Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 9, 2011 : Tealbook A

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Prefatory Note

The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.

Content last modified 02/03/2017.

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Report to the FOMC
on Economic Conditions
and Monetary Policy

Book A
Economic and Financial Conditions:
Current Situation and Outlook
August 3, 2011

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

Authorized for Public Release

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August 3, 2011

Domestic Economic Developments and Outlook
The information on economic activity that we have received since the June
Tealbook has been notably weaker than we had expected, extending a string of several
months of disappointing economic news. Real GDP is now estimated to have increased
at an average annual rate of only 1 percent in the first half of this year, compared with our
estimate of 2 percent in the previous projection. Consumer spending outside of motor
vehicles has been quite sluggish in recent months, consumer confidence has slumped
again, indicators of business sentiment and production have softened noticeably, and the
housing market remains depressed. Moreover, the labor market appears to be in worse
shape than earlier in the year, with employment growth stepping down sharply in May
and June and the unemployment rate edging up.
The specific identity of the forces imposing greater-than-expected restraint on the
expansion is not readily apparent. One possibility is that the shocks that have hit the
economy are more severe and more persistent in their effects on aggregate demand than
we previously recognized. Another possibility is that the self-equilibrating tendency of
the economy has been greatly weakened by the damage resulting from the financial crisis.
A third possibility is that the economic weakness reflects structural factors—and a lower
path of potential GDP—to a greater degree than we had been assuming. We have, in
fact, put greater weight on all of these possibilities and have adjusted the forecast
accordingly. Thus, while we continue to anticipate that a rebound in motor vehicle
production will produce a noticeable acceleration in the near term, we have marked down
our forecast for the growth of real GDP over the second half of the year to 2¾ percent at
an annual rate, about ¾ percentage point weaker than we anticipated in the June
Tealbook, and for 2012, we now project real GDP to increase 3 percent, ½ percentage
point less than in the June Tealbook. On the supply side of the projection, we have
interpreted the BEA’s downward revisions to real GDP over the past three years as
implying a slower growth rate of potential GDP, both during those years and in 2011 and
2012. (The appendix at the end of this section provides a summary of the annual
revisions to the NIPA.) With output growth revised down both this year and next by
more than our adjustment to potential growth, the unemployment rate is projected to
decline even more gradually than in the June Tealbook, remaining close to 9¼ percent for
the remainder of this year before falling to 8½ percent—about ½ percentage point above
the June projection—by the end of 2012.

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Key Background Factors underlying the Baseline Staff Projection

Federal Funds Rate

Long-Term Interest Rates
Percent

Quarterly average
Current
Previous Tealbook
Market, expected rate
Market, modal rate

Percent

11
10

Quarterly average

7
3

BBB corporate yield

6
2

1
3
2007

2008

2009

2010

2011

2012

Conforming
mortgage rate

5
4

Equity Prices

10-year
Treasury yield

2007

2008

2009

Ratio scale, 2007:Q1 = 100
130
Quarter-end

120
110

110
100

70
60

2008

2012

Ratio scale, 2007:Q1 = 100

105
100

Quarterly

2009

2010

105
100

90
CoreLogic
Index

85
80

2007

2011

2010

100

Dow Jones
U.S. Total Stock Market
Index

House Prices

130
120

2011

2012

Crude Oil Prices

2007

2008

2009

2010

2011

2012

Broad Real Dollar
Dollars per barrel

140

2007:Q1 = 100

110

Quarterly average

110

Quarterly average
120

105

100

120

100

West Texas
Intermediate

2007

2008

2009

2010

2011

2012

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2007

2008

2009

2010

2011

2012

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The incoming data on consumer price inflation have been above our expectations
on balance. We continue to think that much of the recent acceleration in core consumer
prices reflects transitory factors. But we have also propagated forward to some extent the
surprises of the past few months, putting some upward pressure on our core inflation
projection over the second half of this year and early next year. Going the other way, the
larger margin of resource slack in this forecast is expected to exert slightly greater
downward pressure on inflation over the medium term than in the June Tealbook. In all,
we revised up our projection of total PCE inflation slightly to 2½ percent this year but
left it unrevised in 2012 at 1½ percent. The projected step-down in total PCE price
inflation next year reflects an expected deceleration in energy and food prices as well as a
lower rate of core inflation, as the pass-through from the earlier run-ups in commodity
and import prices wanes.

KEY BACKGROUND FACTORS
Monetary Policy
In light of the appreciably weaker outlook for real GDP and the little-changed
projection for inflation this round, we now assume that the FOMC will hold the target
federal funds rate in the current range of 0 to ¼ percent until the third quarter of 2013,
three quarters later than we assumed in June. Regarding nonconventional monetary
policy, our forecast is conditioned on the assumption that the FOMC will not undertake
any further expansion of its portfolio and that it will continue to reinvest principal
payments from its securities holdings until the first quarter of 2013—also three quarters
later than we assumed in the previous round. In the first quarter of 2013, we assume that
the FOMC will begin allowing principal payments to reduce its securities holdings, and
we expect the Federal Reserve to begin selling assets in early 2014.

Financial Conditions
Earlier this week, legislation was enacted that raised the statutory debt limit and
restrains expected budget deficits by a total of about $2¼ trillion over the next decade.
While those actions are sufficient to avoid a default by the Treasury, the magnitude of the
deficit reduction over the longer term may well be insufficient to prevent a one-notch
downgrade to Treasury debt by one or more of the major credit rating agencies in the
months ahead.

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We think a downgrade would not come as a surprise to market participants in
light of the extensive news coverage given to the issue, as well as the well-publicized
pronouncements by the credit rating agencies. Thus, while speculation about the timing
or specific elements of a credit rating downgrade could spark a period of heightened
volatility across U.S. financial markets, we have assumed that, over the medium term, a
downgrade will not leave a lasting imprint on intermediate-term Treasury yields or risk
spreads on investment-grade corporate bonds or mortgage rates relative to what is already
priced into the market. That said, while such a relatively benign outcome seems most
likely to us at this point, we cannot rule out the tail risk that even a one-notch downgrade
of Treasury debt could end up destabilizing financial markets, resulting in much higher
interest rates and much lower stock prices, with significant adverse effects on economic
activity.
Since the time of the June Tealbook, the yield on 10-year Treasury securities has
decreased 45 basis points, on net, as market participants—like the staff—shifted their
expectations down significantly for the federal funds rate over the medium term. As a
result, we lowered the projected trajectory for the 10-year Treasury yield noticeably this
round. As in June, we expect this yield to rise markedly over the next year and a half;
this expectation reflects the movement of the valuation window through the period of
near-zero short-term interest rates, as well as an increase in the term premium associated
with the gradual normalization of the Federal Reserve’s balance sheet and with some
investors gradually shifting their portfolios away from the safest assets as the economic
recovery gains a firmer footing over time.
Yields on investment-grade corporate bonds have decreased about in line with
Treasury yields since the June Tealbook, leaving their implied risk spreads about
unchanged at a level that remains somewhat elevated by historical standards. With the
pace of economic growth picking up over the medium term, we expect the spread for
investment-grade bond yields to decrease a little through the end of next year, so that
yields on these bonds rise only slightly less than Treasury yields. Since mid-June,
interest rates on conforming fixed-rate mortgages have stayed close to 4½ percent and
their spreads to intermediate-term Treasury yields have moved up some. In June, we
expected mortgage spreads to increase in coming months, but they came up sooner than
we had anticipated. Looking ahead, we see conforming mortgage rates rising to just
under 5½ percent by the end of 2012, somewhat less than what was projected in the
previous round.

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The Dow Jones U.S. Total Stock Market Index has decreased about 2 percent
since the June Tealbook, including a fairly sharp recent decline amid some weaker-thanexpected economic data and heightened concerns about global growth. Although we
have marked down the projected level of stock prices this round, we expect them to rise
at an average annual rate close to 9 percent through the end of 2012. That pace of stock
price appreciation should bring the equity premium down gradually toward longer-run
norms.
The latest data from CoreLogic showed existing home prices falling through June
at about the pace we had anticipated in the June Tealbook. We continue to expect prices
to decrease about 4 percent this year and to edge down a bit further in 2012.

Fiscal Policy
Our fiscal policy assumptions are unchanged in this projection. The June
Tealbook already incorporated an assumption that the Congress would enact legislation
sufficient to reduce federal deficits by a total of about $2¼ trillion over the next
10 years—an outcome that is in line with the recent budget legislation. We continue to
expect federal fiscal policy actions to be a roughly neutral influence on aggregate demand
in 2011. In 2012, federal fiscal actions are expected to impose a drag of about 1 percent
of GDP as the payroll tax cuts lapse, the Emergency Unemployment Compensation
program is phased out, the stimulus grants for states and localities are essentially
exhausted, real federal purchases decline, and the expensing provision for business
investment is scaled back.
Our projections for the federal deficit are essentially unchanged since the June
Tealbook. The deficit is projected to narrow from $1.3 trillion (about 8½ percent of
GDP) in fiscal year 2011 to $1.1 trillion in fiscal 2012 (around 7 percent of GDP),
primarily reflecting the further waning of stimulus-related policies. Federal debt is
projected to rise to more than 70 percent of GDP by the end of fiscal 2012, up from
36 percent at the end of fiscal 2007 at the start of the financial crisis.

Foreign Activity and the Dollar
We estimate that foreign real GDP growth slowed from 4¼ percent in the first
quarter to 2¼ percent in the second, held down by the direct and spillover effects of the
earthquake in Japan, ongoing financial stresses in Europe, and a downshift in many

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economies toward more sustainable growth rates. Although the deceleration in foreign
economic activity was somewhat more pronounced than we expected in June, we
anticipate that a bounceback in Japan’s economy, together with a pickup in U.S. growth,
will boost foreign real GDP growth to about 3½ percent in the second half of this year
and next. The projected pace of growth this year and next is nearly ¼ percentage point
slower than in the June Tealbook, mainly reflecting the weaker U.S. outlook.
The starting point of our projected path for the broad real dollar is nearly
1 percent lower than we anticipated in the June forecast. From this slightly lower level,
the dollar is assumed to depreciate at an annual rate of about 2¾ percent over the forecast
period, a pace similar to what we wrote down in June. Most of the dollar’s projected
decline occurs against the currencies of the emerging market economies.

Oil and Other Commodity Prices
The spot price of West Texas Intermediate (WTI) crude oil closed on August 2 at
$94 per barrel, $3.50 lower than the closing price in the previous forecast.1 We project
that the spot price of WTI will edge up to almost $100 per barrel by the end of 2012.
Compared with the June Tealbook projection, that path is about $3.50 lower in the second
half of this year and about $2 lower by the end of next year. In contrast, we revised up
our projection for the price of imported oil by an average of almost $6 per barrel. The
spread of the price of imported oil over the price of WTI was much wider in May than we
anticipated in the June Tealbook, and recent indicators suggest that the wider spread
persisted in June. We carried some of this widening forward in our forecast.
Prices for nonfuel commodities have changed little in the aggregate over the past
six weeks despite large movements in the prices of individual commodities. For
example, cotton prices have declined 30 percent since the June Tealbook and are now
only about half of the peak value reached in March. Although U.S. growing conditions
have been unfavorable for cotton, global cotton production is projected to be strong.

Starting with this forecast, we have adopted a new methodology for projecting the prices of oil
and other commodities (see the box “Forecasting Commodity Prices” in the June Tealbook for details).
Whereas previously we had based our forecasts directly on quotes from futures markets, we now adjust
futures prices in light of the divergences between private and staff forecasts for global economic growth
and exchange rates, with the assumption that private forecasters believe that exchange rates follow a
random walk. The adjusted forecast for crude oil prices is slightly lower than the forecast based solely on
the futures markets, largely reflecting the fact that the staff’s projection for economic growth is lower than
that reported in the Consensus Forecasts, our proxy for the market expectation of global growth.

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Metals prices, in contrast, have moved up since mid-June. Although recent disruptions to
copper production may account for some of this run-up, the increase in metals prices has
been broad based, suggesting an important role for demand. Given quotes from futures
markets, combined with our adjustments for divergences between staff and private
economic forecasts, we project that nonfuel commodity prices will remain near their
current elevated levels over the forecast period.

RECENT DEVELOPMENTS AND THE NEAR-TERM OUTLOOK
We have marked down our near-term projection of economic activity yet again.
Much of the downward revision reflects a reduction in our forecast of consumer spending
in response to weaker-than-expected recent readings on spending itself, as well as real
incomes, employment, and sentiment. But we have also marked down our expectation
for the increase in business spending over the second half of this year. We have not
materially changed our estimates of the effects of the Japan disaster on U.S. real GDP
since the June Tealbook, and we continue to expect that most of the Japan-related hit to
second-quarter production will be unwound this quarter. As a result, we currently project
real GDP growth to step up to an annual rate of 3 percent this quarter. Excluding the
effects of the Japan disaster, we estimate that real GDP would have increased roughly
2 percent in both the second and third quarters, about ¾ percentage point lower, on
average, than we expected in June. Of course, the labor market report that we will
receive at the end of the week will play an important role in shaping our near-term
outlook.

The Industrial Sector
Manufacturing production decelerated from a 7¼ percent rate of increase in the
first quarter to a gain of only ¼ percent in the second. Although the slowdown mainly
reflected the effects of the Japan disaster on the motor vehicle producers and the firms
that supply them, the pace of manufacturing activity also slowed appreciably among
industries that were unlikely to have been affected by supply chain disruptions.
Moreover, indicators of near-term manufacturing activity—such as diffusion indexes of
new orders from the manufacturing ISM survey and the various regional manufacturing
surveys—have softened considerably in recent months to levels consistent with only
meager gains in production in coming months. Manufacturing IP is expected to increase
at an annual rate of 4¾ percent in the second half of this year, supported in large part by
the scheduled rebound in motor vehicle assemblies and the associated boost to production

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Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
2011:Q2

2011:Q3

Measure

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Nonres. structures
Equipment and software
Federal purchases
State and local purchases

1.9
2.1
1.5
1.3
6.1
7.0
2.1
-2.3

1.4
1.1
.1
3.5
15.2
5.6
2.2
-2.9

3.9
3.4
2.6
1.6
-.6
13.2
4.7
-1.3

2.9
1.9
1.6
3.1
-2.0
6.3
1.9
-1.8

Contribution to change in real GDP
(percentage points)
Inventory investment
Net exports

-.6
.9

.1
.6

1.2
-.4

1.4
.0

Recent Nonfinancial Developments (1)
Change in Private Payroll Employment

Unemployment Rate

Thousands of employees

400
June
300

300

200
100
0

100
-100
-300
-500
-700
3-month moving average
-900

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Percent

11
10

10
June

-100
-200
-300

-400
-500
-600

-700
-800
-900

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

3-month percent change, annual rate

-5

June

-5

-10

-15

-20

-25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

Manufacturing IP ex. Motor Vehicles and Parts
15

-25

Production of Light Motor Vehicles
Millions of units, annual rate

14
12

June

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

Source: Ward’s Auto Infobank.

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in upstream industries. (See the box “The Near-Term Outlook for Light Motor Vehicle
Production” for further discussion.) Outside of motor vehicles and related industries,
production is expected to post only sluggish gains during the next few months.

The Labor Market
Labor demand appears to have slowed noticeably in recent months. After
increasing an average of 200,000 in the first four months of the year, private nonfarm
payroll employment rose only 73,000 in May and 57,000 in June. The step-down in
private employment gains was widespread across industries. In addition, employment in
the state and local government sector fell 35,000 on average in May and June, as
governments continued to trim payrolls in response to budget pressures. Meanwhile,
initial claims for unemployment insurance have come down in recent weeks but remain
elevated, while the latest indicators of hiring show no signs of improvement. Taking into
account these signals from within the labor market as well as the evidence of weaker
economic activity more generally, we now expect private employment to increase about
130,000 per month during the second half of the year, about 80,000 less than we had
written down in the June Tealbook. The unemployment rate edged up further in June to
9.2 percent; with labor demand projected to increase only modestly in the near term, we
expect the unemployment rate to stay near this level through the end of the year.

Household Spending
After having increased at an annual rate of about 2 percent in the first quarter, real
PCE was nearly unchanged last quarter and looks to be rising at a significantly slower
pace in the current quarter than we expected in the June Tealbook. Much of the secondquarter deceleration in consumer spending reflected a drop in outlays for motor vehicles
that we expect to be largely reversed this quarter as the availability of models affected by
supply chain disruptions improves. Spending on other goods and services, however, has
also been quite soft in recent months. In addition, the latest readings on sentiment,
income, and employment have been more downbeat than we were expecting. In
particular, the Michigan index of consumer sentiment dropped sharply in July to levels
last seen in early 2009, while the disappointing data on the labor market led us to mark
down our forecast of real disposable income in the second half of this year. All told, we
now project that real PCE will rise at an annual rate of about 1¾ percent over the second
half, ¾ percentage point less than our projection in the June Tealbook.

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The Near-Term Outlook for Light Motor Vehicle Production
A significant portion of the acceleration in real GDP in the third quarter projected by the Board staff can
be traced to an expected sizable increase in motor vehicle assemblies. As the supply chain disruptions
resulting from the earthquake in Japan that restrained production in the second quarter continue to
fade, U.S. automakers plan to step up their assembly rates to replenish their current extremely low
level of dealer inventories. Indeed, given the tight level of inventories at present, we believe that
automakers’ near-term production goals would not be affected even if vehicle sales failed to increase
this quarter.
Although the planned increase in vehicle assemblies is historically large, three factors suggest that the
anticipated increase in third-quarter production is attainable. First, while the projected pace of
production for the third quarter stands 1 1/2million units above second-quarter production, it would
exceed the pre-earthquake pace by only about 1/2 million units. As shown by the red circle in the lowerleft figure, production of Japanese nameplate vehicles is scheduled to rise only a bit above preearthquake levels in the third quarter. Scheduled production for the non-Japanese nameplates, the
black circle, is boosted by a modest increase in light truck assemblies at General Motors and Chrysler—
who have announced plans to add production shifts at several plants this quarter—and additional
output from a newly opened Volkswagen plant in Tennessee. Second, U.S. automakers’ capacity is not
binding at present: A rate of production at about 9 million units in the third quarter remains well below
U.S. production capacity of more than 12 million units. Moreover, at the firm level, almost all
automakers would have a noticeable margin of slack capacity if production were to proceed in the third
quarter at the forecasted rate. (The only exception is Toyota, for which the implied utilization rate for
autos, but not light trucks, would be somewhat elevated.) Finally, while reliable data on production in
July are not yet available, industry contacts and the business press remain confident that parts
availability has improved and that increases in assemblies along the lines of what we envision are
Consistent
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from Japan to the United States began to recover in June.

1 Reports on Toyota and Nissan indicate that assemblies in both Japan and the United States are
recovering more quickly than originally expected; however, the resumption of normal production at
Honda is reportedly lagging a bit.

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Housing activity remains exceptionally weak. Although single-family housing
starts moved up to an annual rate of 453,000 units in June, a low level of permit issuance
in the sector suggests that most of this gain will be reversed in the next few months.
Similarly, sales of new and existing single-family homes have failed to gain traction in
recent months. The overhang of unsold existing homes, tight underwriting standards for
mortgage loans, and uncertainty about future home prices will likely continue to
constrain demand for new homes over the near term, while limited availability of credit
for builders is reportedly impeding supply in the few areas where demand is improving.
As a result, we expect single-family housing starts to remain relatively flat over the
second half of the year at an annual rate of about 420,000 units, a level similar to our
projection in the June Tealbook. In contrast, starts in the multifamily sector are expected
to continue edging up, as rising demand for apartments has pushed down vacancy rates
and put upward pressure on rents.

Business Investment
We have downgraded our near-term projection for equipment and software (E&S)
spending considerably. In the first half of this year, real E&S outlays rose about
1½ percentage points more slowly than we had previously estimated, primarily due to
downward revisions to software expenditures. In addition, orders and shipments of
nondefense capital goods through June came in modestly below our expectations, and
indicators of business sentiment have deteriorated considerably in recent months. These
softer data, in conjunction with the much weaker business output growth—both in recent
history and in our projection—led us to revise down our projection for E&S growth in the
second half of this year to an annual rate of about 6 percent, compared with an 11 percent
pace in the June Tealbook.
Real business outlays on nonresidential structures appear to have stabilized at a
very low level in recent months. In the first half of this year, outlays for buildings
continued to decline on average. And with vacancies elevated, construction financing
still tight, and architectural billings having softened some, we expect building outlays to
slip a bit further in the second half of this year. In contrast, outlays for drilling and
mining structures surged in the first half of this year, and high oil prices and recent
increases in indicators of drilling activity point to further solid gains in the second half.
As noted previously, the supply disruptions associated with the earthquake in
Japan led to a sharp drop in motor vehicle inventories in the second quarter, but the

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Recent Nonfinancial Developments (2)

Real PCE

Sales of Light Motor Vehicles
Billions of chained (2005) dollars

9500
9250

June

9500
9250

9000

8750

8500

8250

8000

7750

7500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

7500

Millions of units, annual rate

24
21

12
July

9
6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

Single-Family Home Sales

Thousands of units, annual rate

2100

7000

1800

6500

1500

1200

Thousands of units, annual rate
New
(right scale)

900

5000
900

Existing
(left scale)

900
4500

300
0

Starts
Adjusted permits

June

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

600

4000

June

3500

June

3000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: For existing, National Association of Realtors;
for new, U.S. Census Bureau.

Nondefense Capital Goods ex. Aircraft

70
65
60

75
70

Billions of chained (2005) dollars

450

400

350

June

300

Orders
Shipments

300

Nonresidential Construction Put in Place

Billions of dollars

600

300

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

1500

1200

6000
5500

600

Source: Ward’s Auto Infobank.

Single-Family Housing Starts
2100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

250

200

June
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: U.S. Census Bureau.

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250

200

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projected rebound in production is expected to result in a substantial rebuilding of these
stocks this quarter and next. Elsewhere, the available data suggest that inventory
investment picked up in the second quarter by more than we were expecting. Given the
sluggish pace of business sales last quarter, we suspect that this run-up was at least
partially unintended. Indeed, the ISM survey responses suggest some businesses may
have become less comfortable with the current level of inventories. We expect that
stockbuilding will slow over the second half of this year as businesses work to keep
inventory imbalances from emerging.

Government
Real federal purchases turned up in the second quarter and are expected to
increase moderately in the second half of this year. Earlier this year, defense purchases
were well below the level of appropriations, but real defense expenditures rose briskly in
the second quarter. We expect similar increases in the current quarter as spending moves
back in line with appropriations and then no further change in the fourth quarter.
At the state and local level, real purchases have continued to decline in response
to budgetary pressures. Real state and local purchases fell at an annual rate of about
3 percent in the second quarter, a decline about ½ percentage point larger than we had
expected in the June Tealbook, as governments continued to trim payrolls and
construction outlays fell sharply. We expect job cuts to continue at close to their recent
pace through autumn, whereas declines in construction spending are anticipated to start to
taper off. As a result, total real state and local purchases are projected to contract further
in the second half of this year, albeit less rapidly than in the first half.

Foreign Trade
Real exports of goods and services rose at an annual rate of 6 percent in the
second quarter, down from an 8 percent rate in the first quarter and 4¼ percentage points
slower than we anticipated in the June Tealbook. We view this weakness as transitory
and expect export growth to pick up to a 10 percent pace in the second half of this year,
supported by solid foreign growth and the lower value of the dollar.
Real imports of goods and services increased a modest 1¼ percent in the second
quarter of this year, about 1¼ percentage points lower than previously estimated on
account of weaker-than-expected real imports of oil. In the current quarter, we expect

Page 13 of 110

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August 3, 2011

Recent Nonfinancial Developments (3)

Defense Spending

Inventory Ratios ex. Motor Vehicles
Months

1.8
1.7

Billions of chained (2005) dollars

700
Unified (monthly)
NIPA (quarterly)

650

700

June
650
Q2

1.6
1.5
Staff flow-of-goods system

600

1.5

550

1.4

500

1.3

450

1.2

400

1.1

350

June

1.4
1.3

1.6

Census book-value data

1.2
May
1.1

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

350

Note: The unified series is seasonally adjusted and deflated
by BEA prices. The NIPA series excludes the consumption
of fixed capital.
Source: Monthly Treasury Statement ; U.S. Dept. of Commerce,
Bureau of Economic Analysis.

Note: Flow-of-goods system covers total industry ex. motor
vehicles and parts, and inventories are relative to consumption.
Census data cover manufacturing and trade ex. motor vehicles
and parts, and inventories are relative to sales.
Source: U.S. Census Bureau; staff calculation.

Trade Balance

Exports and Non-Oil Imports
0

200

Billions of dollars
200
May

-10

180

-20

160

-30

-40

Billions of dollars

Non-oil imports

140

-50

May

120

100

-50

-60

-70

-80

-80
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis;
U.S. Census Bureau.

60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis;
U.S. Census Bureau.

PCE Prices ex. Food and Energy
Percent

12-month change
3-month change

12
10

8
6

Exports

Total PCE Prices
12

140

8
June

Percent

5
12-month change
3-month change

4
3

5
4

June

-2

-4

-6

-1

-8

-8
-2

-2
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: 3-month changes are at an annual rate.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

-10

-10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: 3-month changes are at an annual rate.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

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imports to rise more than 8 percent, pushed up by a rebound in automotive imports from
Japan, before flattening out in the fourth quarter as the surge in auto imports fades. Our
forecast for import growth in the second half of the year is about 1½ percentage points
lower than in the June Tealbook, reflecting the markdown in U.S. GDP growth and the
lower path for the dollar.
With exports outpacing imports, the external sector added roughly ½ percentage
point to real GDP growth in the second quarter, about ¼ percentage point less than
estimated in the June Tealbook because of weaker exports. We expect net exports to
make another ½ percentage point contribution to GDP growth in the second half of this
year, ¼ percentage point higher than in the June Tealbook, as slower U.S. demand
restrains imports.

Prices and Wages
The incoming data on inflation have been somewhat higher than we expected on
balance. In the June CPI release, the increases in prices for both core goods and services
were a bit larger than we anticipated—a third month of upward surprises—and these data
were reflected in higher market-based core PCE inflation in June. However, the effect of
that miss on core PCE inflation was masked by a large, unexpected decline in nonmarketbased PCE prices that month. On net, core PCE prices are estimated to have increased at
an annual rate of a little more than 2 percent in the second quarter, in line with the June
Tealbook; core PCE inflation is expected to remain near 2 percent in the current quarter.
We continue to think that the midyear bulge in core inflation reflects temporary factors to
a large degree. For example, tight supplies have boosted motor vehicle prices in recent
months, and this influence should lessen as inventories are rebuilt. In addition, increases
in import and commodity prices have helped push up other goods prices, particularly
apparel, this year. However, given the striking drop in cotton prices in recent weeks and
the projected deceleration in import prices, these pressures should start to fade in coming
months. As a result, we have core PCE inflation slowing to a 1¾ percent pace in the
fourth quarter. Nonetheless, our forecast for core inflation in the second half is
¼ percentage point higher than in the previous Tealbook, as we now expect some of these
transitory factors to unwind more slowly. Meanwhile, total PCE price inflation is
expected to slow from an average annual rate of 3½ percent in the first half of this year to
about 1¼ percent in the second half, reflecting an outright decline in consumer energy
prices and a significant slowing in food price inflation.

Page 15 of 110

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We now estimate that compensation per hour in the nonfarm business sector
increased at an annual rate of 2¾ percent in the first half of this year, and the ECI
measure of hourly compensation rose at an annual rate of 2½ percent over the same
period. Both increases are up a little from their pace in 2010 but remain moderate.
Increases in the first half were boosted in part by a surge in employer contributions to
retirement and savings plans and a large increase in nonproduction bonuses, neither of
which are likely to be repeated in the near term. In addition, the monthly data on wages
and salaries through June suggest that compensation is on a lower trajectory going into
the second half of this year than we had projected previously; these data, coupled with the
weaker outlook for the labor market, led us to nudge down our forecast for compensation
growth in the third and fourth quarters.

THE MEDIUM-TERM OUTLOOK
Broadly speaking, the forces shaping the recovery and its general contour of a
gradual and modestly paced upturn are the same as in recent projections. In an
environment of highly accommodative monetary policy, we still expect a gradual
improvement in credit availability and a pickup in consumer confidence from today’s
extraordinarily low levels to generate an increase in economic growth. But the further
accumulation of weaker data on spending, production, and the labor market during the
intermeeting period, together with the recent deterioration in measures of business and
consumer sentiment, have led us to project a persistently weaker trajectory for economic
growth in the second half of this year and in 2012. All told, excluding the effects of the
earthquake in Japan, we now project real GDP growth to move up from a downwardrevised annual rate of 1¼ percent in the first half of this year to 2 percent in the second
half and 3 percent in 2012. On this basis, our projection for real GDP growth is nearly
1 percentage point lower than in the June Tealbook in the second half and ½ percentage
point lower next year.
Perhaps the most significant area of concern on the spending side of the picture is
the household sector. The disappointing news on consumer spending, employment,
income, and sentiment suggest that consumers will remain on the sidelines until a more
substantial recovery materializes in the labor market. As in previous projections, we
assume that as job growth begins to improve and energy prices level out, real household
incomes should gradually rise and confidence should improve, driving a modest
acceleration in consumption over the medium term. But relative to the June Tealbook,

Page 16 of 110

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Domestic Econ Devel & Outlook

Class II FOMC - Restricted (FR)

Projections of Real GDP and Related Components
(Percent change at annual rate from end of
preceding period except as noted)

2011
Measure

2010

2012
H1

3.1
2.8

.9
2.0

2.7
3.4

3.0
3.5

2.4
2.4

.7
1.7

2.3
3.1

2.9
3.2

3.0
2.6

1.1
1.9

1.8
2.5

2.5
2.8

Residential investment
Previous Tealbook

-6.3
-4.6

.5
-.8

1.8
2.2

6.1
6.0

Nonresidential structures
Previous Tealbook

-1.8
-4.0

-.7
-5.1

-1.1
.0

-1.3
-.8

Equipment and software
Previous Tealbook

16.6
16.9

7.1
8.6

6.3
11.4

5.6
8.0

2.9
4.8

-3.8
-3.0

1.6
2.1

-.9
-.8

-1.7
-1.3

-3.1
-3.1

-1.3
-.9

-.2
.1

Exports
Previous Tealbook

8.8
9.0

6.9
9.1

10.0
10.0

9.0
9.0

Imports
Previous Tealbook

10.7
11.0

4.7
4.0

4.4
5.8

3.3
4.0

Real GDP
Previous Tealbook
Final sales
Previous Tealbook
Personal consumption expenditures
Previous Tealbook

Federal purchases
Previous Tealbook
State and local purchases
Previous Tealbook

Contributions to change in real GDP
(percentage points)
Inventory change
Previous Tealbook

.7
.4

.2
.4

.4
.3

.0
.3

Net exports
Previous Tealbook

-.6
-.6

.1
.5

.6
.4

.7
.6

Real GDP
4-quarter percent change

10
Current
Previous Tealbook

10
8

-2

-4

-6

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Page 17 of 110

2010

2012

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we have marked down our projection for real PCE growth by ¾ percentage point this
year to 1½ percent and by ¼ percentage point next year to 2½ percent. We have the
personal saving rate remaining fairly flat over the medium term.
We continue to see no meaningful recovery in the housing sector within the
projection period. Eventually, rising income and confidence, along with improving credit
availability, should support some pickup in the demand for housing. But with house
prices likely to continue declining through most of next year, demand is projected to be
restrained by fears of purchasing into a falling market. Moreover, much of the expected
increase in housing demand will likely be satisfied by the large stock of low-priced
vacant homes and less-expensive dwellings in multiunit buildings rather than new singlefamily housing. As a result, single-family starts are projected to inch up to an annual rate
of only 500,000 units by the end of next year, less than half of the average rate over the
past 40 years.
Spending by all levels of government is projected to remain subdued over the
medium term. At the federal level, the recently enacted legislation raising the debt
ceiling imposes a tight environment for discretionary appropriations, as we expected, and
with stimulus-related nondefense spending phasing out and outlays related to overseas
military operations expected to wind down, real federal purchases are projected to
decelerate from a modest increase in the second half of 2011 to a small decline in 2012.
At the state and local level, tight budgets will continue to restrain spending over the
medium term, and we expect real state and local purchases to decrease at an annual rate
of 1¼ percent in the second half of this year, a slightly weaker projection than in the June
Tealbook, and to be about flat in 2012. Although states’ tax receipts have posted solid
gains in recent quarters, federal stimulus payments will mostly wind down next year, and
further increases in tax revenues will be limited by the relatively subdued expansion in
economic activity in our current forecast.
In the business sector, elevated vacancy rates, as well as tight financing for
construction, are expected to continue to restrain outlays for nonresidential buildings over
the medium term. In addition, because of substantial planning lags and other factors, the
sector typically trails the rest of the economy, and we expect this pattern to hold in the
current recovery as well. As a result, we project investment in nonresidential structures
to continue to edge lower through 2012.

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Components of Final Demand

Personal Consumption Expenditures
4-quarter percent change

5
Current
Previous Tealbook

Residential Investment
5
4

-1

-2

-3

-4

2007

2008

2009

30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30

2010

2011

2012

-4

Equipment and Software
20

-5

-10

-15

-20

-25

2007

2008

2009

2010

2011

2012

25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35

-25

Government Consumption & Investment
4

2007

2008

2009

2010

2011

2012

30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30

Nonresidential Structures

4-quarter percent change

2007

2008

2009

2010

2011

2012

25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35

Exports and Imports
4

4-quarter percent change

20
15
10

Exports

-1

-5

-2

-10

-3

-15

-4

-4
2007
2008
2009
2010
2011
2012
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

-20

Page 19 of 110

5
0

Imports

2007

2008

-5

2009

2010

2011

2012

-20

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Aspects of the Medium-Term Projection

Personal Saving Rate

Wealth-to-Income Ratio
Percent

10
Current
Previous Tealbook

1
1990

1995

2000

6.4

6.0

5.6

5.2

4.8

4.4

Ratio

2005

2010

4.0

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

4.0
1990
1995
2000
2005
2010
Note: Household net worth as a ratio to disposable personal
income.
Source: For net worth, Federal Reserve Board, flow of funds
data; for income, Dept. of Commerce, Bureau of Economic Analysis.

Single-Family Housing Starts

Equipment and Software Spending
Millions of units

2.00

Share of nominal GDP

2.00

10.0

1.75

9.5

1.50

9.0

1.25

8.5

1.00

8.0

0.75

7.5

0.50

7.0

0.25

6.5

0.00

6.0

0.00

1990

1995

2000

2005

2010

1990

2000

2005

2010

6.0

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

Source: U.S. Census Bureau.

Federal Surplus/Deficit

Current Account Surplus/Deficit
Share of nominal GDP

1995

10.0

Share of nominal GDP

2
1

-1

-2

-4

-3

-6

-4

-8

-5

-10

-6

-12

-7

-12

1990

1995

2000

2005

2010

1990

1995

2000

2005

2010

-7

Note: Share of federal government surplus/deficit is shown
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.
as a 4-quarter moving average.
Source: Monthly Treasury Statement .
Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research.

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Since the business-cycle trough, the stock of E&S has been increasing less rapidly
than is typical during a recovery period. The subpar rate of increase likely reflects the
tepid pace of the overall recovery and the climate of uncertainty that businesses are
facing. To be sure, business outlays on E&S have registered several quarters of brisk
increases over the past two years, but the level of investment remains low enough that,
after accounting for the rapid pace at which E&S depreciates, the expansion of productive
capacity has been fairly subdued. Of course, as business prospects improve and
uncertainty diminishes, businesses with access to capital markets or with substantial
retained earnings seem well positioned to expand capacity more rapidly. That said, we
have marked down our forecast for E&S spending over the forecast period in response to
the recent retrenchment in business sentiment and the weaker outlook for sales growth in
our projection. In particular, we now project growth in real E&S investment to average
about 5½ percent next year, about 2½ percentage points less than in the June Tealbook
projection.
Foreign demand is projected to provide an important source of support to real
activity. Real exports are projected to rise 9 percent in 2012, supported by solid foreign
growth—especially in the emerging market economies—and by past and projected dollar
depreciation. We estimate that real imports will increase 3¼ percent next year, with the
pull of U.S. economic activity restrained somewhat by the weak dollar. In all, net exports
are expected to contribute ¾ percentage point to real GDP growth in 2012, a slightly
larger contribution than in the June Tealbook, primarily due to the effect of the weaker
U.S. outlook on import growth.

AGGREGATE SUPPLY, THE LABOR MARKET, AND INFLATION
Potential GDP and the NAIRU
With no reason to doubt our prior estimate of the unemployment rate gap, we
responded to the BEA’s downward revisions to actual GDP in recent years by marking
down our estimates of potential GDP from 2008 to 2010 by an equal amount, thus
preserving our previous estimate of the GDP gap at the end of 2010. We implemented
this revision to potential GDP growth by adjusting our estimate of multifactor
productivity (MFP) growth. Previously, the data indicated that output per hour held up
surprisingly well during the recession, which we had interpreted as partly reflecting
structural factors. However, with actual productivity growth revised down, there no
longer appears to have been a substantial pickup in the underlying trend in MFP growth.

Page 21 of 110

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Decomposition of Potential GDP
(Percent change, Q4 to Q4, except as noted)
19741995

19962000

20012008

2009

2010

2011

2012

Potential GDP
Previous Tealbook

3.0
3.0

3.5
3.5

2.6
2.6

1.1
1.9

1.7
1.9

2.1
2.3

2.1
2.4

Selected contributions1
Structural labor productivity
Previous Tealbook

1.5
1.5

2.7
2.7

2.5
2.5

1.4
2.3

1.5
2.0

1.7
2.0

1.7
2.1

Capital deepening
Previous Tealbook

.7
.7

1.5
1.5

.8
.8

.2
.3

.4
.4

.6
.5

.6
.7

Multifactor productivity
Previous Tealbook

.5
.5

.9
.9

1.4
1.5

1.0
1.9

1.0
1.4

1.0
1.3

1.5
1.5

1.0
1.0

.6
.6

-.2
-.2

.5
.5

.6
.6

.7
.7

.4
.4

.0
.0

-.2
-.2

-.4
-.4

-.3
-.3

-.2
-.2

Measure

Trend hours
Previous Tealbook
Labor force participation
Previous Tealbook

Note: Components may not sum to totals because of rounding. For multiyear periods, the percent change is the
annual average from Q4 of the year preceding the first year shown to Q4 of the last year shown.
1. Percentage points.
Source: Staff assumptions.

Nonfarm Business Productivity

Chained (2005) dollars per hour

54
Structural
productivity

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Labor Force Participation Rate

Percent

67
Trend

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: For both figures, U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions.
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Indeed, we now estimate that structural MFP has been increasing at about a 1 percent
annual pace since 2005 and assume that a similar rate will prevail over the forecast
period. As a result, we have potential GDP increasing just over 2 percent in 2011 and
2012, ¼ percentage point lower than in the June Tealbook. We have maintained our
assumption that the NAIRU will remain at 6 percent through 2012.2

Productivity and the Labor Market
In line with the weaker outlook for output growth, we have adjusted down our
forecast for employment growth. Specifically, we now project that average monthly
private employment gains will edge up from about 130,000 in the second half of this year
to about 200,000 in 2012; next year’s projected pace is about 30,000 per month lower
than in our previous projection. We also expect government employment to trend lower
through the middle of next year. With job opportunities expected to be more limited over
the medium term, the projected path for the unemployment rate is higher than anticipated
in the June Tealbook, while the path for the labor force participation rate is a little lower.
We judge the current level of labor productivity to be roughly in line with our
estimate of its structural level. As a result, our forecast calls for job growth that
strengthens with the projected acceleration in production over the medium term and for
labor productivity to increase roughly in line with its structural rate of growth.

Resource Utilization
We now expect greater economic slack to prevail over the projection period than
was anticipated in the June Tealbook. We judge the unemployment rate to be
2¾ percentage points above the “effective” NAIRU in the current quarter, and our
projection has the unemployment gap barely narrowing—to about 2½ percentage
points—by the end of 2012; at that point, it would be about ½ percentage point wider
than in the June Tealbook. We have also increased our estimate of the GDP gap over the
projection period, with the output gap at the end of 2012 at 5¼ percent, 1 percentage
point wider than in the June Tealbook. Likewise, we lowered our forecast for capacity
utilization in the manufacturing sector, but it returns fairly close to its longer-run average

Our estimate of the “effective” NAIRU, which includes the influence of extended and emergency
unemployment benefits and is the level of the unemployment rate that we view as being consistent with no
slack in resource utilization, is unrevised from the June projection and is now about 6½ percent. As before,
we expect the effective NAIRU to decline to around 6 percent by the end of 2012 when the extended and
emergency unemployment benefit programs wind down.

Page 23 of 110

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August 3, 2011

The Outlook for the Labor Market
(Percent change, Q4 to Q4, except as noted)
Measure

2009

2010

2011

2012

Output per hour, nonfarm business
Previous Tealbook

5.3
6.5

2.5
2.0

.5
1.3

1.7
1.7

Nonfarm private employment
Previous Tealbook

-5.0
-5.0

.9
.9

1.6
2.1

2.1
2.4

Labor force participation rate1
Previous Tealbook

64.9
64.9

64.5
64.5

64.2
64.3

64.3
64.4

Civilian unemployment rate1
Previous Tealbook

10.0
10.0

9.6
9.6

9.2
8.9

8.5
8.1

Memo:
GDP gap2
Previous Tealbook

-6.9
-6.4

-5.6
-5.7

-5.9
-5.2

-5.2
-4.2

Note: A negative number indicates that the economy is operating below potential.
1. Percent, average for the fourth quarter.
2. Percent difference between actual and potential GDP in the fourth quarter of the year indicated.
Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions.

Private Payroll Employment, Average
Monthly Changes

Unemployment Rate

Thousands

600
Current
Previous Tealbook

400
200
0

600

Percent

11
NAIRU
NAIRU with EEB adjustment

400

200

-200

-400

-600

-800

-1000

1990

1995

2000

2005

2010

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

1990
1995
2000
2005
2010
Note: The EEB adjustment is the staff estimate of the effect
of extended and emergency unemployment compensation
programs on the NAIRU.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics;
staff assumptions.

GDP Gap
6

Manufacturing Capacity Utilization Rate
Percent

-2

-4

-6

-8

-10

-10
1990
1995
2000
2005
2010
Note: The GDP gap is the percent difference between actual
and potential GDP; a negative number indicates that the
economy is operating below potential.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis;
staff assumptions.

Percent

90
85

80
Average rate from
1972 to 2010

1990
1995
2000
2005
2010
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research.

Page 24 of 110

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August 3, 2011

by the end of 2012. The difference in gaps between the industrial sector and the
economy as a whole reflects more-modest increases in industrial capacity relative to
potential output over the recovery period, as well as faster growth in industrial output
than in the rest of the economy.

Compensation and Prices
With the unemployment rate projected to be higher than in the previous forecast,
we have lowered our projection of the increase in compensation per hour in the second
half of 2011 and in 2012, to 1¾ percent and 2¼ percent, respectively. We have also
made a small downward revision to our projection of changes in the employment cost
index. As in the June Tealbook, the projected increases in compensation, combined with
our forecast for productivity, imply little change, on average, in unit labor costs over the
forecast period.
Prices for imported core goods (all goods excluding fuels, computers, and
semiconductors) are projected to rise 3 percent in the current quarter, considerably slower
than the 6¼ percent increase recorded in the second quarter, as foreign inflation steps
down, commodity prices flatten out, and dollar depreciation slows. Over the remainder
of the projection period, core import price inflation is expected to run at about a
1½ percent pace as commodity prices remain relatively flat and the dollar depreciates
only modestly.
Recent readings on inflation expectations have been mixed but generally suggest
that longer-term expectations have remained stable. Median 5-to-10-year-ahead expected
inflation from the Michigan survey was 2.9 percent in July, a touch below the 3 percent
reading in June and in the middle of the range seen over the past decade. TIPS-based
measures of inflation compensation over the next 5 years and 5 to 10 years ahead have
both increased nearly ¼ percentage point since the June Tealbook, but changes in those
measures have been particularly hard to interpret in light of safe-haven flows.
The contour of our core inflation projection over the medium term reflects the
anticipated fading of transitory pressures that have boosted inflation this year. We
assume that inflation expectations will remain stable and that the unemployment rate gap
will decline only slightly next year. As a result, with pressures from commodity and
import prices fading, core inflation is expected to slow from about 1¾ percent this year to
1½ percent in 2012. Given this step-down in core inflation and an expected deceleration

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Inflation Projections
(Percent change, Q4 to Q4)
Measure

2009

2010

2011

2012

PCE chain-weighted price index
Previous Tealbook

1.5
1.5

1.3
1.1

2.4
2.3

1.5
1.5

Food and beverages
Previous Tealbook

-1.7
-1.6

1.3
1.3

4.3
4.5

1.4
1.4

Energy
Previous Tealbook

2.6
2.7

6.2
5.9

9.3
9.6

1.4
1.0

Excluding food and energy
Previous Tealbook

1.7
1.7

1.0
.8

1.8
1.7

1.5
1.5

Prices of core goods imports1
Previous Tealbook

-1.7
-1.9

2.6
2.7

4.9
5.0

1.5
1.4

1. Core goods imports exclude computers, semiconductors, oil, and natural gas.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.
Total PCE Prices

PCE Prices ex. Food and Energy
4-quarter percent change

6
Current
Previous Tealbook

4-quarter percent change

5
4

1
-1

1990

1995

2000

2005

2010

-1

1990

1995

2000

2005

2010

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

Long-Term Inflation Expectations

Compensation per Hour
4-quarter percent change

Market based

Percent

Productivity and Costs
8

4
Thomson Reuters/Michigan,
next 5 to 10 yrs.

July
SPF,
next 10 yrs.

2
Employment cost index

0
-2

1990

1995

2000

2005

2010

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

-2

1
0

1990

1995

2000

2005

2010

Note: The Survey of Professional Forecasters (SPF) projection
is for the CPI.
Source: Thomson Reuters/University of Michigan Surveys of
Consumers; Federal Reserve Bank of Philadelphia.

Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research.

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in consumer energy and food prices, headline PCE price inflation is projected to slow
from 2½ percent in 2011 to 1½ percent in 2012. Relative to the June Tealbook, our
topline inflation forecast is a little higher this year in response to the higher-thanexpected incoming data on core prices. However, the small resulting inflationary impetus
to our forecast next year is offset by the lower level of resource utilization.

THE LONG-TERM OUTLOOK
We have extended the staff forecast to 2015 using the FRB/US model and staff
assessments of long-run supply-side conditions, fiscal policy, and other factors. The
contour of the long-run outlook depends on the following key assumptions:


Monetary policy aims to stabilize PCE inflation at 2 percent in the long
run, consistent with the majority of longer-term inflation projections
provided by FOMC participants at the June meeting.



The Federal Reserve’s holdings of securities follow the baseline portfolio
projections reported in Book B. The projected longer-run decline in the
System’s holdings is forecast to contribute about 25 basis points to the rise
in the 10-year Treasury yield over the period from 2013 to 2015.



The modest effects of the anticipated credit rating downgrade that we
assume are already priced into yields on U.S. Treasury securities persist
beyond 2012; those effects are also assumed to lift private yields
somewhat. In addition, risk premiums on corporate equities decline
gradually to normal levels, and banks ease their lending standards
somewhat further.



The federal government budget deficit (NIPA basis) narrows from
6¾ percent of GDP in 2012 to 4½ percent of GDP in 2015. While the
effects of the economic recovery on tax receipts make a large contribution
to this narrowing of the deficit, about 1 percentage point of the narrowing
reflects our assumption of policy actions starting in 2013 that are
consistent with the recent budget legislation.



The real foreign exchange value of the dollar is assumed to depreciate
2¼ percent in 2013 and then decline 1 percent in both 2014 and 2015.
The price of WTI crude oil is roughly flat at slightly more than $100 per

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barrel during the extension period, consistent with futures prices adjusted
for divergences between staff and market expectations for economic
activity and exchange rates. Foreign real GDP expands, on average,
3½ percent per year from 2013 through 2015, above its trend rate.


The NAIRU declines from 6 percent in late 2012 to 5¼ percent by 2015
as the functioning of the labor market improves. Potential GDP expands
almost 2½ percent per year, on average, over the 2013–15 period.

The economy enters 2013 with output still considerably below its potential, the
unemployment rate well above the projected NAIRU, and inflation below the assumed
objective. In the long-run forecast, improving confidence, diminishing uncertainty, and
supportive financial conditions eventually enable the level of aggregate demand to
approach aggregate supply. In this environment, real GDP rises at an average annual rate
of almost 4 percent from 2013 to 2015, faster than its potential pace; as a result,
unemployment declines appreciably, reaching 5¾ percent by late 2015, while inflation
edges up to 1.6 percent in 2015.

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Evolution of the Staff Forecast
Change in Real GDP
Percent, Q4/Q4
5

5
2011

2012

2010

1/22

3/12

4/22

6/17

8/6

9/16

10/29 12/9

1/20

3/10

4/21

2009

6/16

8/4

9/15

10/27 12/8

1/19

3/9

4/20

2010

6/15

8/3

9/14

10/27 12/7

2011

Tealbook publication date

Unemployment Rate
Percent, fourth quarter
10.5

10.5

10.0

10.0
2010

9.5

9.0

8.5

8.0

8.0
2011

7.5

2012

7.0

6.5

6.0

1/22

3/12

4/22

6/17

8/6

9/16

10/29 12/9

1/20

3/10

4/21

2009

6/16

8/4

9/15

10/27 12/8

1/19

3/9

4/20

2010

6/15

8/3

9/14

10/27 12/7

6.0

2011

Tealbook publication date

Change in PCE Prices excluding Food and Energy*
Percent, Q4/Q4
2.5

2.5

2.0

1.5

1.0

1.0
2011

2010

2012

0.5

0.0

0.5

1/22

3/12

4/22

6/17

8/6

2009

9/16

10/29 12/9

1/20

3/10

4/21

6/16

8/4

9/15

10/27 12/8

2010

1/19

3/9

4/20

6/15

8/3

9/14

2011

Tealbook publication date
*Because the core PCE price index was redefined as part of the comprehensive revisions to the NIPA, projections prior to the
August 2009 Tealbook are not strictly comparable with more recent projections.

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10/27 12/7

0.0

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Appendix
Annual Revision of the National Income and Product Accounts
On July 29, the Bureau of Economic Analysis (BEA) released its annual revision to the
national income and product accounts (NIPA). The adjusted estimates incorporate newly
available or revised data—such as the Census Bureau’s annual surveys and tabulations from the
Internal Revenue Service (IRS)—as well as some changes in methodology. These revisions
mainly affected historical NIPA estimates from 2008 to 2010.1 The four-quarter change in real
GDP was revised down ½ percentage point in 2008 and ¾ percentage point in 2009, while the
four-quarter change in 2010 was revised up about ¼ percentage point.
These estimates indicate that the recent cyclical downturn was deeper than previously
reported and that the recovery proceeded at a slightly slower pace through the first quarter of
2011. Although the dates of the peak (2007:Q4) and trough (2009:Q2) of real GDP remain the
same, the contraction from peak to trough is now estimated to have been about 5 percent—
1 percentage point larger than in previous estimates and nearly 1½ percentage points steeper than
the next-largest postwar contraction in late 1957 and early 1958. Moreover, in contrast to
previous estimates, it now appears that as of the second quarter of 2011, real GDP remained
slightly below its peak level in the fourth quarter of 2007. Quarterly estimates of real gross
domestic income (GDI) were also marked down a little, on net, and these revisions now place real
GDP and real GDI on very similar growth trajectories from 2008 to 2010.
The pattern of revisions to real GDP between 2008 and 2010 largely resulted from
revised estimates for private domestic final expenditures. Most notably, real PCE is now
estimated to have fallen more substantially in both 2008 and 2009 than previously thought and to
have rebounded at a somewhat faster rate in 2010.2 The downward revision to real PCE in recent
years was widespread across major spending categories and was accompanied by a downward
revision to real disposable personal income (DPI). These revisions left the personal saving rate at
the end of 2010—5¼ percent—only a little below the previous estimate, and still well above the
rate that had prevailed at the end of 2007. The downward revision to DPI is mainly explained by
much lower estimates of personal interest income, reflecting newly available IRS tabulations
through 2009 and changes to the methodology used to calculate mortgage interest. In addition,
1

This release marked the debut of “flexible annual revisions” wherein the BEA may choose to
revise NIPA estimates further back in history than the traditional three-year window in order to incorporate
new source data or changes in methodology. In this year’s revision, relatively small changes were made to
current-dollar estimates for some series—such as GDP, PCE, and fixed investment—from 2003 to 2007,
and chained-dollar estimates for these series were revised throughout history.
2
Revisions to fixed investment followed a similar yearly pattern as those to PCE and were
concentrated in the nonresidential sector. Changes to estimates of government spending, inventory
investment, and net exports were fairly modest on balance.

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employee compensation was marked down somewhat, on net, mostly in response to downwardrevised estimates of employer contributions to employee pensions and insurance funds.
By contrast, corporate profits were marked up substantially in both 2009 and 2010.
These latest estimates place the share of economic profits in gross national product at the end of
2010 at nearly 12½ percent, about 1¼ percentage points above the previous estimate. Both
domestic financial and nonfinancial profits were revised up noticeably on balance.
Revisions to the BEA’s estimates of consumer prices were modest and were largely
concentrated in 2010. Estimated rates of increase in both total and core PCE prices were
unchanged in 2008 and 2009 but were revised up about ¼ percentage point in 2010, reflecting
upward-revised price increases in the nonmarket category. Revisions to the market-based
component of PCE prices were minor.
The annual NIPA revision also provided information about the likely magnitude of the
upcoming revision to estimates of productivity and hourly compensation in the nonfarm business
sector. Working from the updated NIPA data, the Board staff estimates that output per hour in
the nonfarm business sector dropped 1¼ percent over the four quarters of 2008 before jumping
5¼ percent in 2009 and rising 2½ percent in 2010; the new figures would leave the productivity
level in the fourth quarter of 2010 about 1½ percent below the previous estimate. The downwardrevised estimates of employee compensation imply somewhat smaller increases in hourly
compensation in recent years, on balance, with the level of compensation per hour in the fourth
quarter of 2010 down about ½ percent from previous estimates. Taken together, these revised
productivity and compensation figures would imply that the level of unit labor costs at the end of
2010 was about 1 percent higher than previously thought.

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Annual Revision to the National Income and Product Accounts

Real GDP
Billions of chained (2005) dollars

13600

Revised (through 2011:Q2)
Previous (through 2011:Q1)
13400

13400

13200

13000

12800

12600

2006

2007

2008

2009

2010

12600

2011

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

Real GDP and GDI

Real DPI
4-quarter percent change

Gross domestic product
Gross domestic income

6
4

-2

4
Q1

2
Q2

-2

-4

-6

4-quarter percent change

2006

2007

2008

2009

2010

2011

-6

-4

2006

2007

2008

2009

2010

2011

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

Personal Saving Rate

Profits as a Share of GNP
Percent

Percent

-4

2006

2007

2008

2009

2010

2011

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

2006

2007

2008

2009

2010

2011

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

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Total PCE Prices

Real Personal Consumption Expenditures
4-quarter percent change

-1

-2

-3

-4

2006

2007

2008

2009

2010

2011

August 3, 2011

-4

4-quarter percent change

5
4

-1

2006

2007

2008

2009

2010

2011

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

PCE Prices Ex. Food and Energy

Market-Based PCE Prices
Ex. Food and Energy

4-quarter percent change

-1

3.0

2.5

2.0

1.5

1.0

0.5

3.0

0.5

2006

2007

2008

2009

2010

2011

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

2006

2007

2008

2009

2010

2011

3.0

0.5

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

Productivity

Compensation per Hour

(Nonfarm business)

4-quarter percent change

-2

2006

2007

2008

2009

2010

2011

Note: Revised values are staff estimates.
Source: U.S. Department of Labor, Bureau of Labor Statistics;
U.S. Department of Commerce, Bureau of Economic Analysis.

2006

2007

2008

2009

2010

2011

Note: Revised values are staff estimates.
Source: U.S. Department of Labor, Bureau of Labor Statistics;
U.S. Department of Commerce, Bureau of Economic Analysis.

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International Economic Developments and Outlook
As expected at the time of the June Tealbook, foreign activity slowed
significantly in the second quarter, but data indicate a somewhat larger deceleration than
anticipated. We estimate that real GDP growth fell from 4¼ percent at an annual rate in
the first quarter to 2¼ percent in the second, about ½ percentage point below our previous
forecast. The step-down in foreign GDP growth reflected a slowing of many economies
and tsunami, and anemic growth in the United States. So far, we are not interpreting the
step-down in foreign economic performance as reflecting a persistent and deep-seated
softening of private domestic demand, but staff will be alert to signs of such weakness in
the coming quarters.
The contour of our forecast remains roughly the same as in June, with economic
growth rebounding in the second half of this year, as the downdrafts from Japan’s
earthquake abate and the U.S. economy accelerates. However, increased headwinds—
from a weaker U.S. outlook and greater concerns over sovereign debt in Europe—have
led us to mark down real GDP growth abroad about ¼ percentage point over the forecast
period. Foreign aggregate real GDP is now projected to increase 3½ percent at an annual
rate both in the second half of this year and in 2012.
Since the June Tealbook, financial conditions in Europe have worsened, despite
the passage of Greece’s fiscal austerity program and the announcement of measures
designed to shore up vulnerable countries. Most troubling has been the increase in
market scrutiny of Italy and Spain. Our baseline forecast assumes that Europe will
manage to avoid a major crisis but that continued financial stresses and more stringent
fiscal consolidation will weigh on economic growth. Moreover, the risk of severe
financial disruptions in Italy, Spain, and perhaps other euro-area countries has increased
since June.
Foreign inflation was 3¼ percent at an annual rate in the second quarter, down
from its peak of 5¼ percent in the fourth quarter of last year, and is expected to continue
to edge lower as the effects of previous food and energy price increases dissipate.
Inflation is projected to fall to just under 2½ percent in 2012, contingent on the staff’s
expectation that commodity prices flatten out.

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toward more sustainable growth rates, the spillover effects of the Japanese earthquake

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August 3, 2011

Recent Foreign Indicators
Nominal Exports

Industrial Production
Jan. 2007 = 100

Jan. 2007 = 100

180

Foreign
AFE
EME*

Foreign
AFE*
EME**

160

130

120

140
110
120
100

Int’l Econ Devel & Outlook

100
90

80
60
2007

2008

* Excludes Venezuela.

2009

2010

80
2007

2011

2008

2009

2010

2011

* Excludes Australia and Switzerland.
** Excludes Colombia, Hong Kong, Philippines, and Venezuela.

Retail Sales

Employment
12-month percent change

4-quarter percent change

Foreign
AFE*
EME**

Foreign
AFE
EME*

5
4

3
2

5
1
0

-1
-5
2007

2008

2009

2010

-2
2007

2011

2008

2009

2010

2011

* Excludes Australia and Switzerland.
** Includes Brazil, China, Israel, Korea, Singapore, and Taiwan.

* Excludes Argentina and Mexico.

Consumer Prices: Advanced Foreign Economies

Consumer Prices: Emerging Market Economies

12-month percent change
Headline
Core*

12-month percent change
10
Headline
Ex. food--East Asia*
Ex. food--Latin America
8

5
4

4
2
2
1

-2

-1
2007

2008

2009

2010

Note: Excludes Australia, Sweden, and Switzerland.
* Excludes all food and energy; staff calculation.
Source: Haver Analytics and CEIC.

2011

-4
2007

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2008

2009

2010

2011

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ADVANCED FOREIGN ECONOMIES
We estimate that GDP growth in the advanced foreign economies (AFEs) slowed
sharply from 2½ percent in the first quarter to a meager ¾ percent in the second.
Although we had built in some moderation, the step-down was nearly ¾ percentage point
greater than we had projected in June, reflecting downward surprises related to temporary
factors in Canada and the United Kingdom. We expect the pace of growth to recover to a
modest 2½ percent in the third quarter, as Japan’s economy snaps back, and then to hover
Int’l Econ Devel & Outlook

around a 2¼ percent pace through 2012. This pace is ¼ percentage point lower than that
in the June Tealbook in view of the weaker trajectory for U.S. growth and the
intensification of financial stresses in Europe. Greece’s near-term prospects improved
over the intermeeting period, but the spread of contagion to Spain and Italy, and the
failure of the European leaders’ summit agreement to address that problem, point to
continued risks to the outlook in Europe. We expect Italy and Spain now will enact
greater austerity measures to try to assuage market concerns.
We estimate that AFE inflation fell from 3¼ percent at an annual rate in the first
quarter to 2¼ percent in the second, partly reflecting the waning influence of the earlier
jump in energy prices. Going forward, with energy and food prices projected to flatten
and output gaps closing slowly, we have AFE inflation stabilizing near 1½ percent over
the remainder of the forecast period. Given greater concerns about economic growth, we
now expect the major central banks to conduct somewhat more accommodative monetary
policies than previously anticipated.

Japan
The Japanese economy is recovering from the March earthquake and tsunami
more rapidly than we had expected. Exports and industrial production have already
retraced much of their substantial losses, while significant progress has been made to
restart operations in the hard-hit automobile industry. Survey data also have been
encouraging, with the June PMI indicating that supply chain bottlenecks have largely
waned. We now estimate that real GDP fell 3 percent last quarter, a contraction that was
¾ percentage point smaller than projected in the June Tealbook. Going forward, we have
output rising at a 4½ percent pace in the second half of the year, an estimate which has
been revised up a bit as downside risks have receded. GDP growth should then slow to
2½ percent in 2012, down ¼ percentage point from the previous Tealbook, in line with
somewhat weaker U.S. growth and a stronger yen.

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The swift Japanese recovery has been facilitated by government relief programs.
On July 15, the Japanese Diet approved a ¥2 trillion (about $25 billion, or nearly
½ percent of GDP) disaster-relief package, which followed the ¥4 trillion supplementary
budget enacted in May. We expect that a third and larger supplementary budget will be
passed before the end of the year. Although Japan has continued to run large budget
deficits—with gross debt reaching an estimated 200 percent of GDP in 2010—sovereign
yields have actually edged down, and financial markets expect the rate on 10-year JGBs
to remain below 1.5 percent over the forecast period. We assume that the Bank of Japan
year-end.
Consumer prices resumed declining in the second quarter, as expected, after rising
½ percent at an annual rate in the first. As the output gap narrows, deflation should
moderate from ½ percent in the second half of 2011 to ¼ percent at the end of 2012.

Euro Area
Our assessment of economic conditions in the euro area has worsened over the
intermeeting period. We had expected economic growth to step down in the second
quarter after an unsustainably strong first-quarter performance in the largest euro-area
economies, and this view has been supported by incoming indicators. Industrial
production barely edged up in May, and retail sales were down in the second quarter.
Business confidence and the composite PMI also weakened in the second quarter and fell
further in July.
The sharp decline in sentiment in July likely reflected the ratcheting up of
financial tensions in Europe. Sovereign spreads initially declined in response to the
successful passage of Greek austerity measures, which secured official financing needed
to avert a disorderly Greek default in July. But subsequently, spreads soared to new
heights amid contentious and protracted negotiations about a second rescue package for
Greece. Even more worrisome, spreads for Spain and Italy ran up substantially, in part
reflecting concerns about the coherence of the regional crisis management strategy, and
have climbed even higher in early August. On July 21, euro-area leaders announced the
rescue package for Greece, which was intended to cover much of Greece’s funding needs
for the next decade and to elicit some debt relief from private creditors. In addition to
€109 billion in new official financing for Greece, the leaders agreed to significantly
reduce the costs and extend the maturities of euro-area financing to Greece, Ireland, and

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will increase the size of its asset purchase program from ¥10 trillion to ¥15 trillion by

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Portugal and to broaden the scope and flexibility of the European Financial Stability
Facility (EFSF).
While the package offered Greece some clear help in meeting its obligations,
several risks remain for Greece and for the euro area. The extent to which the private
sector will participate in the debt restructuring and how successful Greece will be in
achieving its fiscal and privatization targets are not clear. The willingness of the official
sector to make up any future financing shortfalls is also not certain, and regaining market

Int’l Econ Devel & Outlook

access is doubtful given that Greek sovereign debt is still not on a convincingly
sustainable trajectory. In addition, the package did not increase the overall size of the
EFSF, leaving it inadequate to backstop Italy and Spain should financial troubles
intensify there.
On balance, since the June forecast financial conditions have improved somewhat
for Greece but are demonstrably worse for Italy and Spain, where sovereign, bank, and
corporate spreads are well above levels observed in mid-June. Over the next several
years, we expect that financial conditions in the euro area will remain strained with
occasional bouts of more pronounced turbulence. These stresses will keep borrowing
costs elevated, weigh on consumer and business confidence, and add to pressures for
near-term fiscal consolidation. Although we assume European policymakers will manage
to avert a deeper crisis that generates global financial spillovers, such a crisis remains a
distinct possibility. (See the Risks and Uncertainty section for a discussion of the
implications of a severe crisis in Italy and Spain.) Moreover, Greece will require more
drastic private-sector restructuring, more official funds, or both, by 2014 (when Greece is
slated to return to private financial markets for additional financing), if not earlier.
With tighter financial conditions, more-restrictive fiscal policy, and weaker
external demand, we have lowered our projection for euro-area output and now expect
GDP growth to be only 1 percent in the second half of 2011 before it rises to 1¾ percent
by the end of 2012. This forecast is about ¼ percentage point lower than in the June
Tealbook.
Euro-area inflation, after surging to an annual rate of 3¾ percent in the first
quarter on the back of higher energy prices, fell to 2¾ percent in the second, and the July
data are consistent with a sharp further decline this quarter. Amid persistent slack, we
expect inflation to average about 1½ percent over the forecast period, a touch lower than
that in the June Tealbook. On July 7, the ECB raised its benchmark policy rate 25 basis
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points to 1½ percent. Given the weaker outlook for economic growth and inflation, we
now expect the ECB to raise its policy rate only once more by the end of 2012, to
1¾ percent.

Canada
We significantly lowered our estimate of second-quarter GDP growth to
¾ percent at an annual rate in response to weaker external demand and lower oil
production in May, the latter a result of maintenance operations and forest fires that
remained positive overall, with employment posting strong gains through June,
investment activities continuing at a solid pace, and credit conditions easing further. We
expect GDP growth to snap back to almost 3 percent in the third quarter, higher than
projected in the June Tealbook, as oil production recovers and part shortages at auto
plants are resolved. Thereafter, output is projected to rise at a moderate 2¼ percent pace
over the remainder of the forecast period. Relative to the previous Tealbook, GDP
growth is down ¼ percentage point this year and next, reflecting the recent appreciation
of the Canadian dollar and the weaker U.S. outlook.
Inflation was 3 percent in the second quarter, ½ percentage point less than
projected in the previous Tealbook, as core prices decelerated noticeably in June. The
June surprise is largely attributable to aggressive discounts on automobiles that are
expected to last through most of the summer, prompting us to revise down our thirdquarter inflation forecast to an annual pace of ½ percent. Thereafter, inflation should
move back up to around the Bank of Canada’s (BOC) 2 percent target over the remainder
of the forecast period. Given subdued inflation and somewhat softer external demand,
we have lowered the BOC’s path of monetary tightening and now expect its main policy
rate to rise to 1½ percent by the end of 2012, ½ percentage point less than in the previous
Tealbook.

United Kingdom
According to the preliminary estimate, U.K. GDP grew only ¾ percent at an
annual rate in the second quarter, significantly less than we projected in June. The
downside surprise is attributable to a greater-than-expected drag on activity associated
with the Royal Wedding holiday and production disruptions following the Japanese
earthquake. Accordingly, we expect GDP growth to bounce back to 2½ percent in the

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limited access to oil fields. Nonetheless, incoming indicators for domestic activity have

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third quarter as these factors abate before settling down to a roughly 2¼ percent pace
over the remainder of the forecast period. This forecast is a touch lower than in June due
to weaker external demand.
Amid weaker-than-expected core prices, second-quarter inflation declined to
3½ percent, ½ percentage point less than projected in the June Tealbook. Inflation should
decline further to 1¾ percent in the current quarter. However, hikes in energy tariffs
have been announced for later this year, prompting us to bump up our forecast to

Int’l Econ Devel & Outlook

2½ percent on average over the forecast period, although underlying price pressures
should remain contained. Given recent and prospective softer economic growth, and
despite year-on-year inflation readings exceeding 4 percent for the next couple of
quarters, we now assume that the Bank of England will wait until the middle of 2012
before raising the Bank Rate to ¾ percent.

EMERGING MARKET ECONOMIES
We estimate that real GDP growth in the emerging market economies (EMEs)
slowed from an annual rate of 6¼ percent in the first quarter to about 4 percent in the
second, restrained by the effects of the earthquake in Japan and weak U.S. growth, and
reflecting a return to a more sustainable pace of activity. Although these factors were
largely built into the June Tealbook, the tone of the incoming data was weaker than we
had anticipated, leading us to push down our estimate of second-quarter growth about
½ percentage point. In the current quarter, we see growth in the EMEs moving up to
5 percent with the restoration of supply chains that were disrupted by the crisis in Japan.
Real GDP growth is then projected to average 4¾ percent over the remainder of the
forecast period, roughly at its trend pace, but about ¼ percentage point lower than
forecast in June, primarily reflecting the weaker U.S. outlook.
Headline consumer price inflation in the EMEs slowed from 5 percent at an
annual rate in the first quarter to about 4 percent in the second. Inflation over the near
term is projected to be a little higher than anticipated at the time of the June Tealbook,
primarily reflecting a renewed burst of food price inflation in China. Nonetheless, we
expect that inflation in the EMEs will moderate to about 3 percent next year, as the
effects of earlier increases in commodity prices recede and as authorities in many
countries continue to tighten monetary policy.

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China
Chinese real GDP increased 9 percent at an annual rate in the second quarter,
around the same pace as in the first, but other data suggest that the economy is slowing a
touch. The PMI edged down in recent months, and industrial production growth
moderated in the second quarter. Domestic demand also appears to have softened
somewhat, with retail sales slowing and imports falling in the second quarter. We have
lowered our projection of Chinese growth about ¼ percentage point in the second half of
this year, to 8¼ percent, reflecting the weaker outlook in the advanced economies. We
modulate fiscal and monetary policy to keep growth solid while preventing the economy
from overheating. The possibility that the authorities will be unable to fine tune its
Goldilocks policy, such that the economy either overheats or slows sharply, is a risk to
the forecast.
Chinese headline consumer price inflation surged to 6½ percent on a 12-month
basis in June, up from 5½ percent in May. Although the authorities remain concerned
about inflation, the most recent run-up appears to almost entirely reflect rising pork
prices. Anecdotes suggest that a supply response is already in train and that pork prices
should come down by the end of the summer. In response to the higher inflation and as
part of ongoing efforts to normalize monetary policy, Chinese authorities raised the
one-year lending and deposit rates to 6.56 percent and 3.5 percent, respectively. As the
most recent bout of food price increases reverses, we expect Chinese inflation to move
down to 2¾ percent early next year and then stay at about that level thereafter.

Other Emerging Asia
Elsewhere in emerging Asia, indicators suggest that real GDP growth moved
down to only 2½ percent in the second quarter from nearly 8½ percent in the first, a more
pronounced slowing than we anticipated at the time of the June Tealbook. In Korea,
real GDP growth moderated to 3½ percent, as expected, with external demand weakening
but domestic demand remaining robust. However, advance GDP releases in Taiwan and
Singapore were below what we had projected. For the rest of the region, we do not yet
have second-quarter GDP figures in hand, but PMIs softened and industrial-sector output
declined. Late in the second quarter, the effects of the Japanese earthquake appear to
have abated; for example, auto production has mostly normalized in Thailand, a regional
hub for Japanese automakers. Going forward, real GDP growth is projected to bounce

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Int’l Econ Devel & Outlook

project growth will remain at about that pace in 2012 as Chinese authorities try to

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back to a 4½ percent pace through the end of 2012. This forecast is somewhat lower than
in the June Tealbook, as a weaker outlook for the advanced economies—especially the
United States—is projected to weigh on Asian exporters.

Latin America
Mexico is one of the few EMEs to retain an appreciable degree of resource slack,
and little progress in eroding that slack was made in the first half of this year. We now
estimate that real GDP in Mexico expanded only 2½ percent in the second quarter,
Int’l Econ Devel & Outlook

slightly above its anemic first-quarter rate. This estimate is ½ percentage point below our
projection in the June Tealbook, in large part reflecting a downward revision to
U.S. industrial production, which is an important influence on Mexican activity. Looking
ahead, we expect a rebound in Mexican industrial production, mirroring that in the
United States, to temporarily boost Mexican growth to 4¼ percent in the second half of
the year, with growth then stepping down to about 3½ percent in 2012.
In South America, where economic performance has been far more robust,
boosted by high commodity prices, data point to a moderation of activity, from
7½ percent in the first quarter to 4 percent in the second, roughly in line with that in the
June Tealbook. We expect GDP growth to moderate further, to 3½ percent in 2012, a
pace which is somewhat weaker than our June Tealbook forecast, owing largely to the
markdown in global activity.
Inflation in Mexico fell in the second quarter to 1¾ percent at an annual rate,
reflecting a temporary energy subsidy. Inflation is projected to pick up to 3 percent in the
current quarter and to then settle at 3¾ percent over the remainder of the forecast period,
within the upper bound of the central bank’s target range of 2 to 4 percent. In Brazil,
inflation edged down to a still-high 7½ percent in the second quarter. Since the June
Tealbook, the central bank of Brazil has raised its benchmark policy rate 25 basis points
to 12½ percent in continuing efforts to damp inflation pressures and slow the economy.
Partly as a result of these efforts, we project inflation to average 5 percent over the
forecast period. However, with credit growth still strong, the risk of overheating persists
in Brazil.

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Evolution of Staff’s International Forecast

Total Foreign GDP
Percent change, Q4/Q4

6
5

2011
4

2012

3
2
1

1/22 3/12 4/22

6/17 8/6 9/16 10/29 12/9 1/20 3/10 4/21
2009

6/16 8/4 9/15 10/27 12/8 1/19
2010

3/9 4/20

6/15 8/3 9/14 10/27 12/7
2011

Tealbook publication date

Total Foreign CPI
Percent change, Q4/Q4

4.0
3.5
3.0
2.5

2012
2010

2.0

2011
1.5
1.0
0.5

1/22 3/12 4/22

6/17 8/6 9/16 10/29 12/9 1/20 3/10 4/21
2009

6/16 8/4 9/15 10/27 12/8 1/19
2010

3/9 4/20

6/15 8/3 9/14 10/27 12/7
2011

0.0

Tealbook publication date

U.S. Current Account Balance
Percent of GDP

0
-1
-2

2012
-3
2011
-4
2010
-5

1/22 3/12 4/22

6/17 8/6 9/16 10/29 12/9 1/20 3/10 4/21
2009

6/16 8/4 9/15 10/27 12/8 1/19
2010

Tealbook publication date

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3/9 4/20

6/15 8/3 9/14 10/27 12/7
2011

-6

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2010

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Financial Developments
U.S. financial markets were buffeted over the intermeeting period by a number of
developments regarding the fiscal situation in the United States and Europe and by
readings on domestic economic activity that were almost uniformly disappointing. For
most of July, investor sentiment mainly swung in response to news about the severity of
the European sovereign debt crisis, alternating between disappointment and relief. Later
in the period, market participants focused on the debate over the U.S. fiscal situation, and
as the wrangling dragged on and the apparent deadline for raising the debt ceiling neared,
investors became increasingly anxious. For a time, a number of money markets exhibited
significant strains, and there was a surge in the level of domestic bank deposits, sizable
declines in equity prices, and some pullback in the provision of credit to both the business
and household sectors. The strains in U.S. money markets eased notably in response to
the legislation to raise the debt ceiling and cut the federal budget deficit that was signed
into law on August 2. Nonetheless, investors’ concerns about the long-term fiscal
outlook in the United States and Europe persisted, particularly in light of the apparent
slowing in global economic activity, and stock prices and Treasury yields dropped.

sense of pessimism regarding the prospects for global economic growth. Broad U.S.
equity price indexes ended the period down about 3 percent. Interest rates declined
markedly—the 2-year nominal Treasury yield decreased 9 basis points, the 10-year
Treasury yield declined 34 basis points, and the 10-year TIPS yield dropped 53 basis
points. Moreover, the expected path for the federal funds rate flattened substantially,
with Eurodollar futures rates two years hence down about 60 basis points. The foreign
exchange value of the dollar declined about 1 percent on net.

EFFECTS OF SOVEREIGN FISCAL STRESSES ON U.S. FINANCIAL MARKETS
For much of the intermeeting period, investors’ concerns about the fiscal situation
in Europe were a major driver of U.S. asset prices. In late June, relief was evident in
financial markets when Greece appeared to have narrowly avoided a disorderly default.
However, over the first half of July, investors generally pulled back from riskier assets as
scrutiny of sovereign funding needs in the euro area intensified and concerns about Italy
and Spain ratcheted up. Later in July, the retreat from risk-taking abated in reaction to

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Financial Developments

On balance over the intermeeting period, financial markets reflected a growing

Financial Developments

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the agreement reached among European leaders on July 21 to provide assistance to
financially vulnerable European countries. But concerns about the fiscal situation in
Europe resurfaced amid signs of a slowdown in global activity. Further analysis of the
imprint that these events left on U.S. financial markets over the intermeeting period is
presented in the box “The European Fiscal Crisis and U.S. Asset Prices.”
In late July, investors’ focus turned to the debate over raising the U.S. debt ceiling
and the potential for delayed or missed debt service payments by the Treasury
Department, the possibility of a downgrade of U.S. sovereign debt, and the prospects for
significant longer-term fiscal consolidation. Up until the last week in July, these
concerns were not especially evident in financial markets. But investor sentiment
changed markedly that week, and short-dated CDS premiums on Treasury debt climbed.
At the same time, against the backdrop of investors’ continuing anxiety about European
exposures, outflows from institutional money market mutual funds (MMMFs) ramped up,
accumulating to about 8 percent of institutional taxable MMMF assets. Amid surging net
outflows, fund managers reportedly shortened their investment maturities, pulled back
from investing in some money markets, and increasingly chose to park cash at their
custodian banks.

deteriorated for a time. Interest rates on a host of short-term funding instruments—
including federal funds, yields on short-dated Treasury bills, repurchase agreements
backed by general collateral (GC repos), agency discount notes, and commercial paper—
increased markedly.1 Markets for secured funding backed by government-issued or
government-guaranteed collateral were the most affected, as evidenced by elevated bidasked spreads on GC repos at a range of tenors, including overnight, and a sharp decline
in transactions volume. The spreads between Libor and overnight index swap (OIS) rates
increased at one- and three-month horizons but remained within their recent ranges, while
spreads between forward rate agreements and OIS rates rose, and euro Libor–OIS spreads
1

The effective federal funds rate averaged 8 basis points over the intermeeting period, with the
intraday standard deviation averaging about 4 basis points. Late in the period, federal funds traded in the
high end of their recent range, and the daily effective rate touched 17 basis points on August 1, a rate not
seen since March.
In contrast to the conditions in Treasury bill markets, yields on 10- and 30-year nominal Treasury
securities declined over the same time frame, and liquidity in the markets for longer-term Treasury
securities generally remained robust. Partial and confidential data on custody accounts at the Federal
Reserve Bank of New York show a slight pickup in U.S. Treasury holdings by foreign official investors in
July.

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Reflecting these developments, liquidity and functioning in money markets

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The European Fiscal Crisis and U.S. Asset Prices

Financial Developments

The intensification of the European sovereign debt crisis over the intermeeting
period exacerbated conditions in some U.S. financial markets. Most notably, the
U.S. commercial paper (CP) market experienced substantial strains as money
market funds reportedly increased their cash positions and sought to decrease
exposures to CP issued by entities with less‐than‐stellar credit. As concerns over
the European crisis worsened, the level of U.S. CP outstanding from institutions
with European parents contracted substantially. Although these slides have
been something of an ongoing trend in recent months, the intermeeting declines
of some issuers with parents from core European countries were much steeper
than in previous months (see top‐left panel on the facing page). In particular, the
CP outstanding of a few large French banks contracted sharply after Moody’s
placed the banks on watch for credit rating downgrades. Moreover, the share of
CP issuance accounted for by tenors of four days or less increased markedly for
European issuers.
To date, price adjustments in the CP market have generally been orderly. The
market exhibited increased rate tiering, with spreads on paper issued by
institutions with Italian and Spanish parents widening to levels that prevailed last
summer (see top‐right panel on the facing page). However, spreads on paper
issued by institutions from other European nations remained generally low. A
similar pattern was evident in the federal funds market (not shown), where
affected European banks experienced higher borrowing costs than their peers.
Developments in Europe also affected U.S. financial markets more broadly. As
indicated by the negative covariance between the change in the average
sovereign credit default swap (CDS) premium of the most debt‐burdened
European countries and the daily percentage change in the S&P 500 stock price
index (see middle panel on the facing page), on many days during the
intermeeting period, U.S. equity prices fell when concerns about the European
sovereign debt crisis intensified and rose when they eased. The effect was even
more apparent for the equity prices of firms in the financial sector, presumably
due to concerns about the exposure of U.S. financial firms to European entities.
Similarly, as indicated by the negative covariance between sovereign CDS
spreads and changes in the yield on the 10‐year Treasury note, Treasury yields
were buffeted by flight‐to‐quality inflows and outflows in response to investors’
changing sentiment regarding the fiscal situation in Europe (see bottom panel on
the facing page).

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and euro–dollar implied basis spreads also increased. In addition, investors in
commercial paper markets began to require noticeably shorter maturities and higher
interest rates, even for large, highly rated nonfinancial corporations. Conditions eased
noticeably once the agreement in the Congress was enacted, as Treasury bill yields and
other money market interest rates generally declined, transactions volumes increased,
outflows from MMMFs abated, and fund managers reportedly began working down their
stockpiles of cash.2 By contrast, conditions in European money markets remained
relatively strained.

POLICY EXPECTATIONS AND TREASURY YIELDS
Over the intermeeting period, interest rates seesawed in response to news
regarding the fiscal situation in the United States and European, as well as incoming U.S.
economic data. On net, nominal Treasury yields declined between about 10 and 35 basis
points across the yield curve. Market-based measures of uncertainty about long-term
Treasury yields increased for a time but then fell back. The on-schedule completion of
the Federal Reserve’s Treasury purchase program on June 30 appears to have had little
effect on Treasury yields.3

Financial Developments

Both market- and survey-based expectations for the path of monetary policy
shifted down significantly beyond mid-2012. The mean path of the federal funds rate
implied by current futures quotes (with the usual staff assumptions for term premiums)
rises above the current target range in the third quarter of 2013, three quarters later than
observed at the time of the June FOMC meeting. Quotes on interest rate caps suggest
that the modal path of the federal funds rate also declined over the period, although by a
much smaller amount.4 According to the Open Market Desk’s latest survey, primary

After the close of markets on August 2, Moody’s Investors Service and Fitch Ratings affirmed
their AAA credit ratings for the United States but warned that downgrades were possible if the Congress
fails to enact debt reduction measures.
3
The Open Market Desk completed its purchases of $600 billion of longer-term Treasury
securities under the second large-scale asset purchase program, which was announced by the FOMC at its
November 2010 meeting. Since November 12, 2010, the Desk has purchased a total of $784 billion of
Treasury securities, reflecting $600 billion of purchases under the second asset purchase program and
$184 billion of purchases associated with the reinvestment of principal payments on Federal Reserve
holdings of agency MBS and agency debt. The Desk also continued its existing policy of rolling over
maturing Treasury securities.
4
The modal path does not incorporate the staff’s usual adjustment for term premiums because
doing so would lead to some negative values. Term premiums may currently be unusually low, reflecting
investors’ confidence that policy will remain on hold for some time.

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dealers pushed out the timing for policy liftoff to around the end of 2012, about two
quarters later than at the time of the June survey.
Regarding other results from the dealer survey, most respondents expect the
upcoming FOMC statement to recognize recent economic weakness and to further
downgrade the Committee’s outlook for economic growth. Dealers revised down
significantly their forecasts of real GDP growth in 2011—to an average of 1.9 percent
from 2.8 percent at the time of the June survey. They also revised down their growth
forecasts for 2012 and 2013, but by considerably less. Regarding their inflation forecasts,
the dealers marked up slightly their forecasts of core PCE inflation for 2011 and 2012
and revised down their forecasts for 2013 a little, while their forecasts of longer-term CPI
inflation, and the reported uncertainty about those forecasts, were little changed.
Indicators of inflation expectations were mixed over the intermeeting period.
TIPS-based measures of inflation compensation over the next 5 years and 5 to 10 years
ahead increased about 25 basis points, roughly reversing their declines over the previous
intermeeting period. Both measures rose notably in late June when earlier safe-haven
demands for nominal securities were likely reversing. More recently, the release in midJuly of a second consecutive higher-than-expected increase in core CPI, as well as some
Financial Developments

technical factors, reportedly contributed to the rise in these measures. By comparison,
swaps-based measures of inflation compensation, which are much less affected by factors
related to nominal Treasury markets, were little changed. Survey measures of inflation
expectations have generally moved down in recent months. In the Michigan survey, the
median measure of shorter-term inflation expectations has declined 60 basis points since
the time of the June FOMC meeting, and the longer-term measure has edged down
10 basis points on net.

ASSET MARKET DEVELOPMENTS
Broad stock price indexes declined about 3 percent, on net, over the intermeeting
period, as generally strong second-quarter earnings reports appeared to be overshadowed
by growing concerns about the macroeconomic outlook. Stock price movements were
also influenced over the period by bouts of anxiety regarding the fiscal situation in the
United States and Europe. Equity prices of banks and other financial firms declined
roughly as much as the broader market, and CDS premiums for larger banking
institutions were not much changed on net. Option-implied volatility on the S&P 500
index rose notably.

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The staff’s estimate of the spread between the expected real equity return for the
S&P 500 index and the real 10-year Treasury yield—a gauge of the equity premium—
edged up over the intermeeting period from already substantial levels by historical
standards. Spreads on both BBB-rated and speculative-grade corporate bonds relative to
comparable-maturity Treasury securities changed little, on net, although spreads on
speculative-grade issues increased some late in the period. Secondary prices for
syndicated leveraged loans were also little changed. As noted earlier, conditions in
commercial paper markets deteriorated for a time late in the period. The yields on
A2/P2-rated nonfinancial unsecured commercial paper and AA-rated asset-backed
commercial paper ended the period up a bit, on net, amid the significant outflows from
MMMFs.
Hedge funds reported modest positive returns in the aggregate during the
intermeeting period. Nevertheless, these institutions appear to have remained quite
cautious, further reducing leverage. Investment flows to hedge funds in the second
quarter occurred at about the same solid pace as in the preceding quarter.

FOREIGN DEVELOPMENTS

Financial Developments

Swings in investors’ concerns about fiscal stresses in Europe were the dominant
driver of asset prices in foreign markets over the intermeeting period. Sovereign spreads
over German bunds for Greek, Irish, Portuguese, Spanish, and Italian sovereign debt rose
to their highest levels since the adoption of the euro. Markets were temporarily reassured
in late June by the passage of Greek austerity measures and again by an announcement on
July 21 following a summit of European leaders that there would be additional official
financing for Greece; easier terms on official lending to Greece, Ireland, and Portugal;
and a plan for private creditor rollovers of Greek debt. However, on net over the period,
peripheral European sovereign spreads narrowed appreciably only for Greek debt.
Notably, Italian and Spanish sovereign spreads have soared to almost 400 basis points
despite approval by the Italian Parliament on July 15 of austerity measures that would
balance the government budget by 2014.
On balance over the period, equity prices in the euro area dropped 9 percent, and
euro-area bank stocks declined substantially more, as concerns about banks’ exposure to
peripheral debt lingered and incoming economic data were lackluster. Market reaction to
the release on July 15 of the European Banking Authority’s stress tests of European
banks was muted. (See the box “Summary of the 2011 European Union–Wide Bank

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Summary of the 2011 European Union–Wide Bank Stress Test
One key factor keeping financial markets on edge since the beginning of the
fiscal crisis in the euro‐area periphery has been uncertainty about the underlying
strength of European banks and their vulnerability to sovereign default. To help
allay that concern, the European Union (EU) began conducting stress tests of its
banking system. Although the test results released last year improved
confidence for a time, this confidence unwound as several Irish banks that had
passed the test subsequently required large government injections of capital.

Financial Developments

On July 15 of this year, the European Banking Authority (EBA) published the
results of its 2011 EU‐wide stress test. The results were drawn from a test of
90 of the largest banks, which hold 65 percent of the total assets of the EU
banking sector. Under the test’s adverse scenario, eight banks—five Spanish,
two Greek, and one Austrian—failed to meet the benchmark of 5 percent core
Tier 1 capital to risk‐weighted assets. The aggregate capital shortfall of the failing
institutions totaled only €2.5 billion, a manageable sum given the substantial
resources of the EU as a whole.
Although market analysts were surprised by the relatively low capital shortfall
this year, the results do not appear to reflect any obvious leniency on the part of
the EBA. The assumptions used in the stress test, including those on
macroeconomic performance and banks’ profits and losses, appear generally
credible. The relatively modest capital shortfall was due, in part, to the
successful efforts of the banks to strengthen their capital positions in the run‐up
to the test: EU banks raised €46 billion of capital from January through the end
of April 2011.
The EBA also implemented a number of improvements in the 2011 test. Banks
were asked to assess the effect of heightened sovereign risk on the sovereign
exposures not only in their trading books, as in last year’s test, but also in their
banking books, where most such exposures are held. Additionally, this year the
EBA applied a more stringent capital benchmark of a 5 percent core Tier 1 ratio
(CT1R), which excludes all hybrid capital instruments except those injected by
governments in response to the financial crisis.1 This year’s test also included a
month‐long peer review by the EBA, the European Systemic Risk Board, the
European Central Bank, and national supervisory authorities that resulted in
greater consistency of banks’ submissions. Finally, the disclosure of banks’
sovereign and private sector exposures and components of bank capital was
significantly enhanced, allowing market participants to make their own
evaluations of banks’ capital adequacy.

The benchmark in last year’s test was a 6 percent Tier 1 capital ratio. This year’s
benchmark is generally more stringent, despite the lower threshold, because many European
banks include significant amounts of hybrid instruments in their Tier 1 capital.

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As the above exercise suggests, the capital positions of some institutions, while
sufficient for the benchmark, remain vulnerable. Recognizing this vulnerability,
the EBA made two main recommendations to further strengthen banks’ capital
positions: (1) Banks that fell below the 5 percent CT1R benchmark under the
adverse scenario should develop a plan before mid‐October 2011 to strengthen
their capital positions and take action by the end of 2011, and (2) banks that
narrowly exceeded the 5 percent CT1R and have sizable exposure to the
sovereigns under stress should also develop a plan before mid‐October 2011 to
strengthen their capital positions and take action by April 2012. (Sixteen banks,
also concentrated in the periphery, fell between 5 percent and 6 percent CT1R.)
Although more capital raising by EU banks is needed, the EBA has no direct
authority over the banks. Given that few banks “failed” the test, it seems
unlikely that the test itself will spur banks to raise more capital. It is left to
national authorities to compel banks to comply with the EBA’s recommendations
and to establish bank recapitalization facilities at the national level that are
accessible under a range of circumstances. In addition, EU‐wide mechanisms to
support vulnerable countries in these recapitalization efforts may be helpful. The
decision at the July 21 summit has made the European Financial Stability Facility
better able to provide such support, although sufficient funding for the facility to
carry out its tasks has yet to be arranged.

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Financial Developments

Although the 2011 stress test assumed moderate haircuts on sovereign debt held
by banks, it did not assume an explicit sovereign default. Using data on
sovereign debt holdings released by the EBA, the Board staff analyzed the
implications of default on Greek debt, applying haircuts to the trading book that
are double those considered under the adverse scenario and allowing for a
40 percent recovery rate on holdings in the banking book. Across all 90 banks
covered by the stress test, we estimated about €44 billion in total losses
assuming such a default. In addition, we estimated that a total of 16 banks
(8 banks in addition to the 8 that failed under the EBA’s test) would fall short of
the 5 percent CT1R benchmark, resulting in an additional €25 billion capital
shortfall—a material but manageable sum, we think, given the EU’s resources.
Most of the banks requiring additional capital would be Greek. No additional
core European banks would see their CT1R fall below 5 percent, but some would
experience sizable losses. Notably, the four large French banks in the test would
have total losses of €7 billion, which is about 4 percent of these banks’ aggregate
core Tier 1 capital. If the sovereign debt of another peripheral country—
especially Italy or Spain—were also to suffer a default, bank losses would be
considerably larger.

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Stress Test.”) Headline equity prices for other major advanced foreign economies were
flat to down, except in Japan, where surprisingly strong economic data boosted prices
4 percent. German and U.K. 10-year government bond yields declined more than
40 basis points over the intermeeting period, reflecting concerns about the prospects for
economic growth, related expectations of slower monetary policy tightening, and
possibly some safe-haven flows prompted by developments in peripheral Europe.
The softer outlook for economic activity prompted market-based measures of
expected future ECB and Bank of England policy rates to decline relative to their levels
at the time of the June FOMC meeting. In contrast, higher inflation prompted central
banks in the emerging market economies (EMEs) to continue to withdraw the monetary
stimulus that they had provided in the wake of the financial crisis. In particular, the
People’s Bank of China continued to tighten monetary policy, increasing its policy rates
during the period another 25 basis points. The central banks of Brazil, Colombia, India,
Taiwan, and Thailand also tightened monetary policy over the period. Partly as a result, a
number of EME currencies rose sharply against the dollar, and the governments of China,
Brazil, and Korea took further steps to limit capital inflows and credit growth.
The broad nominal index of the foreign exchange value of the dollar declined
Financial Developments

1 percent, on net, over the period. The dollar was up 1¼ percent against the euro but
declined against other major currencies. The protracted U.S. debt ceiling negotiations
appeared to weigh on the dollar for a time toward the end of the period, but the dollar
appreciated somewhat following the announcement of the deal to raise the debt limit.
Demand by foreign official investors for U.S. assets fell back in May and June,
with official investors in Latin America and Asia both contributing to the decline. These
investors acquired Treasury securities at a slower pace in May and made no net purchases
in June, and they continued to shed long-term agency securities. Foreign private
investors sold Treasury securities and corporate bonds, on net, in the second quarter but
made moderate purchases of U.S. equities.

BUSINESS FINANCE
Conditions in markets for business finance generally remained robust through the
second quarter, but investors’ appetite for risk appeared to cool some in July as incoming
data pointed to a weaker outlook for economic activity. The pace of net debt financing
by nonfinancial corporations was solid in July, although a bit below its elevated second-

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quarter pace. The rate of gross bond issuance fell, as some firms reportedly were
reluctant to issue bonds amid heightened uncertainty about prospects for economic
growth, and C&I loans on banks’ books were about flat. Nonfinancial commercial paper
outstanding posted a sizable gain in July, reflecting issuance from a handful of large
corporations. (As noted earlier, MMMFs pulled back from investments in commercial
paper in late July on concerns about the approaching debt limit.)
Issuance of syndicated leveraged loans remained strong last quarter, reportedly
due to continued refinancing activity, but activity appears to have slowed some in recent
weeks. Indeed, investors appear to have become more cautious of late, requiring greater
compensation for risk, and recent deals have embodied wider spreads and moreconservative structures, especially for lower-rated borrowers.
Gross public equity issuance by nonfinancial firms weakened in July from its
solid second-quarter pace, though a steady stream of firms continued to tap equity
markets through IPOs. Net equity issuance is projected to have remained deeply negative
in the second quarter, as share repurchase volumes and cash-financed merger activity
continued to be robust. The calendar of mergers and new repurchase programs suggests

Financial Developments

that net equity issuance will remain deeply negative in the third quarter.
With the bulk of second-quarter earnings reports in hand and private-sector
analysts’ estimates for the rest, the staff estimates that aggregate operating earnings per
share for firms in the S&P 500 index largely beat analysts’ expectations, even though
aggregate earnings are estimated to have fallen a bit relative to the first quarter. The
decline in profits was concentrated in the financial sector, due in large part to a costly
mortgage-related legal settlement at a large banking institution (see note 6). In contrast,
the earnings of nonfinancial corporations grew at a rapid 5 percent quarterly rate, with
nearly all of the gains accounted for by large internationally active firms. Despite the
strong results, analysts’ forecasts for nonfinancial firms were not revised appreciably,
possibly reflecting a view that the recent gains may not be sustained.
The credit quality of nonfinancial corporations remained solid. The latest
available data showed that these firms’ aggregate ratio of debt to assets edged down a bit
further in the first quarter, and their liquid-asset ratio remained near its highest level in
over 20 years. Moody’s Investors Service’s ratings upgrades of corporate bonds of
nonfinancial companies continued to outpace downgrades substantially in July, and the
six-month trailing bond default rate for nonfinancial firms inched closer to zero in June.
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Commercial real estate markets remained weak, and despite a few signs of
stabilization in the first half of the year, conditions appeared to worsen somewhat in July.
Available data for the second quarter indicate that commercial mortgage debt contracted
again, prices of most commercial properties remained depressed, and issuance of
commercial mortgage-backed securities (CMBS) slowed somewhat. The delinquency
rate in June for loans that back existing CMBS stayed below its recent peaks, and
vacancy rates for commercial properties generally continued to edge lower. In July,
however, investors appeared to demand more compensation for risk, and they exhibited
some resistance to the recent decline in credit support in new deals. Renewed uncertainty
about credit rating agency criteria for rating new deals cast a further pall on the market.

HOUSEHOLD FINANCE
Residential mortgage interest rates and yields on current-coupon agency MBS
declined, on net, over the intermeeting period and remained at low levels. The low rates
supported mortgage refinancing activity that was, on average, higher than that seen
earlier this year, although such activity nonetheless stayed subdued because of tight
underwriting standards and low levels of home equity.

quarter of 2011. Amid a large inventory of unsold properties and tight mortgage
underwriting standards, the CoreLogic repeat-sales house price index fell in June for the
13th consecutive month, reaching its lowest level since the spring of 2003. Rates of
serious mortgage delinquency—defined as the percentage of mortgage loans that are
90 days past due or in foreclosure—continued to moderate but remained high, in part due
to persistent delays in the foreclosure process. The rate of new delinquencies on prime
mortgages had been declining but has flattened out in recent months at an elevated level.
On the whole, conditions in consumer credit markets continued to gradually
improve. Consumer credit increased at an annual rate of 2½ percent in May, as both
nonrevolving and revolving credit posted gains. Consumer credit ABS issuance
continued apace in July, although some deals later in the month were postponed a few
days while issuers awaited the outcome of the debt ceiling deliberations. Delinquency
rates for various types of consumer debt receded further in recent months, with some
rates back to levels not seen since the recession began. However, the decline in these
rates partly reflects tighter underwriting standards that have restricted access to credit for
borrowers with weaker credit histories.

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Residential mortgage debt is estimated to have contracted further in the second

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GOVERNMENT FINANCE
Despite investors’ angst regarding federal fiscal conditions, the Treasury issued
about $264 billion of nominal coupon securities across the maturity spectrum and
$20 billion of TIPS during the intermeeting period. The amounts issued of the nominal
securities were consistent with past auctions, while issuance sizes of TIPS continued their
steady expansion. With sentiment about sovereign fiscal conditions in Europe
improving, demand at auctions of nominal Treasury securities in the end of June was
lackluster, but auctions later in the intermeeting period were generally well received.
TIPS auctions over the period reflected continued strong demand for inflation protection.
Investors remained concerned about the financial health of state and local
governments over the intermeeting period. Although issuance of municipal bonds picked
up slightly in July, it remained sluggish by historical standards. In addition, in mid-July,
Moody’s placed the AAA credit ratings of five states on watch for downgrades, citing the
financial vulnerability of these states to a federal government downgrade. CDS spreads
on the debt of these and some other AAA-rated states increased a bit over the
intermeeting period. Yields on long-term general obligation bonds changed little, on net,
and their ratios to yields on comparable-maturity Treasury securities—a gauge of
elevated.

COMMERCIAL BANKING AND MONEY
Core bank loans, which include C&I, real estate, and consumer loans, were flat,
on net, over the months of June and July, as a slowdown in lending to businesses was
offset by a notable pickup in loans to households.5 Indeed, after running off for several
quarters, consumer loans on banks’ books expanded solidly in June and July, as both
credit card and other consumer loans increased significantly. In addition, following
several months of contraction, closed-end residential real estate loans increased slightly
over the period, although home equity loans continued to decline at a moderate pace. In
contrast, after posting sizable increases earlier in the year, C&I loans expanded only
modestly in June and were about flat in July. Commercial real estate loans continued to
run off.

At the close of this Tealbook, Book A, the weekly bank balance sheet data were available
through July 20.

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investors’ assessment of the relative risk of municipal bonds—edged down but remained

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The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in
July indicated that banks again eased lending standards to some degree on all major loan
types other than residential real estate loans. Even so, in response to a special question,
banks indicated that the current level of their lending standards was moderate to
relatively tight—for all loan types, at least two-thirds of respondents reported that their
lending standards were at or tighter than the middle of the range that has prevailed since
2005. In addition, modest fractions of respondents indicated an increase in demand for
business loans, while reported changes in demand were mixed across consumer lending
categories. (See the appendix on the survey at the end of this section.)
Banks shed Treasury securities, on balance, over June and July, with the sales
concentrated at a handful of large domestic banks. These banks’ holdings are relatively
volatile, and the activity does not appear to have been related to concerns about the debt
ceiling. Indeed, banks’ holdings of Treasury securities rose for a time in mid-July. In
recent months, growth in banks’ total assets has been accounted for mainly by U.S
branches and agencies of foreign banks, which reportedly continued to build up their
dollar cash reserves instead of sending funds to their related foreign offices abroad—a
pattern that has prevailed for several months. On the funding side of banks’ balance
sheets, several large domestic banks saw a substantial rise in deposits late in the period

Large banking companies reported second-quarter earnings in July, and nearly all
reports exceeded expectations at least slightly.6 Banks continued to report that
improvements in asset quality supported substantial reductions in loan loss reserves,
though weaker net interest margins offset these gains in part. Many banks, but
particularly the largest ones, anticipated that profitability will come under pressure in
coming quarters from mortgage repurchasing costs, litigation expenses, and lower debit
fee revenues.
M2 expanded at an average annual rate of about 18 percent over June and July,
the fastest pace since the period following the collapse of Lehman Brothers and a marked
acceleration from the 5½ percent average growth rate over the first five months of the

One significant exception was the large loss reported by Bank of America, which reached an
$8.5 billion settlement of mortgage repurchase claims related to loans originated by its Countrywide unit.
Following the loss, some market commentators expressed concern about the bank’s ability to meet Basel III
regulatory capital requirements without raising external capital.

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(discussed later).

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year.7 The rapid growth of M2 was driven by sizable increases in liquid deposits over the
intermeeting period that were due primarily to three special factors. First, the parent
holding company of one large bank transferred a substantial portion of deposits it held
abroad (and so not included in M2) to its large domestic bank in June, reportedly in order
to obtain more-favorable treatment under the FDIC’s new risk-based insurance
assessment rules.8 Second, as noted previously, investors reportedly reallocated some of
their assets out of institutional MMMFs and into demand deposits over the period
because of concerns about the funds’ exposures to U.S. government debt and to European
banks. These investors reportedly viewed demand deposits as having a higher riskadjusted return in light of the unlimited FDIC insurance currently available on
noninterest-bearing transaction accounts.9 Third, as also noted earlier, MMMFs
reportedly began placing substantial amounts of cash in demand deposits at their
custodian banks at the end of July to position for the possibility of heavy redemptions in
the event of an impasse over the debt ceiling.
Retail MMMFs expanded in June and July, driven by growth in Treasury-only
funds. Small time deposits continued to run off unabated as yields on CDs remained
extremely low. Currency growth moderated in June and July but remained robust. The
monetary base continued to expand briskly in June, supported by increases in reserve
Financial Developments

balances as the Open Market Desk completed the Committee’s $600 billion large-scale
asset purchase program; growth in the monetary base dropped back in July. (See the box
“Balance Sheet Developments over the Intermeeting Period.”)

At the close of this Tealbook, Book A, deposit data used to construct the M2 monetary aggregate
were available through July 25, and MMMF data used to construct M2 were available through July 27.
8
This activity accounted for an estimated 4¾ percentage points of the 18 percent average annual
growth in M2 over June and July. This activity is not expected to affect M2 growth going forward.
9
Effective with the July 21, 2011, repeal of Regulation Q that was required by the Dodd–Frank
Wall Street Reform and Consumer Protection Act, financial institutions are permitted to pay interest on
demand deposits. The FDIC’s unlimited deposit insurance on noninterest-bearing transaction accounts
does not apply to demand deposits that earn interest.

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Balance Sheet Developments over the Intermeeting Period
Over the intermeeting period, total assets of the Federal Reserve increased $15 billion
to about $2,870 billion (see table on the facing page). Net purchases of Treasury
securities associated with the Federal Reserve’s second large‐scale asset purchase
program (LSAP) more than accounted for the increase in total assets.

Financial Developments

Since the most recent FOMC meeting, the Open Market Desk at the Federal Reserve
Bank of New York (FRBNY) conducted 14 permanent operations, purchasing
$43 billion in longer‐term Treasury securities.1 The last operation associated with the
second LSAP occurred on June 30. Since June 30, the Desk’s 0perations have been
conducted based on the FOMC’s existing policy of reinvesting principal payments
from its securities holdings.
Other asset categories generally declined over the intermeeting period. Loans
outstanding under the Term Asset‐Backed Securities Loan Facility (TALF) decreased
about $1 billion as a result of prepayments and principal payments; these outstanding
loans totaled $12 billion at the end of the period. On June 29, the Federal Reserve and
other central banks announced an extension of the foreign central bank liquidity swap
arrangements from August 1, 2011, to August 1, 2012. Foreign central bank liquidity
swaps remained at zero. Finally, the net portfolio holdings of all three Maiden Lane
LLCs declined, generally reflecting sales and maturities of underlying securities. On
June 30, the sales of Maiden Lane II assets were suspended due to the deterioration in
market conditions for non‐agency RMBS.
On the liability side of the Federal Reserve’s balance sheet, Federal Reserve notes in
circulation increased $9 billion over the intermeeting period. The U.S. Treasury’s
General Account balance, which is highly volatile from month to month, declined
$68 billion on net. In order to provide greater flexibility in the conduct of its debt
management policy, the Treasury reduced the Supplementary Financing Account
balance from $5 billion to zero. Reserve balances of depository institutions increased
$23 billion, with the rise again concentrated at U.S. branches and agencies of foreign
banks.
The Federal Reserve continued its program of conducting regular auctions of term
deposits, with $5 billion of 28‐day term deposits auctioned in late July. In addition, on
July 27, the FRBNY announced the expansion of its reverse repurchase transaction
counterparties to include Fannie Mae and Freddie Mac. Moreover, the eligibility
criteria for banks and savings associations to serve as counterparties for reverse
repurchase agreement transactions were released to the public on July 28.

Over the intermeeting period, $44 billion in Treasury securities purchases settled on the
balance sheet, and agency debt and MBS holdings declined $23 billion.

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Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices

Domestic banks further eased standards on C&I loans to firms of all sizes over the past
three months. The net fraction of banks reporting easing on loans to smaller firms remained
relatively low and below the net fraction reporting easing for large and middle-market firms. 3 On
net, domestic banks and branches as well as agencies of foreign banks (hereafter foreign banks)
indicated that they had eased most terms on C&I loans over the survey period, and the reported
easing was especially pronounced for price-related terms. As in the past several surveys, the
most commonly cited reason for easing standards or terms on C&I loans was increased
competition from other lenders. As in the April survey, modest net fractions of domestic and
foreign banks reported an increase in demand for C&I loans over the past three months.
Domestic banks indicated that standards on both commercial and residential real estate
loans were about unchanged over the past three months. On net, about 10 percent of respondents
indicated that they had eased standards on home equity lines of credit. The net portion of
domestic respondents indicating an increase in demand for CRE loans in the current survey

The July 2011 survey addressed changes in the supply of and demand for loans to businesses and
households over the past three months. This appendix is based on responses from 55 domestic banks and
21 U.S. branches and agencies of foreign banks. Respondent banks received the survey on or after
July 12, 2011, and responses were due by July 26, 2011.
2
For questions that ask about lending standards or terms, reported net fractions equal the fraction
of banks that reported having tightened standards minus the fraction of banks that reported having eased
standards. For questions that ask about demand, reported net fractions equal the fraction of banks that
reported stronger demand minus the fraction of banks that reported weaker demand.
3
Large and middle-market firms are generally defined as firms with annual sales of $50 million
or more and small firms as those with annual sales of less than $50 million.

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The July Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that,
on net, banks continued to ease lending standards and most terms on all types of loans other than
loans secured by real estate over the past three months. 1 Modest net fractions of respondents
noted an increase in demand for business loans over the same period; at the same time, banks
reportedly experienced, on net, slightly weaker demand for residential real estate loans.2 In
response to a special question, most banks indicated that they expected originations of residential
real estate loans in the second half of 2011 to stay about the same as in the first half of the year.
Responses to another special question about the levels of lending standards indicated that the
current levels of lending standards were at or tighter than the middle of their recent historical
range for commercial and industrial (C&I) and commercial real estate (CRE) loans. Respondents
generally indicated that standards were tighter than the middle of their historical range for
residential real estate and consumer loans, though the reported degrees of tightness varied
noticeably across loan categories.

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declined in comparison with the April survey, but it remained comfortably in positive territory.
In contrast, small net fractions of respondents indicated that demand for both prime and
nontraditional residential real estate loans as well as for home equity lines of credit had weakened
or remained basically unchanged.
With respect to consumer lending, the net percentages of banks that reported easing
standards were low and roughly in line with the previous survey. While positive net fractions of
respondents reportedly experienced an increase in demand for both credit card and auto loans
over the past three months, the pickup in demand was not widespread; moreover, demand for
other consumer loans was about unchanged.

LENDING TO BUSINESSES

The net fraction of domestic banks that indicated that they had eased standards on C&I
loans to large and middle-market firms rose slightly to around 20 percent. On net, fewer
domestic banks indicated an easing of standards on loans to smaller firms, with only about
10 percent of respondents noting that standards for such firms had eased. On balance, domestic
banks eased all of the listed terms on C&I loans to large and middle-market firms, with the most
sizable net fractions of respondents reporting easing on price terms such as the spread of loan
rates over the bank's cost of funds, the use of interest rate floors, and the cost of credit lines.
Domestic survey respondents also indicated some easing of loan terms for smaller firms, though
the reported easing was less widespread than for loans to larger firms. For standards and for most
terms on C&I loans, reported easing among domestic survey respondents was concentrated at
large banks. 4 At foreign banks, almost all respondents indicated that standards on C&I loans had
remained basically unchanged, though between 5 and 35 percent of foreign banks reported easing
various C&I loan terms on balance.
Among both domestic and foreign banks that had eased standards or terms on C&I loans,
the most commonly cited reason for doing so was increased competition from other lenders; this
has been the most commonly cited reason for easing standards and terms since mid-2009. A
number of domestic banks also pointed to a more favorable or less uncertain economic outlook as
an important reason for the change in their lending policies. The reasons that were most widely
cited by domestic banks that reported that they had tightened C&I standards and terms over the
past three months were a less favorable or more uncertain economic outlook, and increased
concerns about the effects of legislative changes, supervisory actions, or changes in accounting
standards.
A modest net fraction of domestic respondents indicated that demand for C&I loans from
large and middle-market firms had increased over the past three months, while the net fraction
that reported stronger loan demand from smaller firms remained positive but low. Most domestic
4

Large banks are defined as banks with assets greater than or equal to $20 billion as of March 31,
2011, and other banks as those with assets of less than $20 billion.

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banks that experienced a strengthening of demand cited a shift to bank borrowing from other
funding sources as an important reason for the change in demand, as well as to an increase in
customers’ inventory financing needs. About 15 percent of foreign banks reported in the July
survey that demand for C&I loans had increased on net.
A special question on the July survey asked respondents to describe the current level of
lending standards at their bank, rather than changes in standards over the survey period. For
several lending categories, including syndicated and nonsyndicated C&I loans, banks were asked
to describe the current level of standards relative to the range of such standards at their bank
between 2005 and the present. Weighting responses by banks’ C&I loans outstanding, between
45 and 70 percent of domestic respondents indicated that their bank’s current standards were near
the middle of that range, though the distribution of banks’ responses varied with credit quality
classification, syndication status, and borrower size. For all types of C&I loans, the fraction of
banks that reported that their current level of standards was tighter than the middle of its historical
range was roughly similar to the fraction of banks that stated standards were easier than the
middle of that range. For syndicated and nonsyndicated loans to large and middle-market firms,
between one-fourth and one-third of foreign banks described standards as near the middle of their
bank’s recent historical range. 5 One-half of foreign banks characterized their standards for
nonsyndicated loans to large and middle-market firms as tighter than the middle of their historical
range, while the corresponding percentages among foreign banks for syndicated loans and
nonsyndicated loans to smaller firms were somewhat lower.

For CRE lending, the net fraction of domestic banks that reported that standards had
eased over the past three months remained positive but close to zero, about the same as in the
previous two surveys. Though few domestic banks have reported a change in CRE standards
over the past year, the July survey’s special question revealed that standards for construction and
land development (CLD) loans, nonfarm nonresidential CRE loans, and for multifamily CRE
loans remain somewhat tight relative to their recent historical range. For all types of CRE loans,
about 50 percent of respondents on a weighted basis described the current level of standards at
their bank as tighter than the middle of the range that standards at their bank have occupied since
2005. Most of the remaining banks characterized standards as near the middle of that range, with
less than 10 percent of banks describing standards as easier than the middle of the range for each
CRE loan type. Nearly 20 percent of foreign respondents reported that their CRE lending
standards had eased, on net, over the past three months. Almost all foreign banks that responded
to the special question about the level of CRE lending standards indicated that the current level of
standards was at or tighter than the middle of its recent historical range for all types of CRE
loans.

Because of a lack of data, responses of foreign banks to special questions on C&I and CRE loans
are reported on an unweighted basis.

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On net, more than one-third of large domestic banks described demand for CRE loans as
having strengthened over the previous three months, while smaller banks indicated that demand
for such loans had remained about unchanged on net. At foreign banks, about 10 percent of
respondents noted an increase in demand. The reported increases in demand for CRE loans
occurred despite signs of continued distress in CRE lending markets, including elevated
delinquency rates, depressed property prices, and high vacancy rates.

LENDING TO HOUSEHOLDS
Questions on Residential Real Estate Lending
On net, banks reported that standards on residential real estate loans were little changed
for both prime and nontraditional loans.6 Similarly, only small net fractions of banks indicated a
change in demand for prime and nontraditional mortgages.

Another special question queried banks about whether they expected their originations of
residential real estate loans, which were quite weak over the first half of 2011, to increase or
decrease over the remainder of the year. About three-quarters of banks reported that they
expected their originations to remain at about the same level through the rest of 2011; the
remaining banks were split between respondents that expected an increase and those that
expected a decrease in originations. A follow-up question asked banks that did not expect any
increase why they anticipated their originations to remain flat or to decrease. All respondents to
this question cited reduced or unchanged demand from creditworthy borrowers and almost all
respondents pointed to unfavorable or uncertain forecasts for the broad economy and for house
prices. Another common but less frequently cited reason for the lack of expected expansion in
originations was increased concerns about the effects of legislative changes, supervisory actions,
or changes in accounting standards.

Questions on Consumer Lending
Moderate net fractions of banks reported an easing of their lending standards on
consumer loans over the past three months. For credit card loans and for consumer loans other
than credit card and auto loans, positive net fractions of banks reported an easing of standards, but
these fractions were less than 10 percent. For auto loans, the reported easing of standards was
more substantial, at nearly 20 percent. For all three consumer loan categories, the net fraction of
large banks reporting an easing of standards was greater than the corresponding fraction of other
6

Three banks responded to a question that asked about changes in standards on subprime
mortgage loans. Responses are not reported when the number of respondents is 3 or fewer.

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Across residential real estate loan categories, the fraction of banks that described their
standards as tighter than the middle of their bank’s recent historical range was about 90 percent or
greater, when weighted by banks’ holdings of residential real estate loans. For all residential real
estate loan categories, less than 5 percent of banks characterized their standards as easier than the
middle of their recent range.

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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

0
Prime
Nontraditional
Subprime

-20
1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

2009

-20
2011

Financial Developments

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

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

Percent

80
Prime
Nontraditional
Subprime

All residential

-20

-40

-60

-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

2009

2011

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

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banks. With respect to loan terms, banks eased some of the listed terms, on balance, but most
banks reported no change on most terms; in addition, the indicated easing was slightly more
widespread for auto than for other consumer loans.
When weighted by banks’ holdings of credit cards, auto loans, and other consumer loans,
responses to the special questions on the level of standards revealed that more than 50 percent of
respondent banks described their standards for auto loans as tighter than the middle of their range
from 2005 to date, while the corresponding percentages for credit card and other consumer loans
were around 90 percent.

Financial Developments

A moderate net fraction of banks reportedly experienced an increase in demand for auto
loans over the past three months. In contrast, the reported demand for credit card and other
consumer loans was about unchanged, on net.

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Risks and Uncertainty
ALTERNATIVE SCENARIOS
The central challenge that we confronted in putting the forecast together was how
to interpret the persistently disappointing pace of economic recovery thus far this year.
In the baseline, we attribute the weakness to a combination of persistent demand and
supply influences. In this section, we use simulations of staff models to sketch in greater
detail several alternatives to the baseline explanation of the recent weakness that would
result in markedly different economic outcomes over the next several years. In the first
scenario, the recent disappointing pace of recovery reflects even-more-persistent restraint
on aggregate demand from impaired balance sheets and other factors than is assumed in
the baseline, implying that the economy will expand only slightly faster than its potential
for several years. The second scenario builds on the first by recognizing the possibility
that such a protracted period of weakness could have adverse effects on labor supply,
thereby restraining future growth even further. In the third scenario, we interpret the
recent weakness in real activity as evidence that the supply side of the economy has
already been damaged more than we have judged, and that there is less slack now than
assumed in the baseline. In the fourth scenario, we assume that the recent weakness is
largely transitory, and that the self-correcting mechanisms that helped to stabilize the
economy during past recoveries are still operating with full force and will cause the
economy to snap back more quickly than in the baseline. Finally, we consider the
additional risk that Europe experiences a very severe bout of financial stress and
recession, with major spillover effects to the rest of the world. We generate the first four
scenarios using the FRB/US model and an estimated policy rule. The last scenario is
generated using the multicountry SIGMA model, which uses a different policy rule for
the federal funds rate. 1

One possible explanation for the disappointing pace of the recovery this year is
that balance sheet restructuring by households and businesses, financial institutions’
1

In the FRB/US simulations, the federal funds rate follows the outcome-based rule described in
the appendix on policy rules in Book B. In the case of SIGMA, its rule is broadly similar but uses a
measure of slack that is the difference between actual output and the model’s estimate of the level of output
that would occur in the absence of a slow adjustment in wages and prices.

Page 85 of 110

Risks & Uncertainty

More-Persistent Spending Weakness

Class II FOMC - Restricted (FR)

Authorized for Public Release

August 3, 2011

Alternative Scenarios
(Percent change, annual rate, from end of preceding period except as noted)

2011
Measure and scenario

Risks & Uncertainty

2012 2013 201415

Real GDP
Extended Tealbook baseline
More-persistent spending weakness
with supply-side corrosion
Greater supply-side damage
Faster snapback
Very severe financial stress in Europe

.9
.9
.9
.9
.9
.9

2.7
2.5
2.3
2.4
3.3
1.4

3.0
2.5
2.2
2.4
3.8
.0

3.7
2.6
2.3
2.8
4.2
2.9

4.0
3.4
3.1
3.1
3.3
4.6

Unemployment rate1
Extended Tealbook baseline
More-persistent spending weakness
with supply-side corrosion
Greater supply-side damage
Faster snapback
Very severe financial stress in Europe

9.1
9.1
9.1
9.1
9.1
9.1

9.2
9.2
9.3
9.1
9.1
9.4

8.5
8.7
8.8
8.3
8.0
9.8

7.5
8.2
8.5
7.5
6.6
9.3

5.7
7.1
8.0
6.5
5.2
7.0

Total PCE prices
Extended Tealbook baseline
More-persistent spending weakness
with supply-side corrosion
Greater supply-side damage
Faster snapback
Very severe financial stress in Europe

3.5
3.5
3.5
3.5
3.5
3.5

1.3
1.3
1.3
1.4
1.3
-.3

1.5
1.5
1.5
1.7
1.5
-.2

1.4
1.3
1.4
1.7
1.5
.8

1.6
1.3
1.5
1.9
2.0
1.6

Core PCE prices
Extended Tealbook baseline
More-persistent spending weakness
with supply-side corrosion
Greater supply-side damage
Faster snapback
Very severe financial stress in Europe

1.8
1.8
1.8
1.8
1.8
1.8

1.8
1.8
1.8
1.9
1.8
1.2

1.5
1.5
1.5
1.7
1.5
.3

1.4
1.3
1.4
1.7
1.5
.8

1.5
1.2
1.4
1.8
1.9
1.4

Federal funds rate1
Extended Tealbook baseline
More-persistent spending weakness
with supply-side corrosion
Greater supply-side damage
Faster snapback
Very severe financial stress in Europe

.1
.1
.1
.1
.1
.1

.1
.1
.1
.1
.4
.1

.1
.1
.1
.2
1.1
.1

.7
.1
.1
1.7
2.1
.1

3.2
.7
1.0
3.6
3.5
2.2

1. Percent, average for the final quarter of the period.

Page 86 of 110

Class II FOMC - Restricted (FR)

Authorized for Public Release

August 3, 2011

adjustments to more-stringent regulations, and other demand-related factors may be
weighing more heavily on borrowing and spending than we had anticipated. Similarly,
consumer sentiment—rather than gradually improving over time, as in the baseline—may
be caught up in an adverse dynamic in which pessimistic households continue to restrain
their spending, thereby holding back the pace of recovery and so ratifying their
pessimism. In this scenario, these factors restrain the growth of private spending and
employment over the next several years relative to baseline and also lead to
less-favorable financial conditions. In particular, the personal saving rate gradually rises
above 6 percent over the next few years, rather than remaining roughly flat at about
5 percent; capital spending expands about 3 percentage points more slowly per year
relative to baseline; and poorer earnings prospects and higher risk premiums push stock
prices about 10 percent below baseline by late next year. As a result, real GDP expands
only 2½ percent in 2012 and 2013 before slowly picking up to a 3½ percent pace by
2015. Improvements in labor market conditions are correspondingly slower to emerge
than in the baseline, and the unemployment rate is still 8¼ percent at the end of 2013. In
the face of such an anemic recovery, core inflation gradually moves down to 1¼ percent
and the federal funds rate stays near zero until mid-2015.
An important reason for the modest inflation response is our assumption that
inflation expectations remain well anchored. However, if expectations were to become
untethered in the face of such a persistently weak economy, inflation would move down
much more decisively.

More-Persistent Spending Weakness with Supply-Side Corrosion
In the previous scenario, future gains in labor productivity and potential output
are somewhat smaller than in the baseline because the slower pace of investment implies
less capital deepening. However, a persistently sluggish economy might also have a
broader corrosive effect on the supply side of the economy. For example, a protracted
period of high unemployment might erode the skills and labor force attachment of
output. This scenario builds on the previous one by assuming that a slower labor market
recovery would cause the downward trend in labor force participation to steepen and the
NAIRU to rise gradually to 6¼ percent, rather than declining as assumed in the baseline.
As a result, potential GDP expands about ½ percentage point more slowly per year
through 2015. Under these conditions, the unemployment rate declines even more slowly

Page 87 of 110

Risks & Uncertainty

unemployed workers more than in the baseline, further slowing the expansion of potential

Class II FOMC - Restricted (FR)

Authorized for Public Release

August 3, 2011

than in the previous scenario and is still 8 percent at the end of 2015. However, the
negative effects on labor supply imply that the unemployment gap closes a bit more
quickly than in the previous scenario. Accordingly, inflation is higher and is now only a
bit below baseline.

Greater Supply-Side Damage
Another possible explanation for the disappointing pace of the recovery this year
is that the supply side of the economy may have suffered greater damage over the past
several years than we have estimated. For example, the NAIRU may have increased
more due to problems related to mismatch in the labor force, trend labor force
participation may have declined more due to poorer job market opportunities, and gains
in structural multifactor productivity may have been slower than we think. In this
scenario, we assume that the combination of these forces causes the current output gap to
be only about half as large as in the baseline. These conditions imply lower long-run
levels of household income and corporate earnings, and hence help to explain the recent
weakness in consumption and investment; they also point to a more-sluggish pace of
recovery going forward. Accordingly, real GDP expands about ¾ percentage point less
rapidly per year, on average, through 2015 than in the baseline, while inflation is higher
because of both the direct effects of lower productivity on firms’ costs and a smaller
margin of slack. Although policymakers are assumed to recognize only gradually the
less-favorable supply-side conditions, the stability of long-run inflation expectations
helps to keep inflation from rising above the assumed 2 percent objective. If inflation
expectations were instead to drift up (perhaps on worries that policymakers were
overestimating slack), inflation could rise considerably more and could become a
persistent problem.
An important distinction between this scenario and the previous one concerns
their contrasting implications for monetary policy. Here, monetary policy can do little to
offset the weakness in real activity because so much of it is driven by supply-side factors
Risks & Uncertainty

impervious to policy actions. In the previous scenario, the weakness is fundamentally
driven by deficient demand, especially as the corrosive labor supply effects are a result of
elevated unemployment. Accordingly, in that scenario monetary policy has much greater
scope to improve overall welfare through stimulative actions.

Page 88 of 110

Authorized for Public Release

Class II FOMC - Restricted (FR)

August 3, 2011

Forecast Confidence Intervals and Alternative Scenarios
Confidence Intervals Based on FRB/US Stochastic Simulations
Extended Tealbook baseline
More−persistent spending weakness
with supply−side corrosion

Greater supply−side damage
Faster snapback
Very severe financial stress in Europe

Real GDP

Unemployment Rate
4quarter percent change

90 percent
interval

Percent
8

10.5

10.0

9.5

9.0

8.5

8.0

2
7.5
1
7.0
0
70 percent
interval

6.5

−1

6.0

−2
−3

5.5

−4

5.0

−5

4.5

−6
2008

2010

2012

4.0

2014

2008

PCE Prices excluding Food and Energy

2010

2012

2014

Federal Funds Rate

4quarter percent change

Percent
7

3.5
3.0

2.5
5
2.0
4
1.5

0.5

0.0

−0.5
0
−1.0
2008

2010

2012

2014

2008

Page 89 of 110

2010

2012

2014

Risks & Uncertainty

1.0

Class II FOMC - Restricted (FR)

Authorized for Public Release

August 3, 2011

Faster Snapback
In this scenario, we consider the possibility that the adverse shocks hitting the
economy are fundamentally transitory in nature and so will soon give way to a
more-robust recovery. Thus, going forward, real activity rebounds at a pace more in line
with that following other deep recessions. Real GDP rises at an annual rate of about
3¼ percent in the second half of this year and 4 percent on average in 2012 and 2013,
boosting the demand for labor enough to bring the unemployment rate down below
7 percent by mid-2013. Initially, the stronger pace of the recovery has little effect on
inflation because higher investment increases labor productivity (thereby holding down
unit labor costs) and because long-run inflation expectations are well anchored. In time,
however, tighter labor and product markets cause inflation to move up more than in the
baseline. Largely in response to stronger real activity, the federal funds rate lifts off from
its effective lower bound by the end of this year.

Very Severe Financial Stress in Europe
In the baseline forecast, we project that the European economies will expand at a
modest pace over the next two years as financial stresses remain elevated but generally
contained while the global economic environment improves. In this scenario, we assume
that financial difficulties intensify markedly in Spain and Italy, and that spillovers—
through trade, financial, and confidence channels—are substantial to both the United
States and the core economies of Europe. Specifically, a worsening in investor sentiment
causes European sovereign and private borrowing costs to soar, with European corporate
bond spreads rising 400 basis points above baseline. European real GDP declines about
7 percent relative to baseline by the second half of 2012, notwithstanding a 20 percent
depreciation of the euro. Financial market spillovers to the United States push
U.S. corporate spreads up about 200 basis points. U.S. net exports are depressed by
weaker foreign activity and the stronger dollar. In addition, U.S. domestic demand is
restrained by higher borrowing costs and declining stock prices. All told, U.S. GDP
Risks & Uncertainty

growth dips to zero in 2012, and the unemployment rate rises to nearly 10 percent next
year. The greater resource slack, coupled with lower import prices, pushes core PCE
inflation down to ¼ percent in 2012. The federal funds rate remains near zero until late
2014, five quarters longer than in the baseline.

Page 90 of 110

Class II FOMC - Restricted (FR)

Authorized for Public Release

August 3, 2011

Measure
Real GDP
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
Civilian unemployment rate
(percent, Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
PCE prices, total
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
PCE prices excluding
food and energy
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
Federal funds rate
(percent, Q4)
Projection
Confidence interval
FRB/US stochastic simulations

2011

2012

2013

2014

2015

1.8

3.0

3.7

4.0

3.9

.9–2.6
.9–2.7

1.1–4.8
1.2–4.6

2.0–5.5
1.6–5.2

...
1.9–6.0

...
2.0–6.3

9.2

8.5

7.5

6.5

5.7

8.8–9.5
8.8–9.5

7.7–9.3
7.7–9.4

6.1–8.9
6.6–8.7

...
5.5–7.8

...
4.7–7.0

2.4

1.5

1.4

1.5

1.6

1.9–2.9
1.8–3.1

.4–2.6
.4–2.7

.2–2.6
.1–2.5

...
.1–2.8

...
.2–2.8

1.8

1.5

1.4

1.5

1.6

1.5–2.1
1.4–2.2

.8–2.2
.7–2.3

.3–2.5
.5–2.2

...
.5–2.4

...
.6–2.5

1.7

3.2

.1–.6

.1–1.9

.1–3.0

.2–3.6

1.1–5.1

Note: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969–2009 set of
model equation residuals.
Intervals derived from Tealbook forecast errors are based on projections made from 1979–2009, except
for PCE prices excluding food and energy, where the sample is 1981–2009.
. . . Not applicable. The Tealbook forecast horizon has typically extended about 2 years.

Page 91 of 110

Risks & Uncertainty

Selected Tealbook Projections and 70 Percent Confidence Intervals Derived
from Historical Tealbook Forecast Errors and FRB/US Simulations

Class II FOMC - Restricted (FR)

Authorized for Public Release

August 3, 2011

OUTSIDE FORECASTS
The most recent Blue Chip survey is almost a month old and was collected before
the disappointing labor market report released in early July. In that survey, the Blue Chip
consensus forecast for the increase in real GDP in the second half of this year was about
3¼ percent at an annual rate, about ½ percentage point higher than in the current staff
projection. The consensus projection also expected real GDP to rise at a 3 percent pace
in 2012, about the same as the staff projection. Nonetheless, the Blue Chip forecast for
the unemployment rate at the end of 2012 was 8.1 percent, almost ½ percentage point
below the staff’s projection. Regarding inflation, the Blue Chip anticipated that the
overall CPI will increase 3.5 percent over the four quarters of 2011 and 2.2 percent in

Risks & Uncertainty

2012, forecasts that are above the staff projection by about ½ percentage point each year.

Page 92 of 110

Class II FOMC - Restricted (FR)

Authorized for Public Release

August 3, 2011

Tealbook Forecast Compared with Blue Chip
(Blue Chip survey released July 10, 2011)
Real GDP

Real PCE
Percent change, annual rate

8
6

Percent change, annual rate

-2

-1

-2

-3

-4

-4
-5

Blue Chip consensus
Staff forecast

-4
-6

-8

-5

-10

-6

2008
2009
2010
2011
2012
Note: The shaded area represents the area between the
Blue Chip top 10 and bottom 10 averages.

2008

Unemployment Rate

2009

2010

2011

2012

-6

Consumer Price Index
Percent

11
10

Percent change, annual rate

-2

-4

-6

-8

5
2008

2009

2010

2011

2012

-10

2008

Treasury Bill Rate

2010

2011

2012

-10

10-Year Treasury Yield
Percent

Percent

5.5

5.0

4.5

4.0

3.5

3.0

2.5

-1

2009

2008

2009

2010

2011

2012

-1

2.0

2008

2009

2010

2011

2012

Note: The yield is for on-the-run Treasury securities. Over
the forecast period, the staff’s projected yield is assumed
to be 15 basis points below the off-the-run yield.

Page 93 of 110

2.0

Risks & Uncertainty

Class II FOMC - Restricted (FR)

Authorized for Public Release

Risks & Uncertainty

(This page is intentionally blank.)

Page 94 of 110

August 3, 2011

4.8
3.7
4.6
3.5
4.1
5.8
5.6
4.3
4.7
4.8
5.2
5.4

4.3
4.1
4.9
4.9
4.8
5.3

.6
4.2
4.9
5.1
-1.7
3.8
4.5
5.0

Quarterly
2010:Q1
Q2
Q3
Q4
2011:Q1
Q2
Q3
Q4
2012:Q1
Q2
Q3
Q4

Two-quarter2
2010:Q2
Q4
2011:Q2
Q4
2012:Q2
Q4

Four-quarter3
2009:Q4
2010:Q4
2011:Q4
2012:Q4

Page 95 of 110

Annual
2009
2010
2011
2012
-2.5
4.2
4.0
4.3

.0
4.7
3.9
4.5

5.5
4.0
3.5
4.4
4.5
4.6

5.5
5.4
3.9
4.2
3.1
3.9
5.1
3.6
3.2
5.9
4.6
4.6

08/03/11

-2.6
2.9
2.6
3.3

.2
2.8
2.7
3.5

2.7
2.8
2.0
3.4
3.2
3.8

3.7
1.7
2.6
3.1
2.1
1.9
3.9
2.9
3.1
3.3
3.7
3.9

06/15/11

-3.5
3.0
1.9
2.7

-.5
3.1
1.8
3.0

3.9
2.4
.9
2.7
2.6
3.3

3.9
3.8
2.5
2.3
.4
1.4
2.9
2.4
2.4
2.9
3.2
3.4

08/03/11

Real GDP

.2
1.7
2.2
1.5

1.5
1.1
2.3
1.5

1.0
1.2
3.6
1.1
1.5
1.5

2.1
.0
.8
1.7
3.8
3.4
.8
1.4
1.4
1.5
1.5
1.5

06/15/11

.2
1.8
2.3
1.5

1.5
1.3
2.4
1.5

1.1
1.5
3.5
1.3
1.5
1.4

1.9
.3
1.0
1.9
3.9
3.1
1.5
1.1
1.6
1.5
1.4
1.4

08/03/11

PCE price index

1.5
1.3
1.3
1.5

1.7
.8
1.7
1.5

1.1
.5
1.8
1.5
1.5
1.5

1.2
1.0
.5
.4
1.4
2.2
1.7
1.4
1.5
1.5
1.5
1.5

06/15/11

Greensheets

1.6
1.4
1.4
1.6

1.7
1.0
1.8
1.5

1.2
.7
1.8
1.8
1.6
1.4

1.1
1.3
.8
.7
1.6
2.1
1.9
1.7
1.6
1.5
1.4
1.4

08/03/11

9.3
9.6
9.0
8.5

3.1
-.4
-.7
-.8

-.4
.0
-.6
-.1
-.3
-.5

9.7
9.6
9.6
9.6
8.9
9.0
9.0
8.9
8.8
8.6
8.4
8.1

06/15/11

9.3
9.6
9.1
8.8

3.1
-.4
-.4
-.7

-.4
.0
-.5
.1
-.3
-.4

9.7
9.6
9.6
9.6
8.9
9.1
9.2
9.2
9.1
8.9
8.7
8.5

08/03/11

Core PCE price index Unemployment rate1

Authorized for Public Release

1. Level, except for two-quarter and four-quarter intervals.
2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points.
3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points.

06/15/11

Interval

Nominal GDP

Changes in GDP, Prices, and Unemployment
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
August 3, 2011

.8
1.1
2.5
2.1
2.7
1.9
9.9
4.8
1.0
-15.3
-12.3
6.0
7.8
21.7
20.4
-24.7
-17.8
-377
-338
7.2
12.5
-1.2
-1.6
2.8
.5
7.8
-3.9
40
44
35
5

Final sales
Previous Tealbook
Priv. dom. final purch.
Previous Tealbook

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

Residential investment
Previous Tealbook

Business fixed invest.
Previous Tealbook
Equipment & software
Previous Tealbook
Nonres. structures
Previous Tealbook

Net exports2
Previous Tealbook2
Exports
Imports

Page 96 of 110

Gov’t. cons. & invest.
Previous Tealbook
Federal
Defense
Nondefense
State & local

Change in bus. inventories2
Previous Tealbook2
Nonfarm2
Farm2
65
69
64
1

3.7
3.9
8.8
6.0
14.7
.4

-437
-449
10.0
21.6

18.6
17.2
23.2
24.8
7.5
-.5

22.8
25.7

2.9
2.2
7.8
1.9
2.5

3.0
.9
5.1
4.4

3.8
1.7

92
121
99
-6

1.0
3.9
3.2
5.7
-1.8
-.5

-459
-505
10.0
12.3

11.3
10.0
14.1
15.4
4.2
-3.5

-27.7
-27.3

2.6
2.4
8.8
3.0
1.6

1.7
.9
2.6
2.3

2.5
2.6

2010

38
16
45
-5

-2.8
-1.7
-3.0
-5.9
3.1
-2.7

-414
-398
7.8
-2.3

8.7
7.7
8.1
7.7
10.5
7.6

2.5
3.3

3.6
4.0
17.2
4.3
1.3

4.2
6.7
4.1
4.4

2.3
3.1

49
57
60
-8

-5.9
-5.6
-9.4
-12.6
-2.7
-3.4

-424
-393
7.9
8.3

2.1
2.9
8.7
10.1
-14.3
-15.2

-2.4
-2.9

2.1
2.3
11.7
1.6
.8

.0
.8
2.0
2.2

.4
2.1

53
38
63
-9

-.8
-.5
2.2
7.3
-7.3
-2.9

-406
-364
6.0
1.3

8.1
6.8
5.6
7.0
15.2
6.1

3.5
1.3

.1
1.5
-4.4
.1
.8

1.3
2.5
1.1
2.1

1.4
1.9

99
76
102
-2

-.3
1.1
1.9
5.7
-5.6
-1.8

-405
-374
10.2
8.1

4.0
9.5
6.3
13.2
-2.0
-.6

3.1
1.6

1.6
2.6
5.0
.2
1.5

1.5
2.6
1.9
3.4

2.9
3.9

2011

80
58
83
-2

.1
-.4
1.4
-.1
4.4
-.8

-366
-338
9.8
.7

4.5
7.2
6.3
9.5
-.2
.7

.5
2.7

1.9
2.4
7.2
.9
1.4

3.1
3.5
2.2
3.0

2.4
2.9

74
57
74
1

-.7
-.3
-1.1
-.7
-1.9
-.5

-332
-305
9.6
1.5

2.6
3.7
4.4
5.6
-2.2
-1.8

3.1
3.0

1.9
2.5
5.7
.9
1.7

2.6
3.2
2.0
2.6

2.4
3.1

78
60
77
1

-.5
-.3
-.8
.1
-2.6
-.3

-307
-283
9.1
3.2

3.0
5.6
4.6
7.8
-1.2
-.7

4.2
5.5

2.4
2.7
8.3
1.1
1.9

2.8
3.2
2.6
3.1

2.9
3.3

83
78
82
1

-.4
-.2
-.9
-.1
-2.6
-.1

-290
-273
8.8
4.4

4.3
6.9
6.2
9.3
-1.0
-.3

8.4
7.3

2.8
2.9
9.6
1.3
2.2

3.0
3.1
3.1
3.5

3.2
3.7

2012

85
93
84
1

-.2
-.2
-.8
.0
-2.6
.2

-271
-258
8.7
4.1

5.0
6.8
7.1
9.2
-1.0
-.3

8.8
8.3

3.0
3.1
9.5
1.5
2.5

3.3
3.4
3.4
3.7

3.4
3.9

59
63
61
-1

.1
1.1
2.9
1.5
5.7
-1.7

-422
-422
8.8
10.7

11.1
10.6
16.6
16.9
-1.8
-4.0

-6.3
-4.6

3.0
2.6
10.9
3.5
1.6

2.4
2.4
3.6
3.3

3.1
2.8

20101

70
57
77
-5

-1.8
-1.4
-1.1
-.2
-2.9
-2.2

-400
-367
8.4
4.6

4.7
6.6
6.7
10.0
-.9
-2.6

1.1
.7

1.4
2.2
4.7
.7
1.1

1.5
2.4
1.8
2.7

1.8
2.7

20111

80
72
79
1

-.5
-.2
-.9
-.1
-2.4
-.2

-300
-279
9.0
3.3

3.7
5.7
5.6
8.0
-1.3
-.8

6.1
6.0

2.5
2.8
8.3
1.2
2.1

2.9
3.2
2.8
3.2

3.0
3.5

20121

Authorized for Public Release

1. Change from fourth quarter of previous year to fourth quarter of year indicated.
2. Billions of chained (2005) dollars.

3.9
3.7

Real GDP
Previous Tealbook

Item

Greensheets
Changes in Real Gross Domestic Product and Related Items
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
August 3, 2011

Page 97 of 110

.6
.6
2.3
2.4
2.3
-.4
66
66
58
8

Gov’t. cons. & invest.
Previous Tealbook
Federal
Defense
Nondefense
State & local

Change in bus. inventories1
Previous Tealbook1
Nonfarm1
Farm1

50
50
50
0

.7
.7
1.2
.4
2.6
.4

-723
-723
6.7
5.2

4.5
4.4
6.2
6.1
-.1
-.1

5.3
5.3

2.8
2.7
2.8
3.1
2.7

2.7
2.7
3.2
3.1

2.8
2.7

2005

28
28
29
-1

1.9
1.9
3.1
2.6
4.2
1.2

-649
-655
10.1
.8

7.9
8.2
3.9
4.3
17.3
17.3

-20.7
-20.7

1.7
1.7
4.6
.8
1.4

2.4
2.5
1.2
1.3

2.2
2.3

2007

Greensheets

59
59
63
-4

1.5
1.5
2.2
4.4
-2.3
1.2

-729
-729
10.2
4.1

7.8
7.8
6.0
6.0
13.0
13.0

-15.7
-15.7

3.2
3.3
7.0
2.9
2.6

2.8
2.8
2.4
2.5

2.4
2.4

2006

-36
-38
-38
1

2.7
3.1
8.8
9.8
6.8
-.9

-495
-504
-2.5
-5.9

-9.4
-8.3
-13.6
-11.8
-1.2
-1.5

-24.4
-24.6

-2.5
-1.9
-13.0
-3.1
-.5

-2.6
-1.9
-4.5
-3.8

-3.3
-2.8

2008

-145
-113
-144
-1

1.1
.8
4.6
3.5
6.9
-1.1

-359
-363
-.1
-6.5

-14.4
-12.7
-5.8
-4.9
-29.3
-26.5

-12.9
-13.4

-.2
.2
3.0
.6
-.9

-.8
-.3
-2.5
-2.0

-.5
.2

2009

59
63
61
-1

.1
1.1
2.9
1.5
5.7
-1.7

-422
-422
8.8
10.7

11.1
10.6
16.6
16.9
-1.8
-4.0

-6.3
-4.6

3.0
2.6
10.9
3.5
1.6

2.4
2.4
3.6
3.3

3.1
2.8

2010

70
57
77
-5

-1.8
-1.4
-1.1
-.2
-2.9
-2.2

-400
-367
8.4
4.6

4.7
6.6
6.7
10.0
-.9
-2.6

1.1
.7

1.4
2.2
4.7
.7
1.1

1.5
2.4
1.8
2.7

1.8
2.7

2011

80
72
79
1

-.5
-.2
-.9
-.1
-2.4
-.2

-300
-279
9.0
3.3

3.7
5.7
5.6
8.0
-1.3
-.8

6.1
6.0

2.5
2.8
8.3
1.2
2.1

2.9
3.2
2.8
3.2

3.0
3.5

2012

Authorized for Public Release

1. Billions of chained (2005) dollars.

-688
-688
7.2
11.0

6.6
6.6

Residential investment
Previous Tealbook

Net exports1
Previous Tealbook1
Exports
Imports

3.3
3.5
5.9
2.7
3.0

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

7.0
7.0
8.8
8.8
1.7
1.7

2.6
2.8
4.0
4.2

Final sales
Previous Tealbook
Priv. dom. final purch.
Previous Tealbook

Business fixed invest.
Previous Tealbook
Equipment & software
Previous Tealbook
Nonres. structures
Previous Tealbook

2.9
3.1

2004

Real GDP
Previous Tealbook

Item

Changes in Real Gross Domestic Product and Related Items
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
August 3, 2011

Page 98 of 110

1.9
1.3
.7
.8
.5
-.4
-.3
.6
.7
1.3
1.2
-.8
-.5
-1.0
-.3
.9
-1.8
-.3
-.3
.2
.0
.2
-.5

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

Residential investment
Previous Tealbook

Business fixed invest.
Previous Tealbook
Equipment & software
Previous Tealbook
Nonres. structures
Previous Tealbook

Net exports
Previous Tealbook
Exports
Imports

Gov’t. cons. & invest.
Previous Tealbook
Federal
Defense
Nondefense
State & local
.8
.8
.9
-.1

.8
.8
.7
.3
.4
.1

-1.9
-3.5
1.2
-3.1

1.6
1.5
1.5
1.5
.2
.0

.5
.6

2.1
1.5
.6
.3
1.2

3.0
.9
4.2
3.6

.9
1.6
1.1
-.2

.2
.8
.3
.3
-.1
-.1

-.7
-1.7
1.2
-1.9

1.0
.9
.9
1.0
.1
-.1

-.8
-.8

1.9
1.7
.6
.5
.8

1.7
.9
2.1
1.9

2.5
2.6

-1.8
-3.4
-1.8
.0

-.6
-.3
-.3
-.3
.1
-.3

1.4
3.3
1.0
.4

.8
.7
.6
.5
.3
.2

.1
.1

2.5
2.8
1.2
.7
.6

4.2
6.5
3.4
3.6

2.3
3.1

.3
1.3
.4
-.1

-1.2
-1.2
-.8
-.7
-.1
-.4

-.3
.1
1.0
-1.4

.2
.3
.6
.7
-.4
-.4

-.1
-.1

1.5
1.6
.9
.3
.4

.0
.8
1.6
1.8

.4
2.1

.1
-.6
.1
.0

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

.6
.9
.8
-.2

.8
.7
.4
.5
.4
.2

.1
.0

.1
1.0
-.3
.0
.4

1.3
2.5
.9
1.7

1.4
1.9

1. Change from fourth quarter of previous year to fourth quarter of year indicated.

3.1
2.6
2.9
.2

.8
1.1
2.1
1.7

Final sales
Previous Tealbook
Priv. dom. final purch.
Previous Tealbook

3.8
1.7

1.4
1.2
1.3
.1

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

.0
-.4
1.4
-1.4

.4
.9
.5
.9
-.1
.0

.1
.0

1.2
1.9
.4
.0
.7

1.5
2.7
1.6
2.8

2.9
3.9

2011

-.6
-.6
-.6
.0

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

1.2
1.1
1.3
-.1

.4
.7
.5
.7
.0
.0

.0
.1

1.4
1.7
.5
.2
.7

3.0
3.5
1.8
2.5

2.4
2.9

-.2
.0
-.3
.1

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

1.1
1.0
1.3
-.3

.3
.4
.3
.4
-.1
.0

.1
.1

1.4
1.7
.4
.2
.8

2.6
3.2
1.7
2.2

2.4
3.1

.1
.1
.1
.0

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

.7
.7
1.3
-.6

.3
.6
.3
.6
.0
.0

.1
.1

1.7
1.9
.6
.2
.9

2.8
3.2
2.1
2.6

2.9
3.3

.2
.6
.2
.0

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

.5
.3
1.3
-.8

.4
.7
.5
.7
.0
.0

.2
.2

2.0
2.0
.7
.2
1.0

3.0
3.1
2.6
2.9

3.2
3.7

2012

.1
.5
.1
.0

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

.5
.4
1.3
-.7

.5
.7
.5
.7
.0
.0

.2
.2

2.1
2.2
.7
.3
1.2

3.3
3.4
2.8
3.0

3.4
3.9

.7
.4
.8
-.1

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

-.6
-.6
1.1
-1.6

1.0
1.0
1.1
1.1
.0
-.1

-.2
-.1

2.1
1.9
.8
.6
.8

2.4
2.4
3.0
2.7

3.1
2.8

20101

.3
.3
.3
.0

-.4
-.3
-.1
.0
-.1
-.3

.4
.4
1.1
-.8

.5
.6
.5
.7
.0
-.1

.0
.0

1.0
1.6
.4
.1
.5

1.5
2.4
1.5
2.2

1.8
2.7

20111

.0
.3
.0
.0

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

.7
.6
1.3
-.6

.4
.6
.4
.6
.0
.0

.1
.1

1.8
2.0
.6
.2
1.0

2.9
3.2
2.3
2.7

3.0
3.5

20121

Authorized for Public Release

Change in bus. inventories
Previous Tealbook
Nonfarm
Farm

3.9
3.7

Real GDP
Previous Tealbook

Item

2010

Contributions to Changes in Real Gross Domestic Product
(Percentage points, annual rate except as noted)

Greensheets

Class II FOMC - Restricted (FR)
August 3, 2011

1.9
2.1
13.7
16.4
1.8
1.8
1.1
1.2
.6
.7
1.3
1.3
.0
.0
2.6
2.6
4.7
4.6
1.6
-.2
-3.0
-4.6
3.9
4.2

PCE chain-wt. price index
Previous Tealbook
Energy
Previous Tealbook
Food
Previous Tealbook
Ex. food & energy
Previous Tealbook
Ex. food & energy, market based
Previous Tealbook

CPI

Previous Tealbook
Ex. food & energy
Previous Tealbook

ECI, hourly compensation2
Previous Tealbook2

Nonfarm business sector
Output per hour
Previous Tealbook
Compensation per hour
Previous Tealbook
Unit labor costs
Previous Tealbook

Page 99 of 110

Core goods imports chain-wt. price index3
Previous Tealbook3
3.1
3.1

1.2
-1.7
2.7
3.1
1.4
4.9

1.8
1.8

-.5
-.5
.8
.8

.3
.0
-14.9
-17.5
1.5
1.6
1.3
1.0
.9
1.0

1.5
1.9

-.6
-.8

2.1
2.3
1.8
2.5
-.3
.1

1.8
1.8

1.4
1.4
1.1
1.1

1.0
.8
5.6
5.4
.3
.3
.8
.5
1.0
1.1

1.4
2.1

4.3
4.3

2.2
2.9
.7
.1
-1.5
-2.7

2.2
2.2

2.6
2.6
.6
.6

1.9
1.7
24.7
24.3
1.4
1.4
.7
.4
.3
.3

1.9
.4

8.3
8.1

-.5
2.2
4.3
2.5
4.9
.3

2.1
2.1

5.2
5.2
1.7
1.7

3.9
3.8
40.7
40.6
6.5
6.3
1.6
1.4
1.3
1.3

2.5
2.0

Q1
2.1
1.6

3.1
3.5

2.3
2.4
1.3
2.1
-1.0
-.3

2.2
2.3

1.8
.6
2.6
1.9

1.5
.8
-5.2
-13.1
2.6
3.0
1.9
1.7
2.2
1.7

Greensheets

6.3
7.2

-.9
-.8
1.2
1.7
2.1
2.5

3.2
2.2

4.1
4.2
2.5
2.4

3.1
3.4
14.9
17.1
6.4
6.7
2.1
2.2
2.4
2.4

2.3
3.8

2011

2.0
1.5

.9
1.5
2.0
2.2
1.1
.6

2.2
2.3

1.0
1.5
1.8
1.4

1.1
1.4
-7.0
1.0
2.0
2.0
1.7
1.4
1.5
1.2

1.2
1.3

1.4
1.4

1.1
1.8
2.4
2.6
1.2
.8

2.4
2.5

1.6
1.5
1.7
1.5

1.6
1.4
.8
1.0
1.4
1.4
1.6
1.5
1.5
1.4

.7
1.6

1.5
1.5

1.6
1.6
2.2
2.4
.6
.9

2.4
2.5

1.6
1.5
1.6
1.6

1.5
1.5
1.9
1.3
1.3
1.3
1.5
1.5
1.4
1.4

2.9
1.5

1.6
1.5

2.0
1.7
2.2
2.4
.3
.7

2.5
2.6

1.6
1.5
1.6
1.6

1.4
1.5
1.8
1.0
1.4
1.4
1.4
1.5
1.3
1.4

1.3
1.5

2012

1.5
1.5

2.1
1.9
2.3
2.5
.2
.7

2.5
2.6

1.5
1.5
1.6
1.6

1.4
1.5
1.3
.5
1.4
1.4
1.4
1.5
1.3
1.4

1.2
1.5

2.6
2.7

2.5
2.0
1.7
1.4
-.9
-.6

2.1
2.1

1.2
1.2
.6
.6

1.3
1.1
6.2
5.9
1.3
1.3
1.0
.8
.7
.8

1.6
1.3

20101

4.9
5.0

.5
1.3
2.2
2.1
1.7
.8

2.5
2.2

3.0
2.8
2.2
1.8

2.4
2.3
9.3
9.6
4.3
4.5
1.8
1.7
1.9
1.6

2.0
2.2

20111

1.5
1.4

1.7
1.7
2.3
2.5
.6
.7

2.5
2.6

1.6
1.5
1.6
1.6

1.5
1.5
1.4
1.0
1.4
1.4
1.5
1.5
1.4
1.4

1.5
1.5

20121

Authorized for Public Release

1. Change from fourth quarter of previous year to fourth quarter of year indicated.
2. Private-industry workers.
3. Core goods imports exclude computers, semiconductors, oil, and natural gas.

1.5
1.0

GDP chain-wt. price index
Previous Tealbook

Item

2010

Changes in Prices and Costs
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
August 3, 2011

Greensheets

3.0
3.0
18.6
18.6
2.7
2.7
2.2
2.2
1.9
1.9
3.4
3.4
2.2
2.2
3.8
3.8
1.3
1.5
3.3
3.3
2.0
1.9
3.6
3.6

PCE chain-wt. price index
Previous Tealbook
Energy
Previous Tealbook
Food
Previous Tealbook
Ex. food & energy
Previous Tealbook
Ex. food & energy, market based
Previous Tealbook

CPI

Previous Tealbook
Ex. food & energy
Previous Tealbook

ECI, hourly compensation1
Previous Tealbook1

Nonfarm business sector
Output per hour
Previous Tealbook
Compensation per hour
Previous Tealbook
Unit labor costs
Previous Tealbook

Page 100 of 110

Core goods imports chain-wt. price index2
Previous Tealbook2

2.2
2.2

1.6
1.4
3.5
3.5
1.9
2.0

2.9
2.9

3.7
3.7
2.1
2.1

3.2
3.3
21.5
21.5
1.5
1.5
2.3
2.3
2.0
2.1

3.5
3.5

2005

2.5
2.5

.8
.9
4.5
4.5
3.6
3.5

3.2
3.2

2.0
2.0
2.7
2.7

1.9
1.9
-3.7
-3.7
1.7
1.7
2.3
2.3
2.2
2.2

2.9
2.9

2006

2.9
2.9

2.5
2.6
3.6
3.6
1.1
.9

3.0
3.0

4.0
4.0
2.3
2.3

3.5
3.5
19.3
19.4
4.7
4.8
2.4
2.4
2.1
2.2

2.6
2.6

2007

3.7
3.5

-1.2
-.4
2.2
2.3
3.4
2.7

2.4
2.4

1.6
1.6
2.0
2.0

1.7
1.7
-8.8
-9.0
7.0
6.9
2.0
2.0
2.2
2.2

2.1
2.1

2008

-1.7
-1.9

5.3
6.5
2.0
2.8
-3.1
-3.5

1.2
1.2

1.5
1.5
1.7
1.7

1.5
1.5
2.6
2.7
-1.7
-1.6
1.7
1.7
1.7
1.7

.7
.5

2009

2.6
2.7

2.5
2.0
1.7
1.4
-.9
-.6

2.1
2.1

1.2
1.2
.6
.6

1.3
1.1
6.2
5.9
1.3
1.3
1.0
.8
.7
.8

1.6
1.3

2010

4.9
5.0

.5
1.3
2.2
2.1
1.7
.8

2.5
2.2

3.0
2.8
2.2
1.8

2.4
2.3
9.3
9.6
4.3
4.5
1.8
1.7
1.9
1.6

2.0
2.2

2011

1.5
1.4

1.7
1.7
2.3
2.5
.6
.7

2.5
2.6

1.6
1.5
1.6
1.6

1.5
1.5
1.4
1.0
1.4
1.4
1.5
1.5
1.4
1.4

1.5
1.5

2012

Authorized for Public Release

1. Private-industry workers.
2. Core goods imports exclude computers, semiconductors, oil, and natural gas.

3.2
3.2

2004

GDP chain-wt. price index
Previous Tealbook

Item

Changes in Prices and Costs
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
August 3, 2011

Page 101 of 110

5.5
4.9
1.3
4.9
5.5
44.9
11.9

Income and saving
Nominal GDP5
Real disposable pers. income5
Previous Tealbook5
Personal saving rate3
Previous Tealbook3

Corporate profits7
Profit share of GNP3

12.6
-.2

-1,278
-28

15.1
12.2

5.4
5.6
5.6
5.6
6.2

.6
11.4

7.1
7.1
8.7
8.7
71.4
71.4

.6
9.6
9.6
6.0
6.0
-5.9
-6.1

12.7
.0

-1,258
-5

11.0
12.4

3.9
2.3
1.0
5.6
6.0

.6
11.6

6.7
6.7
5.1
5.1
72.6
72.6

-.1
9.6
9.6
6.0
6.0
-5.8
-5.9

12.3
-.4

-1,287
-36

5.4
12.4

4.2
1.5
1.1
5.2
5.4

.5
12.3

3.1
3.1
3.4
3.4
73.3
73.3

.2
9.6
9.6
6.0
6.0
-5.6
-5.7

12.4
-.3

-1,206
-57

4.2
12.4

3.1
.7
.8
4.9
5.1

.6
13.0

4.8
4.2
7.2
6.5
74.5
74.4

.4
8.9
8.9
6.0
6.0
-6.0
-5.7

12.5
-.1

-1,263
-56

13.0
12.7

3.9
.7
1.7
5.1
5.2

.6
12.1

.8
2.0
.2
1.4
74.4
74.5

.4
9.1
9.0
6.0
6.0
-6.2
-5.8

8.9
12.8

5.1
1.8
3.0
5.1
5.3

.6
12.8

5.9
7.6
4.9
8.4
75.1
75.8

.2
9.2
9.0
6.0
6.0
-6.0
-5.4

12.8
.4

-1,229
-71

2011

12.9
.4

-1,234
-74

-3.0
12.6

3.6
3.1
2.6
5.4
5.3

.6
13.1

4.1
4.5
4.7
4.7
75.8
76.5

.4
9.2
8.9
6.0
6.0
-5.9
-5.2

13.0
.4

-1,068
-68

-8.5
12.2

3.2
-.1
.1
4.9
4.7

.7
13.4

2.3
3.0
2.7
3.3
76.1
76.8

.5
9.1
8.8
6.0
6.0
-5.9
-5.1

13.4
1.0

-1,024
-66

12.7
12.4

5.9
3.3
3.6
5.1
4.9

.7
13.7

2.9
3.7
3.4
4.3
76.5
77.4

.5
8.9
8.6
6.0
6.0
-5.7
-4.9

1.6
12.3

4.6
3.4
3.6
5.2
5.0

.8
14.0

3.8
4.1
4.2
4.6
77.1
77.9

.5
8.7
8.4
6.0
6.0
-5.5
-4.6

13.6
1.2

-1,006
-57

2012

Greensheets

13.6
1.2

-988
-55

.3
12.2

4.6
3.8
4.1
5.3
5.2

.8
14.2

4.1
4.0
4.8
4.6
77.7
78.5

.6
8.5
8.1
6.0
6.0
-5.2
-4.2

12.3
-.4

-1,274
-25

18.2
12.4

4.7
3.5
2.2
5.2
5.4

.6
11.5

6.2
6.2
6.1
6.1
73.3
73.3

.7
9.6
9.6
6.0
6.0
-5.6
-5.7

20101

12.9
.4

-1,233
-64

5.6
12.6

3.9
1.6
2.0
5.4
5.3

.6
12.8

3.9
4.5
4.2
5.2
75.8
76.5

1.4
9.2
8.9
6.0
6.0
-5.9
-5.2

20111

13.6
1.2

-1,022
-61

1.3
12.2

4.5
2.6
2.8
5.3
5.2

.7
13.8

3.3
3.7
3.8
4.2
77.7
78.5

2.1
8.5
8.1
6.0
6.0
-5.2
-4.2

20121

Authorized for Public Release

1. Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise indicated.
2. Change, millions.
3. Percent; annual values are for the fourth quarter of the year indicated.
4. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential.
Annual values are for the fourth quarter of the year indicated.
5. Percent change, annual rate.
6. Level, millions; annual values are annual averages.
7. Percent change, annual rate, with inventory valuation and capital consumption adjustments.
8. Billions of dollars; annual values are annual averages.

11.9
-1.1

.6
11.0

Housing starts6
Light motor vehicle sales6

Gross national saving rate3
Net national saving rate3

8.1
8.1
7.1
7.1
69.4
69.4

Industrial production5
Previous Tealbook5
Manufacturing industr. prod.5
Previous Tealbook5
Capacity utilization rate - mfg.3
Previous Tealbook3

-1,272
-32

-.1
9.7
9.7
6.0
6.0
-6.4
-6.0

Employment and production
Nonfarm payroll employment2
Unemployment rate3
Previous Tealbook3
NAIRU3
Previous Tealbook3
GDP gap4
Previous Tealbook4

Net federal saving8
Net state & local saving8

Item

2010

Other Macroeconomic Indicators

Class II FOMC - Restricted (FR)
August 3, 2011

Greensheets

2.0
5.4
5.4
5.0
5.0
-.5
-.4
3.1
3.1
3.7
3.7
77.3
77.3
2.0
16.8
6.2
3.5
3.5
3.8
3.6
21.9
10.5
-379
-8
14.5
2.9

Employment and production
Nonfarm payroll employment1
Unemployment rate2
Previous Tealbook2
NAIRU2
Previous Tealbook2
GDP gap3
Previous Tealbook3

Industrial production4
Previous Tealbook4
Manufacturing industr. prod.4
Previous Tealbook4
Capacity utilization rate - mfg.2
Previous Tealbook2

Housing starts5
Light motor vehicle sales5

Income and saving
Nominal GDP4
Real disposable pers. income4
Previous Tealbook4
Personal saving rate2
Previous Tealbook2

Corporate profits6
Profit share of GNP2

Page 102 of 110

Net federal saving7
Net state & local saving7

Gross national saving rate2
Net national saving rate2
15.6
3.6

-283
26

19.6
11.8

6.4
.6
.6
1.6
1.5

2.1
16.9

2.3
2.3
3.4
3.4
78.5
78.5

2.4
5.0
5.0
5.0
5.0
.1
.1

2005

16.5
4.4

-204
51

3.7
11.6

5.3
4.6
4.6
2.8
2.5

1.8
16.5

2.3
2.3
2.0
2.0
78.4
78.4

2.1
4.5
4.5
5.0
5.0
.1
.1

2006

13.9
1.7

-245
12

-8.1
10.1

4.9
1.6
1.5
2.5
2.1

1.4
16.1

2.5
2.5
2.8
2.8
79.0
79.0

1.2
4.8
4.8
5.0
5.0
-.1
.1

2007

12.6
-.6

-613
-72

-33.5
6.8

-1.2
1.0
1.0
6.2
5.2

.9
13.1

-9.1
-9.1
-11.8
-11.8
70.1
70.1

-2.8
6.9
6.9
5.3
5.3
-5.4
-4.8

2008

11.3
-1.9

-1218
-78

61.8
11.0

.0
-2.4
.4
4.3
5.5

.6
10.3

-5.5
-5.5
-6.1
-6.1
67.7
67.7

-5.6
10.0
10.0
6.0
6.0
-6.9
-6.4

2009

12.3
-.4

-1274
-25

18.2
12.4

4.7
3.5
2.2
5.2
5.4

.6
11.5

6.2
6.2
6.1
6.1
73.3
73.3

.7
9.6
9.6
6.0
6.0
-5.6
-5.7

2010

12.9
.4

-1233
-64

5.6
12.6

3.9
1.6
2.0
5.4
5.3

.6
12.8

3.9
4.5
4.2
5.2
75.8
76.5

1.4
9.2
8.9
6.0
6.0
-5.9
-5.2

2011

13.6
1.2

-1022
-61

1.3
12.2

4.5
2.6
2.8
5.3
5.2

.7
13.8

3.3
3.7
3.8
4.2
77.7
78.5

2.1
8.5
8.1
6.0
6.0
-5.2
-4.2

2012

Authorized for Public Release

1. Change, millions.
2. Percent; values are for the fourth quarter of the year indicated.
3. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential.
Values are for the fourth quarter of the year indicated.
4. Percent change.
5. Level, millions; values are annual averages.
6. Percent change, with inventory valuation and capital consumption adjustments.
7. Billions of dollars; values are annual averages.

2004

Item

Other Macroeconomic Indicators
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
August 3, 2011

Page 103 of 110
-937
1.1
0.5
0.6

-757
1.7
1.3
1.2

-0.1
-0.0

-.2

-935

-1275

2533
3780
1071
716
355
2709
-1246
164

110

1129
200
-23

2323
3629
-1306
-1333
-1342
36

-1.1
-1.1

-1.3

-755

-1102

2780
3863
1101
745
356
2762
-1083
162

250

1318
-140
-40

2535
3673
-1138
-1128
-1177
39

2012

1.2
1.0

-920

-1305

2365
3637
1034
691
343
2603
-1272
161

219

478
-25
-124

466
795
-329
-329
-359
30

Q1a

1.0
1.0

-966

-1317

2408
3686
1056
702
354
2630
-1278
169

290

344
-71
14

643
930
-287
-287
-351
64

310

390
-20
-80

565
855
-290
-290
-267
-23

Q3a

0.3
0.6

-.1

-956

-1298

2475
3733
1067
713
354
2666
-1258
171

2010
Q2a

-0.4
-0.2

-994

-1330

2471
3758
1060
703
357
2698
-1287
175

343

368
-33
34

532
901
-369
-369
-390
21

Q4a

2011
Q3

137

93
-19
67

714
855
-141
-168
-202
61

110

408
27
-100

589
925
-336
-336
-299
-37

333
20
20

558
930
-373
-362
-390
17

Not seasonally adjusted

-0.5
-0.3

-.7

-896

-1232

0.3
0.2

-939

-1286

0.1
0.3

-.2

-909

-1253

-0.2
-0.3

-.1

-906

-1256

Seasonally adjusted annual rates
2523
2563
2576
2602
3729
3826
3805
3836
1059
1078
1086
1095
701
723
735
738
358
354
351
357
2670
2749
2719
2741
-1206
-1263
-1229
-1234
161
159
162
163

118

260
225
-24

488
949
-460
-460
-451
-10

Q1a

-1.5
-1.5

-1.1

-733

-1088

2794
3863
1101
744
357
2762
-1068
162

220

575
-130
-20

547
971
-425
-425
-414
-11

-1.0
-1.0

-.3

-695

-1042

2842
3867
1103
747
356
2764
-1024
162

240

175
-20
-20

773
908
-135
-143
-189
54

250

236
-10
-20

658
864
-206
-198
-185
-21

-1.0
-1.0

-.1

-685

-1022

2881
3886
1105
750
355
2781
-1006
163

2012
Q2

-0.8
-0.8

-.1

-681

-1003

2918
3906
1107
753
354
2799
-988
163

235

323
15
-20

636
954
-318
-322
-352
34

Greensheets

Authorized for Public Release

1. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus and the Postal Service surplus are excluded from the on-budget
surplus and shown separately as off-budget, as classified under current law.
2. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
3. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises.
4. HEB is gross saving less gross investment (NIPA) of the federal government in current dollars, with cyclically sensitive receipts and outlays adjusted to the staff’s measure of potential output and the
NAIRU. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. FI is the weighted difference of discretionary changes in federal spending and taxes in chained (2005) dollars, scaled
by real GDP. The FI estimates are calendar year contributions to Q4/Q4 real GDP growth. Also, for FI and the change in HEB, positive values indicate aggregate demand stimulus. Quarterly figures for change
in HEB and FI are not at annual rates.
a Actual.

Fiscal indicators4
High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI),
percent of GDP
Previous Tealbook

-1305

-1098

310

2379
3648
1042
697
346
2606
-1269
165

275

Cash operating balance,
end of period

1474
-35
-146

2163
3456
-1293
-1293
-1370
77

2011

Fiscal year
2010a

2280
3346
972
656
316
2374
-1066
156

1743
96
-427

Means of financing
Borrowing
Cash decrease
Other2

NIPA federal sector
Receipts
Expenditures
Consumption expenditures
Defense
Nondefense
Other spending
Current account surplus
Gross investment
Gross saving less gross
investment3

2105
3518
-1413
-1413
-1550
137

2009a

Unified budget
Receipts1
Outlays1
Surplus/deficit1
Previous Tealbook
On-budget
Off-budget

Item

Staff Projections of Federal Sector Accounts and Related Items
(Billions of dollars except as noted)

Class II FOMC - Restricted (FR)
August 3, 2011

-3.0
-2.2
-2.0
-.6
-2.0
-.5
.0
.3
.9
1.3
1.7
2.0
2.0
2.1
2.1
2.1

-5.2
-2.2
-2.6
-1.1
-3.4
-2.0
-1.4
-1.2
-.6
-.3
.0
.1
.1
.1
.1
.1

-2.8
-2.0
-.2
.1

11.1
6.8
-.5
-1.5

-4.1
-3.1
-1.9
2.0
2.3
4.0
4.5
5.1
5.8
6.4
7.3
8.0
8.2
8.2
8.0
8.0

-1.8
4.0
7.0
8.4

4.1
5.8
1.5
-4.4

Consumer
credit

-.4
-1.3
1.1
1.9
3.2
3.6
2.6
3.0
3.2
3.7
3.8
4.2
4.3
4.3
4.4
4.4

.3
3.2
3.8
4.5

10.6
13.1
5.5
-2.7

Business

5.7
-1.4
5.4
7.9
-2.9
-5.2
1.4
5.4
3.8
3.8
3.7
3.7
3.7
3.6
3.6
3.6

4.5
-.3
3.8
3.7

8.3
9.5
2.3
4.9

State and local
governments

20.5
24.4
16.0
14.6
7.8
10.4
15.0
11.6
19.0
12.0
6.9
9.9
10.4
9.0
5.2
8.8

20.2
11.7
12.5
8.6

3.9
4.9
24.2
22.7

Federal
government

5.5
5.4
3.9
4.2
3.1
3.9
5.1
3.6
3.2
5.9
4.6
4.6
4.2
6.6
5.2
5.1

4.7
3.9
4.5
5.3

5.3
4.9
-1.2
.0

Memo:
Nominal
GDP

Authorized for Public Release

Page 104 of 110

Note: Quarterly data are at seasonally adjusted annual rates.
1. Data after 2011:Q1 are staff projections. Changes are measured from end of the preceding period to end of period indicated except for annual nominal
GDP growth, which is calculated from Q4 to Q4.

3.7
4.4
3.9
4.6
2.1
3.3
4.9
4.6
6.9
5.3
4.0
5.1
5.3
4.9
3.8
4.9

-1.9
-.5
1.5
2.1

4.2
3.8
5.4
4.8

2010
2011
2012
2013

Quarter
2010:1
2
3
4
2011:1
2
3
4
2012:1
2
3
4
2013:1
2
3
4

10.0
6.7
.2
-1.7

Total

9.0
8.6
6.0
3.0

Total

Year
2006
2007
2008
2009

Period1

Home
mortgages

Households

Change in Debt of the Domestic Nonfinancial Sectors
(Percent)

Greensheets

Class II FOMC - Restricted (FR)
August 3, 2011

Page 105 of 110

-262.7
-285.6
-44.2
120.7
-163.2
-277.9
35.7
105.4
245.0

Households
Net borrowing2
Home mortgages
Consumer credit
Debt/DPI (percent)3

Business
Financing gap4
Net equity issuance
Credit market borrowing

State and local governments
Net borrowing
Current surplus5

-192.7

-28.9

1093.9
1093.9
1309.7

-8.6
176.9

-105.8
-398.9
342.3

-73.3
-199.6
97.9
114.8

243.3
9.0

956.2
-398.9
1355.1

2011

265.9

1308.2
1308.2
1083.2

93.7
176.7

-12.1
-340.0
422.4

199.9
-19.7
178.3
111.3

244.0
12.8

1684.2
-340.0
2024.2

2012

315.1

1016.3
1016.3
936.3

93.7
202.3

82.6
-340.0
516.8

282.5
9.8
226.4
107.9

244.1
11.5

1569.3
-340.0
1909.3

2013

211.7

1469.1
408.3
335.6

33.7
160.7

-89.0
-392.0
287.9

5.7
-138.9
110.7
114.0

242.0
11.8

1404.4
-392.0
1796.4

226.9

1178.9
332.7
372.5

129.7
159.2

-109.3
-392.0
335.9

45.2
-118.6
127.0
112.8

242.7
11.0

1297.7
-392.0
1689.7

260.1

1990.1
574.5
424.6

93.7
167.6

-27.6
-320.0
354.7

125.1
-59.1
146.4
112.6

244.2
16.6

2243.6
-320.0
2563.6

259.7

1322.2
174.6
134.6

93.7
171.1

-42.5
-320.0
419.3

175.8
-29.5
164.0
111.6

244.4
12.8

1691.0
-320.0
2011.0

Greensheets

263.0

780.6
236.2
206.2

93.7
182.2

-8.2
-360.0
437.0

232.6
0.0
190.3
110.7

244.5
9.7

1183.9
-360.0
1543.9

2012

280.6

1139.6
322.9
317.9

93.7
185.7

29.7
-360.0
478.8

266.2
9.8
212.5
109.8

244.5
12.3

1618.3
-360.0
1978.3

285.9

1224.4
383.1
378.1

93.7
201.1

85.4
-320.0
500.5

276.9
9.8
222.3
108.9

245.2
12.9

1775.6
-320.0
2095.6

307.5

1088.9
116.2
76.2

93.7
200.1

58.7
-320.0
509.6

282.5
9.8
226.9
108.3

244.4
12.0

1654.8
-320.0
1974.8

328.3

644.9
202.2
172.2

93.7
203.7

73.4
-360.0
525.6

282.5
9.8
225.9
107.6

243.9
9.3

1186.8
-360.0
1546.8

2013

338.6

1106.9
314.7
309.7

93.7
204.4

112.9
-360.0
531.3

288.0
9.8
230.5
106.8

243.5
12.0

1660.0
-360.0
2020.0

Authorized for Public Release

Note: Data after 2011:Q1 are staff projections.��
1. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP.��
2. Includes change in liabilities not shown in home mortgages and consumer credit.��
3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income.
4. For corporations, excess of capital expenditures over U.S. internal funds.
5. NIPA state and local government saving plus consumption of fixed capital and net capital transfers.
n.s.a. Not seasonally adjusted.

Depository institutions
Funds supplied

1580.2
1580.2
1275.1

243.4
10.0

Borrowing indicators
Debt (percent of GDP)1
Borrowing (percent of GDP)

Federal government
Net borrowing
Net borrowing (n.s.a.)
Unified deficit (n.s.a.)

1180.7
-277.9
1458.6

2010

Domestic nonfinancial sectors
Net funds raised
Total
Net equity issuance
Net debt issuance

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 9, 2011 : Tealbook A

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