Revenue

Billions of dollars, ratio scale

Percent

3-month moving average

10
MPUs

Intel revenue

Mar.

-2
-4

-2
Non-MPU chips

-4

-6
-8

Worldwide MPU shipments

-6
2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. MPU is a microprocessor unit.

-8

2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. FRB seasonals. Q2 Intel revenue is the range of the
company’s guidance as of April 16, 2008.
Source. Intel and Semiconductor Industry Association.

Domestic Absorption for
U.S. Personal Computers and Servers

Days’ Supply: Semiconductors

Millions of units, ratio scale

Days
60

18
Q1

0.9
0.8
55

Millions of units, ratio scale

1.0

0.7
0.6

16
15

Servers (left scale)

0.5

12
45

Mar.

0.4
11

PCs (right scale)
40

2003
2004
2005
2006
Source. Staff’s flow-of-goods system.

2007

2008

IP: Communications Equipment

0.3

2001
2002
2003
2004
2005
2006
2007
2008
Note. FRB seasonals. PCs include desktops, notebooks,
ultraportables, and x86 PC servers. Q1 PC shipments is
IDC forecast.
Source. International Data Corporation.

High-Tech Spending Plans
2002 = 100, ratio scale
Mar.

220

Diffusion index

200
75

180

160
140
120

65
Q1
60

100
2000 2001 2002 2003 2004 2005 2006 2007 2008

2003
2004
2005
2006
2007
Note. Indexes are based on responses to survey questions
about whether firms plan to increase or decrease their spending
on various categories of high-tech goods in the next 12 months.
Source. NABE Industry Survey.

II-10
Indicators of Industrial Activity

Manufacturing IP Diffusion Index

Utilities Output
Index
70
65

2002 = 100

116
112

Electricity

+ Apr.

108
60

116
112
108

104

Mar.

104

50
Mar.
45

100

Natural gas

84
40
2002
2003
2004
2005
2006
2007
Note. Diffusion index of three-month changes.

2008

Construction Supplies
Days

2002
2003
2004
2005
2006
2007
2008
Note. April value for electricity generation is based on
weekly data.

IP: Equipment and Consumer Goods
2002 = 100, ratio scale

59
58

2002 = 100, ratio scale

112

125

Days’ supply (left scale)
110

Mar.

57
56
55

106

120

108
115

Business equipment

110

104

Mar.

53
52

Mar.

51
50
49

IP index (right scale)
2002
2003
2004
2005
2006
2007
2008
Note. Days’ supply is from the staff’s flow-of-goods system.

102
100
99
98
97

105
Consumer goods

2002

2003

2004

2005

2006

2007

2008

Note. Data exclude energy, motor vehicles and parts,
high-tech, and aircraft industries.

Weekly Production Index excluding Motor
Vehicles and Electricity Generation

New Orders: ISM and FRB Philadelphia Surveys

Index

10.5

75
ISM

100
98
96

Monthly aggregate of weekly index
Weekly index
10.0

65
60

9.5

55
50
Mar.
Philadelphia survey
Apr.
2002
2003
2004
2005
2006
2007
2008
Note. The diffusion index equals the percentage of respondents
reporting greater levels of new orders plus one-half the percentage
of respondents reporting that new orders were unchanged.

9.0

45
40
35

8.5
Feb. May Aug. Nov. Feb. May Aug. Nov. Feb.
2006
2007
2008
Note. One index point equals 1 percent of 2002 total industrial
output.

II-11

States. In addition, according to the latest survey from the National Association for
Business Economists (NABE), business plans for future spending on high-tech
equipment deteriorated in the first quarter.
Outside of the energy, motor vehicles and parts, and high-tech categories, production
decreased at an annual rate of 1.1 percent in the first quarter. Among the major market
groups, the index for construction supplies registered another big drop. The production
of consumer goods edged down in the first quarter, as weakness in consumer durables—
especially in appliances, furniture, and products related to home improvement—was
mostly offset by gains in the output of nondurables. Production of business equipment,
however, climbed solidly, led by increases in industrial and other equipment.
Available near-term indicators suggest that factory output is likely to weaken over the
next few months. The new orders index from the Institute for Supply Management (ISM)
declined to 46.5 in March and is consistent with modest declines in manufacturing
output. The new orders indexes in the various regional surveys, on balance, strengthened
a touch in March but, at best, suggest little change in manufacturing output. The first
readings on activity in April were mixed. New orders in the Empire State Manufacturing
Survey firmed slightly, but the new orders index from the Philadelphia Fed Business
Outlook Survey fell to a very low level. Finally, outside of a further decline in motor
vehicle assemblies, the available weekly production data, on net, contribute little to the
change in output this month.
Motor Vehicles
Sales of automobiles and light trucks averaged an annual rate of just 15.2 million units in
the first quarter, nearly 1 million units below the pace in the previous quarter (as well as
that for 2007 as a whole).
. High gasoline prices and the sustained decline in residential construction
activity continued to erode demand for full-size pickup trucks and sport-utility vehicles,
and sales in these segments were particularly weak last quarter. The market share of the
Detroit Three automakers, who rely heavily on sales in these categories, moved down
further last quarter, to 50 percent.
Forward-looking indicators of demand for motor vehicles suggest that sales will recede
further in April. The Reuters/Michigan index of car-buying attitudes continued to
deteriorate in the first half of April; although the availability of cash rebates and cut-rate
financing has increased this year, the overall level of incentives has remained modest
relative to past sales promotions. Through the first 20 days of April, sales at the major

II-12
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2007
Category

2007

Total

2008
Q4

Jan.

Feb.

Mar.

16.1

15.9

16.1

15.2

15.3

15.1

7.6
8.5

7.4
8.5

7.8
8.3

7.4
7.8

7.3
8.0

7.4
7.9

7.5
7.5

North American1
Autos
Light trucks

12.4
5.3
7.1

12.3
5.1
7.2

12.3
5.5
6.9

11.5
5.0
6.5

11.8
5.1
6.6

11.7
5.0
6.6

11.2
5.0
6.2

Foreign-produced
Autos
Light trucks

3.8
2.4
1.4

3.6
2.3
1.3

3.8
2.3
1.4

3.7
2.4
1.3

3.5
2.2
1.3

3.6
2.3
1.3

3.9
2.6
1.3

51.2

50.4

50.0

51.3

50.6

48.2

Autos
Light trucks

Memo:
Detroit Three domestic
market share (percent)2

Note. Components may not sum to totals because of rounding.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.
2. Domestic market share excludes sales of foreign brands affiliated with the Detroit Three.

Content redacted.

U.S. Light Vehicle Sales for
Toyota, Honda, Nissan, and Mazda

Car-Buying Attitudes
200

72
64

Millions of units

Index

Percent
80

6.0

Annual rate

180
Appraisal of car-buying conditions (right scale)

56
48

5.5

160
140

40
32
24
16

Apr.

Bad time to buy:
Gas prices and shortages
(left scale)

Apr.

5.0

4.5

100

4.0

0
-8

Apr.

120

2002

2003

2004

2005

2006

2007

Source. Reuters/University of Michigan Survey.

2008

2002

2003

2004

2005

2006

2007

2008

Note. April value is based on sales through April 20, 2008.
Source. Nissan North America.

3.5

II-13

Japanese automakers were below the pace in March, and our contacts at the Detroit Three
automakers also project weaker sales in the near term.
Consumer Spending
Real personal consumer spending appears to have flattened out, on balance, in recent
months. On the basis of the latest retail sales data, we estimate that real expenditures on
goods other than motor vehicles were little changed in March after having declined
slightly, on net, over the preceding six months; spending in March appears to have been
boosted significantly by a sizable increase in real outlays on gasoline, which roughly
offset declines in a number of other categories. Smoothing through the volatility in the
energy components, real outlays on services were reported to have held up reasonably
well through February, but estimates for these categories are often extrapolations of past
trends that may not reflect the actual pace of spending.4 The personal saving rate stood at
0.3 percent in February and has remained close to zero since the middle of last year.
Consumer spending continues to be restrained by adverse fundamentals. In particular,
after averaging an annualized rate of about 3 percent over the first three quarters of 2007,
the rise in real disposable personal income has slowed to an annual rate of just 1 percent
since then, as employment conditions have weakened and prices for energy have risen.
Moreover, household net worth is down: Equity prices—though up this month—have
dropped appreciably, on net, since the start of the year, while recent indicators point to
further declines in house prices early this year. And although interest rates on credit
cards and auto loans have edged down recently in the wake of steep declines in Treasury
rates, the April Senior Loan Officer Opinion Survey suggests that lenders have continued
to tighten standards on household loans (see appendix to the “Domestic Financial
Developments” section).
Consumer sentiment, as measured by the Reuters/Michigan survey, plunged in early
April from already depressed levels. Indeed, both this measure of consumer sentiment
and the one from the Conference Board—which is available through March—have
dropped precipitously since last summer. These declines reflect heightened concerns
about the economy that can only partially be explained by the usual influences on
sentiment, including inflation, the stock market, and employment conditions. The index

Because the Bureau of Economic Analysis lacks timely data on many categories of services
consumption, spending on services has been subject to noticeable downward revisions around the start of
downturns in economic activity—for example, from late 1981 to early 1982 and then from late 1990 to
early 1991.

II-14
Retail and Food Services Sales
(Percent change from preceding period; seasonally adjusted current dollars)
2007
Category

Total sales
Retail control1
Ex. sales at gasoline stations
Memo:
Real PCE control2

2008

Q4
Annual rate

Jan.

Feb.
Mar.
Monthly rate

3.7
4.0
5.0

3.6
6.0
1.9

.0
3.5
.9

.4
.6
.2

-.4
-.1
.0

.2
.3
.2

4.1

1.0

-1.5

-.1

1. Total sales less outlays at building material and supply stores and automobile and other motor
vehicle dealers.
2. Total goods spending excluding autos and trucks. The values for January and February are staff
estimates. The values for March and Q1 are staff forecasts.

Change in Real PCE Control
1.8

Change in Real PCE Services

Percent

1.8

1.4

1.0
6-month

0.8

1.4

Percent

1.0
0.8

0.6
6-month

1.0
0.6

0.6

0.4

1.0

0.4

0.2

0.6

Feb.

0.2

-0.0
0.2

-0.2

0.2
Mar.

-0.2

-0.0
-0.2

-0.4

-0.2

-0.4
1-month

-0.6
-0.6
-1.0

-0.6

1-month
2004
2005
2006
2007
2008
Note. The values for January and February are staff
estimates. The value for March is a staff forecast.

-0.6

-0.8

-1.0

-0.8

-1.0

2004

2005

2006

2007

2008

-1.0

Personal Saving Rate
Percent

6
4

2
Feb.

-2

-4

-6

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Note. Value for December 2004 excludes the effect on income of the one-time Microsoft dividend in that month.

2006

2007

2008

-6

II-15
Fundamentals of Household Spending

Changes in Wages and Salaries and in Disposable Income
Percent, annual rate
Nominal wage and salary disbursements (white)
Nominal DPI (black)
Real DPI (striped)

Changes in Real DPI
12-month percent change

10
8

6
4
2

2
Feb.
0

0
-2
2007:H1

2007:Q3

2007:Q4

Jan.

-2

Feb.

1998
1998

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

-2

Note. Values for December 2004 and December 2005
exclude the effect on income of the one-time Microsoft
dividend in December 2004.

Target Federal Funds Rate
and 10-Year Treasury Yield

Household Net Worth and Wilshire 5000
16200

Index

Ratio

7.0

Percent

7
6

14200

Wilshire 5000
(left scale)

Apr. 22

6.5

Treasury
yield

12200
6.0
Q4

4200

1998

2000

2002

2004

2006

Federal
funds
rate

5.5

3
Apr. 22

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

6200

10200
8200

5.0
1

2008

4.5

1
1998

2000

2002

2004

2006

2008

*The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.

Consumer Confidence
1985 = 100

1966 = 100
Reuters/
Michigan
(right scale)

140

110

120

100

80
Conference Board
(left scale)

Mar.
70
Apr. p

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Note. Shaded bars indicate periods of recession as defined by the National Bureau of Economic Research.
p Preliminary.

2004

2005

2006

2007

2008

II-16

Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2007
2008
Sector

2007

Jan.

Feb.

Mar.

1.36
1.38

1.30
1.32

1.15
1.14

1.04
.99

1.08
1.06

1.08
.98

.95
.93

1.05
.97
.99
.109

.99
.94
.97
.114

.83
.76
.78
.109

.72
.64
.67
.098

.77
.68
.70
.110

.72
.65
.67
.109

.68
.61
.63
.098

.78
8.33

.73
8.79

.66
9.24

.60
9.60

.59
9.58

4.94
8.67

4.76
9.15

4.39
9.96

4.39
10.18

4.35
10.74

4.47
9.77

4.35
10.02

.309
.407
.075

.310
.384
.075

.325
.377
.075

.313
.347
.070

.317
.380
.077

.354
.338
.073

.267
.321
.070

.096

.093

.092

.094

.713

All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
Permit backlog2
New homes
Sales
Months’ supply3
Existing homes
Sales
Months’ supply3
Multifamily units
Starts
Permits
Permit backlog2
Mobile homes
Shipments
Condos and co-ops
Existing home sales

.701

.608

.540

.560

n.a.
n.a.

n.a.
.560

n.a.
n.a.

n.a.
.580

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
2. Number outstanding at end of period. Excludes permits that have expired or have been canceled,
abandoned, or revoked. Not at an annual rate.
3. At current sales rate; expressed as the ratio of seasonally adjusted inventories to seasonally adjusted
sales. Quarterly and annual figures are averages of monthly figures.
n.a. Not available.

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

Millions of units

2.0

1.0

1.8

.9
Single-family starts (right scale)

1.6

1.4

1.2
.6

Single-family adjusted permits (right scale)
1.0

.5
.8
Mar.

.4
.3

.4
Mar.

Multifamily starts (left scale)
.2
.1

.2
1999

2000

2001

2002

2003

2004

2005

2006

Note. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.

2007

2008

II-17

from the Reuters/Michigan survey now stands a touch below the nadir reached during the
1990-1991 recession.
Housing
Residential construction activity has continued to plummet. In the single-family sector,
housing starts were at an annual rate of 680,000 units in March, down 13 percent from
three months earlier, while adjusted permit issuance in this sector—which tends to lead
new activity by a month or so—descended at a similar rate and remained below the level
of starts. Cutting through the month-to-month volatility, multifamily starts came in at an
annual rate of about 310,000 units in the first quarter, in line with their average since
mid-2006 but about 10 percent below the middle of the fairly narrow range of readings
posted during the housing boom.
Housing demand has weakened substantially since late summer, and forward-looking
indicators—such as pending home sales, the Mortgage Bankers Association index of
mortgage purchase applications, and the Reuters/Michigan measure of homebuying
sentiment—provide little basis for expecting demand to firm in the coming months.
Existing home sales fell 2¾ percent in March, down 18 percent from their reading
12 months earlier. As for new homes, available data from the Census Bureau show that
the number of new-home sales agreements dropped to an annual rate of 590,000 units in
February, a decrease of 30 percent from their year-earlier level. As a result, even though
production cuts by homebuilders helped reduce the level of inventories about 13 percent
over the year ending in February, the months’ supply of new homes for sale continued to
move higher.

.
Much of the most recent weakening in housing demand can be attributed to the
challenging mortgage lending environment. The supply of credit is particularly tight for
loans that cannot be purchased by government-sponsored enterprises (GSEs). Nonprime
mortgages (which include the subprime and alt-A categories) have all but disappeared
from the market this year. Meanwhile, rates for prime-rate jumbo mortgages have risen
substantially relative to conforming rates since midsummer, and the share of these loans
in total prime-rate mortgage originations fell from 9 percent in July 2007 to 3½ percent in

II-18
Indicators of Single-Family Housing

Index (2001=100)

New Single-Family Home Sales
140

_
15

Content partially redacted.

Existing Single-Family Home Sales
Millions of units
_ (annual rate)
65

Millions of units
(annual rate)

130
1.3

6.0
120

5.5

110
100

5.0

1.1

0.9

90
0.7

4.5
80

Note:

Source. National Association of Realtors.

Content partially redacted.

Source.
for sales agreements, Census Bureau.

New Home Sales
Months' Supply

Mortgage Rates
Percent
30-year jumbo FRM
30-year confomning FRM
1-year conforming ARM

7
6

5
4

Note.
. Months'
supply is calculated using the 3-month moving average of sales.
Source.
for months' supply, Census Bureau.

Note. The Apr. readings are for data through Apr. 16, 2008.
Source. Conforming rates are from Freddie Mac. The
jumbo rate is the sum of the 30-year conforming FRM rate
and the jumbo conforming spread from bankrate.com.

Prices of Existing Homes
40

Price of New Homes
Percent change, annual rate

Quarterly OFHEO purchase-only index
Monthly OFHEO purchase-only index

Percent change from preceding period, annual rate

Constant quality index
30
20

0
-10
-20

-20

-10

Note. The Case-Shiller and monthly OFHEO indexes are
3-month percent changes.
Source. For purchase-only indexes, OFHEO; for Case-Shiller,

Chicago Mercantile Exchange.

-5

Source. Census Bureau.

II-19

February 2008 (the latest available data).5 In contrast, rates for fixed-rate conforming
loans are now about ¾ percentage point below their midsummer peaks and, at just under
6 percent, are quite low by historical standards. But these low rates are benefiting fewer
buyers because the GSEs have tightened their standards for conforming loans and added
extra fees for borrowers with lower credit scores and less collateral.
House prices have continued to fall. Despite an uptick in February, the new monthly
version of the purchase-only repeat-sales price index calculated by the Office of Federal
Housing Enterprise Oversight (OFHEO) decreased at an annual rate of 4 percent over the
three months ending in February. The 10-city version of the Case-Shiller repeat-sales
price index—which, unlike the OFHEO index, includes houses financed by
nonconforming loans and is more heavily concentrated in urban areas that had seen
greater appreciation in earlier years—fell at an annual rate of 21 percent over the three
months ending in January. And the constant-quality price index for new homes fell at an
annual rate of 6 percent in the fourth quarter. Although these lower prices may
eventually help bolster housing demand, the most recent readings from the
Reuters/Michigan house-price survey indicate that a growing percentage of respondents
expect prices to fall further in the coming year, a consideration that may make buyers
reluctant to purchase homes until prices show signs of stabilizing.
Equipment and Software
Real spending on equipment and software has decelerated in recent months after having
posted a tepid increase in the fourth quarter of 2007. Shipments and orders of nondefense
capital goods excluding aircraft were down in January and February, and investment
more broadly remains under downward pressure from slowing aggregate demand and
tightening credit conditions. On the whole, national and regional indicators of business
conditions remain downbeat. In addition, corporate bond yields, though down in recent
weeks, remain above levels prevailing at the end of last year—especially for high-yield
issues—and the latest Senior Loan Officer Opinion Survey shows that banks continue to
tighten both price and nonprice standards on business loans.

The stimulus bill enacted in February temporarily increased the conforming loan limit for a given city
to 125 percent of the median house price for the highest-priced county in the city’s metropolitan area, up to
a maximum of $729,750. In early April, Fannie Mae and Freddie Mac set up facilities to purchase these
new jumbo conforming mortgages, and they appear ready to begin purchasing these loans from lenders
soon. Early indications suggest that rates for these loans will be about 50 to 75 basis points above rates for
conventional conforming loans. The stimulus bill also raised the limit on Federal Housing Administration
(FHA) loans. However, the FHA's relatively strict underwriting standards will likely limit the number of
households that will benefit from this change.

II-20
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2007
Category

2008
Dec.

Annual rate

Jan.

Feb.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

9.4
6.1
-15.2
13.1
8.0

2.8
4.9
36.6
-16.9
4.4

1.4
1.6
3.6
4.0
1.2

1.6
-.4
-1.3
-4.9
.2

-4.2
-1.9
-3.3
-1.7
-1.8

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

-1.5
3.4
.7
17.3
2.4

6.6
-1.7
8.2
-42.1
2.5

5.4
5.2
5.1
18.5
4.0

-7.7
-1.0
-13.2
-13.7
1.7

-.8
-2.4
10.1
6.8
-4.4

Memo:
Shipments of complete aircraft1

44.9

46.7

43.6

53.9

48.7

1. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.

Communications Equipment

Non-High-Tech,
Nontransportation Equipment

Billions of chained (2000) dollars, ratio scale

20
17
14

Shipments
Orders

20
17
14

Billions of chained (2000) dollars, ratio scale

Shipments
Orders
52

47
Feb.

Feb.
5

2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. Shipments and orders are deflated by a price index
that is derived from the BEA’s quality-adjusted price indexes
and uses the PPI for communications equipment for
monthly interpolation.

Computers and Peripherals
220

2000 = 100

Medium and Heavy Trucks

Billions of chained (2000) dollars
Industrial production (left scale)
Real M3 shipments (right scale)

2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. Shipments and orders are deflated by the staff
price indexes for the individual equipment types included
in this category. Indexes are derived from the BEA’s
quality-adjusted price indexes.

170

Mar.
Feb. 19
17

150

130

1240

Thousands of units, ratio scale
Sales of class 4-8 trucks
Net new orders of class 5-8 trucks

110

1240

190

1040
900

Note. Ratio scales. Shipments are deflated by the staff
price index for computers and peripheral equipment, which
is derived from the BEA’s quality-adjusted price indexes.

620
480

340

2000 2001 2002 2003 2004 2005 2006 2007 2008

760

620
480

760

Mar. 340

200

200
2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. Annual rate, FRB seasonals.
Source. For sales, Ward’s Communications; for orders, ACT Research.

II-21
Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change

8
6

4
Q4

-2

-4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source. Bureau of Economic Analysis.

User Cost of Capital

Corporate Bond Yields
4-quarter percent change

-4

Percent

13.5

12.5

11.5

Non-high-tech

10.5

13.5

10.5
10-year high-yield

0
Q4

-3
-6

-6

1990
1991

1995
1995

2000
1999

2003 2005 2007

6.5

-15

4.5

6.5

10-year BBB

5.5
2000 2001 2002 2003 2004 2005 2006 2007 2008
2000 2001 2002 2003 2004 2005 2006 2007 2008

4.5

Surveys of Business Conditions
Ratio

Billions of chained (2000) dollars

1.4
1300
Q4
Real cash flow
(left scale)

Diffusion index

70
ISM
Philadelphia Fed

1.5

1500

80
70

1.3

1.2
50

Mar.

1.1

900

Q4
Ratio of cash flow
to fixed investment
(right scale)

700
500
300

7.5

Note. Daily averages based on Merrill Lynch bond data.

Corporate Cash Flow

1100

Apr. 22

5.5

Source. Staff calculation.

1700

8.5

7.5

-12

High-tech

9.5

8.5

-9

-9
-12
-15

-3

9.5

1.0
0.9

40
Apr.

30
0.8

1990
1991

1995
1995

2000
1999

2003

2005

0.7
2007

Note. Cash flow and fixed investment for the corporate business sector.
Source. Bureau of Economic Analysis; FRB flow of funds accounts.

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source. Manufacturing ISM Report on Business;
Philadelphia Fed Business Outlook Survey.

II-22

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

Total Structures

Office, Commercial, and Other
Billions of chained (2000) dollars

270
Feb.

250

290

Billions of chained (2000) dollars

270

290

250

Feb.

210

60
Feb.

230

210

190
170

2002

2004

2006

2008

Feb.

Office
30

170

Commercial

190

2000

80
70

Other

60
230

40
30

2000

2002

2004

2006

2008

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

Manufacturing
and Power & Communication
Billions of chained (2000) dollars

70
60

Architectural Billings and
Nonresidential Construction Employment
70

3.0

Percent

Diffusion index

Power & communication

60
2.0

50
Feb.

Billings (right scale)

1.5
50

1.0
40
0.5

Manufacturing

Mar.
Mar.

0.0
-0.5

Change in
employment (left scale)

20
-1.0

2000

2002

2.5

2004

2006

2008

-1.5

2000

2002

2004

2006

2008

Note. Both series are 3-month moving averages. Employment
consists of industrial, commercial, and specialty trade construction.
Source. For billings, American Institute of Architects;
for employment, Bureau of Labor Statistics.

Vacancy Rates

Drilling and Mining Indicators
Percent

Number

Millions of feet

Feb.
15
12

Office

15
12

6
3
0

Drilling rigs
(right scale)

1800
1600

Footage drilled
(left scale)

2200
2000

Apr.

Industrial

2400

Retail

1400
1200
1000
800
600

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. Industrial space includes both manufacturing
structures and warehouses.
Source. Torto Wheaton Research.

2000

2002

2004

2006

2008

Note. The April readings for drilling rigs are based on
data through April 18, 2008. Both series are seasonally
adjusted by FRB staff.
Source. DOE/Baker Hughes.

400

II-23

Some of the softness in equipment spending in early 2008 has been in outlays on light
motor vehicles, which have been pulled down by cutbacks of deliveries to daily rental
companies. In addition, sales of medium and heavy trucks (classes 4 through 8), which
fell sharply over the course of 2007, remained depressed in the first quarter, and a drop in
orders in recent months points to continued near-term weakness in sales. In contrast,
shipments of complete aircraft to domestic purchasers appear to have picked up in early
2008 after a steep decline in the second half of 2007.
Real spending on high-tech equipment and software has also not exhibited much vigor of
late. As noted above, industrial production of computers—the major input into the
estimate of computer spending in the national income and product accounts (NIPA)—
posted a relatively moderate gain in the first quarter, and real M3 shipments of computers
declined, on net, in January and February. Orders and shipments of communications
equipment also fell substantially, on net, over the first two months of 2008. Moreover, as
mentioned above, the NABE survey conducted in the first quarter suggests that
businesses have scaled back their plans for spending on high-tech equipment.
Real spending on equipment other than high-tech and transportation remained subdued in
early 2008 after having slackened somewhat in late 2007. Still, the spending data
through February for this broad category are not as soft as would be implied by the
downbeat readings on business sentiment of late. To be sure, both orders and shipments
fell a good bit in February, but some of this decline may have reflected a hiccup in
foreign demand for these capital goods rather than a further slowing of domestic
spending. Indeed, the February international trade data showed a drop in exports along
with a jump in imports.
Nonresidential Construction
The recent monthly construction data suggest that spending on nonresidential buildings
crested around the turn of the year after posting robust gains in 2006 and 2007.
Moreover, demand for existing commercial properties has fallen off substantially from
record levels last year, and prices appear to be decelerating. Although vacancy rates
point to fairly balanced supply and demand conditions in the markets for office and
industrial space, vacancy rates for retail space have been trending up for some time now,
and anecdotal reports suggest that the supply of new projects in the pipeline may outpace
demand in this sector. The three-month average of the architectural billings diffusion
index—which is fairly well correlated with construction at a horizon of about two
quarters—moved down sharply in March, pointing to considerable declines in
nonresidential construction in the second half of the year.

II-24
Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2007
Measure and sector

2008

Dec.

Jan.

Feb.

1.3
-9.6
10.9

26.0
13.3
12.7

-21.7
-25.7
4.0

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

Manufacturing and trade ex. wholesale
and retail motor vehicles and parts
Manufacturing
Wholesale trade ex. motor vehicles & parts
Retail trade ex. motor vehicles & parts

10.8
-4.2
6.5
8.5

18.1
3.1
13.9
1.1

7.6
8.5
-8.8
7.9

37.2
15.6
-4.6
26.2

57.4 e
40.2 e
10.9 e
6.3 e

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

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

60.8
21.6
20.7
18.4

39.0
12.6
22.0
4.3

73.8
36.3
23.0
14.5

124.2
54.9
35.5
33.7

Real inventory investment
(chained 2000 dollars)
Total nonfarm business
Motor vehicles
Nonfarm ex. motor vehicles

153.9
81.7
62.5
9.8

90.9
34.1
52.2
4.5

n.a. Not available.
e Staff estimate of real inventory investment based on revised book-value data.
Source. For real inventory investment, BEA; for book-value data, Census Bureau.

ISM Customer Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.9
1.8

1.9

Index

1.8

Staff flow-of-goods system

55
1.7

1.7

1.6

Mar.

1.6

Mar.

1.4

1.3

1.5

1.4

1.5

1.3
Feb.

1.2

Census book-value data
1.1

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

Note. Flow-of-goods system covers total industry ex.
motor vehicles and parts, and inventories are relative
to consumption. Census data cover manufacturing and
trade ex. motor vehicles and parts, and inventories are
relative to sales.

1.1

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

Note. A number above 50 indicates inventories are "too high."

II-25

The apparent deceleration in nonresidential construction is likely due, at least in part, to
the difficult financing environment. Issuance of commercial mortgage-backed securities
has slowed to a trickle in recent months, and the April Senior Loan Officer Opinion
Survey indicated that about 80 percent of banks tightened lending standards in the first
quarter—about the same as January’s record reading for this index. Anecdotes from
general contractors also point to tighter credit conditions, especially for speculative
projects.
Finally, data on drilling rigs in operation and on footage of new wells drilled suggest that
real expenditures on drilling and mining structures in the early part of this year likely rose
at a pace similar to the 6¾ percent annual rate realized in the fourth quarter of last year.
Business Inventories
Real nonfarm inventory investment excluding motor vehicles dipped to an annual rate of
just $4 billion in the fourth quarter, but book-value data for the manufacturing and trade
sector point to a modest rebound, on average, in January and February. Still, outside of
categories tied to housing construction—namely, construction supplies and, to a lesser
extent, materials—we continue to see little evidence that firms are burdened with excess
stocks. Although the ratio of book-value inventories to sales (excluding motor vehicles)
has inched up since the end of 2007, data from the staff’s flow-of-goods system suggest
that months’ supply moved down in the first quarter after spurting in December. In
addition, businesses surveyed by the ISM in March continued to report that, on the
whole, their customers were reasonably satisfied with their level of stocks.
Federal Government Sector
Largely because of weakness in receipts, the federal budget deficit has continued to
widen. Adjusted for payment-timing shifts and financial transactions, the unified budget
deficit was $215 billion during the three months ending in March, up from an adjusted
deficit of $169 billion recorded during the same period last year.
In total, tax receipts in the January to March period were about 1½ percent below their
year-earlier level. Individual income and payroll taxes posted a meager 1¼ percent gain,
while corporate tax receipts fell substantially. According to daily Treasury data,
corporate receipts in April, which are mostly the first quarterly estimates on 2008
liabilities, appear to be about the same as collections last April. Nonwithheld individual
income tax payments—which are largely net payments on 2007 liabilities—have come in
slightly below the tax collections of this time last April. However, because final

II-26
Federal Government Budget
(Unified basis; adjusted for payment-timing shifts and financial
transactions; data from Monthly Treasury Statement)

Surplus or Deficit (-)

Billions of dollars

300

300
12-month moving sum

200

100

-100

-200

Mar.

-200

-300

-400

-500

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Outlays and Receipts

2005

2006

2007

-500

2008

Percent change from year earlier

20
Receipts

12-month moving sum
15

Mar.

Outlays

-5

-10

-15

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-15

2008

Recent Federal Outlays and Receipts
(Billions of dollars except as noted)

January-March
Function or source

2007

2008

Percent
change

5.5
7.1
9.6
4.3
4.0

2,709.6
229.4
545.6
1,474.6
460.0

2,828.9
252.1
587.1
1,554.0
435.7

4.4
9.9
7.6
5.4
-5.3

539.8
452.0
36.9
50.9

-1.4
1.3
-33.1
10.7

2,496.0
1,905.3
377.6
213.0

2,592.8
2,023.9
345.7
223.2

3.9
6.2
-8.4
4.8

-168.5

-215.4

...

-213.6

-236.1

...

-178.0

-205.9

...

-203.7

-215.8

...

2007

2008

Outlays
Net interest
National defense
Major transfers1
Other

715.9
60.0
137.1
413.0
105.8

755.2
64.3
150.2
430.7
110.0

Receipts
Individual income and payroll taxes
Corporate income taxes
Other

547.4
446.3
55.2
46.0

Surplus or deficit (-)
Memo:
Unadjusted surplus or deficit (-)

12 months ending in March
Percent
change

1. Includes Social Security, Medicare, Medicaid, and income security programs.
... Not applicable.

II-27

State and Local Indicators

Real Spending on Consumption & Investment

Net Change in Employment

Percent change, annual rate
12

Thousands of jobs, monthly average
12

Spending
4-quarter moving average

4
Q4

-2

30
Q1

-2

-4

1999

2001

2003

2005

-4

2007

-10

Real Construction
Annual rate

1998

2000

2002

2004

2006

2008

-10

Net Saving
Percent of nominal GDP

Billions of chained (2000) dollars

200

190

190
Q1

180

170

160

1.0

0.5

0.0

160

150

1.0

150

Q4
-0.5

140

1998

2000

2002

2004

2006

2008

140

-1.0

-0.5

1987

1992

1997

2002

2007

-1.0

Note. Nominal CPIP deflated by BEA prices through
Q4 and by a staff projection thereafter. Observation for
Q1 is the average for January and February.

State Revenues

Local Revenues

Percent change from year earlier
20

Total
revenues

Individual and
corporate income
taxes

4-quarter moving average

Percent change from year earlier
20

4-quarter moving average

12
10
Property taxes

-5

-10

-15

1999

2001

Source. Census Bureau.

2003

2005

2007

8
Q4

6
4
2

Total revenues
1999

2001

Source. Census Bureau.

2003

2005

2007

II-28

Price Measures
(Percent change)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Mar.
2007

Mar.
2008

Dec.
2007

Mar.
2008

Feb.
2008

Mar.
2008

CPI
Total
Food
Energy
Ex. food and energy
Core goods
Core services
Shelter
Other services
Chained CPI (n.s.a.) 1
Ex. food and energy 1

2.8
3.3
4.4
2.5
-.3
3.6
4.0
3.0
2.6
2.1

4.0
4.5
17.0
2.4
.0
3.3
3.0
3.7
3.6
2.1

6.2
2.6
45.6
2.6
.7
3.4
2.8
3.9
...
...

3.1
5.3
8.6
2.0
-.1
2.9
2.2
3.9
...
...

.0
.4
-.5
.0
-.1
.1
.0
.1
...
...

.3
.2
1.9
.2
-.1
.2
.2
.4
...
...

PCE prices 2
Total
Food and beverages
Energy
Ex. food and energy
Core goods
Core services
Shelter
Other services
Core market-based
Core non-market-based

2.5
3.2
4.9
2.3
-.4
3.4
4.1
3.1
2.1
3.1

3.2
4.3
16.6
2.1
-.3
3.0
2.9
3.1
1.8
3.4

4.8
2.7
48.5
2.4
.7
3.0
3.2
3.0
2.4
2.1

2.9
5.4
8.6
2.0
.5
2.6
2.4
2.7
1.7
3.7

.1
.4
-.4
.1
.0
.2
.1
.2
.1
.2

.3
.2
2.0
.2
-.1
.3
.2
.3
.1
.4

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

3.1
7.7
3.0
1.6
1.4
1.8
3.3
3.2
13.3
24.9

6.9
5.8
20.4
2.7
3.2
2.0
10.5
5.5
31.4
16.8

11.5
9.6
44.1
2.2
2.6
1.6
14.5
4.6
67.7
10.1

10.2
10.1
22.5
5.0
5.5
4.3
19.4
10.7
73.4
52.6

.3
-.5
.8
.5
.6
.5
.8
.6
3.7
3.3

1.1
1.2
2.9
.2
.3
.1
2.3
1.1
8.0
3.5

Measures

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
2. PCE prices in March 2008 are staff estimates.
... Not applicable.

II-29

payments will continue to be recorded through early May, it is still too soon to make a
reliable comparison with last year’s individual tax filing season.
Outlays in the January to March period, adjusted for payment-timing shifts and financial
transactions, rose 5½ percent from the year-earlier comparable period. Defense spending
increased 9½ percent and net interest payments rose 7 percent; major transfers and other
outlays moved up more modestly. Relative to the fourth quarter of 2007, however, the
rise in defense spending was less pronounced and suggests only a small pickup in real
defense purchases as measured in the NIPA in the first quarter.
State and Local Government Sector
Real purchases by state and local governments appear to have decelerated sharply in the
first quarter after having posted a hefty increase in 2007. The deceleration was
concentrated in construction expenditures, which fell steeply in December and remained
subdued in January and February. Although the construction series can be quite volatile,
some slowing in construction activity after the rapid increase in 2007 seems consistent
with the tighter fiscal conditions facing many states and localities. Meanwhile, state and
local employment rose 21,000 per month, on average, in the first quarter, approximately
the same pace as in 2007.
The Census Bureau’s Quarterly Summary of State and Local Government Tax Revenue
indicates that state tax revenues during the year ending in December were 4½ percent
above their year-earlier level, about the same as for the year ending in September. The
recent increases in state revenues are substantially below those recorded a few years ago,
and press reports suggest that at least a few states, including California and Florida,
expect to face significant budgetary stress in the 2009 fiscal year (which begins on July 1
in most states) as revenue growth is projected to slow further. At the local level, growth
in property tax revenue ticked down in the fourth quarter of 2007 but remained relatively
strong, as the downturn in housing prices has not yet translated into a significant
slowdown in these revenues.
Prices
Boosted by large increases in food and energy prices, headline consumer prices continued
to increase faster than core consumer prices over the first three months of 2008 but not as
quickly as they did late last year. On the basis of information from the consumer price
index and other sources, we estimate that overall prices for personal consumption
expenditures (PCE) increased 0.3 percent in March, a rise that brought the 12-month
change through March to 3.2 percent, up from 2.5 percent for the preceding 12 months.

II-30

Consumer Prices
(12-month change except as noted)

PCE Prices

CPI and PCE ex. Food and Energy
Percent

Percent

Total PCE
3
Mar.*

CPI
Mar.*

Core PCE

2000

2002

2004

2006

2008

* Staff estimate.

2
PCE
CPI
chained

2000

2002

2004

2006

PCE Goods and Services
Percent

Percent

4
3

2
Mar.*

Mar.*
Services ex. energy

2
1

Market-based components

2000

2002

2004

2006

2008

-3

* Staff estimate.

1
Mar.*

-1
-2

* PCE for March is a staff estimate.

PCE excluding Food and Energy

2008

0
-1

Goods ex.
food and energy

2000

2002

-2
2004

2006

2008

-3

* Staff estimate.

PCE excluding Food and Energy

CPI excluding Food and Energy
Percent

Percent

-1

3-month change, annual rate

4
3
2

-1

Mar.*

2000

2002

* Staff estimate.

2004

2006

2008

5
4

3-month change, annual rate

Mar.

2000

2002

2004

2006

2008

-1

II-31

Energy and Food Price Indicators
(Data from Energy Information Administration except as noted)

Total Gasoline Margin
180

Gasoline Price Decomposition

Cents per gallon
180
Retail price less average spot crude price*

Cents per gallon

350
Retail price*

350

160

300

140

250

120

200

100

150

100

80
60

Apr. 21
2005
2006
2007
2008
* Regular grade seasonally adjusted by FRB staff,
less average spot crude price: 60% WTI, 40% Maya
heavy crude.

Gasoline Inventories

Apr. 21

Average spot crude price**

300

100

2005
2006
2007
2008
* Regular grade seasonally adjusted by FRB staff.
** 60% WTI, 40% Maya heavy crude.

Ethanol Prices
Millions of barrels

255
245

Rack price

Excluding ethanol
Adjusted for ethanol use*

255
245

Cents per gallon

500
450

Near-futures price, daily
Monthly futures, Apr. 22

500
450

235

225

215

215
Apr. 18

400

350

300

235

400

300

250

205

200

195

150

185

100

2005
2006
2007
2008
Note. Shaded region is average historical range as
calculated by DOE. Monthly data through January 2008,
weekly data thereafter, as indicated by line weights.
* Adjustment for approximate amount of fuel ethanol to be
blended with RBOB component of inventories; estimated by
FRB staff.

PCE Food Prices

4.5

2008

100

Spot Agricultural Commodity Prices
12-month percent change

5.0

2005
2006
2007
Source. Chicago Board of Trade.

Food and beverages
Ex. food and energy

5.0
4.5

4.0

3.5

Mar.*

3.5

3.0

2.5

2.0

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

Apr. 22

1.5

1.0

0.5

0.0

10
3
8
2

0.5

0.0

2005
2006
2007
*Staff estimate.
Source. Bureau of Economic Analysis.

2008

2.0

1.5

3.0

2.5

Dollars per bushel

2
0

2005
2006
2007
Source. Commodity Research Bureau.

2008

II-32

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

2004

2005

2006

2007

Product prices
GDP price index
Less food and energy

3.2
3.2

3.4
3.3

2.7
2.9

2.6
2.2

Nonfarm business chain price index

3.2

3.5

2.2

1.8

Expenditure prices
Gross domestic purchases price index
Less food and energy

3.7
3.1

3.8
3.1

2.4
2.8

3.3
2.2

PCE price index
Less food and energy

3.1
2.2

3.2
2.2

1.9
2.3

3.4
2.1

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

2.8
1.6

3.0
1.7

1.6
2.0

3.4
1.9

CPI
Less food and energy

3.4
2.1

3.8
2.1

1.9
2.7

4.0
2.3

Chained CPI
Less food and energy

3.1
2.1

3.2
1.8

1.7
2.3

3.6
2.0

Median CPI
Trimmed mean CPI

2.3
2.3

2.7
2.6

3.1
2.7

3.1
2.8

Trimmed mean PCE

2.4

2.5

2.7

2.4

Surveys of Inflation Expectations
(Percent)
Reuters/Michigan Survey

Period

Actual
CPI
inflation 1

1 year 2

Professional
forecasters
(10 years) 4

5 to 10 years 3

Mean

Median

Mean

Median

CPI

PCE

2006:Q2
Q3
Q4

4.0
3.3
1.9

4.5
4.0
3.5

3.5
3.4
3.0

3.6
3.3
3.5

3.1
3.0
3.0

2.5
2.5
2.5

...
...
...

2007:Q1
Q2
Q3
Q4

2.4
2.7
2.4
4.0

3.6
4.2
4.1
4.1

3.0
3.3
3.2
3.3

3.4
3.5
3.5
3.3

2.9
3.0
3.0
2.9

2.4
2.4
2.4
2.4

2.0
2.0
2.1
2.1

2008:Q1

4.1

4.2

3.8

3.3

3.0

2.5

2.2

2007:Dec.
2008:Jan.
Feb.
Mar.
Apr.

4.1
4.3
4.0
4.0
n.a.

4.4
4.0
3.9
4.6
5.6

3.4
3.4
3.6
4.3
4.8

3.5
3.4
3.4
3.2
3.4

3.1
3.0
3.0
2.9
3.1

...
...
2.5
...
...

...
...
2.2
...
...

1. Percent change from the same period in the preceding year.
2. Responses to the question, By about what percent do you expect prices to go up, on
average, during the next 12 months?
3. Responses to the question, By about what percent per year do you expect prices to go up,
on average, during the next 5 to 10 years?
4. Median CPI and PCE price projections compiled by the Federal Reserve Bank of Philadelphia.
... Not applicable.
n.a. Not available.

II-33

We estimate that core PCE prices increased 0.2 percent in March after rising just
0.1 percent in February. Smoothing through the volatility in the recent data, the threemonth change in core PCE prices has receded some since November and stood at an
annual rate of 2.0 percent in March. This step-down largely reflects a swing in medical
services prices, which have been nearly flat recently after an earlier period of large
increases. Over the 12 months ending in March, core PCE prices increased 2.1 percent,
0.2 percentage point less than over the preceding 12 months.
PCE energy prices changed little, on average, during January and February; we estimate
that they moved up 2 percent in March and stood 16½ percent above their year-earlier
level. Current survey data suggest that retail gasoline prices have increased moderately
in April. Since the increase has fallen short of the surge in crude oil prices, refiners’
margins have been squeezed. In response, they have cut back on production, and
inventories have fallen back toward seasonal norms.6 With margins tight, producers have
very little cushion to absorb further increases in the price of crude oil.
After advancing quickly in January and February, food prices rose at a more moderate
pace in March. Nevertheless, the 12-month change through March stood at 4¼ percent,
about 1 percentage point higher than the increase over the preceding 12 months. Spot
prices for corn, wheat, and soybeans have been volatile recently after rising markedly
over the past year. Since the March Greenbook, wheat prices have decreased 25 percent
after surging at the beginning of the year, while corn prices have continued to climb
higher. These relative movements may reflect, in part, the release of the U.S. Department
of Agriculture’s annual Prospective Plantings report, which showed that farmers are
likely to plant less corn and more soybeans and wheat this year than they did in 2007.
Measures of near-term inflation expectations have risen sharply: According to the
Reuters/Michigan survey, median expectations for year-ahead inflation moved up from
3.4 percent in December to 4.8 percent in early April, the highest reading since 1990.
Longer-term expectations as measured by the Reuters/Michigan measure of median
inflation expectations over the next 5 to 10 years edged back up in April to 3.1 percent;
the April reading reversed the downtick over the preceding few months and brought the
series close to the top of the narrow range seen over the past few years. In contrast,
measures of inflation compensation derived from Treasury inflation-protected securities
have moved down since the March Greenbook—the five-year measure has edged down
about 0.1 percentage point and the five-year, five-year-ahead measure has decreased
6

Some of the drop in inventories likely also reflects a runoff of gasoline stocks before the June 1
switch to summer blends.

II-34

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

Percent

Percent
12

Quarterly

Monthly

5
Apr.

Median, next 5 to 10 years
6
4
Q1
2
0

Median, next 12 months

1972 1975
1976

1980
1980

1985 1988
1990
1984
1992 1995
1996

2000
2000

2005 2008
2004

Inputs to Models of Inflation
12

2005

Percent

Quarterly

2008

Quarterly

6
Q1

2
4

4
Q1

Distributed lag of
core PCE inflation**

0
0
0
1980
1985 1988
1990
2000
2005 2008
2005
2006
2007
2008
1972 1975
1976
1980
1984
1992 1995
1996
2000
2004
*For 2007 forward, the median projection for PCE inflation over the next 10 years from the Survey of Professional Forecasters (SPF);
for 1991 to 2006, the equivalent SPF projection for the CPI; for 1981 to 1991, a related survey for the CPI conducted by Richard Hoey;
and for the period preceding 1981, a model-based estimate constructed by Board staff. The survey data before 2007 are adjusted down
0.5 percentage point to put the CPI projections approximately on a PCE basis.
**Derived from one of the reduced-form Phillips curves used by Board staff.

Inflation Compensation from TIPS

Percent

Percent
5

Quarterly

Weekly

4
3

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

2007

Percent

2006

5 to 10 years ahead

3
Apr. 22

3
2

Next 5 years

Q1
2

0
0
2001
2002
2003
2004
2005
2006
2007
2008
2005
2006
2007
2008
Note. Based on a comparison of an estimated TIPS yield curve with an estimated nominal off-the-run Treasury yield curve, with an
adjustment for the indexation-lag effect.

II-35

Commodity Price Indexes
Journal of Commerce
Ratio scale, 2006 = 100
Apr. 22

220
180
140

100

100
100
Industrials
60

Metals
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1992
2002
1994
1996
1998
2000
2004
2006
2008
Note. The Journal of Commerce (JOC) industrial price index is based almost entirely on industrial commodities, with a small
weight given to energy commodities. Copyright for Journal of Commerce data is held by CIBCR, 1994.

Commodity Research Bureau
Ratio scale, 1967 = 100

500

650
600
550
500

400

600

Apr. 22

450
Spot industrials
350
300

300
250
Futures

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1992
2002
1994
1996
1998
2000
2004
2006
2008
Note. The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial commodities, excluding
energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals.

Selected Commodity Price Indexes
(Percent change)

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

2007 1

12/18/07
to
3/11/08 2

3/11/08 2
to
4/22/08

52-week
change to
4/22/08

7.6
2.1
8.2
25.5
18.2

12.8
25.1
8.2
17.0
20.8

4.3
5.5
2.4
.3
-2.7

15.6
16.5
11.5
32.6
36.3

1. From the last week of the preceding year to the last week of the year indicated.
2. March 11, 2008, is the Tuesday preceding publication of the March Greenbook.

150

II-36

Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2005:Q4 2006:Q4
to
to
2006:Q4 2007:Q4e

Category

2007
Q1

Q4 e

Compensation per hour
Nonfarm business

5.0

3.9

6.4

1.3

3.4

4.7

Unit labor costs
Nonfarm business

4.1

5.4

-1.3

-2.7

2.7

e Staff estimate.

Compensation per Hour

Unit Labor Costs

(Percent change from year-earlier period)

(Percent change from year-earlier period)
Percent

Percent

Productivity and costs*

6
5

4
3

ECI

1
0

-1

-2

-3

1996199719981999200020012002200320042005200620072008
* Value for 2007:Q4 is a staff estimate.

1996199719981999200020012002200320042005200620072008

-3

Note. Value for 2007:Q4 is a staff estimate.

Average Hourly Earnings

Markup, Nonfarm Business

(Percent change from year-earlier period)
Percent

4.5

Mar.

3.5

Ratio

1.66

4.0

4.5

1.64

1.66
1.64

3.5

1.62

3.0

1.60

2.5

1.58

2.0

1.56

1.5

1.54

1.0

1.52

1.0

1996

1998

2000

2002

2004

2006

2008

Average,
1968-present

1.62

1.56
1.54

1996199719981999200020012002200320042005200620072008
Note. The markup is the ratio of output price to unit
labor costs. Value for 2007:Q4 is a staff estimate.

1.52

II-37

about 0.4 percentage point. Even so, the median expectation over the next 5 to 10 years,
at 2.8 percent, is still about 0.1 percentage point above its level at the end of December,
whereas the five-year measure now stands at 2.1 percent, a bit below its level at the end
of the year.
The producer price index for core intermediate materials rose 1.1 percent in March,
bringing the three-month change to an annual rate of 11 percent. Over the past few
months, price increases have been concentrated in metals and in energy-intensive
categories (such as chemicals, plastics, and paints). The string of recent advances pushed
the 12-month change in March to 5½ percent, more than 2 percentage points higher than
over the preceding 12 months.

Commodity price changes have been mixed recently, but prices remain well above levels
of a year ago. Since the March Greenbook, metals prices have varied; notable within the
metals categories is the price of steel scrap, which jumped 38 percent, largely because of
strong foreign demand and the strike-induced shutdowns of several General Motors
plants, a significant supplier of steel scrap. On balance, the Journal of Commerce’s index
of industrial materials has increased 4¼ percent since the March Greenbook; the
Commodity Research Bureau’s spot index of industrial materials, which excludes energy
products, is up 2½ percent.
Labor Costs
Average hourly earnings increased 0.3 percent in March. Over the past 12 months, this
measure has risen 3½ percent, more than ½ percentage point below the rise over the
preceding 12 months.

Last Page of Domestic Nonfinancial Developments

Domestic Financial
Developments

III-T-1

Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2006

2007

Change to Apr. 22 from
selected dates (percentage points)

2008

Instrument
June 29

Sept. 17

Mar. 17

Apr. 22

2006
June 29

2007
Sept. 17

2008
Mar. 17

5.25

3.00

2.25

-3.00

-.75

4.88
5.06

4.05
4.15

1.09
1.28

1.26
1.61

-3.62
-3.45

-2.79
-2.54

.17
.33

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

5.27
5.37

5.23
5.25

2.41
2.50

2.59
2.76

-2.68
-2.61

-2.64
-2.49

.18
.26

Large negotiable CDs1
3-month
6-month

5.47
5.59

5.52
5.36

2.63
2.45

2.96
3.02

-2.51
-2.57

-2.56
-2.34

.33
.57

Eurodollar deposits3
1-month
3-month

5.33
5.49

5.55
5.60

2.60
2.55

3.00
3.10

-2.33
-2.39

-2.55
-2.50

.40
.55

Bank prime rate

8.25

6.00

5.25

-3.00

-.75

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

5.26
5.15
5.28

4.12
4.18
4.58

1.36
2.20
3.58

2.16
2.98
3.94

-3.10
-2.17
-1.34

-1.96
-1.20
-.64

.80
.78
.36

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

2.51
2.61

2.04
2.15

.39
1.20

.90
1.55

-1.61
-1.06

-1.14
-.60

.51
.35

Municipal general obligations (Bond Buyer)6

4.71

4.46

4.94

4.62

-.09

.16

-.32

Private instruments
10-year swap
10-year FNMA7
10-year AA8
10-year BBB8
10-year high yield8

5.81
5.59
6.20
6.74
8.74

5.17
5.01
6.05
6.46
8.95

4.02
4.43
6.04
6.61
10.54

4.34
4.43
5.95
6.82
9.90

-1.47
-1.16
-.25
.08
1.16

-.83
-.58
-.10
.36
.95

.32
.00
-.09
.21
-.64

Home mortgages (FHLMC survey rate)9
30-year fixed
1-year adjustable

6.78
5.82

6.34
5.65

5.87
5.15

5.88
5.10

-.90
-.72

-.46
-.55

.01
-.05

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

Record high

2007

Change to Apr. 22
from selected dates (percent)

2008

Stock exchange index
Level
Dow Jones Industrial
S&P 500 Composite
Nasdaq
Russell 2000
Wilshire 5000

Date

Sept. 17

Mar. 17

Apr. 22

Record
high

2007
Sept. 17

2008
Mar. 17

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

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

13,403
1,477
2,582
776
14,839

11,972
1,277
2,177
650
12,828

12,720
1,376
2,377
704
13,863

-10.20
-12.09
-52.92
-17.77
-12.29

-5.10
-6.82
-7.93
-9.29
-6.58

6.25
7.78
9.18
8.18
8.07

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect.
6. Most recent Thursday quote.
7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
9. Home mortgage rates for April 22, 2008, are for the week ending April 17, 2008.
_______________________________________________________________________
NOTES:
June 29, 2006, is the day the most recent policy tightening ended.
September 17, 2007, is the day before the most recent policy easing began.
March 17, 2008, is the day before the most recent FOMC monetary policy announcement.
_______________________________________________________________________

III-C-1

Short-Term Funding and Interbank Markets
Spread between 30-Day Libor and OIS Rates

Federal Funds Rates

Basis points
Mar. FOMC

Daily

Apr.
23

Percent
120

Daily

Mar. FOMC

Target

6.0
5.5

100

5.0
80

4.5

Effective

4.0

3.5
40

3.0
Apr. 22

2.5

2.0
July

Sept.
2007

Nov.

Jan.

Mar.
2008

July

Sept.
2007

Note. Libor quotes are taken at 6:00 a.m., and OIS quotes
are observed at the close of business of the previous trading day.

Treasury Repo Rates for General Collateral

Nov.

Jan.

Mar.
2008

3-Month Treasury Bill Rate

Percent
Daily

Mar. FOMC

Overnight

Percent
6

Daily

Mar. FOMC

5.0
4.5
4.0

1-month

5.5

3.5
Apr.
22

3.0
Apr.
22

2.5
2.0
1.5

1.0
0
July

Sept.
2007

Nov.

Jan.

0.5

Mar.
2008

July

Spreads on 30-Day Commercial Paper

Sept.
2007

Nov.

Mar.
2008

Commercial Paper Outstandings

Basis points
Daily

Jan.

Mar. FOMC

Billions of dollars
250

Weekly

Mar. FOMC

1400
1300

200

1200
ABCP

Apr. 22

1100

150

1000
100

Unsecured CP

Apr.
16

900

A2/P2

800

700

ABCP

0
July

Sept.
2007

Nov.

Jan.

Mar.
2008

Note. The ABCP spread is the AA ABCP rate minus the AA
nonfinancial rate. The A2/P2 spread is the A2/P2 nonfinancial
rate minus the AA nonfinancial rate.

600
Jan. Mar. May July Sept. Nov. Jan. Mar.
2007
2008

Note. Seasonally adjusted; weeks ending on Wednesdays.

Domestic Financial Developments
Overview
Conditions in financial markets improved somewhat, on balance, over the intermeeting
period, as investors apparently became less concerned about a severe deepening of the
ongoing financial difficulties. The improved sentiment was supported by the Federal
Reserve’s continued efforts to bolster market liquidity and by news about large financial
institutions that was seen as reducing the odds of possible failures. Investors marked up
the expected path of policy notably, and the onset of a gradual policy tightening is now
anticipated late this year. Treasury yields rose with policy expectations and also on some
reduction in the demand for safe-haven assets; the largest increase was concentrated at
the front end of the yield curve. Over the intermeeting period, inflation compensation
over the next five years remained below the average level between the January and
March FOMC meetings. The five-year-forward measure of inflation compensation
moved lower. Equity prices posted sizable gains over the intermeeting period, and
corporate credit spreads decreased, particularly for speculative-grade and financial firms.
Nevertheless, indicators of risk and volatility remain elevated across most asset classes.
With further losses on securities and household loans, pressures on bank balance sheets
continued to mount, contributing to intensified strains in some short-term funding
markets and to additional tightening of bank lending standards across all types of loans.
Money Market Functioning
Over the intermeeting period, strains increased further in some short-term funding
markets. Amid heightened bank funding pressures, spreads of Libor rates over
comparable-maturity overnight index swap (OIS) rates widened significantly. Primary
credit borrowing picked up noticeably after March 16, when the spread between the
primary credit rate and the target federal funds rate was lowered to 25 basis points.
Outsized demand for bank funding pushed stop-out rates on the ninth and tenth auctions
conducted through the Term Auction Facility up to or above term Libor rates and
considerably above the primary credit rate. The Primary Dealer Credit Facility—
established on March 16 to provide overnight funding to primary dealers in exchange for
a range of collateral including investment-grade securities—drew substantial initial
demand, although the amount outstanding declined somewhat over the period.
In commercial paper markets, spreads of rates on 30-day AA-rated financial paper over
rates on AA-rated nonfinancial paper shot up to record levels, while spreads on both
A2/P2 nonfinancial paper and asset-backed commercial paper were volatile and elevated.
Even among programs that have been paying elevated spreads, low short-term interest
rates have kept yields toward the bottom of their range of the past few years.
III-1

III-2

Policy Expectations and Treasury Yields
Money Market Futures Rates
FOMC
statement

Percent

Durable TSLF
goods

ISM Chairman’s Nonfarm
testimony payrolls
TSLF

FOMC
minutes

3.2

PPI

3.0
2.8

December 2008
Eurodollar

2.6
2.4
2.2
2.0
1.8

May 2008
federal funds
Mar. 17

Mar. 20

1.6
1.4
Mar. 26

Mar. 31

Apr. 3

Apr. 8

Apr. 11

Apr. 16

Apr. 21

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

Implied Federal Funds Rate

Implied Volatility of Interest Rates
Basis points

Percent
3.50

Daily
3.25
3.00

Basis points

300
250

Mar. FOMC

6-month Eurodollar (left scale)*
10-year Treasury (right scale)

1000
900

2.75

800

200
April 22, 2008

2.50
2.25

Apr.
22
150

March 17, 2008

500
100

400

1.50
1.25

Apr.

Aug.
Dec.
Apr.
Aug.
Dec.
Apr.
Aug.
2008
2009
2010
Note. Estimated from federal funds and Eurodollar futures, with an
allowance for term premiums and other adjustments.

Treasury Yield Curve

300

200
Oct.
2005

Mar.

Aug.
2006

Jan.

June
2007

Nov.

Apr.
2008

*Width of a 90 percent confidence interval computed from the
term structures for the expected federal funds rate and implied
volatility.

Inflation Compensation
Percent

Percent

5.0

Daily

Mar. FOMC

4.5

3.5

3.0
2.8

5 to 10 years ahead

3.0

Apr.
22

Next 5 years*

2.5

March 17, 2008

1.8

1.0
7

10
Years ahead

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

2.4

2.0

1.5
5

2.6

2.2

2.0

3.4
3.2

4.0

April 22, 2008

700
600

2.00
1.75

1100

Jan.

Apr.

July
2007

Oct.

Jan.

Apr.
2008

Note. Estimates based on smoothed nominal and inflation-indexed
Treasury yields.
*Adjusted for lagged indexation of TIPS.

III-3

Early in the intermeeting period, strong demand for safe-haven assets was reflected in
historically low rates for general collateral (GC) Treasury repo and Treasury bills, and
both markets were under considerable strain. Conditions in those markets have improved
significantly, evidently in response to Federal Reserve actions that increased the
availability of Treasury securities. In four separate auctions conducted through the Term
Securities Lending Facility (TSLF), the Federal Reserve offered a total of $150 billion of
Treasury securities in exchange for less-liquid assets. Treasury GC rates moved back in
line with other short-term interest rates, and their spreads below mortgage-backed
security (MBS) repo rates decreased. Yields on Treasury bills also recovered, and their
spreads below comparable-maturity OIS rates narrowed substantially. Nevertheless,
haircuts on non-Treasury collateral remain elevated and in some cases have increased a
little in recent weeks.
Policy Expectations and Treasury Yields
The expected path for the federal funds rate moved up significantly, on net, over the
intermeeting period. The 75 basis points of policy easing at the March FOMC meeting
was somewhat less than investors had expected, and market participants reportedly also
revised up their expectations on the basis of the FOMC statement, including the news of
two dissenting votes; overall, the statement conveyed more concern about inflation than
investors had anticipated. The Chairman’s testimony on April 2 was associated with a
further small upward shift in the expected policy path. Incoming economic data were
mixed but on net contributed to the rise in policy expectations, as did a number of
announcements by large financial institutions that investors interpreted as pointing
toward more-favorable prospects for such firms.
Options on federal funds futures indicate that market participants now see about a
70 percent probability of a 25 basis point cut at the upcoming FOMC meeting, about
25 percent odds of no policy change, and low odds of a 50 basis point cut. Investors
expect the funds rate to bottom out at about 2 percent this summer, and they anticipate
that the target will rise gradually in 2009 and 2010. The April survey of primary dealers,
on the other hand, suggests that economists expect the target rate to bottom out at about
1½ percent in the first part of 2009. Over the intermeeting period, the implied
distribution of the federal funds rate six months ahead became significantly less skewed
to the downside, and implied uncertainty about the near-term policy path decreased
considerably.

III-4
Corporate Yields, Risk Spreads, and Stock Prices
Selected Stock Price Indexes

Ratio of Trend Earnings to Price for S&P 500 and
Long-Run Treasury Yield
Percent

Jan. 3, 2007 = 100
Daily
S&P 500

March
FOMC

DJ Securities
Brokers

Apr.
22

Jan. Mar. May July Sept. Nov. Jan. Mar.
2007
2008

120
115
110
105
100
95
90
85
80
75
70
65
60
55

Monthly

10
(Trend earnings) / P*

+
6
Apr.
22

Long-run real Treasury yield

1988

1992

1996

2000

4
2

2004

2008

* Trend earnings are estimated using analysts’ forecasts of
year-ahead earnings from I/B/E/S.
+ Denotes the latest observation using daily interest rates and
stock prices and latest earnings data from I/B/E/S.

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Percent
50

Weekly Friday*

12.5

Daily

March
FOMC

10.5

10-year high-yield

Apr.
22
Apr.
22

8.5

20
6.5
10-year BBB

4.5
2002

2003

2004

2005

2006

2007

2008

2002

* Latest observation is for most recent business day.

2003

2004

2005

2006

2007

2008

Note. Yields from smoothed yield curves based on Merrill Lynch
bond data.

Corporate Bond Spreads

Forward Credit Spreads on Spec.-Grade Bonds

Basis points

Basis points
450

Daily
March
FOMC

800

Daily

1000

March
FOMC

375

800
600

10-year high-yield
(left scale)

Apr.
22

400

300
Near-term*

Apr.
22

225

200

400

150

200

Far-term**

10-year BBB
(right scale)

75
2002

2003

2004

2005

2006

2007

2008

Note. Measured relative to comparable-maturity Treasuries.

600

0
2002

2003

2004

2005

2006

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

2007

2008

III-5

Yields on Treasury coupon securities rose sharply over the intermeeting period, with
2-year and 10-year yields climbing about 80 and 40 basis points, respectively, increases
that were consistent with both the higher expected path for policy and an easing of safehaven demand. At the 5-year horizon, TIPS-based inflation compensation was
particularly volatile in the days around the March FOMC meeting, as investors sought the
comparative liquidity of nominal Treasury securities. Since the March meeting, 5-year
inflation compensation increased about 25 basis points, but smoothing through the recent
volatility, 5-year inflation compensation is still in the lower portion of its range of the
past several months. Over the intermeeting period, inflation compensation 5 to 10 years
ahead declined 30 basis points, returning to about the middle of its recent range.
Stock Prices and Corporate Interest Rates
Broad stock price indexes increased about 8 percent, on net, over the intermeeting period,
more than reversing the sharp decline recorded between the January and March FOMC
meetings. Much of the rise came in response to earnings and recapitalization
announcements from financial institutions, which investors read as trimming the odds of
severe difficulties among major financial firms. Gains were widespread across sectors,
but securities brokers outperformed the broader market. The spread between the
12-month-forward trend earnings-to-price ratio for all firms in the S&P 500 and a real
long-term Treasury yield—a rough gauge of the equity risk premium—remained at the
upper end of its range over the past two decades. Option-implied volatility on the S&P
500 index came down over the intermeeting period but continued to be elevated.
Yields on BBB-rated corporate bonds rose a bit less than those on comparable-maturity
Treasury securities, while those on speculative-grade bonds fell. As a result, spreads on
BBB-rated bonds decreased 15 basis points from their recent multiyear highs, and
spreads on speculative-grade bonds dropped 100 basis points. For speculative-grade
bonds, near-term forward spreads fell much more than far-term forward spreads, an
indication of an easing of concerns about the outlook for corporate credit quality over the
next few years. Measures of secondary-market functioning for corporate bonds also
improved notably over the intermeeting period. Although issuance remained weak,
secondary-market prices of leveraged syndicated loans continued to rebound from their
February lows, and bid-asked spreads narrowed somewhat.
Corporate Earnings and Credit Quality
According to the approximately 200 reports in hand for the first quarter and analysts’
forecasts for the rest, operating earnings per share for S&P 500 firms are estimated to

III-6
Corporate Earnings and Credit Quality
S&P 500 Earnings Per Share

Revisions to Expected S&P 500 Earnings

Percent
40

Change from 4 quarters earlier

Percent
3

Monthly

30
20
Q1 f
+

2
1

0
+
Q1 f

-1
MidApr.p

-10
All firms
Nonfinancials

-20

All firms
Nonfinancials

-3

-30
1998

2000

2002

2004

2006

2003

2004

2005

Financial Ratios for Nonfinancial Corporations
Ratio

2008

Percent of outstandings
7

0.35

Liquid assets over
total assets
(left scale)

Debt over
total assets
(right scale)

2007

Selected Default and Delinquency Rates

Ratio

Annual*

2006

Note. Index is a weighted average of the percent change in the
consensus forecasts of current-year and following-year EPS for a
fixed sample.
p April number is preliminary.

f Forecast.
Source. I/B/E/S for S&P 500 earnings per share.

0.12

-4
2002

2008

-2

6
5

0.09

0.30

C&I loan delinquency rate
(Call Report)

4
3

0.06

0.25
Q4
Bond default rate*
Mar.

0.03

1
0

0.20
1989

1992

1995

1998

2001

2004

2007

1990

* Data are quarterly starting in 2000:Q1.
Source. Calculated with Compustat data.

1993

1996

1999

2002

2005

2008

* 6-month moving average, from Moody’s Investors Service.

Expected Year-Ahead Defaults

Bond Ratings Changes of Nonfinancial Companies

Percent of liabilities

Percent of outstandings
30

Annual rate
Upgrades

2.0

Monthly

20
Feb.

1.5

10
0

Jan.

1.0
10
Mar.

0.5
30
Downgrades

0.0

50
1992 1994 1996 1998 2000 2002 2004 2006 2008
Source. Calculated with data from Moody’s Investors Service.

1993

1996

1999

2002

2005

2008

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

III-7

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2008
2004

2005

2006

2007

Jan.

Feb.

Mar.

Apr. p

5.4
1.6
3.8

4.6
1.7
2.8

4.7
1.8
2.9

5.5
1.6
3.8

2.0
.6
1.3

3.1
.1
3.0

21.5
19.7
1.8

2.5
1.0
1.5

22.7
8.2
9.7
4.9

19.1
8.4
6.4
4.3

29.8
13.0
8.0
8.8

35.6
17.2
10.3
8.2

28.3
24.8
1.0
2.5

22.6
19.0
.8
2.7

36.9
28.1
3.2
5.6

36.0
28.0
4.0
4.0

1.5

-.4

3.9

-.4

9.9

6.6

-3.6

4.4

2.4

9.6

11.6

20.9

12.8

12.4

21.7

-1.0

6.9
139.3

Type of security

5.0
176.3

5.3
187.7

8.6
156.0

25.1
93.0

9.1
44.3

5.1
33.4

11.0
48.0

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings
Bonds2
Investment grade
Speculative grade
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3,4
Financial corporations
Stocks1
Bonds2

Note. Components may not sum to totals because of rounding.
1. Excludes private placements and equity-for-equity swaps that occur in restructurings.
2. Data include regular and 144a private placements. Bond totals reflect gross proceeds rather than par value of
original discount bonds. Bonds are categorized according to Moody’s bond ratings or to Standard & Poor’s if
unrated by Moody’s.
3. End-of-period basis, seasonally adjusted.
4. Based on adjusted commercial bank credit data through April 9th.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

70
Monthly rate, nonfinancial firms

40
Monthly rate, nonfinancial firms
H1

Commercial paper*
C&I loans*
Bonds

30
20
10

Total
H1

Apr.
Jan.
Mar.p
Feb.

-10

-20
-30

-40
20

-50
-60

-70
-80

Public issuance
Private issuance
Repurchases
Cash mergers

0
-10

-90
-100

Total

-110

-20
2003

2004

2005

2006

* Seasonally adjusted, period-end basis.
p Preliminary.

2007

2008

-120
2003

2004

e Staff estimate.

2005

2006

2007

2008

III-8

Commercial Real Estate
Commercial Mortgage Debt

Sales of Commercial Real Estate

Percent change from year earlier

Billions of dollars
120

Quarterly

3-month moving average
Monthly

100

14
Q4

10
60
8
6

Mar.

2
0
1997

1999

2001

2003

2005

2007

0
2002

Source. Flow of funds.

2004

2006

2008

p Preliminary.
Source. Real Capital Analytics.

BBB Commercial Mortgage CDS Index Spreads
CMBX.NA

CMBS Issuance

Basis points

Daily

Billions of dollars
2000

100

Quarterly rate

1800

2006:H2*
2006:H1*
2005:H2*

1600
1400
Apr.
22

1200
1000

Apr.
22

800

Apr.
22

400

600
20

200
0

Sept.

Jan.

Apr.

July

Oct.

Jan.

1998

Apr.

2000

2002

2004

2006

2008

Source. Commercial Mortgage Alert.

2006
2007
2008
Note. Measured relative to Libor.
*Corresponds to pools of mortgages originated in that period.
Source. JP Morgan.

Delinquency Rates on Commercial Mortgages
Percent
4

Delinquency Rates on Commercial Mortgages
Percent
at Banks
Quarterly

8
7

3
At commercial
banks*

Residential
construction

6
5

CMBS

Commercial
construction

At life
insurance
companies

Existing
properties

Mar.
Q4

2
1

0
1996

1998

2000

2002

2004

* Excluding farm land.
Source. Citigroup, Call Report, ACLI.

2006

2008

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

III-9

have fallen 14 percent relative to year-earlier levels. The decline resulted from a large
drop in financial sector earnings, reflecting additional write-downs of troubled assets. In
contrast, earnings per share for nonfinancial firms are estimated to have increased
8 percent over the past year. Estimated earnings for financial firms over the year ahead
were revised down noticeably in March, but the corresponding estimates for nonfinancial
firms were little changed.
The data indicate that nonfinancial corporations ended 2007 with solid balance sheets.
The aggregate ratio of liquid assets to total assets remained high by historical standards.
and the aggregate leverage ratio only edged up from a low level. In February, there were
few ratings changes for corporate bonds, and in March the realized six-month default rate
on corporate bonds stayed close to zero. However, the KMV forecast of the aggregate
year-ahead default rate, climbed to its highest level in several years.
Business Finance
Gross bond issuance by nonfinancial firms was robust in March and the first half of
April. The vast majority of issuance was by investment-grade firms, although
speculative-grade issuance, which had been low early in the year, picked up a bit.
Nonfinancial commercial paper outstanding edged down in March but moved back up in
April. Commercial and industrial (C&I) loans from banks jumped in March, as some
borrowers reportedly tapped existing low-cost bank lines of credit, but outstandings were
about flat in early April. On balance, net debt financing through commercial paper,
bonds, and bank C&I loans was solid through mid-April, albeit well below the pace over
the second half of last year.
Retirements from completed cash-financed mergers and acquisitions were less than half
their level in the fourth quarter, and only one new deal valued above $5 billion was
announced. Retirements resulting from share repurchases also cooled in the first quarter,
as profit growth slowed and firms reportedly sought to preserve cash positions. Gross
public equity issuance in March and the first three weeks of April was dominated by a
single large initial public offering and was otherwise sluggish in an environment of
generally low valuations and volatile equity prices.
Commercial Real Estate
Sales of existing commercial properties were steady in February and March at a level far
below the peak in 2007, and indications are that commercial real estate prices have
flattened out. Spreads on credit default swap (CDS) indexes for commercial mortgage-

III-10
Residential Mortgages
Mortgage Debt

Delinquencies on Mortgages
Percent change from year earlier

Percent of loans
16

Quarterly

Percent of loans
3.0

Monthly
Feb.

18
16

12
10

2.5

Subprime (left scale)
2.0

14
Feb.

1.5

Prime (right scale)
8
6
4
2002

2003

2004

2005

2006

2007

0.0
2002

2003

2004

2005

2006

2007

2008

Note. Percent of loans 90 or more days past due or in
foreclosure. Prime includes near-prime mortgages.
Source. First American LoanPerformance.

Prime Conforming Mortgage Rate and Spread
Basis points

30-Year Option-Adjusted Current Coupon Spreads

Percent

Basis points
7.0

Mar.
FOMC

Weekly

270

0.5

6
2001

Source. Flow of funds.

300

1.0

2001

30-year fixed-rate
(right scale)

250

Mar.
FOMC

Daily

200

Fannie Mae
Ginnie Mae

6.5

240
Apr.
16

210
180

150
6.0

Apr.
22

Apr.
16

30-year fixed-rate spread
(left scale)

5.5

150
120

5.0
Sept.

Jan.

Apr.

July

Oct.

Jan.

2006
2007
Note. FRM spread relative to 10-year Treasury.
Source. Freddie Mac.

Apr.

0
Sept.

2008

100

Apr.
22

Jan.

Apr.

2006

July

Oct.

Jan.

2007

Apr.
2008

Note. Option-adjusted spread from Bloomberg’s prepayment model.
Source. Bloomberg.

GSE Credit Default Swap Index

Agency and Non-agency MBS Issuance
Billions of dollars

Basis points
300

Monthly rate
Agency
Non-agency

120

Mar.
FOMC

Daily

250

100

200

150

H1
H2

F.
J.

100

Apr.
18

2001 2002 2003 2004 2005 2006

2007 2008

Source. For agency issuance, Fannie Mae, Freddie Mac,
and Ginnie Mae. For non-agency issuance, Inside Mortgage
Finance MBS database.

40
20

0
Sept.

Jan.

Apr.

July

Oct.

Jan.

Apr.

2006
2007
2008
Note. Sector index is the median of individual quotes.
Source. Markit.

III-11

Consumer Credit and Household Wealth
Delinquencies on Consumer Loans

Consumer Credit
Percent

Percent change
6

Credit card loans
in securitized pools

3-month moving average, annual rate

16
5

Jan.

12
Nonrevolving
consumer loans at
commercial banks

Q4
Feb.

10
8

6
4

2
Auto loans at captive
finance companies

Feb.
1

1998

2000

2002

2004

2006

2
0

2008

1998

2000

2002

2004

2006

2008

Source. For nonrevolving, Call Report; for credit cards, Moody’s;
for auto loans, Federal Reserve.

Interest Rates on Consumer Loans

Gross Issuance of Consumer ABS by Type
Percent

Billions of dollars
16

Weekly

40
Monthly rate

Apr.
16

Credit cards

Apr.
13

Used auto loans

Auto
Credit card
Student loans

New auto loans

2004

2005

20
M.
A.*

2006

2007

2002

2008

2003

2004

2005

2006

2007

2008

Note. Auto includes car loans, leases, and financing for buyers of
motorcycles, trucks, and other vehicles.
* As of Apr. 11
Source. Inside Mortgage Finance MBS database, Merrill Lynch.

Source. For credit cards, Bank Rate Monitor; for auto, PIN.

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

H1
Total long-term funds
Equity funds
Domestic
International
Hybrid funds
Bond funds
High-yield
Other taxable
Municipals
Money market funds

4
2

2003

Apr.
13

2002

30
J.

2006

18.9
13.3
0.9
12.4
0.6
5.0
-0.2
4.0
1.3
27.8

2007
Q3

Jan.

2008
Feb.

Mar.e

Assets
Feb.

32.0
14.8
1.3
13.5
2.6
14.6
0.2
11.9
2.4
26.3

4.6
1.2
-8.3
9.5
1.0
2.5
-0.8
3.1
0.2
110.9

7.0
1.2
-8.5
9.7
1.2
4.6
-0.6
6.5
-1.3
86.6

-22.1
-44.9
-35.6
-9.2
-1.5
24.2
-2.2
23.9
2.5
178.4

27.6
9.5
3.6
5.9
3.3
14.9
-0.5
14.2
1.2
112.2

3.4
-10.7
-9.5
-1.2
0.9
13.2
-0.8
11.7
2.3
68.1

8,360
5,967
4,424
1,543
682
1,711
149
1,200
362
3,435

Note. Excludes reinvested dividends.
e Staff estimate based on confidential weekly data.
Source. Investment Company Institute.

III-12

Treasury Finance
Foreign Participation in Treasury Auctions

Foreign Custody Holdings

Percent of total issue

Billions of dollars
60

6-month moving average

Weekly average

1200

Treasury

50
Indirect bids

1400

Mar. FOMC
Apr.
16

800

30
Mar. 31
Mar. 31

Actual foreign allotment

1000

Apr.
16

600

20
Agency

400

10
200
0

2000

2002

2004

2006

2008

2003

2004

2005

2006

2007

2008

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

Note. Securities held in custody at the Federal Reserve Bank
of New York on behalf of foreign official institutions.

Securities Lending

Bid-Ask Spread

Cents per
$100 face value

Billions of dollars
25
Weekly (Wed.) average

Mar.
FOMC

5-day moving average

1.10
1.05

20
Apr.
22

1.00
0.95

2-year on-the-run
Treasury notes

Apr.
16

0.90

0.85
0.80

0
2003

2004

2005

2006

2007

2008

Feb.

June

Oct.

Feb.

June

Oct.

Note. Volume of securities lent to market participants from the
System Open Market Account portfolio through the overnight
facility.

Treasury On-the-Run Premiums

Feb.

Source. BrokerTec Interdealer Market Data.

Average Trading Volume

2006

2007

Basis points

2008

Billions of dollars
40

Mar.
FOMC

5-day moving average

Monthly average

30
10-year

400

300

Apr.
Apr.
22

200
5-year

Apr.

100

-10
2001 2002 2003 2004 2005 2006 2007 2008

0
Feb.

June

2006
Note. Computed as the spread of the yield read from an estimated
off-the-run yield curve over the on-the-run Treasury yield. April
observation is the month to date average.

Oct.

Feb.

June

2007

Oct.

Feb.

2008

Note. 5-day moving average of daily trading volume in 2-, 5-,
and 10-year on-the-run coupon securities in interdealer market.
Source. BrokerTec Interdealer Market Data.

III-13

backed securities (CMBS) fell substantially, like those on most other debt securities.
Even so, CMBS CDS spreads are still quite high by historical standards, and the cash
CMBS market remained essentially dormant over the intermeeting period. Delinquency
rates on CMBS and commercial bank loans backed by existing properties have remained
relatively low, while those on loans for residential and commercial construction projects
climbed further in the fourth quarter. In the April Senior Loan Officer Opinion Survey, a
large majority of banks reported tightening lending standards on commercial real estate
loans over the past three months.
Household Finance
Incoming data suggested a further deterioration in residential loan performance. Data for
February continued to show nonprime loans performing the worst, but the delinquency
rates on other types of mortgages have risen.
After having tightened notably in March, conditions in the conforming-mortgage market
recovered somewhat in recent weeks. Spreads between primary-market interest rates on
conforming mortgages and rates on 10-year Treasury securities decreased over the
intermeeting period. Option-adjusted spreads on agency MBS also declined on net over
the period, amid significant volatility. Although primary-market and secondary-market
spreads remained high by historical standards, issuance of agency MBS remained very
strong in the first two months of 2008, suggesting ample supply of credit for conforming
mortgages. In contrast, almost no non-agency MBS were issued in January or February,
indicating that the market for nonconforming products remained exceptionally tight.
Indicators of the availability of nonmortgage consumer credit have been mixed. Growth
of consumer credit has slowed in recent months, particularly for nonrevolving loans.
Following rising delinquency rates on credit-card and auto loans early in the year, lenders
reportedly continued to tighten standards and curb credit limits through April.
Nonetheless, interest rates on consumer loans decreased in recent weeks. Issuance of
most types of consumer asset-backed securities picked up in March, but issuance for auto
loans remained quite light. Amid continued difficulties in the secondary market, lenders
representing more than 10 percent of government-guaranteed student loan originations
announced that they would not originate new loans in the fall of 2008, and originators of
private-credit (non-government-guaranteed) loans raised interest rates and tightened
credit standards.

III-14

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

2008
2004

2005

2006

2007

Jan.

Feb.

Mar.

Apr. p

34.7
29.8
10.8
19.0
4.9

Type of security

38.4
34.2
15.6
18.6
4.2

36.1
32.5
10.6
21.9
3.7

40.3
35.5
12.5
23.0
4.9

21.1
19.4
3.9
15.4
1.7

22.2
21.2
6.3
14.9
.9

42.5
41.1
19.9
21.2
1.4

37.0
36.0
18.0
18.0
1.0

2.0

2.1

2.5

2.4

1.0

3.5

3.0

Total
Long-term 1
Refundings 2
New capital
Short-term
Memo: Long-term taxable

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.
p Based on preliminary data through April 17, 2008.

Ratings Changes
Number of ratings changes
2800

Annual rate
H1 H2

2100
Apr.*

Upgrades

Mar.
Feb.
Jan.

1400
700
0
700
1400

Downgrades

2100
2800
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

* Staff estimate based on data through April 16, 2008.
Source. S&P’s Credit Week Municipal and Ratings Direct.

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
8

Weekly

Ratio
1.2

Weekly

7
20-year

1.1

6
Apr.
17

5
20-year

Apr.
17

0.9

3
1-year

Apr.
22

1.0

0.8

1
0
1994 1996 1998 2000 2002 2004 2006 2008
Source. Municipal Market Advisors and Bond Buyer.

0.7
1994 1996 1998 2000 2002 2004 2006 2008
Source. Bond Buyer.

III-15

Long-term mutual funds registered small inflows in March, as investors shifted the
composition of their portfolios from equity funds to bonds funds. Money market mutual
funds continued to attract heavy inflows last month, but at a slower pace than earlier in
the year.
Treasury Finance
During the intermeeting period, the Treasury auctioned 2- and 5-year nominal securities,
with mixed results. Demand at the auction for the 2-year security was quite strong, while
the bid-to-cover ratio at the 5-year auction was slightly below its recent average. Two
inflation-indexed securities were auctioned as well, with demand at both auctions in line
with recent experience. Allotments to foreign investors in the nominal Treasury auctions
were roughly in line with other recent auctions.
The greater availability of Treasury securities resulting from TSLF operations and sales
from the System Open Market Account appears to have supported trading conditions in
the Treasury coupon market, although the functioning of this market is still somewhat
strained. Bid-asked spreads have declined from their March peaks but remain elevated,
and the on-the-run premium for the 10-year note remains at a five-year high. Trading
volumes in Treasuries have been about average in recent weeks.
State and Local Government Finance
Gross issuance of long-term municipal bonds rebounded strongly in March and remained
robust in the first half of April, reflecting, in part, the refinancing of auction-rate security
issues, for which the market remains impaired. Short-term issuance was moderate, in line
with typical seasonal patterns.
The underlying credit quality of municipal bonds has remained strong; indeed, the
number of ratings upgrades outpaced the number of downgrades in March and April.
Yields on long-term municipal bonds declined slightly over the intermeeting period. The
yield ratio to comparable-maturity Treasuries retraced much of the spike in late February
and early March.
Money and Bank Credit
M2 expanded at an annual rate of 12½ percent in March, only a little below its torrid pace
in February. Retail money funds and liquid deposits accounted for the rapid growth last
month. In contrast, small time deposits contracted in March, the first decline since 2004,

III-16

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)1

Level
(billions
of dollars),

2006

2007

2007
Q4

4.9

5.8

4.8

9.5

16.8

12.6

7,662

Components
Currency
3
Liquid deposits
Small time deposits
Retail money market funds

3.5
.7
18.6
13.0

2.0
4.5
4.1
19.3

1.1
2.1
5.7
20.4

-.6
6.8
3.0
39.0

1.4
13.4
2.5
62.1

4.9
15.0
-8.9
33.3

762
4,611
1,217
1,065

Memo:
Institutional money market funds
Monetary base

15.7
3.1

39.3
2.0

54.1
1.0

46.7
-.5

87.6
1.9

44.1
6.9

2,148
827

Aggregate and components
M2

2008
Feb.

Mar.

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

III-17

as some depository institutions that had been competing aggressively for these funds
reduced their rates.
Results from the April Senior Loan Officer Opinion Survey (see appendix to this section)
indicate that commercial banks continued to tighten their credit standards on all major
loan categories over the past three months. Indeed, the net fractions of banks tightening
lending standards reached or surpassed historical highs for all loan categories in the
survey. Notwithstanding this reported tightening, commercial bank credit expanded at an
annual rate of 13 percent in March, an increase supported by growth in business and
residential real estate lending. Lending to businesses through C&I and commercial real
estate loans jumped in March, particularly at large institutions. Part of the recent strength
in C&I lending was reportedly due to increased utilization of existing credit lines, the
pricing of which does not fully reflect current lending practices.
In March, outstanding residential mortgages at banks rose at a vigorous annual rate of
14 percent, in part because of a sluggish pace of securitization. Growth of home equity
lines of credit (HELOCs) was brisk last month, but commercial banks have started to take
actions to limit their exposure to these loans: According to the April Senior Loan Officer
Opinion Survey, a significant fraction of banks reported that they had tightened their
credit standards for approving new applications for HELOCs, and a notable fraction
reported that they had also firmed lending terms on existing home equity lines, mainly in
response to declines in property values.
Write-downs of mortgage-related assets and leveraged syndicated loans contributed
importantly to a drop in commercial bank profitability in the first quarter. Banking
institutions also increased loss provisions substantially. In addition to housing-related
problems, banking organizations cited increased delinquency rates on consumer loans,
and a few indicated that cracks had begun to appear in the credit quality of their small
business loan portfolios.

III-18

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

Total
Loans2
Total
To businesses
Commercial and industrial
Commercial real estate
To households
Residential real estate
Revolving home equity
Other
Consumer
Originated3
Other4
Securities
Total
Treasury and agency
Other5

Level1
Mar. 2008

H1
2007

Q3
2007

Q4
2007

Jan.
2008

Feb.
2008

Mar.
2008

9.5

12.4

9.5

1.8

9.6

13.4

9,026

10.8

11.7

10.5

10.7

6.9

8.4

6,796

11.7
9.9

21.4
10.4

27.4
9.2

14.7
6.9

8.0
8.2

19.8
13.0

1,466
1,621

13.1
4.9
16.0
4.8
4.8
11.4

2.6
5.4
1.7
10.7
10.1
19.7

-5.5
7.3
-9.8
10.6
8.4
21.0

6.0
8.5
5.0
3.9
6.8
24.8

10.2
11.2
10.0
.6
6.5
2.8

14.1
18.5
12.5
4.6
4.0
-22.1

1,881
494
1,388
812
1,219
1,016

5.8
-6.2
22.5

14.8
7.7
23.4

6.3
-17.4
34.3

-25.0
-32.9
-16.7

18.0
7.5
28.8

29.1
43.1
14.9

2,230
1,129
1,101

Note. Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data
have been adjusted to remove the effects of mark-to-market accounting rules (FIN 39 and FAS 115), the initial consolidation of certain variable interest entities (FIN 46), the initial adoption of fair value accounting (FAS 159), and the effects
of sizable thrift-to-bank and bank-to-thrift structure activity in October 2006, March 2007, and October 2007. Data also
account for breaks caused by reclassifications.
1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels.
2. Excludes interbank loans.
3. Includes an estimate of outstanding loans securitized by commercial banks.
4. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified.
Also includes lease financing receivables.
5. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign
governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains
on derivative contracts.

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices
The April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed
changes in the supply of, and demand for, bank loans to businesses and households over the past
1

three months. Special questions in the survey queried banks about changes in terms on home
equity lines of credit and about their student loan programs. This appendix is based on responses
from 56 domestic banks and 21 U.S. branches and agencies of foreign banks.
In the April survey, domestic and foreign institutions reported having further tightened their
lending standards and terms on all loan categories over the past three months, with the net
fractions of banks reporting tighter lending standards now being at, or above, historical highs for
all loan categories in the survey. Compared with the January survey, the net fractions of banks
that tightened lending standards increased significantly for consumer and commercial and
industrial (C&I) loans. Demand for bank loans from both businesses and households reportedly
weakened further, on net, over the past three months, although by less than had been the case over
the previous survey period.
Business Lending
Questions on C&I loans. About 55 percent of domestic banks—up from about 30 percent in the
January survey—reported tightening lending standards on C&I loans to large and middle-market
firms over the past three months. A significant majority of respondents reported tightening price
terms on C&I loans to these firms, and in particular, about 70 percent of banks—up from about
45 percent in the January survey—indicated that they had increased spreads of loan rates over
their cost of funds. In addition, smaller but significant net fractions of domestic banks reported
tightening non-price-related terms on C&I loans to these firms over the past three months.
Regarding C&I loans to small firms, about 50 percent of domestic respondents reported
tightening their lending standards on such loans over the survey period, compared with about
30 percent who reported doing so in the January survey. About 65 percent of banks—up from
about 40 percent in the January survey—also noted that they had increased spreads of C&I loan
rates over their cost of funds for these firms. In addition, large net fractions of domestic
respondents reported tightening other price-related terms, and smaller fractions tightened nonprice-related terms on C&I loans to small firms.
About 60 percent of U.S. branches and agencies of foreign banks—a slightly smaller fraction than
in January—noted that they had tightened lending standards on C&I loans over the past three
months, and very large majorities also reported that they had tightened price terms on such loans:
1

Banks received the survey in early April, and their responses were due on April 17.

III-A-1

III-A-2

Measures of Supply and Demand for C&I Loans,
by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
Percent
80

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

Jan.
survey

60
40
20
0
-20
-40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks’ Costs of Funds
Percent
80

Jan.
survey

60
40
20
0
-20
-40
-60
-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans
Percent
60

Jan.
survey

40
20
0
-20
-40
-60
-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

III-A-3
In particular, around 80 percent of foreign banks—about the same as in the January survey—
reported increasing spreads of loan rates over their cost of funds. Finally, large fractions of
foreign respondents reported tightening selected non-price-related terms over the past three
months.
Substantial majorities of domestic and foreign respondents pointed to a less favorable or more
uncertain economic outlook and to a worsening of industry-specific problems as reasons for
tightening their lending standards and terms on C&I loans over the past three months. In
addition, significant majorities of respondents cited their banks’ reduced tolerance for risk and
decreased liquidity in the secondary market for these loans. About 35 percent of domestic banks
and 45 percent of foreign institutions—somewhat larger fractions than in the January survey—
noted that concerns about their banks’ current or expected capital position had contributed to
more-stringent lending policies over the past three months.
On net, about 15 percent of large domestic banks reported that demand for C&I loans from large
and middle-market firms had increased over the past three months, but a similar net fraction of
these banks reported weaker demand from small firms. In contrast, about 20 percent of small
domestic banks, on net, reported weaker demand for C&I loans from all types of firms over the
past three months. Finally, about 25 percent of foreign banks, on balance, reported weaker
demand for C&I loans over the survey period.
The vast majority of large domestic banks that reported stronger loan demand from large and
middle-market firms indicated that customer borrowing shifted to their banks from other bank or
nonbank sources, as these other sources became less attractive for such borrowers. Substantial
majorities of domestic and foreign institutions that reportedly experienced weaker loan demand
over the past three months pointed to a decrease in customers’ needs to finance investment in
plant and equipment. In addition, as reasons for a lower demand for C&I loans, the majority of
domestic banks indicated that customers’ needs to finance inventories had declined, and all
foreign respondents noted a decrease in customers’ needs for merger and acquisition financing.
Regarding future business, about 20 percent of large domestic banks, on net, reported an increase
in the number of inquiries from potential business borrowers over the past three months. In
contrast, tiny net fractions of small domestic banks and foreign institutions indicated that
inquiries from potential business borrowers had declined during the survey period.
Questions on commercial real estate loans. About 80 percent of domestic banks and
55 percent of foreign banks—fractions similar to those in the January survey—reported
tightening their lending standards on commercial real estate loans over the past three months.
Concerning loan demand, about 35 percent of domestic banks and 45 percent of foreign
institutions reported weaker demand, on net, for commercial real estate loans over the past three
months.

III-A-4

Measures of Supply and Demand for Commercial Real Estate Loans
Net Percentage of Domestic Respondents Tightening Standards for Commercial Real Estate Loans
Percent
100

Jan.
survey

-20

-40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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

Jan.
survey

-20

-40

-60

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

III-A-5
Lending to Households
Questions on residential real estate loans. Majorities of domestic respondents reported that
they had tightened their lending standards on prime, nontraditional, and subprime residential
mortgages over the past three months. About 60 percent of domestic respondents—a somewhat
larger fraction than in the January survey—indicated that they had tightened their lending
standards on prime mortgages. 2 Of the 37 banks that originated nontraditional residential
mortgage loans, about 75 percent—a somewhat smaller fraction than in the January survey—
reported a tightening of their lending standards on such loans over the past three months. 3
Finally, 8 of the 10 banks that originated subprime mortgage loans—a somewhat higher
proportion than in the January survey—indicated that they had tightened their lending standards
on such loans. 4
About 25 percent of domestic respondents, on net, experienced weaker demand for prime
residential mortgage loans over the past three months, and 30 percent indicated weaker demand
for nontraditional mortgage loans over the same period. The net fractions of respondents that
reportedly experienced weaker demand for these two types of loans in the current survey were
significantly smaller than in the January survey. Finally, about 65 percent of domestic banks—
a net fraction similar to that in the January survey—reported weaker demand for subprime loans.
About 70 percent of domestic respondents—a somewhat higher fraction than in the January
survey—indicated that they had tightened their lending standards for approving applications for
home equity lines of credit (HELOCs) over the past three months. Regarding demand for these
lines, about 20 percent of domestic banks, on net, reported weaker demand over the past three
months.
Special questions on existing HELOCs. About 50 percent of domestic respondents reported
having tightened terms on existing HELOCs over the past six months. Nearly all respondents
pointed to declines in the value of the collateral significantly below the appraised value for the
purposes of the HELOCs as reasons for tightening terms on these lines. Large majorities of
respondents also cited increased defaults of material obligations under loan agreements, as well as
significant changes in borrowers’ financial circumstances, as additional reasons for tightening
terms on the existing HELOCs.

A total of 53 institutions reported that they originated prime residential mortgages. According to Call
Reports, these 53 banks accounted for about 80 percent of residential real estate loans on the books of all
commercial banks as of December 31, 2007.
3
According to Call Reports, these 37 institutions accounted for about 75 percent of residential real
estate loans on the books of all commercial banks as of December 31, 2007.
4
According to Call Reports, these 10 institutions accounted for about 50 percent of residential real
estate loans on the books of all commercial banks as of December 31 2007.

III-A-6

Measures of Supply and Demand for Residential Mortgage Loans

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

Percent

100

All residential
20

Prime
Nontraditional
-20

-20

Subprime
1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

Q2
2008

Note. For data starting in 2007:Q2, changes in standards for prime, nontraditional, and subprime mortgage loans are reported separately.

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

Percent

Prime
All residential

Nontraditional

Subprime
40

-20

-40

-60

-80

-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

Q3
2007

Q2
2008

Note. For data starting in 2007:Q2, changes in demand for prime, nontraditional, and subprime mortgage loans are reported separately.

III-A-7

Measures of Supply and Demand for Consumer Loans

Net Percentage of Domestic Respondents Tightening Standards for Consumer Loans
Percent
60

Credit card loans
Other consumer loans

Jan.
survey

-20
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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

Jan.
survey

30
20
10
0
-10
-20
-30

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Net Percentage of Domestic Respondents Reporting Stronger Demand for Consumer Loans
Percent
60

Jan.
survey

40
20
0
-20
-40
-60

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

III-A-8
Questions on consumer loans. About 30 percent of domestic banks—up from around
10 percent in the January survey—reported that they had tightened their lending standards on
credit card loans over the past three months. In addition, significant net fractions of respondents
indicated that they had reduced the extent to which such loans were granted to customers who did
not meet credit-scoring thresholds, reduced credit limits on credit card loans, and increased
minimum required credit scores. On net, about 25 percent of domestic banks—up from around
15 percent in the January survey—expressed a diminished willingness relative to three
months earlier to make consumer installment loans. About 45 percent of domestic banks—up
from around 30 percent in the January survey—reported tightening lending standards on
consumer loans other than credit card loans. Similar fractions of respondents indicated that they
had widened spreads of loan rates over their banks’ cost of funds and had reduced the extent to
which such loans were granted to customers who did not meet credit-scoring thresholds.
Regarding loan demand, about 20 percent of respondents, on net, indicated that they had
experienced weaker demand for consumer loans of all types over the previous three months,
down notably from around 35 percent in the January survey.
Special questions on student loan programs. In the April survey, 29 domestic banks reported
that they had originated student loans under the Federal Family Education Loan Program
(FFELP) in the fall of 2007. Of these, about 40 percent, on net, expected that their commitments
to provide these loans for the fall of 2008 will decrease relative to those made last year. In
addition, about 45 percent of respondents, on net, expected the number of schools for which they
will provide financing under the FFELP to decline relative to 2007, and about 60 percent of
respondents expected to reduce the amount of borrower benefits on these loans relative to those
provided in 2007.
Of the 20 banks that reported originating private-credit (non-FFELP) student loans in the fall of
2007, about 15 percent, on net, expected their commitments to provide these loans for the fall of
2008 to decline relative to 2007. In addition, about 40 percent of respondents expected a decline
in the number of schools for which their banks will provide financing for this fall. Finally, large
fractions of banks anticipated that, compared with 2007, they will increase private-credit student
loan rate spreads over their cost of funds. Similarly, large fractions of respondents expected to
tighten credit standards on private-credit student loans for the fall of 2008.
Last Page of Domestic Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to $62.3 billion in February following a
deficit of $59 billion in January. The widening of the deficit reflected a sharp upswing in
imports that more than offset continued robust growth of exports.

In February, the value of exports of goods and services rose 2 percent, a continuation of
recent robust growth. Goods exports were boosted by strong growth of agricultural
goods, automobiles, and industrial supplies, particularly fuels. Exports of capital goods
declined for the second consecutive month, with declines spread across a wide range of
products. Exports of services increased about 1 percent from the previous month, with
most of this rise attributable to exports of travel services.
The average value of exports in January and February increased 17 percent (a.r.) from the
fourth quarter. With the exception of automobiles and aircraft, all major categories of
exports increased. Exports of agricultural goods, industrial supplies, computers, and
consumer goods were particularly strong.

IV-1

IV-2

IV-3

IV-4

The value of imports of goods and services rose about 3 percent in February. Excluding
imports of petroleum, which declined in February, imports rose a very strong 5 percent.
There were increases in most of the major categories of non-oil imports, with the most
noteworthy increases in natural gas, automobiles, and consumer goods. Outside of
petroleum, declines were registered in building materials and computers. Imports of
services continued to rise at a robust pace.
The average value of imports in January and February increased almost 15 percent (a.r.)
from the fourth quarter. Nearly all of the increase was in petroleum products, but there
were more modest increases in imports of capital goods, foods and some categories of
nonfuel industrial supplies. In contrast, imports of automobiles and consumer goods
recorded declined. Imports of services rose, albeit at a slower pace than in recent
quarters.
Prices of Internationally Traded Goods
Non-oil imports. In March, following large increases in January and February, core
import prices rose 1.2 percent. This increase is the second largest one-month increase in
core prices in the 13 year history of the index. About two-thirds of the increase was due
to higher prices for material-intensive goods, which rose 3 percent. Prices for nonfuel
industrial supplies jumped 3.2 percent, largely reflecting higher prices for imported
metals and chemicals. For imported food, prices were up 2.5 percent. In March, prices
for finished goods increased 0.3 percent. Prices for consumer goods rose 0.5 percent,
driven in large part by increases for furniture and pharamaceuticals.
For the first quarter, core import prices rose at an annual rate of 9½ percent (on a BLS
basis). Much of the increase reflected higher prices for material-intensive goods, which
increased at a 22¼ percent pace. Prices for finished goods rose at a 3¾ percent pace,
which is a notable pick-up from the 2007 pace of 2 percent.

IV-5

IV-6

IV-7

Oil. The BLS price index of imported oil rose 9.1 percent in March. The spot price of
West Texas Intermediate (WTI) crude oil averaged $105.42 per barrel in March, up 10
percent from its February average. Moving into the current month, the spot price of WTI
has continued to climb, settling at $119.38 per barrel on April 22. The price of futures
for delivery at the end of 2016 closed at $108.83 per barrel on April 22, up $9 since midMarch. The increase in oil prices over this period likely reflects incoming adverse news
regarding prospects for supply in the coming year, particularily downward revisions to
projected production in Mexico and Russia, as well as robust demand growth, despite the
moderation of global economic growth.
Exports. In March, core export prices rose 1.9 percent. Much of the increase reflected
higher prices for material-intensive goods. Prices for agricultural products rose
4.1 percent. Within agricultural products, soybean and corn prices were the largest
contributors to the March increase, rising 9.6 percent and 7.9 percent, respectively.
Prices for nonagricultural industrial supplies were also higher, rising 3.7 percent,
reflecting higher prices for fuels, metals, and chemicals. Prices for finished goods
decelerated slightly in March, increasing only 0.2 percent.
In the first quarter, core export prices rose at an annual rate of 15¾ percent (on a BLS
basis), as prices of material-intensive goods soared 30½ percent and prices of finished
goods rose 4 percent. The large increase in material-intensive goods reflected a
57½ percent increase in prices for agricultural exports combined with a 22½ percent
increase in prices for nonagricultural industrial supplies. Within finished goods, the
category with the largest increase was capital goods excluding computers and
semiconductors, which rose 5½ percent.
U.S. Current Account
The U.S. current account deficit for the fourth quarter of 2007 was reported at $692
billion (a.r), which is $18 billion narrower than in the third quarter (revised). For the
third consecutive quarter, an improvement in net investment income was the primary
reason for the narrowing deficit. The fourth quarter increase of $47 billion (a.r.) in net
investment income came mainly from a fall in direct investment income payments. A
smaller decline in portfolio interest and dividend payments was offset by a similar
decline in portfolio income receipts, as both reflect the downward drift in interest rates.
The large increase in net investment income was partly offset by a $21 billion (a.r.)
widening in the deficit on goods and services in the fourth quarter and an increase in net
unilateral transfers abroad. The trade deficit on goods widened by $30 billion, with

IV-8

import growth outpacing export growth, while the surplus on services expanded
somewhat.
U.S. Current Account
(Billions of dollars, seasonally adjusted annual rate)
Goods and
Investment
Other
Period
services,
income,
income and
net
net
transfers, net
Annual
2006
-758.5
43.2
-96.1
2007
-708.5
81.1
-111.2
Quarterly
2007:Q1
Q2
Q3
Q4
Change
Q1-Q4
Q2-Q1
Q3-Q2
Q4-Q3

Current
account
balance
-811.5
-738.6

-714.5
-717.9
-690.3
-711.4

36.1
57.1
92.1
139.0

-114.4
-99.4
-111.6
-119.3

-792.8
-760.2
-709.4
-691.7

-6.8
-3.4
27.6
-21.1

-9.2
21.0
35.0
46.9

-25.0
15.0
-12.2
-7.7

-41.0
32.6
50.4
18.1

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

U.S. International Financial Transactions
The financial flows associated with the current account are presented in the Summary of
U.S. International Transactions Table. Fourth-quarter foreign official inflows (line 1)
were quite strong, bringing the total for 2007 to nearly the level of 2006 despite weaker
inflows in the second and third quarters. Private foreign net purchases of U.S. securities
(line 4) were also strong in the fourth quarter, driven particularly by continued „flight-toquality‟ into Treasury securities (line 4a). These net purchases of Treasuries were at their
highest quarterly level since early 2005. Corporate stocks and bonds also posted solid net
purchases by foreigners, more than reversing net sales in the previous quarter.
The inflows from private purchases of securities were offset by an unusually large
outflow of U.S. direct investment abroad (line 6) and an outflow in the volatile banking
category (line 3). U.S. direct investment abroad jumped in the fourth quarter because of
increases in equity capital investment by U.S. corporations in their foreign affiliates.
Meanwhile, foreign direct investment in the U.S. fell back to a more normal level in the
fourth quarter after the previous quarter‟s surge (line 7).

IV-9

Overall, net financial inflows recorded in the fourth quarter exceeded the recorded
current account deficit, resulting in a -$57 billion statistical discrepancy for the quarter.
This discrepancy will be narrowed somewhat once newly-released data on derivatives
settlements are incorporated by BEA. These new data show a net outflow of $13 billion
for derivatives in the fourth quarter (line 8).
Turning to the recent monthly data, in February private foreign net purchases of U.S.
securities (line 4) jumped dramatically to $77 billion after a very weak inflow in January.
This puts February among the highest months for private foreign net purchases recorded
in the past two years. The surge was primarily into the safe havens of Treasury and longterm agency securities. Private net purchases of Treasury securities were near the peaks
seen in the turbulent months of August, October, and November of last year. However,
February‟s $26 billion record high for private net purchases of agencies is in sharp
contrast to the monthly net sales generally recorded since last August (top-right panel of
the chart on Private Securities Flows). Private foreign net purchases of corporate bonds
and equities were also positive but small. Meanwhile, U.S. residents stayed on trend by
making $12 billion in net purchases of foreign securities (line 5), reflecting strong
purchases of foreign stock only partly offset by net sales of foreign bonds.
Foreign official flows into the United States (line 1) came down from their unusual highs
of the past three months, but remained positive at $15 billion. Official inflows went
primarily into long-term agency bonds, with lesser inflows into corporate bonds and
stocks.
. In contrast, foreign official investors on net sold
short-term Treasury bills and short-term agencies. The prices of these securities have
been very elevated of late because of their desirability for use as collateral for repurchase
agreements. Official institutions, not needing them as collateral, may be shifting out of
these securities in response. Overall, while official inflows in February were below trend
for most countries, inflows from OPEC remained near the record high set in January
(charts on Foreign Official Financial Flows). Finally, partial and confidential data on
custody accounts at FRBNY show very strong foreign official net purchases of both
agency and Treasury securities in March,
.

IV-10

IV-11

IV-12

IV-13

Foreign Financial Markets
The trade-weighted index of the exchange value of the dollar against the major foreign
currencies is little changed since the March Greenbook. The dollar rose about 3 percent
against the Canadian dollar, 2 percent against sterling, and ½ percent against the yen, but
it depreciated 2¾ percent against euro.
Liquidity in European bond markets has improved as the spread between 10-year Italian,
Portuguese, Spanish and Greek government bond yields and 10-year German government
bond yields have decreased 15 to 20 basis points since the March Greenbook. Ten-year
nominal sovereign yields rose about 35 basis points in the euro-area, 25 basis points in
the United Kingdom, and 10 basis points in Canada and Japan, and ten-year real rates
rose 10 and 40 basis points in the euro-area, the United Kingdom, and Japan, but were
little changed in Canada. In line with improvements in market sentiment, major headline
equity indexes in Europe, Japan, and the United Kingdom ended the period up 2 to
6 percent on net. Market analysts were focused over the period on the releases of
better-than-expected earnings reports by Lehman Brothers and Goldman Sachs, and
efforts by banks to recapitalize. In particular, on April 1, UBS announced that it would
seek a new $15.1 billion rights issue, which would be fully underwritten by a group of
investment banks.
Despite improvements in market sentiment, the passing of quarter end, and several steps
taken by foreign central banks to help funding markets, there are still heightened liquidity
pressures in long term funding. LIBOR-OIS spreads widened in sterling and in euro. The
Bank of England lowered its policy rate by 25 basis points and conducted two 3-month
repo auctions. On April 21 the Bank of England unveiled a plan to swap securities
backed by mortgages for government bonds for a period of one to three years as the U.K.
mortgage market showed increasing signs of distress. The ECB and SNB drew upon
their swap lines with the Fed to auction $15 billion and $6 billion, respectively, in 28-day
funds in conjunction with the March 25 and April 22 TAF auctions, and the ECB
auctioned another $15 billion of 28-day funds in conjunction with the April 7 TAF. On
March 21 the ECB announced the introduction of a new long-term refinancing operation
(LTRO) with a 6-month maturity. Demand at the first LTRO auction on April 2 was
high, indicating continued strong demand for term euro funding. The Bank of Canada
lowered its policy rate 50 basis points to 3 percent as expected.
Several German landesbanks announced write downs since the March Greenbook,
including the second largest landesbank, Bayern LB, which reported a €4.3 billion ($6.7

IV-14

billion) write down through the end of March, and WestLB, which reported a write down
of €2 billion ($3.1 billion). A news report released in early April, citing internal
documents from the German bank regulator, BaFin, suggested that the regulator‟s
baseline estimate for German bank losses, most of which are expected to be among the
landesbanks, will total around €43 billion. Credit Suisse ($2.9 billion), the Bank of China
($1.3 billion), UBS ($19 billion), Deutsche Bank ($3.9 billion), KfW ($2.8 billion), and
Mizuho ($5.6 billion) all reported write downs or loss provisions.
The exchange value of the dollar against its other important trading partners has fallen
1¼ percent since the March Greenbook, as the dollar has depreciated against most Asian
and Latin American currencies. The dollar depreciated 1¾ against the renminbi on net as
newspaper articles reported that China would use yuan appreciation as one of its major
weapons to fight mounting inflation and the PBoC raised reserve requirements by 50
basis points on March 18 and another 50 basis points on April 16. The Shanghai
Composite Index dropped 19 percent, continuing its slide since January 2008. The
Mexican and Brazilian stock markets rose 9 percent and 5 percent, respectively. The
South Korea stock market rose 8½ percent.

IV-15

IV-16

IV-17

IV-18

IV-19

IV-20

Developments in Advanced Foreign Economies
Data released since the time of the March Greenbook point on balance to continued
softening of growth in the advanced foreign economies. In Japan, the Tankan survey
continues to suggest subdued investment growth. Euro-area retail sales have been flat so
far this year, and sentiment and other survey indicators have generally declined further.
Credit standards remained tight in Europe in the first quarter, and housing markets in a
number of economies, such as Spain, Ireland, and the United Kingdom, continued to
weaken. Nevertheless, some upside surprises have materialized. Industrial production in
the euro area and retail sales in both the United Kingdom and Canada moved up at a solid
pace early in the year. Both the Bank of England and the Bank of Canada continued to
ease in response to ongoing concerns about the disruptions in financial markets and their
effects on economic activity.
Inflation has continued to move up in most of these economies largely due to the past rise
in energy and food prices. The twelve-month rate of inflation moved up over the past
two months in Europe, rising to 3.6 percent in the euro area and 2.5 percent in the United
Kingdom in March. Japanese inflation rose to 1 percent in February. In contrast,
inflation continued to drop in Canada, reaching 1.4 percent in March.
In Japan, the March Tankan survey indicated that business confidence among large
manufacturers fell significantly since the previous survey in December amidst higher oil
prices, a much stronger yen, concerns about a slowdown of the U.S. economy, and
turmoil in financial markets. The decline in business confidence at small- and mediumsized firms also accelerated, as high energy prices and low pricing power continued to
lower firms‟ profitability. All companies lowered their investment plans for FY2007 and
are projecting cuts in capital expenditures in FY2008.
Indicators of production for the first quarter have been weak on balance as well.
Shipments and machinery orders were down in the first two months of the year, and
inventories rose slightly. Industrial production edged up 0.1 percent on average in
January and February relative to the fourth quarter. Real merchandise exports rose
3.3 percent in the first quarter, while real imports were about unchanged. The solid
growth in exports so far this year reflects robust demand from Asia and the euro area,
while exports to the United States continued to decline.

IV-21

IV-22

IV-23

Although the labor market remains relatively strong overall, there are some signs that
employment is weakening. The unemployment rate inched up to 3.9 percent in February,
and the job offers-to-applicants ratio (the number of officially posted job openings
relative to the number of officially registered job seekers) fell to 0.97, its lowest level in
two years. On the other hand, total cash earnings (which include bonuses) rose for a
second consecutive month in February, halting more than a year of declines.
The nationwide core consumer price index (excluding fresh food only) rose 1 percent in
February from a year earlier. The rise in the index was attributable to an increase in oil
prices, as consumer prices excluding fresh food and energy fell 0.1 percent. The core
CPI for Tokyo rose 0.6 percent from a year earlier in March.
On March 19, Governor Fukui stepped down as the head of the Bank of Japan upon the
expiration of his term. Deputy Governor Shirakawa was recently confirmed as the new
Governor. At its April meeting, the Bank of Japan unanimously voted to leave its target
for the overnight call rate unchanged at 0.5 percent, amid concerns about the economic
outlook and the health of financial markets.
In the euro area, recent indicators generally point to continuing slowing in economic
activity. The slowdown appears to be particularly marked in consumer confidence and
spending, as suggested by the 0.5 percent decline in the volume of retail sales in
February. Purchasing managers‟ indexes (PMI) for both manufacturing and services
eased a bit in March to levels consistent with subdued growth, and the flash estimate of
the manufacturing PMI in April slipped further. The European Commission survey of
euro-area economic sentiment fell in March for the tenth consecutive month, with
declines in confidence widespread across the consumer, industrial, and construction
sectors. However, Germany‟s IFO business climate index unexpectedly edged up in
March, as firms took a slightly less gloomy view of current conditions.
Growth in the euro-area manufacturing sector has slowed, but less sharply than in
services, and the most recent manufacturing data have shown some resilience. Euro-area
industrial production (excluding construction) rose during the first two months of the
year, and new manufacturing orders for capital goods have remained solid. In February,
the euro-area unemployment rate stayed at 7.1 percent—the record low set the previous
month—as a further tightening of the labor market in Germany offset a rise in joblessness
in Spain and Ireland. The unemployment rate has fallen about one percentage point since
the second half of 2006.

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Within the euro area, relatively favorable news about the German and French economies
increasingly contrasts with unfavorable news about the Italian and Spanish economies.
That dichotomy can be seen in PMIs, sentiment surveys, and data on credit growth,
spending and external trade. Italian firms are facing pressures from the stronger euro and
unit labor costs that have been rising faster than in the euro area as a whole over the past
several years. The Spanish economy is suffering the effects of an abrupt slowdown in the
housing sector, exacerbated by tighter credit conditions faced by consumers and firms.
Spanish approvals for home construction have moved sharply lower, house price growth
has slowed markedly, and demand for new homes has weakened considerably.
Driven by higher energy and food prices, the twelve-month rate of euro-area consumer
price inflation rose from below 2 percent in August to 3.6 percent in March, the highest
rate since euro-area statistics began in January 1997. Excluding energy and unprocessed
food prices, inflation in March was 2.7 percent, the highest rate since early 2002.
In the United Kingdom, data that we have received since the last Greenbook are
consistent with the U.K. economy retaining some strength in the first quarter, though
more forward-looking indicators point to a softening of real activity in the near term. The
volume of retail sales rose roughly 1 percent in both January and February following
disappointing end-of-year sales, and the employment rate in January stood 0.2 percentage
point higher than it was three months earlier. However, consumer confidence slid close
to a five-year low in March as households grew increasingly worried about their personal
financial situation and the general economic situation over the next twelve months.
Investment intentions in both the manufacturing and services sectors declined further in
March, according to the Bank of England Agents‟ Survey of Business Conditions.
According to the Bank of England‟s Credit Conditions Survey, lenders reduced the
availability of credit “across the full range of their activities to households and
corporates” in the three months to mid-March. The tightening of credit conditions was
apparent in the housing sector, where the number and value of loans approved for house
purchases were nearly 40 percent lower in February than a year earlier. Halifax and
Nationwide, two major lenders, reported that house prices were 3 to 4 percent lower in
March than at their peak at the turn of 2007.
Overall price pressure rose further in the intermeeting period, with both consumers and
producers facing higher utility costs. Manufacturers‟ input prices ramped up 20.4 percent
over the year ending in March, their fastest pace of increase in a quarter-century, leading

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manufacturers to increase their output prices 6.2 percent over the same period. Headline
consumer price inflation was unchanged at 2.5 percent in March after rising sharply in
February as a result of higher electricity and natural gas prices. Median inflation
expectations over the coming twelve months, as measured by a Bank of England survey,
rose to 3.3 percent in the first quarter, the highest value since the survey began in 1999.
On April 10, the Bank of England lowered the official interest rate to 5 percent, its third
cut since December. The Committee noted that the “prospects for output growth abroad
[had] deteriorated” and that business surveys suggested that “a margin of spare capacity
[would] emerge during this year.”
In Canada, data for the first quarter continue to indicate a substantial drag from exports
and an expansion of domestic demand. Real exports rose in January and February, but
remained below their average levels in the fourth quarter. Real imports also fell because
of declines in both machinery and equipment and consumer goods excluding automotive
products. The volume of retail sales grew 1 percent in January, likely boosted by a
reduction in the sales tax, following solid fourth-quarter growth.
Although, employment increased substantially in the first quarter (adding an additional
86,000 jobs), actual hours worked fell 0.2 percent over the quarter. Weather-related
disruptions may have contributed to the fall in hours. The twelve-month growth rate of
nominal wages was 4.7 percent in March, down slightly from 4.9 percent in January.
The twelve-month rate of consumer price inflation fell more than ¾ percentage point
from January to March, when it was 1.4 percent. Core inflation, which excludes the eight
most volatile components and the effects of changes in indirect taxes, edged down to
1.3 percent, well below the 2.5 percent rate seen in the summer of 2007. Although
disinflation is apparent across a broad range of Canadian goods, a 7.1 percent fall in the
prices for purchasing and leasing vehicles subtracted 0.5 percentage points from the
twelve-month rate of headline inflation. Food prices rose only 0.4 percent over the same
period, in contrast with many other countries around the globe.
The Bank of Canada cut its target for the overnight rate by 50 basis points to 3 percent at
its April meeting. The Bank cited concerns over weakness in the global economy,
reflecting a sharp slowdown in the United States and ongoing financial turbulence.

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Economic Situation in Other Countries
Recent indicators for emerging market economies generally point towards a moderation
in activity, but growth remains robust. Except for China and Malaysia, available data
indicate that trade balances continued to decline in emerging market economies. In many
cases, softer growth of exports has been accompanied by strong growth of imports,
suggesting that domestic demand has yet to slow significantly. Headline inflation posted
additional increases in most of the developing world, largely owing to rising food and
energy prices. Readings for core inflation have also shot up in a number of countries.
Since the March Greenbook, authorities in China, India, Singapore, Taiwan, and Brazil
have tightened monetary conditions.
In China, staff estimates that real GDP grew at a surprisingly strong 10.8 percent
(s.a.a.r.) in the first quarter. Data on retail sales and fixed asset investment suggest that
domestic demand has strengthened further; retail sales in the first quarter were up more
than 20 percent from their year-earlier levels, and nominal fixed asset investment was up
nearly 25 percent. However, external demand continued to weaken, as indicated by a
further deceleration of the value of exports in the first quarter. Despite the slowing of
exports, the trade surplus in the first quarter increased—albeit only a little—as imports
decelerated more than exports.
Twelve-month consumer price inflation moderated somewhat, to about 8¼ percent in
March, due to some deceleration in food prices. Food price inflation, however, remains
elevated. In mid-March, the People‟s Bank of China (PBOC) raised the required reserve
ratio (RRR) for banks by ½ percentage point, and this ratio was raised again in mid-April
by another ½ percentage point immediately following the first-quarter GDP data release.
The latest increase, the sixteenth since the middle of 2006, brings the RRR to 16 percent
for large banks. Twelve-month growth of money supply and credit both decreased
significantly in March. Despite more RMB appreciation against the dollar in recent
months, the PBOC has continued to accumulate international reserves at a rapid rate;
reserves reached nearly $1.7 trillion in March, up about $150 billion so far this year.

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Industrial production in India rebounded in February, more than reversing its January
decline, reflecting improvements in the mining and electricity sectors. The current
account deficit widened to 1.7 percent of GDP in the fourth quarter of 2007, largely
reflecting an increase in the merchandise trade deficit. In the first two months of 2008,
the trade deficit remained elevated, with both exports and imports growing more than
30 percent from the year earlier. Consumer price inflation held relatively constant in
February, as did wholesale price inflation. In March, however, wholesale inflation rose
to a twelve-month rate of 6.4 percent from the 4.7 percent reading for February,
suggesting that consumer price inflation will rise as well. This increase largely reflects
higher food prices and a recent government decision to pass through more of the rise in
oil prices. The government has recently adopted measures to stem inflation, including an
export ban on non-basmati rice and a reduction of the import duty on edible oils. The
central bank raised banks‟ required cash reserve ratio ½ percentage point to 8 percent in
mid-April.

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With the exception of Singapore, incoming data point to a moderation of activity in the
first quarter across the NIEs.1 After rebounding in January, industrial production fell in
February, and trade balances so far this year generally continued to decline. Consumer
sentiment weakened in South Korea, and Taiwan‟s leading economic index continued to
fall. In Singapore, however, activity in the volatile biomedical sector rebounded sharply
from a contraction in the previous quarter, which we estimate propelled real GDP growth
into double-digit territory in the first quarter.
Twelve-month consumer price inflation remained elevated, owing mainly to higher food
and, in some cases, energy prices. Inflation concerns prompted central banks in
Singapore and Taiwan to tighten monetary policy. In mid-April, the Monetary Authority
of Singapore (MAS) announced an upward shift of the exchange rate policy band to
allow a more rapid appreciation of the Singapore dollar. The central bank of Taiwan
raised its benchmark interest rate 12½ basis points to 3.5 percent.
In Taiwan, the opposition party‟s (KMT) candidate Ma Ying-Jeou won the presidential
election. His victory is expected to strengthen economic and political ties between
Taiwan and mainland China. In Korea, the conservative Grand National Party of newly
elected President Lee Myung-bak won the majority of seats in the parliamentary
elections, which should facilitate the implementation of his economic reforms.

Newly-industrialized economies: Hong Kong, South Korea, Singapore, and Taiwan

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Incoming data from the ASEAN-4 have been mixed. February industrial production
readings indicate slowing and in some cases contraction. Countries in the region
generally experienced slowdowns in their exports, although, in Malaysia, exports reached
a 15-month high in February due to strong fuel and palm oil exports. On the positive
side, despite weakening demand in Europe and the United States, domestic consumption
continued to support economic activity. For example, retail sales in Indonesia increased
significantly over the first two months, and anecdotal evidence points towards similar
patterns in the other countries. Across the region, increased food and energy prices
continued to push consumer price inflation higher.

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Recent indicators in Mexico have been mixed. After signs of slowing during the fourth
quarter of 2007, industrial production rebounded in January but contracted in February.
Retail and wholesale sales posted strong gains over the same period, and both business
and residential investment registered large increases in January. Preliminary indicators of
manufacturing activity, however, point towards weakness in March. During the first two
months of 2008, the trade deficit widened, reflecting stronger imports for intermediate
inputs and capital goods together with softer export. Headline inflation in March reached
4¼ percent, outside the range targeted by the central bank. Both food and core inflation
continue to put upward pressures on consumer prices.

In Brazil, recent data suggest that activity moderated in the first quarter. Both industrial
production and retail sales declined in February, although vehicle sales were strong.
Capacity utilization rates have tapered off, but remain elevated. The current account
deficit continued to widen on average in the first two months of 2008, with imports
increasing rapidly and exports slowing some. Capital goods imports have leveled off in
recent months, but were still up by over 50 percent from their year-earlier levels.
Inflation has increased over the past year, reaching 4.7 percent over the twelve months
ending in March. Food prices contributed the most to the increase in inflation, and core

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inflation (which excludes food and energy and other government-administered prices)
rose to nearly 4½ percent. In a surprise move, the Brazilian central bank raised its policy
rate 50 basis points to 11.75 percent; most analysts expected a 25-basis-points hike. In its
statement, the central bank explained this decision as an attempt to preempt additional
inflationary pressures that could result in the need for more extensive monetary
tightening.

Real GDP growth in Argentina continued to be strong in the fourth quarter of 2007,
posting an increase of 8 percent (s.a.a.r.). For the year as a whole, the economy grew
9.2 percent, marking the fifth consecutive year of extraordinary growth. The increase in
commodity prices in international markets continues to provide stimulus to agricultural
production and exports. During the first two months of 2008, the trade surplus has
widened, despite a substantial increase in imports. In an attempt to reduce upward
pressures on domestic food prices, the government recently raised export taxes on several
agricultural products, including soybean, grains and oilseeds. Consumer prices in the
first quarter of 2008 increased 8.5 percent from a year earlier, amid large increases in
services prices such as housing, transportation and health. Allegations that authorities
understate the rate of inflation continue.

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In Venezuela, private manufacturing activity moderated in January and the
unemployment rate increased to 8.7 percent. Consumer price inflation continued to
increase in the first quarter, reaching nearly 28 percent on a twelve-month basis in March.
Economic management continues to be inept. In April, President Chavez announced the
nationalizations of the cement industry and of the country‟s largest steel company.
Mexican and French companies own the main cement companies affected, while the steel
company is majority-owned by an Argentine company. The government also seized
30 sugarcane plantations.
Recently, President Chavez has suggested that capital controls might be relaxed to make
the exchange rate regime more flexible but that the government would not eliminate
currency controls altogether. In recent months, the government has been intervening to
reduce the dollar‟s premium on the black market. The premium had peaked at over
200 percent in late 2007 and has since fallen to about 70 percent.

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In Turkey, real GDP increased 5 percent in the fourth quarter, thanks to strong private
sector investment. After a large increase during the month of January, industrial
production in February showed signs of moderation. Twelve-month consumer price
inflation reached 9.2 percent in March, significantly higher than the upper limit of the
central bank‟s year-end target of 4 percent +/- 2 percentage points. Food and energy
prices continue to put upward pressure on inflation. After six consecutive benchmark
interest rate cuts, the Monetary Policy Committee decided to keep policy rates unchanged
in March. The Committee indicated that global uncertainty and adverse developments in
food and energy prices have increased the need for a more cautious policy.

Last Page of Part 2

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, April 29-30, 2008 : Greenbook Part 2

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