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Class III FOMC - Internal (FR)

Part 2

December 7, 2005

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

December 7, 2005

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
Overview
Incoming data suggest that economic activity is expanding at a solid pace this quarter.
Industrial production bounced back in October and appears to be headed for a sizable
gain in November. Likewise, the increase in private payroll employment of nearly
200,000 in November indicates that the labor market is recovering smartly from the
depressing effects of the recent hurricanes. Sales of light motor vehicles have dropped
back from the extremely high levels of the summer, but other spending by consumers and
businesses has been reasonably strong. Although the housing sector has shown some
signs of cooling, the level of construction and sales remains high. The prices of refined
petroleum products have retreated significantly, on balance, from their post-hurricane
peaks. However, spot prices of natural gas moved up further in early December and
remain well above their year-ago level, setting the stage for sizable increases in home
heating bills this winter. Recent data on core price inflation have been favorable despite
some evidence of energy price pass-through.
Energy Sector
Energy producers in the Gulf of Mexico have made progress in repairing damage from
Hurricanes Katrina and Rita. At this point, total domestic crude oil production has
recovered to 88 percent of its pre-Katrina level and natural gas production to 93 percent. 1
However, the recovery is taking longer than had been expected; indeed, it has been
significantly slower than the recovery after Hurricane Ivan in 2004, when a similar
amount of oil and somewhat less gas were shut in. The biggest remaining problem is the
damage to the huge Mars platform in the Gulf of Mexico; it alone generates about
4 percent of domestic crude oil extraction and is not expected to come back on line until
the middle of next year.
Much of the hurricane damage to oil refineries has been repaired, though these repairs are
taking longer than expected. Of the twenty Gulf Coast oil refineries shut down by the
hurricanes, three are still out of service. 2 Although a few other refineries around the
country are shut down for normal maintenance, the Department of Energy reported that,

In the Gulf, about 34 percent of crude oil production and about 27 percent of natural gas production
currently remain shut in. By comparison, at the time of Hurricane Rita’s landfall, all crude oil production
and 80 percent of natural gas production were shut in. Damaged onshore and near-offshore (that is, within
3 miles of shore) production facilities also have recovered. After Hurricane Rita, almost all this oil and gas
capacity in Louisiana was shut in. Currently, however, less than half of Louisiana’s crude oil production
capacity and about one-third of its natural gas capacity remain shut in.
2
These three amount to roughly 5 percent of U.S. refinery capacity.

II-1

II-2

Energy Production and Inventories

Energy IP

Energy Production
(As a percentage of pre-Katrina levels)

2002=100

Percent
100

3-day intervals
Petroleum refining

Natural gas

110
100

105

100

Crude oil

75
70
65 243
255
8/26
9/10

267
9/25

279
303
10/10 291 10/25
2005

315
327
11/9
11/24
2005
Source. Department of the Interior, Department of
Energy, and staff calculations. Figures exclude onshore
and near-offshore facilities in Louisiana.

65
339

9.4

9.2

Dec. 2

9.1
9.0

Natural gas extraction

90
85

Crude oil
+Nov.

80
75

2003

2004

2005

235

230

225

220

9.2

215

9.1

210

9.0

205

210
Dec. 2

205

200

195

195
190

8.9

8.8

190

8.7

185

2005

235
Monthly
Weekly

230

8.9

Note. U.S. gasoline product supplied (or apparent
consumption), seasonally adjusted by FRB staff.
Source. Department of Energy.

Heating Oil Inventories

185
July
Sept.
Nov.
Jan.
2005
2006
2005
2006
Note. Shaded region is average historical range for
2000-04 as calculated by Energy Information
Administration.

Jan.

Mar.

May

Natural Gas Inventories
Billions of cubic feet

Millions of barrels

4000

Monthly
Weekly

3500

60
3000
Dec. 2

2500
2000

1500

1000

500

35
30
July
Sept.
Nov.
Jan.
2005
2006
2005
2006
Note. Shaded region is average historical range for
2000-04 as calculated by FRB staff.

Mar.

May

3000

2000

Jan.

Nov. 25

2500

+Nov.

Millions of barrels
9.5

9.3

100

Note. November values are based on available weekly
data and estimates of facilities that remain off line.

Katrina Rita

9.3

2004

+Nov.

Gasoline Inventories

Millions of barrels per day
4-week moving average

105

Petroleum refining

70
2002

Gasoline Consumption
9.5

110

0
July
Sept.
Nov.
Jan.
2005
2006
2005
2006
Note. Shaded region is average historical range for
2000-04 as calculated by FRB staff.

Jan.

Mar.

May

II-3

Energy Prices

Total Gasoline Margin

Gasoline Price Decomposition
Cents per gallon

350

Cents per gallon

160

Katrina Rita

160

Katrina Rita

300

250

140

120

250
Retail price*
Dec. 5

200

200
Dec. 5
Rack price

100

150

Retail price less WTI spot price*

100

150
Dec. 5
80

100

100
Dec. 5

WTI spot price

2004

2005

2004

2005

* Regular grade seasonally adjusted by FRB staff, less
West Texas intermediate spot price.
Source. Oil Price Information Service.

* Regular grade seasonally adjusted by FRB staff.
Source. Oil Price Information Service.

Heating Oil Prices

Natural Gas Prices
Cents per gallon

300

Dollars per million Btu
300

Katrina Rita

Dec. 5

14
250

250

200

200
Dec. 5

150

100

Rita

Katrina

2004

2005

Note. Price on racks at bulk terminals.
Source. Oil Price Information Service.

2004

2005

Note. National average spot price.
Source. Bloomberg.

II-4

as of the week ending December 2, U.S. total refinery capacity utilization was running
near 91 percent, about 1 percentage point below pre-Katrina levels.
Because U.S. energy production has been returning to normal and extra imports of crude
oil and refined products have been readily available, the supply of energy products has
been ample. On the demand side, the seasonally adjusted apparent consumption of
gasoline and other refined products—which dropped roughly 2½ percent in September—
has returned to pre-Katrina levels as gasoline prices have declined. In addition, unusually
temperate weather through mid-November held down space-heating demand for natural
gas and heating oil.
As a result of these developments, petroleum inventories have rebounded from their
post-hurricane lows. Crude oil stocks are now well above normal, and inventories of
gasoline, heating oil, and some other refined products are comfortably within the normal
ranges for the season; by contrast, inventories of diesel fuel are at the low end of their
normal range. 3 Natural gas inventories remained comfortably above seasonal norms in
November. However, unusually cold weather in early December likely caused natural
gas inventories to fall back, and spot prices spiked in the week ending December 5. If the
winter were to be unusually cold, then temporary local shortages of natural gas could
arise. If temperatures run at seasonal averages, however, inventories likely would be
sufficient to meet space-heating demand.
The bulge in crude oil inventories has contributed to a net decline in spot crude oil prices
of about $0.75 per barrel since the October Greenbook. At the same time, wholesale
markups for gasoline and heating oil fell back to the normal range as inventories of these
products also recovered. As both crude oil costs and wholesale markups have moved
lower, rack prices of gasoline have fallen 16 percent since late October, and rack prices
of heating oil have fallen 17 percent. 4 Because declines in wholesale prices of gasoline
are usually passed through to the retail level over a period of one to six weeks, the sharp
decreases in rack prices of gasoline caused only a 6 percent decline in retail gasoline
prices in October; survey data point to a substantially larger retail decline in November.

Domestic refiners boosted the share of gasoline in the output mix of refined products immediately
after the hurricanes to address the low level of gasoline inventories at the time; since then, this share has
declined only slightly.
4
Rack prices are wholesale prices for oil products at bulk terminals.

II-5

For natural gas, plentiful inventories and declining prices of competing fuel oil resulted in
a large decline, on balance, in the U.S. average spot price from its peak in early October
to mid-November. However, consumer prices of natural gas increased in October
because in many states the regulated residential prices of natural gas are based on costs at
the end of the previous month. The huge net decline in spot prices from early October to
mid-November is thus likely to hold down consumer prices of natural gas for the month
of November. However, with the surge in spot prices since mid-November, current
consumer prices of natural gas are estimated to be about 35 percent above the level of
December 2004, and, as a result, households are facing a significant jump in home
heating costs this winter.
Labor Market Developments
The labor market appears to be recovering from the losses that occurred as the result of
the recent hurricanes. After a subpar gain in October, private nonfarm payroll
employment rose by nearly 200,000 in November, somewhat above the pace in the three
months before September.
By industry, construction employment rose 37,000 last month, likely because of
hurricane-recovery activity. Employment at food service and drinking establishments
also rose nearly 40,000 last month and reversed about half of the decline experienced
over the previous two months. Broad-based gains in durable goods industries pushed up
manufacturing employment in November, and the related industries of temporary help
services and wholesale trade experienced job growth as well. Elsewhere, significant
increases occurred in professional and technical services and in education and health
services.
Average weekly hours of production or nonsupervisory workers on private nonfarm
payrolls ticked down 0.1 hour, to 33.7 hours, in November but remained in the narrow
range that they have occupied over the past year. The decline in the workweek pushed
aggregate hours down 0.1 percent. Still, aggregate hours last month stood 0.2 percentage
point above their third-quarter average.
In the household survey, the unemployment rate held steady at 5.0 percent in November
and has changed little, on net, since the spring. 5 The labor force participation rate, at
5

According to responses to special questions in the household survey that were asked of individuals
who evacuated their homes as a result of Hurricane Katrina, the direct effect of Katrina on the measured
unemployment rate appears to have been less than 0.1 percentage point in November.

II-6

Changes in Employment
(Thousands of employees; seasonally adjusted)
2005
Measure and sector

2004

Sept.

Average monthly change
Nonfarm payroll employment
(establishment survey)
Private
Previous
Manufacturing
Construction
Wholesale trade
Retail trade
Transportation and utilities
Information
Financial activities
Professional and business services
Temporary help services
Nonbusiness services1
Total government
Total employment (household survey)
Memo:
Aggregate hours of private production
workers (percent change)2
Average workweek (hours)3
Manufacturing (hours)

Oct.

Nov.

Monthly change

183
171
171
3
23
7
13
9
-2
12
45
15
59
12
146

182
172
172
-6
24
6
17
18
2
13
41
9
51
10
115

198
188
188
-13
24
7
23
8
4
14
37
8
83
10
379

147
115
107
-11
18
5
-5
5
2
19
44
21
35
32
265

17
10
-16
-16
17
4
-48
3
6
17
54
31
-32
7
-17

44
49
46
15
35
2
3
6
-13
27
6
6
-35
-5
214

215
194
...
11
37
12
9
9
3
13
29
5
70
21
-52

2.4
33.7
40.8

2.3
33.7
40.6

2.8
33.7
40.4

2.1
33.7
40.6

.3
33.8
40.7

.1
33.8
41.0

-.1
33.7
40.8

1. Nonbusiness services comprises education and health, leisure and hospitality, and "other."
2. Establishment survey. Annual data are percent changes from Q4 to Q4. Quarterly data are percent changes from preceding
quarter at an annual rate. Monthly data are percent changes from preceding month.
3. Establishment survey.
... Not applicable.

Changes in Private
Payroll Employment

Thousands
500

500

Aggregate Hours of Production or
Nonsupervisory Workers
106

2002 = 100
106

104

Nov.

3-month moving average
400

400

300

200

100

102

100

100
Nov.

-100

-200

-300

-400

104

1998

2000

2002

2004

-400

1998

2000

2002

2004

II-7
Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2005
Rate and group

2004

Sept.

Oct.

Nov.

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

5.5
17.0
9.4
4.4
4.4

5.3
16.9
9.5
4.1
4.1

5.1
17.3
8.8
3.8
4.2

5.0
16.1
8.6
3.8
4.2

5.1
15.8
8.7
3.9
4.3

5.0
15.9
8.5
3.7
4.2

5.0
17.2
8.4
3.7
4.3

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

66.0
43.8
75.0
75.3
59.3

65.8
43.5
74.4
75.2
59.1

66.0
43.9
74.3
75.5
59.2

66.2
43.9
74.7
75.6
59.5

66.2
43.6
74.7
75.5
59.6

66.1
43.0
75.1
75.5
59.5

66.1
43.8
75.0
75.3
59.6

Labor Force Participation Rate
and Unemployment Rate

Percent
67.4

Percent
7.0

67.2

6.5

67.0
6.0

Participation rate (left scale)

66.8

5.5

66.6
66.4
Nov.
66.2

5.0
4.5

66.0
Unemployment rate (right scale)

4.0

65.8
65.6

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

3.5

2005

Job Leavers Unemployed
Less Than 5 Weeks

Persons Working Part-Time
for Economic Reasons
4.0

Percent of household employment
4.0

3.5

0.30

3.0

0.25

2.5

0.20

2.0

0.15

3-month moving average

Percent of household employment
0.35

Nov.

0.30

Nov.
2.5

2.0

1994

1996

1998

2000

2002

2004

2006

1994

1996

1998

2000

2002

2004

2006

0.15

II-8

Labor Market Indicators

Labor Market Tightness

Insured Unemployment Rate
Percent
4.0

4.0

Percent
40

Index
150

4-week moving average
3.5

3.5

Job availability*
(right scale)

130

3.0

Nov. 19

110

3.0

Nov.
25

2.5

2.5
Hard to fill**
(left scale)

2.0

1.5

2.0

1996

1998

2000

2002

2004

2006

1.5

15
10

1996

1998

2000

2002

2004

*Proportion of households believing jobs are plentiful, minus the
proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one "hard to
fill" job opening.
Source. For job availability, Conference Board; for hard to fill,
National Federation of Independent Business.

Initial Claims

Layoff Announcements
Thousands
550

550

250

Thousands
250

200

150

4-week moving average
500

500

450

400

350

300

300
Nov. 26

250
200

250
1996

1998

2000

2002

2004

2006

200

100

Nov.

1996

1998

2000

2002

2004

2006

Note. Seasonally adjusted by FRB staff.
Source. Challenger, Gray, and Christmas, Inc.

Net Hiring Plans

Expected Labor Market Conditions
Percent
25

Index
120

Index
140
Michigan SRC

3-month moving average
20

20
Nov.

(right scale)
120

100

1996

1998

2000

2002

2004

Note. Percent planning an increase in employment
minus percent planning a reduction.
Source. National Federation of Independent
Business.

2006

Nov.
Conference Board
(left scale)

1996

1998

2000

2002

2004

2006

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

II-9

66.1 percent, was unchanged. Other household survey measures suggest some reduction
of late in labor market slack. The number of employees working part time for economic
reasons as a percent of employment has moved down, on net, over the past two months,
while the number of workers leaving their jobs to enter unemployment as a percent of
employment—an indicator of individuals’ perceptions of job availability—has increased,
on net, over this period.
Among other indicators of slack in the labor market, the four-week moving average of
insured unemployment moved down to 2.78 million for the week ending November 19,
about 200,000 above the levels immediately preceding Katrina but 85,000 less than the
post-Katrina peak. Both the Conference Board’s job availability index and the share of
firms reporting hard-to-fill job openings to the National Federation of Independent
Business’ (NFIB) moved up in November.
The latest indicators of labor demand are consistent with a robust labor market. The
four-week average of initial claims for unemployment insurance fell to 322,000 for the
week ending November 26, a level similar to that prevailing before Katrina. Layoff
announcements compiled by Challenger, Gray, and Christmas, Inc., bounced back from a
low October reading, but the average for the past two months was still below the average
for the year before September. Meanwhile, the three-month moving average of business
hiring plans reported to the NFIB remained close to recent highs in November, and
individuals’ expectations of future labor market conditions—as measured by the
Conference Board and the Michigan Survey Research Center (SRC)—moved up last
month, largely reversing post-Katrina declines.
The BLS reported that output per hour in the nonfarm business sector rose at an annual
rate of 4.7 percent in the third quarter. Over the four quarters ending last quarter,
productivity advanced 3.1 percent, up from the 2.2 percent pace registered over the
preceding four quarters. In the nonfinancial corporate sector, output per hour rose
4.7 percent over the most recent four quarters, considerably above the 3.2 percent
increase over the previous four quarters.

II-10

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

Sector
Nonfarm business
All persons
All employees1
Nonfinancial corporations2

2003:Q3 2004:Q3
to
to
2004:Q3 2005:Q3
2.2
2.2
3.2

3.1
2.8
4.7

2004

2005

2.5
2.1
8.5

3.2
3.7
2.7

Q2
2.1
1.9
4.3

Q3
4.7
3.6
3.2

1. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of employees.
2. All corporations doing business in the United States except banks, stock and commodity brokers,
and finance and insurance companies. The sector accounts for about two-thirds of business employment.

Industrial Production
Industrial production (IP) bounced back in October and appears to have increased briskly
in November after having been held down in September by hurricanes and by a strike at
Boeing. Total IP rose 0.9 percent in October; about one-half of the increase was due to
the resumption of commercial aircraft production, and roughly one-fourth of the gain
reflected recoveries in hurricane-related industries primarily outside of energy.
Manufacturing production surged nearly 1½ percent, but output at mines, which includes
oil and gas extraction, slipped further in October after plunging more than 8½ percent in
September. Utilities output fell for a fourth consecutive month in October, and weekly
data suggest that utilities output contributed little to the increase in November IP.
The available product data for November suggest that a sharp increase in oil and gas
extraction and in refining likely contributed about ½ percentage point to the change in IP
last month. Outside of energy, the restarting of hurricane-idled facilities boosted output
in October and appears to have further lifted output in November; most prominently, the
production of chemicals rose about 2½ percent in October after falling more than
5 percent in the previous month. 6 Output gains in other hurricane-affected industries—
such as parts of the food, rubber and plastics, and paper industries—also contributed to
the increase in IP in October.
Industry estimates suggest that the pace of motor vehicle assemblies dropped to an annual
rate of 11.8 million units in November; the associated decline in the production index for
motor vehicles will reduce total IP in November about ¼ percentage point. The latest
6

Hurricane Rita idled nearly half of petrochemicals capacity at the beginning of October.

II-11

Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2004

Component

2005

20041

(percent)

2005
Q3

Aug.

Annual rate
Total
Previous

Sept.

Oct.

Monthly rate

100.0
100.0

4.3
4.3

2.7
2.5

.9
1.3

.2
.2

-1.5
-1.3

.9
...

82.0
74.7
69.7

5.1
5.4
4.4

2.9
3.2
1.7

1.9
.9
-.9

.4
.1
-.1

-.7
-1.0
-1.3

1.4
1.7
1.6

Mining
Utilities

8.5
9.5

-.4
1.2

2.0
2.2

-14.8
9.3

-.7
-.9

-8.6
-.9

-.5
-1.9

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.9
.9
1.1
2.9

18.4
4.6
22.3
21.4

24.4
12.4
18.1
30.8

27.6
6.3
29.7
33.5

2.9
.2
1.2
4.4

2.2
.4
.9
3.2

1.7
.4
2.7
1.7

Motor vehicles and parts

7.3

2.6

-.5

12.5

3.6

2.3

-.6

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

21.7
4.3
17.4

2.3
1.8
2.5

2.2
-.2
2.8

.0
3.2
-.7

-.3
.5
-.5

.6
1.5
.3

.0
-.6
.2

Business equipment
Defense and space equipment

7.8
1.9

9.0
9.7

7.4
11.9

-1.6
5.4

-.2
.3

-6.3
-2.2

8.2
2.3

Construction supplies
Business supplies

4.4
7.9

4.6
3.3

2.3
2.0

4.5
.3

.7
.3

1.2
-.2

1.3
1.0

25.0
13.8
11.2

4.7
6.0
3.2

-1.3
-.4
-2.4

-1.6
2.9
-7.1

-.1
.5
-.8

-1.3
1.2
-4.5

1.3
1.0
1.8

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

Materials
Durables
Nondurables

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

Capacity Utilization
(Percent of capacity)
19722004
average

199495
high

200102
low

Sept.

Oct.

Total industry

81.0

85.0

73.9

79.9

79.7

78.9

79.5

Manufacturing
High-tech industries
Excluding high-tech industries

79.8
78.2
79.9

84.5
86.1
84.4

72.0
57.4
73.1

78.7
75.3
79.0

78.5
74.7
78.9

78.5
75.4
78.9

78.1
75.8
78.4

79.0
75.8
79.5

Mining
Utilities

87.3
86.8

89.0
93.7

85.6
83.7

89.4
83.9

89.6
85.2

86.1
87.2

80.9
86.4

80.4
84.8

Sector

2005

II-12

production schedules for December suggest that assemblies will average 11.9 million
units for the fourth quarter as a whole, a decline of more than 200,000 units from the rate
in the third quarter. Despite the slower pace of production, dealer stocks of new vehicles
are headed for a large increase in the fourth quarter. That increase should move
inventories back into the range generally targeted by the automakers: Days’ supply at the
end of October was about sixty-six days as measured by a six-month moving average of
sales. The automakers’ initial plans for the first quarter of next year call for assemblies to
step down further to 11.6 million units.
Elsewhere in transportation, commercial aircraft production at Boeing snapped back in
October. However, the company has decided not to make up for the production lost
during the September strike; as a result, previously scheduled deliveries of commercial
aircraft are essentially delayed by one month. 7
Output in high-technology industries rose 1.7 percent in October, a step down from the
average monthly rate of 2½ percent during the third quarter but about the average
monthly pace during the first half of 2005. Production of communications equipment
continued to surge after increasing at an annual rate of about 30 percent in the third
quarter. The output gains for communications equipment, while broadly based, have
been particularly strong for data networking equipment. For the most part, industry
reports continue to be positive. However, the CIO Magazine diffusion index for future
spending on data networking equipment fell sharply in October, and in November the
index remained near the low end of its range over the past two years. In contrast to
communications equipment, growth in the output of computers and peripherals has
slowed recently, even relative to the tepid pace of the past year. Although unit sales and
production of personal computers have held up reasonably well, the product mix has
shifted toward lower-end desktops and laptops. In addition, the production of large
servers dropped off markedly, although the output of small and midsize servers was solid
in the third quarter. The composition of semiconductor production has reflected the
contrast between the output growth of computers and that of communications equipment;
rates of increase in the IP index for the microprocessor chips used in computers have
been running well below the rapid pace of the index for other chips.

Nevertheless, Boeing intends to increase production substantially over the next couple of years, partly
because of the introduction of the 787 Dreamliner. By not boosting scheduled production to make up for
the output lost during the strike, Boeing is attempting to avoid the problems that occurred during its last
major expansion: Sales and production soared in 1997, but overtime charges, parts shortages, and
late-delivery fees imposed large financial losses.

II-13
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted; FRB seasonals)
2005
Item

2004

U.S. production1
Autos
Light trucks

Aug.

Sept.

Oct.

11.7
4.3
7.4

11.5
4.3
7.2

11.7
4.3
7.4

11.5
4.5
7.0

11.8
4.3
7.5

12.1
4.4
7.7

11.9
4.4
7.5

Days’ supply2
Autos
Light trucks

74
59
83

68
53
77

59
44
68

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

61
47
71

65
44
82

80
51
103

Inventories3
Autos
Light trucks

3.22
1.02
2.20

2.96
.93
2.03

2.76
.82
1.94

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

2.65
.85
1.80

2.76
.82
1.94

2.97
.86
2.10

Memo: U.S. production,
total motor vehicles4

12.0

11.9

12.1

11.9

12.2

12.5

12.4

Note. Components may not sum to totals because of rounding.
1. Production rate for the fourth quarter reflects the latest schedules from Ward’s Communications.
2. Half-year and quarterly values are calculated with end-of-period stocks and average reported sales.
3. End-of-period stocks.
4. Includes medium and heavy trucks.
n.a. Not available.

Inventories of Light Vehicles
Millions of units
3.4
3.2
Oct.

3.0
2.8
2.6
2.4

1998

1999

2000

2001

2002

2003

2004

2.2

2005

Note. FRB seasonals. Monthly totals.

Days’ Supply of Light Vehicles
Days
90
80
Oct.

*
60
50
1998

1999

2000

2001

* Constructed using 6-month moving average of sales.

2002

2003

2004

2005

II-14

Indicators of High-Tech Manufacturing Activity

CIO Magazine Future Spending
Diffusion Indexes

Communication Equipment and Computer IP
2002 = 100, ratio scale
175
Oct.
Communications equipment

Oct.

150

Index
75

125

Nov.

60
100

Computers
2002

2003

2004

2005

0.7

Computer hardware

45
2001
2002
2003
2004
2005
Note. The diffusion index equals the percentage of respondents planning to increase future spending plus one-half the
percentage of respondents planning to leave future spending
unchanged.
Source. CIO Magazine.

Percent

Millions of units, ratio scale

0.9

17
Q3

0.8

Rate of Change in Semiconductor
Industrial Production

U.S. Personal Computer and Server Sales
Millions of units, ratio scale

Data networking equipment

PCs (right scale)

0.6
0.5

12
11
Servers (left scale)

0.4
10

14
3-month moving average

12
10
MPUs

8
6

Oct.

2
-2

1999 2000 2001
Note. FRB seasonals.
Source. Gartner.

2002

2003

2004

2005

Microprocessor Unit (MPU) Shipments
and Intel Revenue

-6

4
2

0
Non-MPU chips

-2

-4
0.3

-4
2002

2003

2004

-6

2005

Semiconductor Manufacturing
Equipment Orders and Shipments

Billions of dollars, ratio scale
Q4
Q3

Billions of dollars, ratio scale
11

3.5
3.0

10
9

2.5
2.0

Shipments

Intel revenue
8

1.5
Orders

Oct.

1.0

6
Worldwide MPU shipments
1999 2000 2001 2002 2003 2004 2005
Note. Q4 is the range of Intel’s revenue guidance as of
October 18, 2005. FRB seasonals.
Source. Intel and Semiconductor Industry Association.

1999 2000 2001 2002 2003 2004 2005
Source. Semiconductor Equipment and Materials
International.

0.5

II-15

Indicators of Manufacturing Activity

Boeing Commercial Aircraft Completions
Millions of units
14

0.6

Medium and heavy trucks
(left scale)

0.5

+ Nov.

0.4

0.3

11
Autos and light trucks
(right scale)

0.1
0.0

1999 2000 2001 2002 2003 2004 2005 2006
Note. November values are based on latest industry
schedules.

2002 = 100
165

145

125

105

85
65

+ Nov.

0.2

165

85
Oct.

Actual

IP: Equipment and Consumer Goods

5
2000 2001 2002 2003 2004 2005 2006 2007
Note. 1998 price-weighted index. Actual completions equal
deliveries plus the change in the stock of finished aircraft.
FRB seasonals.

IP: Materials and Supplies
2002 = 100

2002 = 100
Oct.

Business equipment

Oct.

Consumer goods

2002
2003
2004
2005
Note. Data exclude energy, motor vehicles and parts,
commercial aircraft, and high-tech industries.

119
117
115
113
111
109
107
105
103
101
99
97
95

New Orders: ISM Survey and Change in
Real Adjusted Durable Goods Orders (RADGO)
Percent

90
ISM (right scale)

Oct.

105

103
101

Oct.
Nonindustrial supplies

99
97
95

Nov.

99
97

Industrial materials

95
2002
2003
2004
2005
Note. Data exclude energy, motor vehicles and parts, and
high-tech industries.

90
Primary and semifinished
processing

-1

-2

30
20

85
Oct.

60
50

RADGO (left scale)

103
101

-5

105

Percent

-4

107
Oct.

Capacity Utilization, by Stage of Process
100

-3

107

Diffusion index

Oct.

75
Finished processing

10
0
2002
2003
2004
2005
Note. The diffusion index equals the percentage of
respondents reporting greater levels of new orders plus
one-half the percentage of respondents reporting that
new orders were unchanged. RADGO is a 3-month moving
average.

2000
2001
2002
2003
2004
2005
Note. The horizontal lines are the mean utilization
rates of each series calculated for 1972-2004.

Content partially redacted.

Motor Vehicle Assemblies
Millions of units

II-16

In market groups excluding energy, motor vehicles and parts, and high-tech products,
business equipment output jumped more than 8 percent in October. Much of the increase
reflected the resumption of commercial aircraft production. But excluding aircraft,
production still rose substantially; oil and gas field machinery recorded a particularly
large gain. By contrast, the output of consumer goods remained weak in October,
continuing the pattern evident in recent quarters. The output of construction supplies
surged in both September and October, and some of the increase was likely related to
rebuilding efforts in the Gulf Coast region. Materials output also rose in October, partly
because of the hurricane-related recovery in chemicals output. By stage of process,
capacity utilization rates in October for both the primary and semifinished stages and the
finished stage were only a touch below their long-run averages. 8 Because additions to
capacity continue to be meager, a sustained pickup in production could move the
industrial operating rate to its long-term average fairly quickly. 9
The forward-looking indicators of production remain indicative of solid, if unspectacular,
increases in manufacturing output. The three-month moving average of the staff’s series
on real adjusted durable goods orders rose moderately in October. The new orders
diffusion index from the Institute for Supply Management (ISM) slipped a bit in
November, but like the new orders indexes from most of the regional surveys, the ISM
index remained at a level consistent with further output gains in coming months.
Motor Vehicles
Smoothing through the large swings caused by the automakers’ temporary summer
pricing programs shows that sales of light vehicles averaged an annual rate of
16.8 million units over the past five months, a pace little changed from that recorded in
the first half of the year. Sales plunged in October after the expiration of the employee
discount programs, but the decline was widely forecasted after the summer spike, and
sales in November rebounded to an annual rate of 15.7 million units. The pace of sales
will likely advance further this month after the introduction of another round of
8

The annual revision of industrial production and capacity utilization was published in November, and
revisions were generally small. Capacity utilization for total industry in the third quarter of 2005, at
79.7 percent, was 0.3 percentage point higher than previously reported. Between the fourth quarter of 2000
and the third quarter of 2005, industrial output increased about 1 percentage point more than previously
estimated, and because capacity was revised up less than was production, operating rates are above those
previously reported.
9
Capacity growth may be restrained slightly by the plant closures recently announced by GM. If GM
carries through with these plans, capacity in the light motor vehicle sector, currently 14.7 million units,
would fall about 450,000 units by the end of calendar year 2006 and would decline another 275,000 units
by the end of 2008. In addition, in January Ford will announce details of a restructuring plan that the
company has said will include several plant closures and deep cuts in its workforce.

II-17
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2005
Category

2004

Total

Sept.

Oct.

Nov.

16.8

16.7

17.2

17.9

16.3

14.7

15.7

7.5
9.3

7.6
9.1

7.6
9.6

8.0
10.0

8.0
8.4

7.3
7.4

7.6
8.1

North American1
Autos
Light trucks

13.4
5.3
8.1

13.3
5.5
7.9

13.7
5.4
8.3

14.5
5.7
8.8

13.0
5.7
7.3

11.4
5.2
6.2

12.5
5.5
7.0

Foreign-produced
Autos
Light trucks

3.4
2.1
1.2

3.4
2.2
1.2

3.5
2.2
1.3

3.5
2.3
1.2

3.3
2.3
1.1

3.3
2.1
1.1

3.2
2.1
1.1

58.7

57.7

58.4

57.3

54.6

52.0

53.4

Autos
Light trucks

Memo:
Big Three domestic
market share (percent)2

Note. Components may not sum to totals because of rounding. Data on sales of trucks and imported autos for the most
recent month are preliminary and subject to revision.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.
2. Domestic market share excludes sales of foreign brands affiliated with the Big Three.

Sales of Light Vehicles

Average Value of Incentives on Light Vehicles
Ratio scale, current dollars per vehicle

Millions of units, annual rate
21

3800

Quarterly averages

2900

Quarterly averages

Nov. 27

2000

1100

17
Nov.

16
15

2002

2003

2004

2005

2000

2001

2002

2003

2004

2005

2006

200

Note. Weighted average of customer cash rebate and
interest rate reduction. Data are seasonally adjusted.
Source. J.D. Power and Associates.

Note. FRB seasonals.

Michigan Survey Index of Car-Buying Attitudes
Index

Percent
64

200

Bad time to buy: gas prices/shortages (left scale)
Appraisal of car-buying conditions (right scale)

180

160

140

32
120
24

Nov.

100

-8

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

II-18

aggressive incentives by the Big Three firms in an attempt to bolster their year-end totals.
Weekly data indicate that the average incentive per light vehicle sold moved up to $1,650
in the week ending November 27, well above the recent low of about $1,100 recorded in
September.
Forward-looking indicators suggest that vehicle demand will be fairly well maintained in
the near term. The Michigan SRC index of car-buying attitudes ticked up in November,
indicating that consumers’ buying perceptions have improved a bit from their recent
lows. Also, the fraction of Michigan survey respondents who cited high gasoline prices
as the reason behind their pessimistic views of buying conditions declined noticeably in
November.
Consumer Spending
Although the dropback in motor vehicle sales in recent months will likely hold down
growth in total real consumer spending this quarter, spending outside motor vehicles is on
pace for a solid gain. Non-auto spending moved up notably in October after having
edged down in September in response to the hurricanes. Consumer spending has been
supported by an improving labor market, a strengthening of equity and housing prices,
and a rebuilding of household purchasing power due to the recent fall in retail energy
prices.
Excluding motor vehicles, spending gains in October were broad based. Real
expenditures on durable goods expanded, reversing some of the decline posted in
September. Outlays for nondurable goods, which rose briskly, were aided by a recovery
in real outlays on gasoline. At the same time, spending on services moved up despite a
sizable fall in outlays for electricity services. Further, early indications from retailers
point to robust spending in late November and early December and suggest that the
holiday shopping season is off to a decent start.
The fundamental determinants of consumer spending, which were lackluster in the third
quarter, appear to have improved of late. Real disposable personal income firmed in
October and looks to have increased further in November, bolstered by improvements in
the labor market and falling energy prices. Continued brisk gains in home prices and a
recent pickup in the stock market have strengthened household balance sheets and pushed
up the ratio of household wealth to disposable income. The personal saving rate, which
plummeted in August to -2.2 percent (partly because of the uninsured hurricane-related
losses to income), moved up to -0.7 percent in October.

II-19

Real Personal Consumption Expenditures
(Percent change from the preceding period)
2004:
H2
Total real PCE
Durable goods
Motor vehicles
Excluding motor vehicles
Nondurable goods
Energy1
Other
Services
Energy2
Other
Real PCE excl. motor vehicles
Memo:
Real disposable personal income3

2005
Aug.
Sept.
Monthly rate

Oct.

4.2
10.5
15.1
6.9
3.6
-5.1
4.9
3.3
2.9
3.4
3.7

-.9
-8.5
-18.7
1.1
.4
-.7
.5
.2
.3
.2
.3

-.4
-3.0
-6.0
-.7
-.7
-4.0
-.2
.3
1.1
.3
-.1

.0
-3.3
-8.3
.3
1.0
3.6
.6
.1
-1.8
.2
.4

-.7

-1.5

1.0

H1
Annual rate

4.4
8.1
7.5
8.6
4.7
2.0
5.0
3.5
10.8
3.2
4.2

3.4
5.2
-.6
10.1
4.5
2.2
4.8
2.6
-1.9
2.7
3.7

3.5

1. Includes gasoline, motor oil, fuel oil, and coal.
2. Includes natural gas and electricity usage for household operations.
3. Microsoft dividend is excluded.

Real PCE

Real PCE Excluding Motor Vehicles
Billions of chained (2000) dollars
8000

8000

Quarterly average
Oct.

7900

7800

7700

7600

7500

7400

Billions of chained (2000) dollars
7500

7500

Quarterly average

2004

7400

2005

Oct.

7400

7300

7200

7100

7000

2004

2005

7000

Changes in DPI and Wages and Salaries
Percent, annual rate
14
Real disposable personal income
Real wages and salaries
Nominal wages and salaries

12
10
8
6
4
2
0

2004

Note. Microsoft dividend is excluded.

2005

Oct.

-2

II-20

Household Indicators

Household Net Worth and Wilshire 5000
Index
15000

Ratio
7.0

13000

Nov.
Wilshire 5000
(left scale)

11000

6.0

9000

5.5

7000

5.0
Ratio of household net worth to DPI*
(right scale)

5000
3000

6.5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

4.5
4.0
2006

2005

* Value for 2004:Q4 excludes the effect on income of the one-time Microsoft dividend in December. Value for 2005:Q3 is a staff estimate.

Personal Saving Rate
6

Percent
6

0
Oct.

-1

-2
-3

-2
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-3
2006

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

Consumer Confidence
1985 = 100
160

1966 = 100
120

140

110

Michigan SRC (right scale)

120

100

90
Nov.

60
40

Conference Board (left scale)
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

60
2006

II-21

Consumer confidence picked up some in November after having been weighed down by
high energy prices and the hurricanes during the late summer and early fall. However, as
indicated by surveys from the Michigan Survey Research Center and the Conference
Board, confidence remains below levels seen during the first half of the year and is likely
damping spending a touch.
Housing Markets
Despite the downbeat tone of many anecdotes and press reports, the available data show
only limited signs of cooling in the housing market. Although starts of single-family
homes declined in October to an annual rate of 1.70 million units, this pace was equal to
the average level seen in the first half of the year. In the multifamily sector, starts dipped
to an annual rate of 310,000 units in October, only a bit below the average pace of the last
few months. New permit issuance for both single-family and multifamily homes also
moved down in October, but the level of permits and the backlog of unused permits both
remained elevated, suggesting that housing starts will remain strong through the end of
the year.
New home sales jumped in October to an annual rate of 1.42 million units, the highest
pace on record. Nevertheless, the stock of new homes for sale moved up in October and
represents 4.3 months’ supply at October’s elevated sales pace, a level near the upper end
of the range it has occupied since 1997. In October, sales of existing single-family
homes declined but remained quite elevated, while inventories of existing homes for sale
edged up.
Mortgage rates have moved up significantly since midyear. The rate on a thirty-year
fixed-rate mortgage has increased about 75 basis points since June, and the rate on the
one-year adjustable-rate mortgage has increased about 90 basis points. Nevertheless,
mortgage rates remain well below their levels of a few years ago.
Other indicators of housing activity have turned down recently. The Mortgage Bankers
Association’s index of mortgage applications for home purchases declined in November,
and builders’ ratings of new home sales have also fallen off in recent months. Moreover,
the Michigan SRC index of homebuying attitudes fell significantly in September and
October and bounced back only a little in November; recent homebuying attitudes are at
levels last observed in the early 1990s.

II-22

Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2005
Sector
All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
Permit backlog2
New homes
Sales
Months’ supply3
Existing homes
Sales
Months’ supply3
Multifamily units
Starts
Permits
Permit backlog2
Mobile homes
Shipments
Condos and co-ops
Existing home sales

2004

Aug.

Sept.

Oct.

1.96
2.05

2.08
2.08

2.04
2.11

2.09
2.18

2.08
2.14

2.13
2.22

2.01
2.10

1.61
1.60
1.64
.15

1.71
1.60
1.63
.15

1.69
1.64
1.67
.16

1.74
1.71
1.74
.17

1.72
1.68
1.71
.16

1.77
1.77
1.81
.17

1.70
1.71
1.74
.17

1.20
4.03

1.25
4.30

1.29
4.30

1.29
4.50

1.25
4.70

1.26
4.70

1.42
4.30

5.96
4.30

5.98
4.00

6.30
4.30

6.32
4.60

6.34
4.70

6.39
4.50

6.23
4.80

.35
.46
.07

.37
.48
.07

.35
.47
.06

.36
.46
.07

.36
.45
.06

.31
.40
.06

.13

.14

.13

.14

.19

.82

.85

.93

.92

.94

.90

.86

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

Private Housing Starts and Permits
(Seasonally adjusted annual rate)

Millions of units
2.0

2.0
1.8

1.8
Single-family starts

Oct.

1.6
1.4

1.2

1.2
Single-family adjusted permits

1.0

.6
Multifamily starts

.4
Oct.

.2
.0

.2
1999

2000

2001

2002

2003

2004

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

2005

II-23

Indicators of Single-Family Housing
Existing Home Sales

New Home Sales
Thousands of units
6500

6500

Thousands of units
1500

1500

Oct.

Oct.
6000

6000

5500

5000

4500

4000

1999

2000

2001

2002

2003

2004

2005

2006

4000

1300

1100

900

700

1999

2000

2001

2002

2003

2004

2005

2006

700

Source. Census Bureau.

Source. National Association of Realtors.

Mortgage Rates

Homebuying Indicators
Percent
9

9
Fixed rate

Dispersion index
120
MBA purchase index (right scale)
Michigan homebuying attitudes (left scale)
100

Index
575
525
475

Dec. 2

425

Nov.
6

375
Nov.

5
1-year ARM rate

1999 2000 2001 2002 2003 2004 2005 2006
Note. The November readings are based on data
through November 30, 2005.
Source. Freddie Mac.

275
1999 2000 2001 2002 2003 2004 2005 2006 2007

225

Note. MBA index is a 4-week moving average. Builders’
ratings are seasonally adjusted by Board staff.
Source. Mortgage Bankers Association and Michigan
Survey.

Prices of Existing Homes

Prices of New Homes

Percent change from year earlier
20

325

Nov.

Percent change from year earlier
20

Repeat transactions, purchase-only index
Average price of homes sold

Constant quality
Average price of homes sold

Q3
Oct.

10
Q3

-5

1999

2000

2001

2002

2003

2004

2005

Source. For repeat transactions, OFHEO; for
average price, National Association of Realtors.

2006

Oct.

1999

2000

2001

2002

2003

2004

2005

Note. Average price of homes sold is a 3-month
moving average.
Source. Census Bureau.

2006

-5

II-24

At the same time, prices of existing homes continue to increase rapidly. The
purchase-only version of the OFHEO price index, which controls for differences in
quality by tracking repeat sales of the same houses over time, was 11 percent higher in
the third quarter than its year-ago level. The constant-quality price index for new
homes—which controls for changes in the geographic composition of sales, home size,
and other readily measurable attributes—was up 7½ percent in the third quarter from its
year-ago level. The average price of existing homes sold in October was 11¼ percent
higher than its year-earlier level, a slightly larger increase than the previous
twelve-month rise. The only house price measure that has shown any moderation is the
average price of new homes sold, which has decelerated markedly since the beginning of
the year.
Equipment and Software
Real outlays for equipment and software posted a solid gain in the third quarter, growing
at an annual rate of about 11 percent. Although business purchases of motor vehicles
were weak in October and November, spending excluding motor vehicles appears strong
this quarter: Shipments of nondefense capital goods excluding aircraft moved up
1.8 percent in October. Business investment has been supported by robust growth in
business sales and by ample financial resources in the corporate sector. Additionally, the
cost of capital continues to decline as the relative prices of high-tech equipment and,
more recently, of motor vehicles have moved down. The favorable investment climate is
reflected in executive surveys, which generally point to widespread, planned increases in
capital outlays.
Real spending on high-tech equipment and software increased at an annual rate of
16 percent in the third quarter, and demand indicators for the fourth quarter are positive
on balance. October shipments of computers jumped 6.3 percent; deliveries of
communications equipment edged down 0.4 percent, but bookings surged 14.4 percent.
After having increased at a rapid pace in the previous two quarters, business purchases of
motor vehicles appear to have moderated. Fleet sales of light vehicles moved up to a
record high level in the third quarter and have come off a bit since then. In the
commercial truck sector, sales of medium and heavy trucks (classes 5 to 8) edged down
to 490,000 units in October, but the level was well within the range of values recorded
over the past year. The indicators of near-term truck demand suggest that sales will
continue at a solid pace. The three-month moving average of new orders for medium and

II-25

Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2005
Indicators

Aug.

Annual rate

Sept.

Oct.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

8.2
1.3
9.3
-8.5
1.0

1.8
3.2
-6.6
30.8
2.3

3.7
2.3
4.0
2.5
2.0

-2.9
-.6
-5.7
1.3
.1

4.4
1.8
6.3
-.4
1.4

Shipments of complete aircraft1

30.2

26.2

37.5

14.4

n.a.

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

66.1
2.2
36.8
-20.5
.0

-15.6
4.0
-10.7
23.2
4.8

4.0
3.9
13.5
1.3
2.6

-8.7
-1.8
-6.6
-12.0
.2

6.7
1.4
-1.4
14.4
.5

1. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.
n.a. Not available.

Computers and Peripherals

Communications Equipment

Billions of dollars, ratio scale

13
12

Shipments
Orders

13
12
10

Oct.

Billions of dollars, ratio scale

20
17
14

Shipments
Orders

8
Oct.

5
6

20
17
14

1999

2000

2001

2002

2003

2004

2005

2006

1999

2000

Aircraft Shipments

2001

2002

2003

2004

2005

2006

Other Equipment

Billions of dollars, ratio scale

Shipments
Orders

Oct.

51
48

Sept.
1

1999 2000 2001 2002 2003 2004 2005 2006
Source. Census Bureau, Current Industrial Reports.

1999

2000

2001

2002

2003

2004

2005

2006

II-26

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change
8

6
Q3

-2

-4

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-4

2005

User Cost of Capital
3

High-Tech

4-quarter percent change

-3

-6

-6
Q3

-9

-12

-15

1990 1992 1994 1996 1998 2000 2002 2004 2006

-15

4-quarter percent change

-5

-10

1990 1992 1994 1996 1998 2000 2002 2004 2006

-5

-10

NABE Capital Spending Diffusion Index

Real Corporate Cash Flow
4-quarter percent change

Index

-5

-12

-10

-24

1990 1992 1994 1996 1998 2000 2002 2004 2006

-10

Non-High-Tech

-12
-24
1990 1992 1994 1996 1998 2000 2002 2004 2006
Note. The diffusion index equals the percentage of
respondents planning to increase spending minus the percentage
of respondents planning to reduce spending.
Source. NABE Industry Survey.

II-27

heavy trucks increased in October. Order backlogs, although down from their peak,
remained elevated through October.
Real investment in non-high-tech, non-transportation equipment increased at an annual
rate of nearly 5 percent in the third quarter—a noticeable pickup from the sluggish
½ percent pace registered in the first half of the year. Shipments of this equipment type
increased 1.4 percent in October, and bookings moved up ½ percent. An important
contributor to growth in this category over the past two years has been construction
machinery: After pausing earlier in the year, real investment in construction machinery
reached a new high in the third quarter, and nominal orders and shipments both posted
increases in October.
Nonresidential Construction
Real expenditures on nonresidential structures rose at an average annual rate of about
3 percent over the second and third quarters, primarily reflecting an increase in outlays on
drilling and mining structures. Outside this category, spending on new construction has
yet to gain traction, even though vacancy rates in nonresidential properties have moved
down a bit during the past two years. The vacancy rate for office buildings stood at
12¼ percent in November, about 2 percentage points below its peak in the first quarter of
2004. However, construction in this sector remains near the depressed levels of the past
two years. Similarly, spending on commercial buildings has held steady at a low level
since the middle of 2002 despite persistently low vacancy rates in this sector. In addition,
real construction outlays in the manufacturing sector have flattened out after increasing a
bit late last year.
Outlays on drilling and mining structures, which rose at an annual rate of 18 percent in
the third quarter, continue the strong growth from earlier in the year. Although the
number of gas rigs in operation has edged down since October, large increases in natural
gas prices over the past year suggest that expenditures on drilling and mining structures
will continue to grow in the near term. 10
Business Inventories
The book value of inventories held by the manufacturing and trade sectors increased
$25 billion in the third quarter. When measured in real terms, however, nonfarm
inventories actually declined $6 billion. The runoff in the third quarter largely reflected a
10

Less than 15 percent of active drilling rigs are located in areas affected by the hurricanes. Reports
suggest that only a fraction of these rigs were damaged.

II-28

Nonresidential Construction and Indicators
Real Construction
(Seasonally adjusted, annual rate; nominal CPIP deflated by
BEA prices through Q2 and by staff projection thereafter)

Total Structures

Office and Commercial

290

Billions of chained (2000) dollars
290

270

Billions of chained (2000) dollars
70
Commercial

60
Oct.

250

230

210

190

170

190

50
Office

40
30

Oct.

Oct.
170

1999

2000

2001

2002

2003

2004

2005

2006

Manufacturing and Power &
Communication

1999

2000

2001

2002

2003

2004

2005

2006

Other

Billions of chained (2000) dollars
70

Billions of chained (2000) dollars
90

70
60

Power & communication

Oct.
Manufacturing
Oct.

20
10

1999

2000

2001

2002

2003

2004

2005

2006

Oct.

1999

2000

2001

2002

2003

2004

2005

2006

Note. Includes religious, educational, lodging, amusement
and recreation, transportation, and health-care facilities.

Indicators
Vacancy Rates

Drilling Rigs in Operation

Percent
18

1400

1200

Office

15
12

Industrial

9
6

Number
1400
Nov.

1000

1000
Natural gas

800

600

400

Retail
3
0

1999

2000

2001

2002

2003

2004

2005

2006

Petroleum

200

Note. The Q4 readings are based on data through November.
Source. For office and industrial, CoStar Property Professional;
for retail, National Council of Real Estate Investment Fiduciaries.

1200

Nov.

1999

2000

2001

2002

2003

2004

2005

2006

200
0

Note. November values are averages through November 25, 2005.
Source. DOE/Baker Hughes.

II-29

Changes in Manufacturing and Trade Inventories
(Billions of dollars; seasonally adjusted book value; annual rate)
2005
Sector

Aug.

Sept.

Oct.

88.6

18.7

24.6

57.9

81.8

n.a.

92.0

29.1

38.5

33.8

46.1

n.a.

Manufacturing
Ex. aircraft

42.6
38.1

.9
4.0

8.3
5.2

-13.3
-4.2

5.7
-1.8

31.9
25.8

Wholesale trade
Motor vehicles and parts
Ex. motor vehicles and parts

30.5
-1.1
31.6

20.2
7.9
12.4

16.8
-2.0
18.7

20.6
-5.2
25.8

25.7
-.4
26.1

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

Retail trade
Motor vehicles and parts
Ex. motor vehicles and parts

15.5
-2.3
17.7

-2.4
-18.3
15.8

-.5
-11.9
11.4

50.6
29.3
21.3

50.4
36.1
14.3

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

Manufacturing and trade
Ex. wholesale and retail
motor vehicles and parts

n.a. Not available.

Book-Value Inventories Relative to Shipments and Sales
Ratio

Retail trade ex. motor vehicles and parts

1.6

1.5

1.5
Manufacturing

1.4

1.3
1.2

1.0

1992

1993

1994

1995

1996

1997

1998

1999

Oct.

1.2

2000

2001

2002

2003

2004

2005

2006

1.1
1.0

Inventory-Consumption Ratios, Flow-of-Goods System

ISM Customer Inventories: Manufacturing

Days’ supply

Index
60

54
50

1.3

Sept.

Wholesale trade ex. motor vehicles and parts

1.1

Sept.

Total

Average, 1996 to present

52
45

45
Nov.

50
Oct.

2000

2001

2002

2003

2004

2005

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

48
46

Total ex. motor vehicles and parts

2000

2001

2002

2003

2004

2005

II-30

paring of motor vehicle stocks. Even excluding motor vehicles, inventory investment
was relatively subdued. While the lull in non-auto stockbuilding may have been merely
an intentional pause after the large restocking that businesses undertook earlier in the
year, it may also have reflected stronger-than-expected sales in the third quarter. Indeed,
survey data from the ISM indicate that an increasing number of firms believed their
customers’ inventories were running too low in October and November relative to the
readings earlier in the year. Moreover, the book value of inventories relative to sales for
the combined manufacturing and trade sectors excluding motor vehicles dropped in
August and September. In October, manufacturers’ book-value inventories (the only
inventory data received for the fourth quarter) rose $32 billion at an annual rate.
Information from the staff’s flow-of-goods inventory system suggests that, excluding
motor vehicles, inventory-consumption ratios fell in October after increasing in
September. The rise in September was concentrated among chemicals and aerospace
products, whose hurricane- and strike-related jumps were reversed in October.
Elsewhere, inventories, with the exception of paper, remained well aligned with
consumption.
Federal Government Sector
Recent data show the federal deficit continuing to narrow as robust growth of receipts has
more than offset large increases in outlays. For the twelve months ending in October, the
deficit was $308 billion, down nearly $100 billion from a year earlier. After adjusting for
shifts in the timing of payments, receipts in October were 14 percent above year-earlier
levels while outlays were up 8 percent; both are similar to the increases recorded in
earlier months of this year. Spending for national defense rose 5 percent, a slower pace
than earlier in the year. Outlays for emergency preparedness and response (mostly
disaster relief and expenditures less premiums for national flood insurance) remained
elevated in October. 11
Just before the Thanksgiving recess, the Congress passed a second continuing resolution;
set to expire December 17, it funds spending for the three appropriations bills that have
yet to clear the Congress (Labor-HHS-Education, Defense, and the District of Columbia).
In addition, the House and the Senate each passed spending and tax reconciliation bills,
but they face uncertain outcomes because provisions in the separate versions of the bills
11

Outlays were $4 billion in both September and October, and daily data indicate that they will be
even higher in November. In 2004, these outlays were about $1 billion per month in September, October,
and November.

II-31

Federal Government Outlays and Receipts
(Unified basis; billions of dollars except as noted)
12 months ending
in October

October
Function or source

2004

2005

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

194.2
-.1
.0
194.3

196.7
.0
-12.3
209.1

Receipts
Payment timing
Adjusted receipts

136.9
6.0
130.9

Surplus or deficit (-)
Selected components
of adjusted outlays
and receipts
Adjusted outlays
Net interest
Non-interest
National defense
Social Security
Medicare
Medicaid
Income security
Agriculture
Other

Percent
change

2004

2005

1.3
...
...
7.6

2281.5
-1.9
-13.3
2296.6

2474.3
-1.2
-.5
2476.0

8.5
...
...
7.8

149.5
.0
149.5

9.2
...
14.2

1880.9
.0
1880.9

2165.9
.0
2165.9

15.2
...
15.2

-57.3

-47.2

...

-400.6

-308.4

...

194.3
15.6
178.7
37.8
41.7
22.5
15.1
23.9
7.6
30.0

209.1
17.7
191.4
39.6
44.1
23.3
15.4
25.4
9.7
33.9

7.6
13.0
7.1
4.8
5.7
3.6
2.1
6.3
26.9
12.9

2296.6
162.2
2134.4
458.2
497.5
270.9
175.9
333.1
17.8
381.0

2476.0
185.5
2290.5
492.4
525.7
296.4
182.0
346.1
30.3
417.5

7.8
14.4
7.3
7.5
5.7
9.4
3.5
3.9
70.3
9.6

Adjusted receipts
Individual income and
payroll taxes
Withheld + FICA
Nonwithheld + SECA
Less: Refunds
Corporate
Gross
Less: Refunds
Other

130.9

149.5

14.2

1880.9

2165.9

15.2

116.0
109.2
9.4
2.6
1.7
7.9
6.2
13.2

128.9
120.8
10.8
2.7
6.1
10.5
4.4
14.4

11.2
10.7
15.4
5.3
260.6
33.2
-28.7
9.0

1493.1
1395.0
285.6
187.5
193.4
231.9
38.5
194.4

1686.3
1498.3
366.3
180.4
276.7
303.7
27.0
202.9

12.9
7.4
28.3
-3.8
43.1
31.0
-29.8
4.4

Adjusted surplus or deficit (-)

-63.4

-59.6

...

-415.7

-310.1

...

Note. Components may not sum to totals because of rounding.
1. Financial transactions consist of deposit insurance, spectrum auctions, and sales of major assets.
2. A shift in payment timing occurs when the first of the month falls on a weekend or holiday, or
when the first 3 days of a month are nonworking days. Outlays for defense, Social Security,
Medicare, income security, and "other" have been adjusted to account for these shifts. In addition,
defense outlays have been adjusted to treat the timing of accruals for retiree health consistently.
... Not applicable.
Source. Monthly Treasury Statement.

II-32

are quite different. 12 Also, the Congress cleared a bill to increase the borrowing authority
of the national flood insurance fund. This increase will allow hurricane-related claims to
be paid but will force future increases in flood insurance premiums to repay the resulting
increase in debt.
State and Local Government Sector
Real state and local purchases are off to a slow start in the current quarter despite further
signs of improvement in the sector’s fiscal position. Employment rose an anemic
8,000 per month, on average, in October and November, a pace only about half that
recorded over the first nine months of the year. As for construction, expenditures fell
sharply in real terms in the third quarter after a strong performance in the first half of the
year. In October, construction spending rose 0.6 percent in nominal terms; this gain
follows similar increases in August and September and suggests that real construction
spending entered the fourth quarter on a gradual uptrend.
The results of the November election point to some cooling of voters’ enthusiasm for
tight controls on state spending and taxes. In California, voters soundly defeated an
initiative that would have limited increases in state spending to the average rate of
increase in revenues over the preceding three years; the initiative would also have
permitted the governor to reduce spending unilaterally under certain circumstances. In
Colorado, voters approved a five-year suspension of the state’s stringent structure of
fiscal constraints, which had been in place since the early 1990s and required the state to
return to the taxpayers any revenue gains in excess of the sum of the rates of population
growth and inflation. As of now, Colorado will be able to spend these “excess revenues”
on health care, education, transportation projects, and some pensions. In the state of
Washington, voters sustained a gasoline tax increase approved by the legislature earlier
this year.
Prices
Overall consumer prices rose 0.1 percent in October; this move reflects small increases in
food and core prices and a decline in energy prices. Nonetheless, over the twelve months
ending in October, PCE prices increased 3.3 percent, nearly ½ percentage point more
than in the preceding year; this step-up reflected soaring energy prices over the past
twelve months. In contrast, core consumer price inflation has remained fairly subdued:

The House version of the tax reconciliation bill has only cleared the Ways and Means Committee;
the bill is slated for a vote by the full House on December 8.

II-33

Measures of Inflation
(Percent)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Oct.
2004

Oct.
2005

July
2005

Oct.
2005

Sept.
2005

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

3.2
3.4
15.2
2.0
.1
2.8
2.7
1.7

4.3
2.2
29.5
2.1
.4
2.7
3.3
1.7

1.9
1.5
4.7
1.6
-1.1
2.4
...
...

8.0
2.3
89.3
1.8
1.1
2.2
...
...

1.2
.3
12.0
.1
.1
.1
...
...

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

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

2.9
3.1
16.1
2.1
.0
3.1
1.6
5.0

3.3
2.0
29.6
1.8
-.1
2.6
1.6
2.9

1.4
.9
3.5
1.3
-1.8
2.5
1.2
1.7

5.9
2.3
90.0
1.9
.5
2.5
1.6
3.4

.9
.3
12.3
.2
.1
.2
.1
.4

.1
.2
-.6
.1
.0
.2
.1
.2

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

4.5
2.7
17.3
1.8
1.7
1.8
9.2
8.0
16.3
27.6

5.9
.3
26.1
1.9
2.0
1.7
10.5
4.3
31.5
1.1

1.8
-5.8
11.2
1.5
1.7
1.4
2.1
-1.8
2.5
-19.8

13.2
4.0
78.9
.0
-.2
.3
27.7
9.7
109.1
40.1

1.9
1.4
7.1
.3
.2
.3
2.5
1.2
10.2
5.3

.7
-.1
4.1
-.3
-.2
-.2
3.0
1.2
6.7
-1.2

Measures

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
... Not applicable.

Oct.
2005

II-34

Consumer Price Inflation
(12-month change except as noted)

Percent

CPI and PCE ex. Food and Energy

PCE excluding Food and Energy

Percent
3

CPI
2

Oct.

2
Oct.

PCE
1

CPI
chained

1
Market-based components

1999

2000

2001

2002

2003

2004

2005

2006

Percent

PCE excluding Food and Energy
3-month change, annual rate

1999

2000

2001

2002

2003

2004

2005

2006

Percent

PCE Goods and Services

4
3
Oct.

Services ex. energy

1
2

Oct.

2
0

0
-1

1999

2000

2001

2002

2003

2004

2005

2006

Oct.

-2

-1

-3

-10
-20

-10

1999

2000

2001

-1

2002

2003

2004

2005

2006

-20

0
Oct.

Percent

PCE Energy

-1
Goods ex. food and energy

1999

2000

2001

2002

-2

2003

2004

2005

2006

-3

Percent

PCE Transportation Services

Oct.
5

-5

-10

-15

1999

2000

2001

2002

2003

2004

2005

2006

-15

II-35

Broad Measures of Inflation
(Percent change, Q3 to Q3)
Measure

2002

2003

2004

2005

Product prices
GDP price index
Less food and energy

1.6
2.0

2.1
1.8

2.7
2.6

2.8
2.6

Nonfarm business chain price index

1.1

1.2

2.3

2.8

Expenditure prices
Gross domestic purchases price index
Less food and energy

1.6
1.9

2.1
1.7

3.0
2.6

3.3
2.4

PCE price index
Less food and energy

1.5
1.9

1.8
1.2

2.6
2.0

3.1
1.9

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

1.1
1.5

1.8
1.1

2.3
1.5

3.0
1.6

CPI
Less food and energy

1.6
2.3

2.2
1.3

2.7
1.8

3.8
2.1

Chained CPI
Less food and energy

1.3
1.8

2.0
1.0

2.3
1.5

3.0
1.8

Median CPI
Trimmed mean CPI

3.3
2.1

2.0
1.8

2.5
2.1

2.4
2.3

Surveys of Inflation Expectations
(Percent)
University of Michigan
1 year 2

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10-year) 4

2004:Q1
Q2
Q3
Q4

1.8
2.9
2.7
3.3

3.1
4.0
3.3
3.4

2.7
3.3
2.9
3.0

3.4
3.3
3.1
3.1

2.9
2.8
2.8
2.8

2.5
2.5
2.5
2.5

2005:Q1
Q2
Q3
Q4

3.0
2.9
3.8
n.a.

3.6
3.9
4.3
n.a.

3.0
3.2
3.5
n.a.

3.2
3.3
3.5
n.a.

2.8
2.9
2.9
n.a.

2.5
2.5
2.5
2.5

2005:July
Aug.
Sept.
Oct.
Nov.

3.2
3.6
4.7
4.3
n.a.

3.6
3.7
5.5
5.5
4.1

3.0
3.1
4.3
4.6
3.3

3.3
3.3
3.8
3.8
3.3

2.9
2.8
3.1
3.2
3.0

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

Period

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

II-36

PCE prices excluding food and energy rose 1.8 percent over the twelve months ending in
October, slightly less than in the preceding year.
Consumer energy prices have started to recede. The PCE price index for energy fell
0.6 percent in October and reflects a sizable 4¼ percent decline in gasoline prices. The
PCE price indexes for both fuel oil and natural gas increased in October.
Core consumer price inflation remains moderate, though some signs of a pass-through of
higher energy costs are becoming evident, especially in transportation services. The PCE
price index for purchased intercity transportation (mainly airfares) turned up 0.6 percent
in October and rose 6.4 percent over the past twelve months after having declined
5.7 percent during the previous twelve months. Some pass-through of energy costs was
also evident in PCE prices for delivery services and for moving and storage, though the
weights of these two categories in the overall PCE price index are quite small.
On a twelve-month change basis, the slight step-down in the rate of core PCE inflation
reflected a deceleration in the non-market component of PCE prices, particularly in the
index for imputed financial service charges. The market-based component of core PCE
prices increased 1.6 percent over the twelve months ending in October, the same as in the
preceding year. Changes in core goods prices were near zero over the twelve months
ending in October. Prices of core market-based services increased about 2.6 percent over
this period, about the same as in the preceding twelve months.
Near-term inflation expectations declined sharply in November, presumably in response
to receding energy prices. As measured by the Michigan SRC survey, median inflation
expectations for the coming year dropped more than 1 percentage point in November;
still, year-ahead inflation expectations remained slightly higher than those in August.
Median expectations for the next five to ten years remained about 3 percent for the third
consecutive month—a touch above the narrow range observed in recent years. By
contrast, rate spreads on CPI-indexed Treasury bonds (as of December 6) implied
inflation compensation just below 2½ percent over both the next five and ten years—the
low end of the range observed over the past year.
Most of the broader measures of inflation have picked up a bit over the past four quarters,
a reflection of higher energy prices. Excluding food and energy, however, GDP price
inflation this year has remained near last year’s 2½ percent rate, as slower increases in

II-37

prices for residential investment have offset faster increases in prices for state and local
government purchases.
Increases in energy costs have pushed up producer prices in some sectors. The soaring
cost of diesel and jet fuel contributed to large increases in producer prices for air, rail,
truck, and water transport services in October. In addition, core intermediate materials
prices rose 1.2 percent for the second consecutive month in October; the increase reflects
the further pass-through of energy costs into the prices of energy-intensive products, such
as chemicals, plastics, metals, and nitrogenate fertilizer. The prices of several types of
building materials, such as concrete, cement, asphalt, and gypsum, increased sharply in
October, a move possibly related to rebuilding efforts after the hurricanes and to high
energy costs. Still, notwithstanding the recent increases in core materials prices, the PPI
for intermediate materials has decelerated nearly 4 percentage points in the past twelve
months relative to the preceding twelve-month period.
Changes in non-energy commodity prices since the October Greenbook have been mixed:
Prices of steel scrap and copper have surged, while prices of plywood and oriented strand
board fell sharply after posting very large increases in August and September. Over the
past six weeks, the Journal of Commerce metals index has risen 11.2 percent, and the
CRB spot industrials index (which excludes energy) increased 0.2 percent.
Labor Costs
Over the three months ending in September, the employment cost index (ECI) for hourly
compensation in private industry rose at an annual rate of 3.2 percent—a bit faster than in
the first half of the year. Nonetheless, September’s twelve-month increase was only
3 percent, well below the 3.7 percent increase of a year earlier. Another measure of labor
costs—compensation per hour in the nonfarm business sector—has been buffeted by
transitory factors since late last year but, on balance, has shown some moderation in
growth since then.
The wages and salaries component of the ECI rose at an annual rate of 2.4 percent in the
third quarter, a reading unchanged from the two previous ones for this year. Monthly
increases in average hourly earnings of production workers were similarly restrained for
most of this year and averaged about 3 percent at an annual rate from March through
September. However, this indicator has increased more rapidly so far in the fourth
quarter, rising at an average monthly rate of 0.4 percent in October and November.

II-38

Commodity Price Indexes
Journal of Commerce
1996 = 100
140

140

130

130
Dec. 6

120

110

100

100
Industrials

80
Metals

70
60

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

70
2004

2005

2006

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

Commodity Research Bureau
1967 = 100
400

400
Spot industrials

350

350
Dec. 6

300

250

250
Futures

200

150

200

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Note. The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial commodities, excluding energy. The CRB
futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly equally among energy
commodities, industrial commodities, and precious metals.

Selected Commodity Price Indexes
(Percent change)

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

2004 1
8.7
19.4
4.6
2.7
11.1

12/28/04 10/25/052
to
to
10/25/05 2 12/6/05
6.3
-4.9
3.4
-3.2
18.7

-.6
11.2
.2
1.0
.6

52-week
change to
12/6/05
4.6
7.3
3.1
-8.6
20.7

1. From the last week of the preceding year to the last week of the year indicated.
2. October 25, 2005, is the Tuesday preceding publication of the October Greenbook.

150

II-39

The benefits component of the ECI increased at an annual rate of 5.2 percent in the third
quarter, a faster rise than experienced in the first half of the year. Nonetheless, over the
past twelve months, the increase in benefits costs (4.8 percent) was 2 percentage points
slower than over the preceding twelve months, when benefit costs were swollen by a
surge in outlays for retirement and savings plans.
In the ECI release, employer contributions for health insurance are estimated to have
risen 6¾ percent over the twelve months ending in September—about the same as the
previous year but well below the 10 percent yearly increases in 2002 and 2003.
Available indicators provide no evidence that a sharp change in the rate of increase is in
the offing. Private surveys suggest that premiums will rise about 7 percent to 10 percent
in 2006, increases similar to the survey results for 2005. Among the major plans for
public employees, OPM expects premiums in the Federal Employees Health Benefits
Program to rise 6½ percent, on average, in 2006 after a rise of 7½ percent in 2005.
Premiums for the California Public Retirement System are slated to increase 9 percent, on
average, in 2006 after a climb of 10 percent in 2005.
Compensation per hour in the nonfarm business sector increased at an annual rate of
3¾ percent in the third quarter. In addition, the incorporation of new state UI data caused
the second-quarter increase in compensation per hour to be revised down sharply to an
annual rate of 0.9 percent. This low figure appears to indicate that the unwinding of the
transitory factors—bonuses and exercises of stock options—that led to a sizable gain in
compensation in the fourth quarter of last year is largely completed. Averaging through
these transitory factors, compensation growth seems to have slowed a bit recently.

II-40

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

Category
Nonfarm business
compensation per hour
Employment cost index
Benefit costs
Wages and salaries
Average hourly earnings 2

2005 1

2003:Q3
to
2004:Q3

2004:Q3
to
2005:Q3

2005
Q1

Sept.

Oct.

Nov.

4.0
3.7
6.8
2.6
2.2

5.0
3.0
4.8
2.2
2.7

5.5
2.5
4.3
2.4
2.4

.9
2.5
3.2
2.4
2.9

3.7
3.2
5.2
2.4
3.4

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

...
...
...
...
.6

...
...
...
...
.2

1. Percent change at a monthly rate.
2. Production or nonsupervisory workers.
... Not applicable.

Compensation per Hour
(Quarterly percent change at an annual rate)
Percent
16

10
Productivity and costs
8

Q3
Q3

ECI

-2

2001

2002

2003

2004

Last Page of Nonfinancial Developments

2005

-2

Domestic Financial
Developments

III-T-1

Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2004

Change to Dec. 6 from
selected dates (percentage points)

2005

Instrument
June 28

Dec. 31

Oct. 31

Dec. 6

2004
June 28

2004
Dec. 31

2005
Oct. 31

1.00

2.25

3.75

4.00

3.00

1.75

.25

1.36
1.74

2.18
2.52

3.89
4.12

3.95
4.18

2.59
2.44

1.77
1.66

.06
.06

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

1.28
1.45

2.29
2.28

4.01
4.13

4.22
4.35

2.94
2.90

1.93
2.07

.21
.22

Large negotiable CDs1
3-month
6-month

1.53
1.82

2.50
2.72

4.22
4.43

4.42
4.61

2.89
2.79

1.92
1.89

.20
.18

Eurodollar deposits3
1-month
3-month

1.29
1.51

2.32
2.49

4.08
4.25

4.31
4.43

3.02
2.92

1.99
1.94

.23
.18

Bank prime rate

4.00

5.25

6.75

7.00

3.00

1.75

.25

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

2.88
3.97
4.90

3.08
3.63
4.34

4.45
4.46
4.67

4.44
4.42
4.61

1.56
.45
-.29

1.36
.79
.27

-.01
-.04
-.06

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

1.56
2.25

1.03
1.65

1.81
2.00

2.05
2.17

.49
-.08

1.02
.52

.24
.17

Municipal general obligations (Bond Buyer)5

5.01

4.49

4.56

4.53

-.48

.04

-.03

Private instruments
10-year swap
10-year FNMA6
10-year AA7
10-year BBB7
5-year high yield7

5.21
5.30
5.59
6.18
8.30

4.65
4.61
4.98
5.38
7.34

5.05
4.97
5.37
5.97
8.34

5.08
4.92
5.34
5.95
8.36

-.13
-.38
-.25
-.23
.06

.43
.31
.36
.57
1.02

.03
-.05
-.03
-.02
.02

Home mortgages (FHLMC survey rate)8
30-year fixed
1-year adjustable

6.21
4.19

5.77
4.10

6.31
5.09

6.26
5.16

.05
.97

.49
1.06

-.05
.07

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

Record high

2004

Change to Dec. 6
from selected dates (percent)

2005

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

Level

Date

Dec. 31

Oct. 31

Dec. 6

Record
high

2004
Dec. 31

2005
Oct. 31

11,723
1,527
5,049
691
14,752

1-14-00
3-24-00
3-10-00
12-2-05
3-24-00

10,783
1,212
2,175
652
11,971

10,440
1,207
2,120
647
12,063

10,857
1,264
2,261
688
12,668

-7.39
-17.27
-55.22
-.43
-14.13

.68
4.27
3.92
5.53
5.82

3.99
4.70
6.62
6.34
5.01

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Most recent Thursday quote.
6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
8. Home-mortgage data for December 6, 2005, is from December 1, 2005.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the most recent policy tightening began.
October 31, 2005, is the day before the most recent FOMC meeting.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Eurodollar Futures
Percent

Chairman’s
testimony October
employment
November
report
FOMC

Bernanke’s
hearing CPI

November
FOMC
minutes

New home
sales and
consumer
confidence

June 2006

Percent
5.05
Productivity
and cost
5.00
release
4.95
4.90
4.85
4.80
4.75

December 2006

4.70
4.65
4.60

Oct. 31

Nov. 3

Nov. 7

Nov. 9

Nov. 15

Nov. 18

Nov. 23

Nov. 29

Dec. 2

Dec. 6

Note. 5-minute intervals.

Expected Federal Funds Futures Rate

Eurodollar Implied Volatility at Selected
Basis points
Maturities

Percent
5.0

400

Nov.
FOMC

Daily

December 6, 2005

350

12 months ahead

300
4.5

250

October 31, 2005

200
Dec.
6

4.0

150
100

6 months ahead

3.5
Dec.
2005

Apr.

Aug.
2006

Dec.

Apr.

Aug.
2007

Dec.
2008

June

Oct.
2004

Jan.

Apr.

July
2005

Oct.

Jan.

Note. Estimates from federal funds and Eurodollar futures,
with an allowance for term premia and other adjustments.

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

Nominal Treasury Yields

Inflation Compensation

Percent
6

Nov.
FOMC

Daily
10-year

Percent

Daily

5 to 10
years ahead

3.5

Nov.
FOMC

3.0

Dec.
6

4
2-year

Dec.
6

5-year

2.0

2
1
June

Oct.
2004

Jan.

Apr.

July
2005

Oct.

Jan.

Note. Estimates from smoothed Treasury yield curve based
on off-the-run securities.

2.5

1.5
June

Oct.
2004

Jan.

Apr.

July
2005

Oct.

Jan.

Note. Estimates based on smoothed nominal and inflationindexed Treasury yield curves, and are adjusted for the
indexation-lag effect.

Domestic Financial Developments
Overview
Most market interest rates changed little, on balance, over the intermeeting period, as the
effects of better-than-expected data on spending and output were offset by benign
incoming data on core inflation and communications from the FOMC that were perceived
as optimistic about inflation prospects. On net, market participants revised up only
slightly the expected path of monetary policy through 2006, though some notable swings
occurred over the intermeeting period. Equity markets rallied on the perception that the
economy has substantial momentum with limited inflation pressure.
Household and business credit quality appears to have remained favorable. Net
borrowing by nonfinancial businesses stayed moderate in October and November, and
cash-rich firms are estimated to have been retiring equity at a near-record pace. Home
prices advanced again at a double-digit annual rate in the third quarter, supporting robust
growth in household mortgage debt.
Policy Expectations and Treasury Interest Rates
The decision at the November FOMC meeting to increase the target for the federal funds
rate 25 basis points and the accompanying statement were in line with expectations and
evoked little reaction in financial markets. Favorable inflation data in mid-November led
investors to mark down their expectations for the path of monetary policy. Market
participants also revised down the policy path in response to the November FOMC
minutes and speeches by Federal Reserve officials that investors reportedly read as
suggesting that only moderate additional policy firming would likely be necessary to
contain inflation pressures. A steady stream of strong economic data over the past couple
of weeks, however, more than offset those declines in the expected policy path.
Judging from federal funds futures quotes, market participants have fully priced in a
25-basis-point tightening at the upcoming FOMC meeting and place high odds on another
move at the January meeting. The policy path over the next year was marked up slightly,
on net, over the intermeeting period. With longer-term expectations about unchanged,
the policy path now has a slightly more pronounced downtilt between late-2006 and mid2007. Uncertainty about the path of monetary policy, implied by options on Eurodollar
futures, edged up at the six- and twelve-month horizons.
Yields on two-year Treasury securities were about unchanged, on net, over the
intermeeting period, but longer-term Treasury yields decreased slightly. Five-year
inflation compensation implied by TIPS adjusted for the indexation lag was little changed
III-1

III-2

Corporate Yields, Risk Spreads, and Stock Prices
S&P 500

12-Month Forward Trend Earnings-Price Ratio
for S&P 500 and Long-Run Treasury Yield Percent

Ratio scale, Nov. 1, 2005=100
110

Daily
Dec.
6

Monthly

105
12-month forward
trend E/P ratio

100

95
Nov.
FOMC

Dec.
6

Long-run real Treasury yield*

6
4
2

85
2004

2005

1985

1989

1993

1997

2001

2005

* Yield on synthetic Treasury perpetuity minus Philadelphia Fed 10-year
expected inflation.
+ Denotes the latest observation using daily interest rates and stock prices
and latest earnings data from I/B/E/S.

Implied Volatility on Nasdaq 100 (VXN) and
S&P 500 (VIX)
Percent

Yields for BBB and High-Yield Corporate Bonds
Percent
14

Weekly Friday*
Nov.
FOMC

Percent
8

Daily
Nov.
FOMC

30
12

Nasdaq

10-year BBB
(right scale)

6
Dec.
6

Dec.
6

S&P 500

5-year high yield
(left scale)

6
2004

2005

* Latest observation is for most recent business day.

Basis points
Daily

2004

Commercial Paper Quality Spread
(30-Day A2/P2 less A1/P1)

Basis points
150

5-year high yield
(left scale)

2003

2005

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

Corporate Bond Spreads
550

4
2002

Nov.
FOMC

140

450

Basis points

Weekly Friday*

130
Dec.
6

120
350

Dec.
6

110
10-year BBB
(right scale)

100

250

90
2004

2005

Note. Measured relative to comparable-maturity Treasuries.

2002

2003

2004

* Latest observation is for most recent business day.

2005

III-3

amid mixed energy price movements, but inflation compensation for the interval five to
ten years ahead declined somewhat.1
Stock Prices and Corporate Interest Rates
On net, most major stock price indexes rose 5 percent to 7 percent since the last FOMC
meeting, an increase spurred by reduced inflation concerns and favorable real-side
economic data. The equity price gains were broad based, though technology stocks
posted the biggest increases. The equity risk premium—measured by the spread between
the twelve-month forward trend earnings-price ratio for S&P 500 firms and an estimate
of the real long-run Treasury yield—narrowed slightly but remained above the average of
the past two decades. Implied volatilities on both the Nasdaq 100 and S&P 500 indexes
declined over the intermeeting period.
Yields on investment-grade corporate bonds moved about in line with those on
comparable Treasuries since the November FOMC meeting, so credit spreads were
roughly unchanged. Indexes of high-yield bond spreads were also little changed, as GM
and Ford bonds spreads widened after further troubles were reported at GM and these
increases were largely offset by narrower spreads for other issuers. Risk spreads on
commercial paper—measured by the spread of yields on thirty-day A2/P2 paper over
A1/P1 paper—remained low. No evidence of year-end pressures has emerged.
Corporate Earnings and Credit Quality
With the third-quarter reporting period now almost concluded, four-quarter growth in
operating earnings per share for S&P 500 firms is estimated to have remained close to
15 percent. Third-quarter NIPA profits were robust as well, coming in about 18 percent
higher than the level of four quarters earlier. Excluding the hurricane-related hit to
insurance industry profits, both series also imply strong growth on a quarter-over-quarter
basis. Analysts’ revisions to year-ahead earnings for S&P 500 firms turned slightly
negative in November. The decrease from October, however, was driven almost entirely
by downward revisions to energy sector forecasts that reflected the movement of oil
prices away from their recent peaks.

The larger decline in inflation compensation implied by the unadjusted five-year TIPS rate reflects a
substantial indexation lag effect from the large swings in energy prices, which have led investors to expect
that total CPI will fall back in November from its spike in September. The high volatility of energy prices,
however, may have made the adjustment somewhat imprecise.

III-4
Corporate Earnings and Credit Quality
Corporate Earnings Growth

S&P 500 Earnings Expectations Revisions Index

Percent

Quarterly*

Percent

Q3
Q3

Monthly

0
MidNov.

0
-10
S&P 500 EPS
NIPA, economic
profits before tax

-2
S&P 500
S&P 500 excluding energy

-20

-3

-30
1990

1993

1996

1999

2002

* Change from four quarters earlier.
Source. I/B/E/S for S&P 500 EPS.

2003

2004

2005

Note. Index is a weighted average of the percent change in the consensus
forecasts of current-year and following-year EPS for constant sample.

Bond Ratings Changes of
Nonfinancial Companies

Financial Ratios for Nonfinancial Corporations
Ratio
0.12

-4
2002

2005

-1

Ratio

Percent of outstandings
30

0.35

Annual, at year-end

Upgrades

Debt over total assets
(right scale)

20
Q3
H1
Oct.

Q3 p

0.30

0.09

10
0
10

0.06

Q3 p

0.25

30
Liquid assets over total assets
(left scale)

Downgrades
0.03

0.20
1990

1993

1996

1999

2002

2005

50
1991 1993 1995 1997 1999 2001 2003

Note. Compustat data.
p Preliminary.

2005

Note. Data are at an annual rate.
Source. Moody’s Investors Service.

Bond Defaults and
C&I Loan Delinquency Rates

Expected Year-Ahead Defaults
Percent of outstandings

Percent of liabilities
7

2.0

Monthly

6
1.5

5
4

C&I loan delinquency rate
(Call Report)

1.0

3
2

0.5

Bond default rate*

Oct.

0.0

0
1990

1993

1996

1999

2002

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

2005

1991 1993 1995 1997 1999 2001 2003 2005
Note. Firm-level estimates of default weighted by firm liabilities as a
percent of total liabilities, excluding defaulted firms.
Source. Moody’s KMV.

III-5

On balance, the credit quality of nonfinancial firms has remained strong, supported by
continued high profitability. Data through the third quarter indicate that leverage on
corporate balance sheets has stayed fairly low and liquidity has stayed high despite a
rapid pace of equity retirements. The modest volume of bond rating downgrades in
October owed mainly to the announcement of major share repurchase programs by a few
highly-rated firms. The six-month trailing bond default rate ticked up in October on
bankruptcy filings by Delphi and Refco after a sharper rise in September.2 About onehalf of the jump in the default rate in September and October reflects troubles in the
airline and auto industries which are saddled with high legacy cost structures, and these
factors have not affected broader credit trends. The rise may also reflect filings that were
pulled ahead to avoid changes in the bankruptcy code that took effect on October 17.
The delinquency rate on C&I loans at commercial banks remained very low in the third
quarter, and the aggregate expected year-ahead default rate based on KMV was little
changed in October at a low level.
Business Finance
Gross bond issuance by nonfinancial firms rebounded strongly in November after a lull in
October when interest rates were climbing. C&I loan growth in October and November
about matched its rapid third-quarter pace. By contrast, commercial paper outstandings
fell sharply in November, reportedly in part because some multinational firms used
repatriated foreign profits to pay down their paper. On balance, the amount of net debt
raised by nonfinancial firms through bank loans, commercial paper, and bonds in October
and November remained near the solid pace of recent quarters.
Net equity outstanding contracted even more sharply in the third quarter than earlier this
year, as equity retirements approached a record high. The pace of retirements reflected a
surge in cash-financed mergers and acquisitions and continued large share repurchase
programs, bolstered by strong profits and still plentiful cash on corporate balance sheets.
Gross equity issuance picked up with a rebound in IPOs in November, about matching

The bankruptcy of Delphi temporarily created settlement problems in the credit derivatives market
stemming from the mismatch between the notional amount of these derivatives written on Delphi
(estimated to be $25 to $30 billion) and its outstanding debt ($2.5 billion). Because credit derivatives
typically require delivery of a defaulted security to the protection provider in exchange for its par value,
market participants were concerned that investors would substantially bid up the price of Delphi’s defaulted
bonds to obtain them for delivery. This concern was eased, however, when market participants agreed to
settle index trades in cash at a price determined by an auction. Furthermore, most of the single-name credit
default swap contracts on Delphi were terminated through a netting process, which facilitated a smooth
physical settlement for the remaining contracts.

III-6

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2005
Type of security

2002

2003

2004

6.5
2.1
4.4

5.2
.7
4.4

3.7
.4
3.3

5.4
1.6
3.8

3.8
1.6
2.1

5.2
2.2
3.8

2.4
.7
1.7

4.3
2.1
2.1

39.8
27.5
8.9
3.4

24.8
15.7
4.8
4.2

31.6
16.0
11.3
4.3

22.7
8.3
9.5
4.9

18.1
7.9
6.2
3.9

19.7
9.8
7.4
2.6

8.8
6.3
1.8
.8

24.8
12.7
7.5
4.6

-8.0

-6.3

-3.8

1.4

2.6

13.5

-11.0

-5.8

-5.2

-7.8

3.4

10.4

10.5

5.3

13.0

4.2
80.2

4.0
87.0

6.6
111.1

6.9
139.3

5.3
167.3

5.6
180.9

4.5
156.5

3.6
131.4

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

Nov. e

2001

Oct.

Note. Components may not sum to totals because of rounding.
1. Excludes private placements and equity-for-equity swaps that occur in restructurings.
2. Data include regular and 144a private placements. Bond totals reflect gross proceeds rather than par value of
original discount bonds. Bonds are categorized according to Moody’s bond ratings, or to Standard & Poor’s if
unrated by Moody’s.
3. End-of-period basis, seasonally adjusted.
4. Adjusted for FIN 46 effects.
e Staff estimate.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

60
Monthly rate, nonfinancial firms

50
Monthly rate, nonfinancial firms

Commercial paper*
C&I loans*
Bonds

Public issuance
Private issuance
Repurchases
Cash mergers

50
40

Total

40
30

Total
e

Nov.
H1

Q3 Oct.

20
0
10
-10
0
-20
-10

-30

-20

-40

-30

-50

-40
2001

2002

2003

2004

* Seasonally adjusted, period-end basis.
e Staff estimate.

2005

-60
2001
e Staff estimate.

2002

2003

2004

2005

III-7

Commercial Real Estate
Gross Issuance of CMBS

Growth of Commercial Mortgage Debt

Billions of dollars

Percent change from year earlier

Quarterly, s.a.a.r.

Quarterly

16
e
Q3

45
40

12
*

30
25

0
1996
1998
2000
e Staff estimate.

2002

2004

2006

1996
1998
2000
2002
* Through December 2.
** Staff estimate for Q4.
Source. Commercial Mortgage Alert.

Investment-Grade CMBS Spreads

Delinquency Rates on Commercial
Mortgages and CMBS

Basis points
300

Weekly

0
2006

2004

Percent
4

250

CMBS
At commercial
banks

200

BBB

2
Oct.
Q3

150
Nov. 30
AAA

At life
insurance
companies

100

50
2000 2001 2002 2003 2004 2005
Note. Measured relative to the 10-year Treasury yield.
Source. Morgan Stanley.

1996
1998
2000
2002
2004
Source. Call Report, ACLI, Morgan Stanley.

Commercial Real Estate Valuation

Average Office Rent and Vacancy Rate
Dollars per sq. ft.
28

Percent

1990:Q1=4
18

Quarterly
Rent
(left scale)

2006

Vacancy rate
(right scale)

16
14
Q4 *

24
Q4 *

Ratio of net operating income to price*
(left scale)

12
10

Percent

Quarterly

6
4

Q3
3

2
18

0
1996
1998
2000
2002
2004
* Based on data through November.
Source. CoStar.

2006

Long-run real Treasury yield**
(right scale)

3
Q3

2
1986 1989 1992 1995 1998 2001 2004
* Staff calculation from NCREIF data.
** Yield on synthetic Treasury perpetuity minus
Philadelphia Fed 10-year expected inflation.

III-8

Household Liabilities
Mortgage Rates

Household Debt Growth
Percent

Percent change from year earlier
9

Weekly

16
Mortgage

Q3e

30-year
FRM

Consumer
credit

Nov.30

1-year
ARM

Oct.

2002

2004

2006

0
1996
1998
2000
e Staff estimate.

Financial Obligations Ratio

4
2

3
1996
1998
2000
Source. Freddie Mac.

2002

2004

2006

Household Bankruptcy
Percent

Thousands of filings
19.0

Quarterly, n.s.a.
e
Q3

550

Weekly, n.s.a.

500

2004
2005 (through Dec. 3)

18.5

450
400
350
300

18.0

250
200
150

17.5

100
50
0

17.0
1996
1998
2000
e Staff estimate.

2002

2004

2006

Credit Card Delinquency Rates

F M A M J
J
A S O N D
Note. October data adjusted for court backlogs.
Source. Lundquist Consulting, Inc.

Other Delinquency Rates
Percent

Percent
6

Moody’s

Consumer loans
at commercial banks

5
Auto loans at captive
finance companies

Commercial banks
(Call Report)

Sept. 4
Q3

Oct.
Residential mortgages
at commercial banks

1998

2000

2002

2004

2006

3
1996

1
1996
1998
2000
Source. Call Report.

2002

2004

2006

III-9

their average monthly pace this year. Nonetheless, sizable announcements of both share
repurchases and cash mergers suggest that net equity retirements will remain deeply
negative in the fourth quarter.
Commercial Real Estate
Commercial mortgage borrowing has been strong over the past year, with the level of
debt in the third quarter estimated to have been about 15 percent above that of a year
earlier. Continued robust debt growth in the sector appears to be in prospect: The
issuance calendar for commercial-mortgage-backed securities (CMBS) currently shows
that a record volume of deals are scheduled to close during the fourth quarter.
Spreads of CMBS to comparable Treasuries edged up in November, reportedly owing in
part to the plentiful supply, even as credit quality in the sector remains favorable.
Delinquency rates on CMBS and commercial mortgages at commercial banks and life
insurance companies remain low by historical standards, and data on office vacancy rates
and rents point to further improvement in market fundamentals. Prices of commercial
properties have risen rapidly this year, keeping the ratio of net operating income to
property prices on a steep downtrend. Nonetheless, the spread of this ratio over the real
perpetuity Treasury yield—a measure of the risk premium on commercial real estate
assets—has widened somewhat in recent quarters.
Household Finance
Average interest rates on thirty-year fixed-rate and one-year adjustable-rate home
mortgages were little changed over the intermeeting period after having moved higher in
late October. The OFHEO all-transactions house price index increased at an annual rate
of 11½ percent in the third quarter after an upwardly revised gain of 14½ percent in the
second quarter. Household mortgage debt continued to expand rapidly in the third
quarter, spurred by the ongoing steep increase in home prices. Meanwhile, the expansion
of consumer credit in September and October slowed a bit from its already modest pace.
Growth of overall household debt exceeded that of personal income in the third quarter,
and the financial obligations ratio moved up further.
After reaching unprecedented levels just before the implementation of more-stringent
bankruptcy rules in mid-October, personal bankruptcy filings have hovered at very low
levels in recent weeks, an indication that at least some of the pre-reform filings were
pulled forward from future months. Delinquency rates on residential mortgages and

III-10

Household Assets

Asset Prices

1993:Q1 = 100
350

Quarterly, n.s.a.
Stock prices (Wilshire 5000)
Q3

250
Q3

150

House prices*

1991

1993

1995

1997

1999

2001

2003

2005

* Source. Office of Federal Housing Enterprise Oversight (OFHEO) repeat-transactions purchase-only index.

Net Worth Relative to Disposable Income

Ratio
7

Quarterly, period-end, s.a.

4
1991

1993

1995

1997

1999

2001

2003

2005

e Staff estimate.

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

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

2003

18.0
12.7
10.7
2.0
2.7
2.6
2.2
1.0
-0.6

2004
H2

Oct.

Nov.e

Assets
Oct.

20.0
19.7
13.7
6.0
4.1
-3.8
-2.1
0.1
-1.9

15.0
9.9
4.9
5.1
3.0
2.0
0.5
2.0
-0.4

22.3
15.8
5.2
10.6
4.5
2.0
-2.3
3.8
0.4

13.9
8.7
3.1
5.6
2.3
2.9
-1.0
3.5
0.4

8.1
6.5
-2.9
9.4
0.9
0.8
-1.9
2.4
0.2

17.7
17.4
7.0
10.3
0.6
-0.3
-0.9
1.3
-0.6

6,560
4,663
3,834
829
552
1,345
143
864
338

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

2005

III-11

GSE Market Developments
GSE Stock Prices

Dollars
85

Nov.
FOMC

Daily

Fannie Mae
Freddie Mac

Ten-Year GSE Yield Spreads
to Treasury
Fannie Mae
Freddie Mac

Basis points
50

Nov.
FOMC

Daily

70
Dec.
6

65
30
60
Dec.
6

25
55
20

June

Oct.
2004

Jan.

Apr.

July
2005

Oct.

June

Oct.
2004

Jan.

Apr.

July
2005

Oct.

Note. GSE yields based on senior unsecured debt.

III-12

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

2005
Type of security
Total
Long-term 1
Refundings 2
New capital
Short-term

2002

2003

2004

36.3
30.3
10.1
20.2
6.0

37.9
32.0
10.0
22.1
5.8

1.7

3.5

Memo: Long-term taxable

Oct.

Nov.

34.7
29.8
10.8
19.0
4.9

38.2
35.1
17.0
18.0
3.1

38.4
33.0
15.3
17.7
5.4

30.1
27.7
9.7
18.0
2.4

44.8
37.5
10.4
27.1
7.2

2.0

2.5

1.3

2.1

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.

Ratings Changes
Number of ratings actions
2000

Annual rate

Upgrades

1500

1000
500
0
500
1000
1500

Downgrades

2000
1991

1993

1995

1997

1999

2001

2003

2005

* Data through November 30 at an annual rate.
Source. S&P’s Credit Week Municipal and Ratings Direct.

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
7

Weekly

Ratio

Weekly

20-year

1.0
20-year

Dec.
1
Dec.
6

1-year

Dec.
1

0.9

3
0.8

2
1
0
1996

1999

2002

Source. Bloomberg and Bond Buyer.

2005

0.7
1996

1999

Source. Bond Buyer.

2002

2005

III-13

consumer loans have remained low in recent months and do not point to deterioration in
household credit quality.
The continued strength in house prices, coupled with gains in stock prices, led to an
increase in household net worth relative to income in the third quarter. Net purchases of
equity mutual funds were strong in November, as significant inflows to international
funds continued and inflows to domestic funds rebounded amid the rally in U.S. equity
markets. Net purchases of bond funds dipped in November.
Treasury and Agency Financing
The Treasury’s auction of ten-year notes during the intermeeting period was well
received, but demand in other auctions was somewhat tepid. In the three- and five-year
note auctions, indirect bidder participation—which includes purchases by foreign official
institutions—was a bit below recent averages. In the ten-year auction, however, indirect
bidders were awarded 56 percent of the amount sold, an unusually high proportion. The
Treasury’s mid-quarter refunding announcement noted that they continue to study the
possibility of establishing a securities lending facility as a possible solution to resolve
episodes of chronic failures to deliver in Treasury repo markets.
The share price of Freddie Mac ended the period about 4 percent higher, roughly in line
with the average rise for other financial firms, but the share price of Fannie Mae was little
changed, as investors remained concerned about its financial reporting practices. Agency
debt spreads over comparable-maturity Treasuries were largely unchanged, on net, over
the intermeeting period, tracking the behavior of other highly-rated corporate bonds.
State and Local Government Finance
Gross issuance of long-term municipal bonds was strong in November, largely owing to a
surge in new capital issuance that was fueled by education bond issues by entities in
California and New York. The higher level of interest rates, however, continued to hold
advance refunding activity well below the robust pace recorded in the first three quarters
of the year. Issuance of short-term municipal bonds, boosted by a few large deals, also
jumped in November.
The credit quality of municipal bonds has remained stable. Rating upgrades have slightly
outpaced downgrades so far this year despite the recent downgrades of hurricane-affected
issuers on the Gulf Coast and the downgrade of Detroit in response to the recent GM

III-14

Monetary Aggregates
(Based on seasonally adjusted data)
2005

Aggregate or component
Aggregate
1. M22
2. M33
Components of M24
3. Currency
4. Liquid deposits5
5. Small time deposits
6. Retail money market funds
Components of M3
7. M3 minus M26
8. Large time deposits, net7
9. Institutional money
market funds
10. RPs
11. Eurodollars
Memo
12. Monetary base

2003

2004

Oct.

Percent change (annual rate)1
2.8
3.9
7.2
5.7
8.3
9.9

Nov.
(e)

Level
($ billions),
Nov.
(e)

4.2
4.7

6,650
10,098

1.3
5.9
11.0
15.6

4.4
1.6
12.0
8.4

719
4,244
960
720

17.3
18.9
14.4

15.1
27.9
7.2

5.7
1.3
-6.2

3,447
1,340
1,120

-4.0
23.9

20.0
16.7

23.9
-13.6

32.4
17.3

552
435

3.2

2.9

3.1

5.0

783

5.5
4.8

5.2
5.8

5.9
14.1
-9.3
-11.5

5.5
10.1
-.4
-11.9

3.2
.8
18.6
-3.1

3.4
1.5
19.6
-1.4

3.4
4.3
-5.5

7.0
20.9
-5.6

11.9
30.5
-3.1

12.5
29.3

-.1
27.3

5.9

5.6

Average monthly change (billions of dollars)8
Selected managed liabilities
at commercial banks
13. Large time deposits, gross
14. Net due to related foreign
institutions
15. U.S. government deposits
at commercial banks

-1.5

14.9

22.2

13.1

23.5

-2.0

1,414

3.1

-10.8

3.6

10.7

22.1

-15.3

-.3

2.4

-4.3

-5.2

20.3

1. For the years shown, Q4-to-Q4 percent change. For the quarters shown, based on quarterly averages.
2. Sum of currency, liquid deposits (demand, other checkable, savings), small time deposits, retail
money market funds, and nonbank traveler's checks.
3. Sum of M2, net large time deposits, institutional money market funds, RP liabilities of depository
institutions, and Eurodollars held by U.S. addressees.
4. Nonbank traveler's checks not listed.
5. Sum of demand deposits, other checkable deposits, and savings deposits.
6. Sum of large time deposits, institutional money market funds, RP liabilities of depository
institutions, and Eurodollars held by U.S. addressees.
7. Net of holdings of depository institutions, money market funds, U.S. government, and foreign
banks and official institutions.
8. For the years shown, "average monthly change" is the Q4-to-Q4 dollar change divided by 12.
For the quarters shown, it is the quarter-to-quarter dollar change divided by 3.
e Estimated.

III-15

Commercial Bank Credit
(Percent change, annual rate, except as noted; seasonally adjusted)
Type of credit
Total
1. Adjusted1
2. Reported
3.
4.
5.
6.

Securities
Adjusted1
Reported
Treasury and agency
Other2

7.
8.
9.
10.
11.
12.
13.
14.

Loans3
Total
Business
Real estate
Home equity
Other
Consumer
Adjusted4
Other5

Level
($ billions),
Nov. 2005e

2004

Q1
2005

Q2
2005

Q3
2005

Oct.
2005

Nov.e
2005

8.9
8.4

14.6
12.3

10.2
10.1

8.8
9.2

2.7
1.3

5.8
5.4

7,145
7,293

6.6
5.2
4.8
5.8

23.7
14.9
20.2
6.7

5.6
5.4
-5.6
22.7

.0
1.9
-6.0
13.4

.1
-4.9
-7.9
-.6

-2.5
-3.3
-17.5
15.9

1,854
2,002
1,140
863

9.8
1.3
14.0
43.9
9.8
8.8
5.9
7.9

11.3
16.8
13.5
18.6
12.6
8.3
4.9
-1.3

12.0
13.8
14.2
14.1
14.3
3.1
-2.7
9.7

12.1
12.2
15.6
11.7
16.3
4.7
4.3
5.6

3.6
9.2
7.6
-4.9
10.0
-18.5
-22.6
2.0

8.7
12.9
6.3
1.4
7.4
5.2
1.7
15.8

5,291
1,009
2,856
437
2,420
694
1,046
732

Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by
reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown)
are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates are
percentage changes in consecutive levels, annualized but not compounded.
1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115).
2. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign
governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains
on derivative contracts.
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified.
Also includes lease financing receivables.
e Estimated.

C&I Loan Rate Spreads

Bank Profitability

Basis points

All Banks

Percent
180

Quarterly

20
Return on equity
(right scale)

160

Weighted
average
adjusted*

Percent

2.0

1.5

140
Q3

120

1.0

Return on assets
(left scale)

100
0.5

80
Nov.

60
1997

1999

2001

2003

2005

* Spread over estimated cost of funds adjusted for
changes in nonprice loan characteristics.
Source. Survey of Terms of Business Lending.

0.0

0
1990

1993

1996

1999

2002

2005

III-16

layoff announcement. In addition, the ratio of yields on ten-year municipal bonds to
comparable Treasuries narrowed a touch over the intermeeting period.
Money and Bank Credit
M2 is now on track to grow at a 5¾ percent annual rate in the fourth quarter—close to the
projected growth rate of nominal GDP—after apparently receiving a substantial boost
from hurricane relief payments. After a robust October, M2 decelerated in November, as
growth of both liquid deposits and retail money market funds slowed. The continued rise
in the opportunity cost of holding M2 balances, along with waning mortgage prepayment
effects and perhaps the increased relative attractiveness of equities, evidently outweighed
a further boost to M2 from federal disaster relief payments.
Bank credit decelerated in October and November from its third-quarter pace, reflecting
slower growth in both securities and total loans. Continued increases in the prime rate
apparently began to restrain home equity lending in recent months, and other real estate
lending also cooled a bit from the double-digit gains posted earlier in the year. Consumer
loans decreased slightly in October even after adjusting for the acquisition of a large
credit card bank by a thrift institution. As noted earlier, however, business lending
continues to be strong. The spread of interest rates on newly originated business loans
over comparable-maturity Eurodollar and swap rates fell in the most recent Survey of
Terms of Business Lending (conducted during the week starting November 7), continuing
the downward trend over the past several years.
Call Report data for the third quarter indicated that commercial bank profitability
remained robust, in part because of a rise in non-interest income that outweighed the drag
from higher loss provisioning. The increase in provisioning reportedly reflected in part
an expected rise in consumer loan charge-offs as banks prepared for a surge in personal
bankruptcies before the new rules went into effect in October.
Last Page of Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to a record $66.1 billion in September from
$59.3 billion in August (revised). The increase in the deficit reflected a surge in imports
that was compounded by a fairly sizeable drop in exports.
Net Trade in Goods and Services
(Billions of dollars, seasonally adjusted)
2004

Annual rate
2005
Q1
Q2
Q3

Monthly rate
2005
July
Aug.
Sept.

Real NIPA1
Net exports of G&S

-601.3

-645.4

-614.2

-621.3

...

Nominal BOP
Net exports of G&S
Goods, net
Services, net

-617.6
-665.4
47.8

-692.2
-745.3
53.1

-693.3
-747.7
54.4

-733.7
-790.9
57.3

-58.0
-62.5
4.6

-59.3
-64.1
4.7

-66.1
-71.1
5.0

1. Billions of chained (2000) dollars.
Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census.
n.a. Not available. ... Not applicable.

In September, the value of exports of goods and services fell 2½ percent from a strong
August level. The decline reflected a drop in merchandise exports, driven mainly by a
steep falloff in aircraft exports owing to the strike at Boeing. Exports of industrial
supplies and agricultural products declined as well, partly on account of hurricane-related
disruptions to trade, whereas exports of consumer goods rose.
For the third quarter as a whole, nominal exports of goods and services rose a modest
2¾ percent at an annual rate, as higher exports in July and August offset September’s
decline. Exports of automotive products and capital goods (with the exception of
aircraft) were particularly strong. In contrast, exports of aircraft, industrial supplies, and
agricultural products declined. In real terms, exports of goods and services (on a NIPA
basis) increased only ¾ percent in the third quarter.
The value of imported goods and services rose about 2½ percent in September, reflecting
gains in most categories of merchandise imports and, to a lesser extent, services. Within
goods, increases in imports of oil and of industrial supplies (especially natural gas) were
particularly strong, reflecting higher prices. Imports of automotive products, on the other
hand, fell from an elevated August level.

IV-1

IV-2

U.S. International Trade in Goods and Services
Net Exports

Bil$, s.a.a.r.

Nominal
BOP basis

Contribution of Net Exports to Real GDP Growth
-50

Percentage points, s.a.a.r.

-100
-150
-200
-250
-300

Real
NIPA basis
(2000$)

1997

1999

2001

2003

2005

3
2
1
0
-1
-2
-3
-4

-350
-400

Bil$, s.a.a.r.
Net trade in computers
and semiconductors

-450

20
0

-500

-20

-550

-40
Net automotive trade
with Canada and Mexico
1997
1999
2001

-600
-650

-60
2003

2005

-80

-700

1997

1999

Selected Exports

2001

2003

2005

Bil$, s.a.a.r.

-750

430

Selected Imports

Consumer goods

Aircraft

1997
1999
2001
2003
2005
1. Excludes agriculture and gold.
2. Excludes computers and semiconductors.

310

410

290

240

390

270

220

370

250

200

350

230

Machinery 2/

Industrial
supplies 1/

Bil$, s.a.a.r.

Consumer goods
180

330

210

160

310

190

140

290

120

270

170
Industrial
supplies 1/

150
Machinery 2/

100

250

130

230

110

210

190

170

90
Automotive 3/
(overseas)

1997
1999
2001
2003
2005
1. Excludes oil and gold.
2. Excludes computers and semiconductors.
3. Excludes Canada and Mexico.

70
50

IV-3

U.S. Exports and Imports of Goods and Services
(Billions of dollars, s.a.a.r., BOP basis)
Change1

Levels
2005

Exports of G&S
Goods exports
Gold
Other goods

2005
Q2
Q3
Aug. Sept.
1269.1 1278.2 1296.0 1262.5

2005
Q2
43.4

2005
Q3
Aug. Sept.
9.1
19.7 -33.5

894.2
5.5
888.7

900.7
5.4
895.4

920.4
5.3
915.2

881.0
5.8
875.2

38.8
-0.0
38.8

6.6
-0.1
6.7

19.7
0.3
19.4

-39.4
0.6
-40.0

63.7
45.8
45.9
205.2

59.4
46.7
48.8
208.4

72.6
46.5
49.8
208.2

42.1
47.2
48.9
211.1

9.9
1.8
2.4
4.8

-4.3
0.9
2.9
3.2

9.1
0.2
2.2
2.3

-30.6
0.7
-1.0
2.9

93.9
51.4
15.4
27.1

98.7
53.5
15.6
29.5

100.0
54.5
16.6
28.9

100.1
54.9
17.5
27.6

-0.9
-0.0
0.6
-1.4

4.8
2.1
0.2
2.4

4.2
3.4
3.9
-3.1

0.0
0.4
0.9
-1.3

68.6
219.0
114.1
32.5

67.1
217.4
116.0
33.0

68.0
223.9
114.4
31.8

63.0
210.8
119.1
32.9

6.3
12.0
0.9
1.6

-1.5
-1.6
1.9
0.5

-2.3
6.4
-0.3
0.0

-4.9
-13.1
4.7
1.1

375.0

377.5

375.5

381.5

4.6

2.5

0.0

6.0

Imports of G&S

1962.4 2011.9 2008.1 2055.8

44.5

49.5

36.3

47.6

Goods imports
Petroleum
Gold
Other goods

1641.9 1691.7 1689.2 1734.5
229.6 269.6 273.6 285.6
4.0
4.4
4.1
5.4
1408.3 1417.6 1411.5 1443.5

41.2
17.9
0.2
23.1

49.8
40.0
0.4
9.4

37.9
23.9
0.4
13.7

45.3
12.0
1.4
31.9

Aircraft & parts
Computers & accessories
Semiconductors
Other capital goods
Automotive
to Canada
to Mexico
to ROW
Agricultural
Ind supplies (ex. ag, gold)
Consumer goods
All other goods
Services exports

Aircraft & parts
Computers & accessories
Semiconductors
Other capital goods

28.2
93.7
25.3
236.3

24.4
94.2
26.1
239.5

21.5
94.2
25.3
242.5

26.2
92.9
25.9
242.0

2.6
1.6
0.4
16.0

-3.8
0.5
0.7
3.2

-4.0
-1.1
-1.7
8.5

4.7
-1.3
0.6
-0.5

Automotive
from Canada
from Mexico
from ROW

232.3
65.7
45.6
121.0

242.5
72.2
43.0
127.4

250.2
73.0
46.4
130.8

241.4
75.8
48.9
116.7

-0.4
-3.6
5.0
-1.7

10.2
6.4
-2.6
6.4

14.1
5.2
12.8
-3.8

-8.7
2.8
2.5
-14.1

Ind supplies (ex. oil, gold)
Consumer goods
Foods, feeds, bev.
All other goods

257.2
408.1
67.3
59.7

258.2
403.9
69.2
59.6

251.8
399.6
68.8
57.7

271.2
410.0
71.6
62.1

-0.5
-0.0
1.0
2.4

1.0
-4.2
2.0
-0.1

0.3
-2.6
1.6
-1.4

19.4
10.5
2.8
4.5

320.6

320.2

318.9

321.2

3.3

-0.3

-1.6

2.3

13.57
46.28

13.37
55.22

13.63
54.95

13.00
60.14

-0.98
6.39

-0.19
8.93

0.15
4.23

-0.63
5.19

Services imports
Memo:
Oil quantity (mb/d)
Oil import price ($/bbl)

1. Change from previous quarter or month.
Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census.

IV-4

For the third quarter, nominal imports of goods and services expanded 10¼ percent at an
annual rate. Most of this rise reflected higher prices, with the 90 percent increase in
nominal oil imports being particularly notable. Imports of non-oil goods rose about
2¾ percent. Gains were widespread, with the exception of consumer goods. In real
terms, imports of goods and services (on a NIPA basis) rose only about 2 percent at an
annual rate in the third quarter.
Prices of Internationally Traded Goods
Non-oil imports. In October, BLS prices of U.S. imports of non-oil goods increased
0.8 percent, and prices of imports of core goods increased 0.9 percent. A large increase
in the price of imported natural gas contributed to both increases. Core goods prices
excluding natural gas rose 0.3 percent, as higher prices for material-intensive goods were
partially offset by slightly lower prices for finished goods. Prices of imported non-oil
industrial supplies, including natural gas, increased 4.4 percent in October, following an
identical increase in September. Natural gas prices led the increase, with chemicals and
metals also contributing to the gain. Imported food prices increased 1.1 percent in
October, while the remaining categories of core imports recorded flat or declining prices.
Imported computer and semiconductor prices both fell sharply, declining 0.7 and
0.8 percent respectively.
Oil. The BLS price index of imported oil fell 4.4 percent in October, reflecting declines
in the prices of imported crude oil and refined petroleum products from their hurricaneinduced highs the previous month. The average spot price of West Texas Intermediate
(WTI) crude oil fell nearly 5 percent in October to about $62.40 per barrel. The spot
price continued its decline in November, averaging $58.30 per barrel. The decline in the
spot price over the past few months reflects in part the release of strategic stocks in
response to the hurricanes and, until recently, warmer-than-normal temperatures, which
reduced oil demand and allowed inventories to build. Recently, the spot price has edged
up, closing on December 6 at $59.95 per barrel, little changed from the time of the
November FOMC meeting.
Exports. In October, the prices of U.S. exports of total goods increased 0.6 percent, and
the price of core exports increased 0.7 percent. The increase in export prices was led by a
1.7 percent increase in prices of exported non-agricultural industrial supplies, with the
largest contribution coming from chemicals. However, all other major categories of core
exports also posted increases. Prices of both exported capital goods and consumer goods
increased 0.3 percent, while prices of automotive products and agricultural products both

IV-5

Prices of U.S. Imports and Exports
(Percentage change from previous period)
Annual rate
2005
Q1
Q2
Q3

Monthly rate
2005
Aug.
Sept.
Oct.

----------------------- BLS prices --------------------3.3
10.5
14.7
1.4
2.3
-0.3
-1.6
69.7 115.0
7.5
8.0
-4.4
4.2
1.7
0.0
0.1
1.0
0.8

Merchandise imports
Oil
Non-oil
Core goods*
Cap. goods ex comp & semi
Automotive products
Consumer goods
Foods, feeds, beverages
Industrial supplies ex oil

5.1
5.3
0.4
4.7
9.2
8.5

2.1
2.0
0.5
0.0
7.3
6.8

0.8
-0.7
0.6
-0.8
-3.2
5.4

0.1
-0.1
0.1
-0.2
0.5
0.3

1.1
0.2
0.1
0.3
0.1
4.4

0.9
-0.1
0.0
-0.1
1.1
4.4

-6.6
-1.1

-4.9
-2.0

-10.2
-4.9

-0.1
0.2

-0.4
-0.8

-0.7
-0.8

4.9

3.3

1.0

-0.1

0.8

0.6

Core goods*
Cap. goods ex comp & semi
Automotive products
Consumer goods
Agricultural products
Industrial supples ex ag

6.0
3.9
1.4
2.4
3.6
12.9

4.3
1.5
0.8
0.3
18.7
6.5

2.5
0.6
0.8
-0.4
2.0
6.3

0.1
0.0
0.1
0.0
-0.6
0.2

1.0
0.3
0.0
0.3
-1.3
3.4

0.7
0.3
0.2
0.3
0.2
1.7

Computers
Semiconductors

-7.8
-1.4

-7.4
-3.3

-8.4
-12.7

0.1
-3.2

-0.5
-0.4

-1.1
0.1

Computers
Semiconductors
Merchandise exports

Chain price index
Imports of goods & services
Non-oil merchandise
Core goods*

--------------------2.9
8.2
3.7
1.6
4.6
2.2

Exports of goods & services
Total merchandise
Core goods*

4.6
4.5
6.1

3.7
2.9
3.8

NIPA prices --------------------9.3
...
...
...
0.0
...
...
...
0.9
...
...
...
3.0
1.5
2.0

...
...
...

*/ Excludes computers and semiconductors.
n.a. Not available. ... Not applicable.

Oil Prices
Dollars per barrel

75
65
55
45
35

Spot West Texas Intermediate

25
15

Import unit value
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

IV-6

increased 0.2 percent. In October, prices of exported computers fell 1.1 percent, and
prices of exported semiconductors increased 0.1 percent.
U.S. International Financial Transactions
In October, foreign official flows into the United States (line 1 of the Summary of U.S.
International Transactions table) totaled $31 billion, compared with outflows of $5 billion
in September. September’s outflows were unusual and reflected both a significant
slowing of inflows from China and net official sales of U.S. assets by the G-10 countries
and the ECB (line 1a). In October, however, flows from the G-10 countries and the ECB
turned positive, and those from OPEC (line 1b) moved up significantly.
. For the third quarter, total foreign official inflows were $37 billion,
below the unusually large inflows recorded for the second quarter. However, the pace of
inflows from July to October was similar to that during the first half of the year.
It should be noted that these monthly transactions data may attribute some foreign official
flows to the foreign private sector if the official investments are made via foreign private
intermediaries. Thus, the official inflows reported above are likely to be understated, and
the foreign private inflows reported below in line 4 are likely to be overstated.
As recorded, net foreign private purchases of U.S. securities (line 4) slowed in October to
$78 billion as foreign purchases of corporate-debt securities (line 4c) dropped from their
rapid pace in September. Foreign purchases of other debt securities picked up, whereas
purchases of equities cooled. For the first ten months of the year, total net foreign private
acquisitions of U.S. securities amounted to $574 billion, surpassing the value recorded
for 2004 as a whole.
U.S. residents purchased $5 billion of foreign securities (line 5) in October, a significant
slowing from the pace in September. Net sales of foreign bonds (line 5a) partly offset net
purchases of foreign equities (line 5b). U.S. residents continued to show a marked
preference for Japanese equities in October, increasing their holdings of those securities
by $4 billion. For the third quarter, total purchases of foreign securities amounted to $34
billion, somewhat lower than in the second quarter.
The volatile banking sector (line 3) registered a substantial inflow in October of $34
billion, exceeding the inflows recorded for September. For the third quarter, total net
inflows were $20 billion, compared to net outflows of $45 billion for the second quarter.

IV-7

Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)

398.1

2004
Q4
94.9

Q1
31.3

Q2
81.0

2005
Q3
42.0

Sep
-5.4

Oct
31.6

267.5
111.4
5.9
150.2

395.3
161.7
12.1
221.5

94.2
-3.1
6.8
90.4

25.9
5.5
-3.9
24.3

81.8
-18.2
4.4
95.6

37.3
-5.5
-4.1
46.8

-5.4
-10.1
-.6
5.4

31.2
3.6
8.8
18.9

1.5

2.8

5.3

-.8

4.8

-.0

291.7

186.5

74.1

130.7

61.3

n.a.

...

64.7

-20.4

-2.6

-2.9

-44.9

19.5

26.7

33.8

336.0
113.3
-38.3
223.8
37.2

505.9
122.5
66.0
255.0
62.4

170.9
10.9
43.2
71.1
45.8

152.2
76.0
.8
54.9
20.5

125.9
10.6
20.6
80.2
14.5

218.3
41.3
39.3
98.8
38.9

98.6
15.1
14.4
45.4
23.7

77.7
18.4
19.4
27.9
12.0

5. U.S. net acquisitions (-) of foreign
securities
a. Bonds
b. Stock purchases
c. Stock swaps 3

-146.6
-28.0
-101.2
-17.4

-146.2
-60.9
-97.6
12.2

-29.6
-19.9
-35.2
25.5

-46.9
-6.5
-38.3
-2.1

-42.0
-17.8
-22.3
-1.9

-34.3
.6
-34.9
.0

-18.2
-10.1
-8.1
.0

-5.2
1.7
-6.9
.0

Other flows (quarterly data, s.a.)
6. U.S. direct investment (-) abroad
7. Foreign direct investment in the U.S.
8. Foreign holdings of U.S. currency
9. Other (inflow, +) 4

-140.6
67.1
16.6
94.3

-252.0
106.8
14.8
-22.5

-100.0
31.6
5.3
-1.6

-27.0
35.1
1.1
19.2

-33.6
17.6
4.5
33.8

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

...
...
...
...

U.S. current account balance (s.a.)
Capital account balance (s.a.) 5
Statistical discrepancy (s.a.)

-519.7
-3.2
-37.8

-668.1
-1.6
85.1

-188.4
-.5
19.9

-198.7
-4.5
41.2

-195.7
-.3
53.6

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

...
...
...

Official financial flows
1. Change in foreign official assets
in the U.S. (increase, +)
a. G-10 countries + ECB
b. OPEC
c. All other countries
2. Change in U.S. official reserve
assets (decrease, +)
Private financial flows
Banks
3. Change in net foreign positions
of banking offices in the U.S. 1
Securities 2
4. Foreign net purchases of U.S.
securities (+)
a. Treasury securities
b. Agency bonds
c. Corporate and municipal bonds
d. Corporate stocks 3

2003

2004

269.0

Note. Data in lines 1 through 5 differ in timing and coverage from the balance of payments data published by the
Department of Commerce. Details may not sum to totals because of rounding.
1. Changes in dollar-denominated positions of all depository institutions and bank holding companies plus certain
transactions between broker-dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase
agreements). Includes changes in custody liabilities other than U.S. Treasury bills.
2. Includes commissions on securities transactions and therefore does not match exactly the data on U.S. international
transactions published by the Department of Commerce.
3. Includes (4d) or represents (5c) stocks acquired through non-market means such as mergers and reincorporations.
4. Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere plus amounts
resulting from adjustments made by the Department of Commerce and revisions in lines 1 through 5 since publication of the
quarterly data in the Survey of Current Business.
5. Consists of transactions in nonproduced nonfinancial assets and capital transfers.
n.a. Not available. ... Not applicable.

IV-8

Foreign Financial Markets
The major currencies index of the dollar rose 1¼ percent on net over the intermeeting
period, as the dollar appreciated against most major currencies. On a bilateral basis, the
dollar appreciated 2¼ percent versus the euro, 1¾ percent against sterling, and 3½
percent vis-à-vis the yen. In contrast, the dollar depreciated 1½ percent vis-à-vis the
Canadian dollar.
Exchange Value of the Dollar
November 1, 2005 = 100
103
November
FOMC
102

101
Other important trading partners
100

Broad

Major currencies

Aug

Sep

Oct

Nov

2005

The dollar appreciated against the euro over the intermeeting period despite a tightening
move by the European Central Bank which had not been widely expected as of early
November. European Central Bank President Trichet strongly signaled in mid-November
that an increase in the ECB’s minimum refinancing rate would come sooner than had
been expected and, on December 1, the ECB raised its minimum refinancing rate 25 basis
points, to 2.25 percent, its first move since June 2003. Social unrest in France appeared
to weigh on the euro early in the period; some market analysts also speculated that the
euro’s weakness versus the dollar may be due in part to the repatriation of funds from
Europe to the United States spurred by the Homeland Investment Act. The dollar
appreciated versus the yen to its highest level since early 2003, as investors scaled back
expectations that the Bank of Japan would end its policy of quantitative easing in the next

IV-9

few months. Japanese government officials publicly pressured the Bank of Japan to
delay a change in its monetary policy stance, going as far as threatening to change the
law governing the Bank of Japan’s independence. The Canadian dollar was supported by
growing expectations over the period that the Bank of Canada may extend its current
tightening cycle for a longer period than had previously been expected. This was spurred
by strong Canadian output, export, and inflation data. The Bank of Canada increased its
main policy interest rate 25 basis points, to 3.25 percent, on December 6, and signaled
that further tightening moves were likely.
Financial Indicators in Major Industrial Countries

Country
Canada

Three-month rate
Percentage
Dec.6/7
point
(Percent)
change

Ten-year yield
Percentage
Dec.6/7
point
(Percent)
change

Equities
percent
change

3.42

.27

4.08

-.09

7.15

.08

.00

1.54

-.03

8.52

Euro area

2.45

.19

3.39

-.03

6.25

United Kingdom

4.56

.03

4.28

-.06

4.60

Switzerland

1.02

.16

2.11

-.01

6.81

Australia

5.63

-.03

5.43

-.03

3.42

United States

4.42

.20

4.49

-.08

5.13

Memo:
Weighted-average
foreign

2.28

.15

n.a.

-.06

n.a.

Japan

NOTE. Change is from October 31/November 1 to December 6/7.
n.a. Not available.

Three-month interest rates rose about 25 basis points on balance over the period in
Canada and about 20 basis points in the euro area and the United States; they were little
changed in the United Kingdom and Japan. Ten-year sovereign yields were little
changed on balance in the euro area and Japan; they declined about 5 basis points in the
United Kingdom and about 10 basis points in Canada and the United States. The
inflation compensation implied by the difference between long-term nominal yields and
yields on inflation-indexed notes declined about 5 basis points in the euro area, Japan and
the United Kingdom. Equity indexes rose substantially throughout the industrial world
over the period, with net increases of 6 percent or more in the euro area and Canada. In

IV-10

Japan, the Topix index rose 8½ percent and the Nikkei index rose nearly 12 percent, to its
highest level in five years, amid continuing reports of large purchases of Japanese
equities by foreign investors, better-than-expected economic data, and improving
earnings expectations.
Financial Indicators in Latin America, Asia, and Russia
Currency/
US dollar

Short-term
interest rates1
Percentage
Dec.6/7
point
(Percent)
change

Dollar-denominated
bond spread2
Percentage
Dec.6/7
point
(Percent)
change

Equity
prices

Dec. 7

Percent
change

10.42

-3.28

8.40

-.42

1.24

-.08

10.56

Brazil

2.17

-3.71

18.79

-.84

3.16

-.41

9.29

Argentina

2.99

-.15

7.88

1.44

4.73

1.02

-2.93

Chile

509.55

-6.38

4.91

.25

.75

.01

-3.78

China

8.08

-.12

n.a.

.68

.09

.89

Korea

1035.60

-.65

3.60

.02

...

11.42

33.48

-.29

1.57

-.02

...

9.16

Singapore

1.69

-.52

3.09

.59

...

3.44

Hong Kong

7.75

.03

4.15

-.06

...

3.86

Malaysia

3.78

.07

3.12

.23

.82

.02

-2.10

Thailand

41.29

1.18

4.05

.05

.46

-.02

.23

9830.00

-1.80

13.25

-1.03

2.63

-.42

8.11

Philippines

53.84

-1.93

7.44

-.13

3.21

-.39

7.31

Russia

28.98

1.35

n.a.

1.11

-.01

16.02

Economy
Mexico

Taiwan

Indonesia

Percent
change

NOTE. Change is from October 31/November 1 to December 6/7.
1. One month interbank interest rate, except Chile: 30-day deposit rate; Korea: 1-week call rate.
No reliable short-term interest rates exist for China or Russia.
2. Spreads over similar maturity U.S. Treasuries. Mexico, Brazil, Argentina, Chile, Korea, China,
Malaysia, Thailand, Indonesia, the Philippines and Russia: EMBI+/EMBI Global.
Taiwan, Singapore, and Hong Kong do not have outstanding sovereign bonds denominated in dollars.
n.a. Not available. ... Not applicable.

Equity prices also rose substantially in a number of emerging market economies over the
period. Headline indexes registered increases of about 10 percent in Mexico, Brazil,
Taiwan, and Korea. There were only small movements in the exchange rates of the
currencies of emerging Asian countries versus the dollar, implying an appreciation of
these currencies against the Japanese yen. In contrast, the Mexican peso and the
Brazilian real appreciated about 3-1/2 percent versus the dollar. The Mexican peso
appeared to have been boosted by growing optimism about the country’s economic

IV-11

performance. The Argentine peso was little changed against the dollar, and the Merval
stock index declined 3 percent. Argentine Finance Minister Lavagna, widely credited
with the recent recovery in Argentina’s economy, resigned his post in late November,
reportedly following a dispute with Argentina’s president over the conduct of economic
policy.
The dollar price of gold rose 11 percent over the period, exceeding $500 per ounce for
the first time since 1983. Although the factors driving this price increase were unclear,
market analysts generally did not interpret this move as a harbinger of future inflationary
pressure.

The Desk did not intervene
during the period for the accounts of the System or the Treasury.

IV-12

Developments in Foreign Industrial Countries
Growth in the foreign industrial countries was surprisingly strong in the third quarter, and
indicators for the fourth quarter are promising, on balance. The growth rate in the euro
area picked up as investment and exports strengthened, and some surveys of business
activity improved further in the fourth quarter. Although growth moderated in Japan and
the United Kingdom, investment expanded briskly, and consumption growth in both
countries stayed firm. Canadian GDP accelerated in the third quarter, boosted by net
exports and still solid growth in domestic demand. Employment growth in Canada
remained robust in the first two months of this quarter.
Headline rates of consumer price inflation fell back a touch in October in most of the
major foreign economies in line with the declines in energy prices. Central banks in
Canada and the euro area tightened monetary policy.
Real GDP in Japan rose 1.7 percent (s.a.a.r.) during the third quarter, marking the fourth
consecutive quarter of positive growth. Although domestic demand decelerated from its
pace in the first half of the year, it continued to be the country’s primary source of
growth. Both private consumption and gross fixed private investment expanded at a
moderate pace. Inventories also rose for the quarter, leading to a further rise in
inventory/sales ratios. Imports posted a surprisingly strong increase, which resulted in a
slight decline in net exports.
October data have been generally positive. Industrial production rose 0.6 percent on the
month, lower than had been expected, but shipments rose 1.7 percent. Real worker
household spending rose 1.2 percent, rebounding from a decline in the third quarter. Real
exports rose slightly while real imports fell, leaving the real trade surplus up 9.5 percent
from the previous month. The unemployment rate jumped back up to 4.5 percent after
falling to 4.2 percent in September; however, the decline in employment was almost
entirely amongst those reporting themselves as self-employed or as family workers, while
regular employment was fairly stable. Despite the rise in the unemployment rate, the job
offers-to-applicants ratio rose to a new twelve-year high. Nominal wages rose
0.5 percent over the twelve months ending in October, and summer bonuses rose
1.3 percent from the previous year following an already strong round of bonuses at the
start of the year.

IV-13

Japanese Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
20031 20041

Component
GDP
Total domestic demand
Consumption
Private investment
Public investment
Government consumption
Inventories2
Exports
Imports
Net exports2

2.2
1.3
1.0
8.9
-12.5
.9
-.3
10.6
2.8
.9

.9
.6
.3
1.1
-12.0
3.1
.4
10.8
10.4
.3

2004:
Q4
.4
.7
-1.1
1.1
-1.3
2.6
.7
6.6
10.3
-.2

2005
Q1

6.3
6.6
5.0
9.3
-1.2
2.8
1.3
-.0
.3
-.0

3.3
2.8
2.7
10.1
-7.4
1.3
-.6
13.0
9.4
.7

1.7
2.1
1.4
3.5
4.1
1.2
.2
11.4
16.7
-.2

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

Japanese Economic Indicators
(Percent change from previous period except as noted, s.a.)
2005

Indicator
1

Industrial production
All-industries index
Housing starts
Machinery orders2
Machinery shipments3
New car registrations
Unemployment rate4
Job offers ratio5
Business sentiment6
CPI (core, Tokyo area)7
Wholesale prices7

Aug.

Sept.

1.8
1.3
3.3
.8
-.4
-2.7
4.6
.91
-2.0
-.5
1.3

-.4
.3
-2.1
.8
2.4
1.6
4.3
.95
1.0
-.4
1.7

-.2
.2
8.0
2.1
1.2
-2.9
4.3
.97
2.0
-.4
1.6

1.1
.4
1.2
-.4
-4.8
-2.1
8.2 -10.0
3.6
-1.6
1.3
2.1
4.3
4.2
.97
.97
…
…
-.3
-.4
1.7
1.7

1. Mining and manufacturing.
2. Private sector, excluding ships and electric power.
3. Excluding orders for ships and from electric power companies.
4. Percent.
5. Level of indicator.
6. Tankan survey, diffusion index.
7. Percent change from year earlier, n.s.a.
n.a. Not available. . . . Not applicable.

Oct.
.6
n.a.
3.8
n.a.
2.9
-6.1
4.5
.98
…
-.3
1.9

Nov.
n.a.
n.a.
n.a.
n.a.
n.a.
1.2
n.a.
n.a.
…
-.3
n.a.

IV-14

Consumer prices declined 0.7 percent in the twelve months ending in October, though
core consumer prices, which exclude fresh food but include energy, were unchanged over
the same period and the their twelve-month rate is expected to turn positive by the end of
the year. Tokyo core consumer prices, which are reported one month in advance of the
figures for the country as a whole, fell 0.3 percent in the year to November. In the third
quarter, the GDP deflator fell 1.1 percent below its level a year earlier. Monetary policy
was unchanged. Long-term interest rates fell following statements by the Prime Minister
and other government officials that strongly questioned the Bank of Japan’s apparent
intention to end its policy of quantitative easing in the first half of 2006. However, we do
not see any sign that Bank officials have given ground on this issue, although they have
emphasized that they may hold the policy rate at zero for some time after ending
quantitative easing.
Euro-Area Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component

20031 20041

2004:
Q4

2005
Q1

GDP
Total domestic demand
Consumption
Investment
Government consumption
Inventories2
Exports
Imports
Net exports2

1.0
1.5
.9
1.0
1.6
.5
1.5
2.9
-.5

1.6
2.0
1.8
1.6
.7
.5
5.9
7.1
-.4

.8
2.4
3.4
2.4
-.4
.0
1.3
5.5
-1.6

1.3
.3
.6
.5
1.1
-.4
-3.3
-5.9
1.0

1.6
2.1
.9
3.2
2.2
.5
9.1
10.7
-.5

2.6
1.4
1.2
6.6
2.6
-1.2
14.5
11.7
1.2

Memo:
GDP of selected countries
France
Germany
Italy

1.4
.2
.1

2.0
.5
.8

2.7
-.3
-1.6

1.3
2.4
-2.1

.4
.9
2.6

2.7
2.5
1.2

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

In the euro area, GDP growth rebounded to a 2.6 percent annual rate in the third quarter,
supported by strength in investment and exports. GDP grew at about the euro-area
average rate in Germany and France following weak second-quarter performance, but
growth slowed in the third quarter in Italy and the Netherlands.

IV-15

Recent survey data generally indicate that business activity in the euro area entered the
fourth quarter on an upswing. The manufacturing PMI rose from 51.7 in September to
52.7 in October, the highest level in a year, and edged slightly higher in November. The
services PMI made smaller gains edging up to 55.2 in November from 54.6 in September.
The European Commission survey of business sentiment also improved (for the fifth
month in a row) in October and held that gain in November. Hard data on business
activity have been mixed, with euro-area industrial production declining 0.4 percent (not
annualized) in September but rising a solid 0.8 percent for the third quarter as a whole.
Euro-Area Economic Indicators
(Percent change from previous period except as noted, s.a.)
2005

Indicator
Industrial production1
Retail sales volume2
Unemployment rate3
Consumer confidence4
Industrial confidence4
Manufacturing orders, Germany
CPI5
Producer prices5
M35

Aug.

Sep.

Oct.

Nov.

-.1
.7
8.8
-13.3
-6.7
-.2
2.0
4.1
6.5

.7
-.3
8.6
-14.3
-10.3
.9
2.0
3.9
7.6

.8
.1
8.4
-14.7
-7.7
4.6
2.3
4.1
8.4

.8
1.0
8.4
-15.0
-8.0
-3.4
2.2
4.0
8.2

-.4
-.9
8.3
-14.0
-7.0
2.9
2.6
4.4
8.4

n.a.
.5
8.3
-13.0
-6.0
2.0
2.5
4.1
8.0

n.a.
n.a.
n.a.
-13.0
-6.0
n.a.
2.4
n.a.
n.a.

1. Excludes construction.
2. Excludes motor vehicles.
3. Percent. Euro-area standardized to ILO definition. Includes Eurostat estimates in some cases.
4. Diffusion index based on European Commission surveys in individual countries.
5. Eurostat harmonized definition. Percent change from year earlier, s.a.
n.a. Not available.

Consumer spending continued to be a relative weak component of demand in the euro
area in the third quarter, especially in Germany, where private consumption declined
again. However, a recent upturn in euro-area consumer sentiment may be a sign that
improved prospects for employment and income could lead to a rebound in consumer
spending. The European Commission’s measure of consumer sentiment picked up in
September and October from weak readings over the summer (and held those gains in
November), with the improvement coming mainly in consumers’ perceptions of
employment prospects. In contrast, French consumer confidence declined in November.
The euro-area unemployment rate ticked down to 8.3 percent in September and remained
there in October. The rate is down from the cyclical peak of 8.9 percent late last year, but
is still above the 7.8 percent low reached in mid-2001.

IV-16

Twelve-month consumer price inflation edged down to 2.4 percent in November from a
high of 2.6 percent in September. Core inflation, excluding energy and unprocessed
food, picked up to 1.6 percent in October but remained near recent lows.
On December 1, the ECB’s Governing Council raised its official interest rates 25 basis
points, moving its key policy rate up to 2.25 percent after keeping it unchanged for nearly
2½ years. The rate hike had been widely expected after President Trichet had indicated
in a speech on November 18 that the Governing Council was ready to move rates higher.
At the press conference following the December 1 meeting, Trichet said that “we [the
Governing Council] are not engaging ex ante in a series of interest rate increases and …
we will continue to monitor closely all developments with respect to risks to price
stability.” Also following the December meeting, the ECB unveiled its new staff
forecasts, which showed a somewhat higher path than the previous forecast for GDP
growth and inflation this year and next. The mid-point of the ECB’s forecast for inflation
is just above 2 percent in 2006 and just below in 2007.
U.K. Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component
GDP
Total domestic demand
Consumption
Investment
Government consumption
Inventories2
Exports
Imports
Net exports2

20031 20041
3.1
3.2
2.4
-.8
6.1
.6
3.7
4.0
-.2

2.5
2.9
3.9
4.1
.5
-.4
5.6
6.8
-.5

2004:
Q4
1.9
2.8
2.5
3.0
1.0
.3
4.6
7.4
-1.0

2005
Q1

1.0
.8
.6
-.2
2.2
.4
-2.7
-3.0
.2

2.0
-.3
1.4
3.9
2.0
-2.6
18.6
7.8
2.3

1.6
3.3
1.9
4.3
1.2
1.6
3.0
8.7
-1.8

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

GDP for the United Kingdom rose 1.6 percent in the third quarter, up slightly from the
preliminary estimate. Private consumption grew more than had been expected. Fixed
investment growth was also robust. Net exports subtracted 1.8 percentage points from
growth.

IV-17

After rising steadily since June, the PMI for manufacturing crossed the 50 threshold in
the third quarter and remains at 51 in November, though industrial production declined in
October. The PMI for services has remained just above 55 through all of 2005 and
continued to do so in November. Retail sales grew 1.5 percent in the twelve months
ending in October. After rising sharply over the second and third quarters, the PMI for
construction activity fell from its year-to-date high in September of 57 to 54 in October
and November.
U.K. Economic Indicators
(Percent change from previous period except as noted, s.a.)
2005

Indicator
Industrial production
Retail sales volume1
Unemployment rate2
Claims-based
Labor force survey3
Business confidence4
Consumer confidence5
Consumer prices6
Producer input prices7
Average earnings7

Aug.

Sept.

Oct.

Nov.

-1.0
-.1

.0
.6

-.6
.5

-.9
.2

.5
.6

-1.0
.2

n.a.
n.a.

2.6
4.7
12.7
1.0
1.7
10.5
4.5

2.7
4.7
-.3
-2.0
1.9
9.8
4.1

2.8
n.a.
5.0
-2.0
2.4
12.5
4.0

2.8
4.7
3.0
-2.0
2.4
13.0
4.0

2.8
n.a.
6.0
-3.0
2.5
10.2
3.7

2.8
n.a.
2.0
-4.0
2.3
7.7
n.a.

n.a.
n.a.
-4.0
-4.0
n.a.
n.a.
n.a.

1. Excludes motor vehicles.
2. Percent.
3. Three-month average centered on month shown.
4. Percentage of firms expecting output to increase in the next four months less
percentage expecting output to decrease.
5. Average of the percentage balance from consumers’ expectations of their financial
situation, general economic situation, unemployment, and savings over the next 12 months.
6. Consumer prices index (CPI), percent change from year earlier.
7. Percent change from year earlier.
n.a. Not available.

House prices have been rising in recent months, after staying roughly unchanged for
much of the previous year. In November, the Nationwide and Halifax indexes of house
prices rose 2.3 and 5.9 percent on a twelve-month basis, respectively. Lending secured
on dwellings rose 0.8 percent in October, a tad higher than in September. Mortgage
refinancing fell, suggesting that much of the October lending was associated with new
lending.

IV-18

The twelve-month rate of consumer price inflation fell from 2.5 percent in September to
2.3 percent in October, both above the Bank of England’s 2 percent target. The twelvemonth rate of inflation excluding energy remained stable at 1.7 percent in October.
Chancellor of the Exchequer Gordon Brown presented the government’s Pre-Budget
Report on December 5. Brown raised his projection for Public Sector Net Borrowing to
about 3 percent of GDP for fiscal year 2005-06 and to about 2.7 percent of GDP for fiscal
year 2006-07.
In the third quarter, real GDP in Canada expanded 3.6 percent in the third quarter, with
strong domestic demand helped by a rebound in exports. After a small decline in exports
in the second quarter, third-quarter export growth topped 10 percent, led by exports of
automobiles, energy products, and agricultural products. Output of the mining, oil, and
gas extraction sector was up strongly as well, and overall industrial production posted a
solid advance. Business investment growth continued its recent steady climb, reaching
its fastest pace in nearly two years, but output in the residential construction sector
declined. Consumer spending, which propped up growth over the past year, continued to
decelerate, led by a second straight quarter of declining spending in the household
furnishings sector.
Canadian Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component
GDP
Total domestic demand
Consumption
Investment
Government consumption
Inventories2
Exports
Imports
Net exports2

20031
1.7
3.9
2.7
8.5
2.7
.0
.1
5.7
-2.1

20041
3.3
5.1
3.9
5.4
2.5
1.2
3.0
8.3
-1.9

2004:
Q4
2.1
6.2
3.8
7.5
2.1
1.9
-3.1
8.3
-4.5

2005
Q1

2.0
3.2
6.4
7.3
1.8
-2.3
5.4
9.2
-1.4

3.4
2.7
3.2
4.9
5.1
-1.1
-1.0
-1.9
.4

3.6
3.6
2.4
7.7
4.4
-.4
10.4
9.2
.5

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

On balance, early indicators for the fourth quarter suggest that activity continues to be
firm. The composite index of leading indicators advanced in October, with indicators of
retail trade activity among the sources of strength. Housing starts declined in October,

IV-19

but still remain elevated. The Ivey Purchasing Managers Index picked up a bit in
November.
The solid job gains of the past year have continued in the fourth quarter. Total
employment increased in both October and November, with the November jump driven
entirely by an increase in full-time jobs, which have been where job gains have been
concentrated throughout the year. The unemployment rate dipped in November to
6.4 percent, its lowest level in over 30 years. Even the beleaguered manufacturing sector,
which has shed about 5 percent of its workforce over the past year, saw solid job gains in
November.
In October, the twelve-month rate of consumer price inflation fell to 2.6 percent from
3.4 percent in September, almost entirely a result of a sharp fall in gasoline prices. The
twelve-month rate of core inflation, excluding the eight most volatile components, held
steady at 1.7 percent for the third consecutive month.
Canadian Economic Indicators
(Percent change from previous period except as noted, s.a.)
2005

Indicator
GDP by industry
Industrial production
New manufacturing orders
Retail sales
Employment
Unemployment rate1
Consumer prices2
Core consumer prices2,3
Consumer attitudes (1991 = 100)
Business confidence (1991 = 100)

Aug.

Sept.

Oct.

Nov.

.6
-.2
3.2
2.3
.1
7.0
2.1
1.7
123.6
135.9

.7
-.1
-1.3
1.1
.4
6.8
1.9
1.6
121.1
139.2

1.0
1.3
1.3
.1
.3
6.8
2.6
1.7
108.1
127.1

.5
1.2
3.0
-1.2
.2
6.8
2.6
1.8

-.0
-.5
-1.7
-1.5
-.0
6.7
3.4
1.8

n.a.
n.a.
n.a.
n.a.
.4
6.6
2.6
1.7

n.a.
n.a.
n.a.
n.a.
.2
6.4
n.a.
n.a.

…
…

1. Percent.
2. Percent change from year earlier, n.s.a.
3. Excluding the 8 most volatile components (fruits, vegetables, gasoline, fuel oil, natural gas,
mortgage interest, intercity transportation, and tobacco).
n.a. Not available. . . . Not applicable.

In December, the Bank of Canada increased the targeted overnight rate 25 basis points to
3.25 percent, following 25-basis-point increases at each of its previous two meetings.
This move was widely expected. In its accompanying statement, the Bank said the
economy has been evolving broadly in line with its expectations and that “some further

IV-20

reduction in monetary stimulus will be required…over the next four to six quarters” to
keep inflation on target.
On November 29, after the minority Liberal government lost a vote of confidence, Prime
Minister Martin announced that national elections will be held on January 23. The
current minority government has been in place since June 2004.

IV-21

External Balances
(Billions of U.S. dollars, s.a.a.r.)
2005

Country and balance
Q1
Japan
Trade
Current account
Euro area
Trade
Current account
Germany
Trade
Current account
France
Trade
Current account
Italy
Trade
Current account
United Kingdom
Trade
Current account
Canada
Trade
Current account

Aug.

Sept.

102.0 78.1 65.4 67.7 62.7
171.3 160.0 154.0 140.2 175.2
66.8
23.5

49.5
2.5

13.1
-62.0

2.8
-73.8

Oct.
75.2
n.a.

18.2
-66.1

n.a.
n.a.

212.8 202.1 200.0 182.9 217.6
144.2 108.9 113.1 84.0 98.5

n.a.
n.a.

-27.8
-31.7

-26.2
-37.4

-31.9
-32.7

-32.9
-42.5

-25.3
-25.3

n.a.
n.a.

-8.8
-33.8

-8.4
-27.2

-16.6
-23.4

-20.8
-39.4

-14.8
-13.6

n.a.
n.a.

-119.0 -108.5 -119.2 -127.0 -117.9

n.a.

-55.5

-22.7

n.a.

…

42.2

43.6

62.2

63.5

71.5

n.a.

30.8

…

14.8

15.7

n.a. Not available. . . . Not applicable.

IV-22

Consumer Price Inflation in Selected Industrial Countries
(12-month change)
Japan

Germany
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

-1

-2

France

1998 1999 2000 2001 2002 2003 2004 2005

-2

United Kingdom
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

-1

-2

Italy

1998 1999 2000 2001 2002 2003 2004 2005

-2

Canada
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

-1

-2

1998 1999 2000 2001 2002 2003 2004 2005

-2

IV-23

Industrial Production in Selected Industrial Countries
Japan

1998=100

1998 1999 2000 2001 2002 2003 2004 2005

France

1998 1999 2000 2001 2002 2003 2004 2005

Italy

1998 1999 2000 2001 2002 2003 2004 2005

130

Germany

1998=100

130

120

110

100

130

1998 1999 2000 2001 2002 2003 2004 2005

United Kingdom

130

120

110

100

130

1998 1999 2000 2001 2002 2003 2004 2005

Canada

130

120

110

100

1998 1999 2000 2001 2002 2003 2004 2005

IV-24

Economic Situation in Other Countries
Recent indicators of economic activity across the developing economies have been
generally positive. In Asia, economic performance has been robust, most notably in
greater China, Korea, and India. In Latin America, performance in Mexico and
Argentina was solid in the third quarter; however, Brazilian activity has been weak.
Inflation in the developing world has edged up but generally remains contained.
Chinese industrial production continued to grow at a solid pace in October, as did
investment, which was up more than 25 percent from a year earlier. Chinese government
officials, including Premier Wen, have made several statements about the need to slow
investment growth further. However, to date no new steps have been taken. At the same
time, retail sales growth has remained in double-digit territory. The trade surplus has
hovered around $100 billion (annualized) in recent months, triple the 2004 level, and
both exports and imports surged in October to new record highs. Twelve-month
consumer price inflation remains low.
Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2005

2004
Q2

Real GDP1
Industrial production
Consumer prices2
Trade balance3

10.0
18.9
3.2
25.5

9.5
5.0
14.4
4.3
2.6
1.7
32.1 109.0

Aug.

Sept.

Oct.

8.2 …
3.2
1.2
1.3
1.2
113.8 115.7

…
1.9
1.0
87.2

…
1.1
1.2
100.4

1. Annual rate. Quarterly data estimated by staff from reported four-quarter growth rates.
Annual data are Q4/Q4.
2. Percent change from year-earlier period, except annual data, which are Dec./Dec.
3. Billions of U.S. dollars, annual rate. Imports are c.i.f.
. . . Not applicable.

Recent data from Hong Kong have been generally positive. In the third quarter, real
GDP expanded almost 10 percent (s.a.a.r.), on the back of strong performance in exports
and private consumption. Reports indicate that Hong Kong Disneyland opened to large
crowds, which may have boosted growth in the third quarter. In October, the
unemployment rate fell to its lowest rate in four years. Trade volume, a good indicator of
activity in Hong Kong’s entrepôt economy, moved up in September. Twelve-month
consumer price inflation has continued to edge up in recent months but remains below
2 percent.

IV-25

Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Consumer prices3
Trade balance4

2003
4.5
7.9
-1.8
-8.5

2005

2004
6.9
6.9
.2
-12.0

Aug.

Sep.

Oct.

12.6
5.7
.8
-9.1

9.9
5.5
1.4
-12.0

…
5.7
1.3
-16.7

…
5.5
1.6
-12.7

…
5.3
1.8
-5.1

1. Annual rate. Annual data are Q4/Q4.
2. Percent. Monthly data are averages of the current and previous two months.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate. Imports are c.i.f.
. . . Not applicable.

In Taiwan, recently revised GDP figures indicate growth in the first half of the year was
about two times higher than previously reported. In the third quarter, output expanded
almost 7 percent (s.a.a.r.), the highest rate in nearly two years, reflecting strong export
growth and inventory accumulation. Industrial production in the third quarter was
3.2 percent higher than in the second quarter and continued to expand in October, while
new orders for electronics and other goods were also up. The unemployment rate has
inched down in recent months. Exports surged to a new high in October, contributing to
a sizeable monthly trade surplus, before moderating a bit in November. Twelve-month
consumer price inflation fell back for the third straight month in November to
2½ percent.

IV-26

Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2005

2004
Q2

Real GDP1
Unemployment rate2
Industrial production
Consumer prices3
Trade balance4
Current account5

5.9
5.0
7.1
-.1
16.9
29.3

2.6
4.5
9.8
1.6
6.1
18.6

5.9
4.2
1.3
2.1
3.1
7.0

Q3
6.9
4.1
3.2
3.0
4.4
3.5

Sept.

Oct.

Nov.

…
4.0
2.4
3.2
7.7
…

…
4.0
1.3
2.7
13.1
…

…
n.a.
n.a.
2.5
10.5
…

1. Annual rate. Annual data are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate. Imports are c.i.f.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

Economic indicators for Korea remain upbeat. Third-quarter real GDP was revised up
half a percentage point, to 8 percent. More recently, industrial production rose 1 percent
in October after surging the previous month. A post-strike recovery in the auto sector
was behind much of the October gain but increases in other export-linked sectors also
boosted production. Consumer and business confidence jumped in October, and the level
of retail sales remained elevated. Exports fell slightly in October after previous rapid
increases, but a larger decline in imports led to an improvement in the trade balance.
Twelve-month consumer price inflation was 2.4 percent in November, unchanged from
the third-quarter pace.

IV-27

Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

2003
4.2
4.9
3.4
3.4
22.0
11.9

2005

2004
3.0
10.2
3.5
3.0
38.2
27.6

Sept.

Oct.

Nov.

5.0
.5
3.6
3.0
27.7
11.0

8.0
3.3
3.8
2.4
32.3
10.1

…
2.4
4.0
2.7
29.1
19.7

…
1.0
3.9
2.5
34.3
35.8

…
n.a.
n.a.
2.4
n.a.
n.a.

Data from the ASEAN countries indicate that economic activity continued to expand at a
solid pace, but performance varied across the region. Third-quarter real GDP rose
9 percent in Thailand, 7 percent in Singapore, and around 6 percent in Malaysia and
Indonesia. In the Philippines, however, growth moderated from the strong secondquarter pace, mostly due to a contraction of government expenditures aimed at reining in
the high public debt level. More recently, October industrial activity was up a bit in
Singapore, but down in Thailand and Malaysia. Data and anecdotes from the region
point to a recovery in global demand for high-tech products and to an expansion of the
external sector going forward.
Consumer price inflation remains elevated in much of the region, reflecting higher food
prices in some countries as well as the effect of higher energy prices. The increases in
energy costs were partly a result of cuts in fuel subsidies, most notably in Indonesia,
where twelve-month inflation exceeded 17 percent in October and November after fuel
subsidies were sharply reduced. Citing concerns over higher inflation, the central bank of
Indonesia raised interest rates 125 basis points in November and another 50 basis points
in December. Similarly, Malaysia raised interest rates 30 basis points in November.

IV-28

ASEAN Economic Indicators: Growth
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2005

2004
Q2

Aug.

Sept.

Oct.

…
…
…
…
…

-1.8
4.6
.9
2.5
2.5

-.3
1.3
-4.4
10.7
-.7

n.a.
-1.3
n.a.
.1
-1.4

Real GDP1
Indonesia
Malaysia
Philippines
Singapore
Thailand

5.3
6.7
4.6
5.5
7.9

6.5
5.8
5.4
6.5
5.5

3.2
.9
7.1
19.0
9.3

5.7
6.3
2.3
7.1
9.0

Industrial
production2
Indonesia3
Malaysia
Philippines
Singapore
Thailand

5.5
9.3
.0
3.0
13.9

3.3
11.3
1.0
13.9
11.0

-2.5
-.2
1.7
8.0
3.1

-2.1
1.1
-.6
7.8
2.7

1. Annual rate. Annual data are Q4/Q4.
2. Annual data are annual averages.
3. Staff estimate.
n.a. Not available. . . . Not applicable.

ASEAN Economic Indicators: Trade Balance
(Billions of U.S. dollars, s.a.a.r.)
Indicator

2003

2005

2004
Q2

Indonesia
Malaysia
Philippines
Singapore
Thailand

28.5
21.4
-4.2
16.2
3.8

n.a. Not available.

25.1
21.2
-4.4
16.1
1.2

20.9
26.1
-4.4
16.3
-20.6

Q3
n.a.
25.7
n.a.
16.5
n.a.

Aug.
20.5
28.5
-5.4
21.4
-2.9

Sep.
n.a.
25.2
n.a.
10.1
n.a.

Oct.
n.a.
32.6
n.a.
11.9
n.a.

IV-29

ASEAN Economic Indicators: CPI Inflation
(Percent change from year earlier, except as noted)
Indicator

2005

20031 20041
Q2

Indonesia
Malaysia
Philippines
Singapore
Thailand

5.3
1.2
3.9
.7
1.8

6.6
2.1
8.6
1.3
2.9

7.6
3.0
8.2
.1
3.7

Sept.

Oct.

Nov.

9.0
3.4
7.0
.6
6.0

17.4
3.3
7.0
1.1
6.2

18.9
n.a.
7.1
n.a.
5.9

8.4
3.4
7.1
.5
5.6

1. Dec./Dec.
n.a. Not available.

The Indian economy remains strong. Output rose 7.6 percent in the third quarter with
large gains in the trade and service sectors and continued healthy growth in
manufacturing. More recent data point to a slight improvement in India’s trade deficit in
October, reflecting an uptick in export growth. The closely watched wholesale price
index rose 4.6 percent in October, in part reflecting the effect of earlier reductions in fuel
subsidies.
Indian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2005

2004
Q2

Real GDP1
Industrial production
Consumer prices2
Wholesale prices2
Trade balance3
Current account4

11.0
6.6
3.7
5.8
-13.7
6.9

6.4
8.5
3.8
6.7
-21.7
-.8

11.6
3.5
4.0
5.3
-38.7
-24.8

Aug.

Sept.

Oct.

7.6
…
.8
2.3
3.7
3.4
4.0
3.7
-39.2 -38.2
n.a. …

…
1.5
3.6
4.1
-39.5
…

…
n.a.
4.2
4.6
-33.7
…

1. Annual rate. Annual data are Q4/Q4.
2. Percent change from year-earlier period, except annual data, which are Dec./Dec.
3. Billions of U.S. dollars, annual rate.
4. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

In Mexico, recent data releases point to a strong but uneven recovery from the weak
second quarter. Real GDP jumped almost 9 percent (s.a.a.r.) in the third quarter,
supported by a sharp recovery in agriculture from its contraction in the second quarter.
Services sector output also grew solidly. Despite high real interest rates, domestic

IV-30

demand has continued to perform well. However, industrial activity (especially
manufacturing) remained weak, mainly due to anemic auto exports to the United States.
Consumer price inflation has stayed well contained. Twelve-month consumer price
inflation was 3 percent in October, at the middle of the 2-to-4 percent target range.
Furthermore, twelve-month core inflation stood at 3.1 percent in October. The soft
economy and improved inflation prospects led the Bank of Mexico (BOM) to begin
easing policy in late August; the BOM has eased policy four times in as many months
since then. As a result, the rate on 28-day peso-denominated bills, a widely used measure
of the monetary policy stance, has fallen from 9.6 percent in early August to 8.4 percent
in early December.
Mexican Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2005

2004
Q2

Real GDP1
Overall economic
activity
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Imports4
Exports4
Current account5

2.1

4.9

-1.3

8.9

1.4
4.1
-.1
3.5
3.4
3.9
4.0
5.2
-5.8
-8.8
170.5 196.8
164.8 188.0
-8.6
-7.2

-.2
-.1
3.8
4.5
-5.2
213.6
208.4
.3

2.0
.4
3.5
4.0
-7.7
222.1
214.4
-2.6

Aug.

Sept.

Oct.

…

.8
.4
.4
1.0
3.3
3.4
3.9
3.5
-9.2
-4.0
224.9 223.4
215.7 219.4
…
…

n.a.
n.a.
3.4
3.0
-9.1
228.4
219.3
…

1. Annual rate. Annual data are Q4/Q4.
2. Percent; counts as unemployed those working one hour a week or less.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

In Brazil, real GDP declined 4.7 percent (s.a.a.r.) in the third quarter, led by a 13 percent
fall in agricultural output. Industrial output also contracted. Indicators for the fourth
quarter point to continued weakness, as October auto sales and production were down,
unemployment edged up, and industrial output stagnated. Headline inflation rose to
6.4 percent in October on a twelve-month basis, reflecting in part a September hike in
prices of gasoline and diesel fuel. Food and energy price increases appear to have kept

IV-31

inflation elevated through mid-November as well. The trade surplus rose in November,
on the back of strong export growth.
In late November, the central bank reduced its policy rate 50 basis points to 18.5 percent,
following rate reductions of 25 and 50 basis points at the September and October
meetings. The weakening economy and the political scandals have exacerbated political
pressures to loosen macroeconomic policies, and Finance Minister Palocci has been
rumored in recent weeks to be on the verge of resigning.
Brazilian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

2003
.9
.1
12.3
9.3
24.8
4.2

2005

2004
4.8
8.3
11.5
7.6
33.7
11.7

Sept.

Oct.

Nov.

4.6
1.9
9.8
7.8
44.8
10.3

-4.7
-.8
9.3
6.2
46.2
23.1

…
-2.3
9.5
6.0
40.9
28.6

…

…
n.a.
n.a.
n.a.
58.3
n.a.

.0
9.7
6.4
37.6
10.9

1. Annual rate. Annual data are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
Price index is IPC-A. Data are n.s.a.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

In Argentina, the monthly index of economic activity, which has closely tracked real
GDP growth in recent years, suggests that output in the third quarter likely continued to
expand at close to the second quarter’s robust 10 percent pace. In addition, industrial
production in the third quarter was 2 percent above its second-quarter level. Twelvemonth consumer price inflation was 12 percent in November, well above the central
bank’s informal target range of 5 to 8 percent for the end of 2005. The central bank has
continued to intervene to stem upward pressures on the peso, although recently in smaller
amounts.
In late November, the government announced the appointment of Felisa Miceli as
Finance Minister, after the resignation of Roberto Lavagna. Rumors of a rift between
President Kirchner and Mr. Lavagna had long existed, and a cabinet reshuffle was
expected after recent legislative elections. Mrs. Miceli, currently president of the state-

IV-32

owned Banco de la Nacion, will have to steer Argentina through difficult negotiations
with the IMF. Markets reacted unfavorably to the appointment of Mrs. Miceli, a littleknown economist who has close political connections to the administration, because of
concerns that she will be less independent than Mr. Lavagna.
Argentine Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

2003
11.8
16.2
17.3
3.7
15.7
8.0

2005

2004
9.1
10.7
13.6
6.1
12.1
3.3

Sept.

Oct.

10.1
1.6
12.1
8.8
12.1
7.1

n.a.
2.0
n.a.
9.8
13.6
n.a.

…
1.1
…
10.3
12.1
…

…
.7
…
10.7
15.3
…

Nov.
…
n.a.
…
12.0
n.a.
…

1. Annual rate. Annual data are Q4/Q4.
2. Percent; n.s.a.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

In Venezuela, real GDP is estimated to have fallen 10.4 percent (s.a.a.r.) in the third
quarter. The contraction followed a very strong first half of the year and reflected
declines in both petroleum and non-petroleum output. The policy environment continues
to be weak, as monetary and fiscal policies remain lax. Despite a fixed exchange rate and
price controls on many products, inflation has been persistently high and was
15.3 percent in November on a twelve-month basis. President Chavez’s ruling party won
a landslide victory in the December 4 parliamentary elections, but opposition parties had
boycotted the vote over concerns about electoral procedures.

IV-33

Venezuelan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Consumer prices3
Non-oil trade balance4
Trade balance4
Current account5

2003
6.6
18.0
27.1
-5.5
16.5
11.4

2005

2004
12.1
15.1
19.2
-10.5
21.4
13.8

25.5
11.9
16.3
-16.2
30.4
24.7

-10.4
11.9
15.4
-19.4
28.1
30.4

Sept.
…
11.3
16.0
n.a.
n.a.
…

Oct.
…
n.a.
16.0
n.a.
n.a.
…

Nov.
…
n.a.
15.3
n.a.
n.a.
…

1. Annual rate. Annual data are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

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Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 13, 2005 : Greenbook Part 2

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