Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 15-16, 2008 : Greenbook Part 2

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Prefatory Note

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

Content last modified 03/07/2014.

Class III FOMC - Internal (FR)

Part 2

December 10, 2008

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

December 10, 2008

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
Recent data on spending and production show deterioration in almost every sector of the
economy. Conditions in the labor market have worsened markedly as job losses have
accelerated and the unemployment rate has jumped. Consumer spending has recorded
large and broad-based declines in recent months, and the ongoing deterioration in
consumer fundamentals provides little evidence that demand will stabilize in the near
term. At the same time, the housing market remains exceptionally weak, and residential
construction activity has continued its steep decline. In the business sector, the
contraction in real spending on equipment and software appears to have gathered
momentum and broadened in scope, and nonresidential building construction has turned
down. Excluding the effects of the September hurricanes and the Boeing strike,
industrial production has registered large and widespread declines since July.
Plummeting energy prices led to a drop in headline PCE prices in October, and core PCE
prices also decelerated noticeably through October.
Labor Market Developments
Conditions in the labor market took another turn for the worse in November after having
deteriorated sharply earlier in the fall. Private nonfarm payroll employment plunged
540,000 last month after losses averaging about 370,000 in September and October and
about 100,000 per month over the first eight months of the year. 1 The quickening pace of
job losses over the past three months was widespread across industries, as each of the
manufacturing, construction, retail, financial activities, and business services sectors
experienced substantial declines in payrolls. The average workweek of production and
nonsupervisory workers continued to move lower in November, and aggregate hours of
production workers fell 0.9 percent last month to a level 1.4 percent (not at an annual
rate) below their third-quarter average.
In the household survey, the unemployment rate jumped to 6.5 percent in October and
rose further to 6.7 percent in November—its highest level since 1993. The fraction of
workers who are working part time for economic reasons, another indicator of labor
market slack, continued its steep ascent last month and now stands 2 percentage points
above its level at the end of last year. In addition, the labor force participation rate fell

Excluding the effects of the Boeing strike, payrolls fell 335,000 in October and 567,000 in
November.

II-1

II-2
Changes in Employment
(Thousands of employees; seasonally adjusted)
2008
Measure and sector

2007

Sept.

Average monthly change
Nonfarm payroll employment
(establishment survey)
Private
Natural resources and mining
Manufacturing
Ex. motor vehicles
Construction
Residential
Nonresidential
Wholesale trade
Retail trade
Financial activities
Temporary help services
Nonbusiness 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

91
71
3
-22
-15
-19
-20
1
9
6
-9
-7
76
21
22

-82
-97
4
-43
-31
-41
-30
-11
-6
-29
-7
-24
66
15
-81

-71
-100
6
-39
-31
-49
-30
-19
-7
-26
-6
-30
63
29
-26

-199
-210
9
-57
-39
-33
-17
-15
-12
-42
-13
-36
5
11
-212

-403
-384
7
-69
-53
-55
-18
-38
-8
-76
-23
-45
-52
-19
-222

-320
-362
1
-104
-95
-64
-33
-32
-24
-62
-31
-45
6
42
-297

-533
-540
4
-85
-72
-82
-36
-46
-25
-91
-32
-78
-43
7
-673

1.3
33.8
41.2

-1.1
33.7
41.1

-.9
33.7
41.0

-2.2
33.7
40.8

-.7
33.6
40.5

-.4
33.6
40.5

-.9
33.5
40.3

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

Changes in Private
Payroll Employment
400

Aggregate Hours and Workweek of
Production and Nonsupervisory Workers
Thousands

3-month moving average

400

300

2002 = 100

200

100

Hours

300

200

35.0

110

100

34.5
0

108

Aggregate
hours
(right scale)

106

-100

-200

-300

-400

Nov.

104

-400

34.0

102
100
Workweek
(left scale)

33.5
Nov.

-500
-600

2000

2002

2004

2006

2008

98
96

-500
-600

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

33.0

2000

2002

2004

2006

2008

II-3
Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2008
Rate and group

2007

Sept.

Oct.

Nov.

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

4.6
15.7
8.2
3.6
3.6

4.9
16.8
9.0
3.8
3.9

5.3
17.4
9.8
4.2
4.1

6.0
19.5
10.4
5.0
4.5

6.1
19.1
10.5
5.5
4.4

6.5
20.6
10.6
5.5
5.1

6.7
20.4
10.9
5.9
5.2

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

66.0
41.3
74.4
75.6
59.7

66.0
40.3
73.9
75.5
59.9

66.1
41.4
74.6
75.2
60.0

66.1
40.4
74.8
75.6
60.0

66.0
40.1
74.5
75.5
60.0

66.1
39.9
74.0
75.5
60.1

65.8
38.3
73.8
75.3
60.1

Persons Working Part Time
for Economic Reasons

Labor Force Participation Rate
and Unemployment Rate
Percent

Percent

67.6

Percent of household employment

5.2

Nov.

67.4

6.5

66.4

Nov.

66.2
66.0

Participation
rate (left scale)

65.8
2000

2002

2004

2006

2008

4.0

3.6

4.5

3.2

2.8

3.5

66.6

4.0

66.8

4.4

5.5

Unemployment rate
(right scale)

4.8

4.4

5.0

67.0

4.8

6.0

67.2

65.6

7.0

2.4

3.0

2.0

2000

2004

2006

Percent of labor force

4.5

5.0

Percent of household employment

1.6

2.0

Nov.

4.0

3.5

3.0

2.5

2.0

1.5

1.4

3-month moving average (thick line)

3.0

2.5

1.6

Nov.

4.5

4.0

2008

Job Losers Unemployed
Less Than 5 Weeks

Unemployed Due to Job Loss
5.0

2002

1.5

1.0

2000

2002

2004

2006

2008

1.0

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

1.2

1.0

0.8

0.6

2000

2002

2004

2006

2008

0.6

II-4
Labor Market Indicators

Unemployment Insurance
4.5

Layoffs and Job Cuts

Millions

Thousands
Nov. 22

4.0

Insured unemployment
(left scale)

3.5

Nov.
29

3.0

600
550
500

300

Percent of private employment

Thousands

250

Oct.

1.4
Nov.

150
400
Initial claims
(right scale)

2.0

350

1.0

1.2
100

300
2000

2002

2004

2006

2008

1.0

Announced job cuts
(left scale)

250

1.5

2000

2002

2004

2006

0.8

2008

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

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

Job Openings
150

Job Availability and Hard-to-Fill Positions

Index, 2006=100

Percent of private employment

3.6

3.1

Percent

120

2.6

Job availability*
(right scale)

110

110
Oct.

2.1

100

1.6
Composite
Help Wanted
Index* (left scale)

20
15

0.6
2000
2002
2004
2006
2008
*Index of staff composite help wanted advertising as a percent
of private payroll employment.
Source: For job openings, Job Openings and Labor Turnover
Survey; for Help Wanted Index, Conference Board and staff
calculations.

Nov.

Expected Labor Market Conditions

50
Hard-to-fill**
(left scale, 3-month moving average)

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

120

105

90
Nov.

Percent

Conference Board
25

Manpower, Inc.

Reuters/Michigan

75
60

2002

2004

2006

2008

Note: The proportion of households expecting labor
market conditions to improve, minus the proportion expecting
conditions to worsen, plus 100.
Source: Conference Board; Reuters/University of Michigan
Survey.

NFIB
(3-month moving average)

5
Nov.

2000

10
Q1

Nov.
45

30
25

10
60

Net Hiring Plans
Index

70
Nov.

1.1

150
130

130
Job openings
(right scale)

Index

140

1.6

200

450

2.5

1.8

Layoffs and discharges
(right scale)

-5

0
2000

2002

2004

2006

2008

Note: Percent planning an increase in employment
minus percent planning a reduction.
Source: National Federation of Independent
Business (NFIB); Manpower, Inc.

-5

II-5

0.3 percentage point in November after having held up surprisingly well for much of the
year.2
Initial claims for unemployment insurance under regular state programs shot up in
November, with the four-week moving average reaching 525,000 for the week ending
November 29. Continuing claims for regular state unemployment insurance also rose
steeply last month, while continuing emergency unemployment compensation (EUC)
claims leveled off at around 700,000 after having peaked at 1.4 million in September.3
An additional measure of job separations—the short-term job losers rate from the
household survey—increased further in November. In addition, announcements of
downsizing plans compiled by Challenger, Gray, and Christmas, Inc., rose steeply last
month.
Other labor market indicators suggest that jobs are in short supply. The job openings rate
as measured by the Job Openings and Labor Turnover Survey continued its downward
trajectory in October, and help-wanted advertising fell again in November. Hiring plans
from the National Federation of Independent Business (NFIB) dropped steeply in
November, and the latest reading from Manpower, Inc., remained at a low level. NFIB’s
measure of hard-to-fill positions remained low, as did perceptions of current job
availability in the Conference Board survey. Finally, household expectations for labor
market conditions, as reported in the Reuters/University of Michigan and Conference
Board surveys, have been volatile in recent months but remain near historic lows.
Industrial Production
Industrial production (IP) rebounded 1.3 percent in October after plunging 3.7 percent in
September, when activity was held down by the hurricanes and the machinists’ strike at
Boeing. Excluding these special factors, output is estimated to have decreased about
⅔ percent in both September and October, with declines widespread across industries.
Indeed, the diffusion index of three-month changes in IP, which should not be greatly
influenced by these special factors, fell in October to its lowest level since July 1980.

The extension of unemployment insurance benefits, which has induced workers to remain in the labor
force, likely helped support the labor force participation rate in the face of diminished job opportunities.
Reflecting this influence, we estimate that the Emergency Unemployment Compensation program boosted
the level of the published unemployment rate about 0.3 percentage point in October and 0.2 percentage
point in November.
3
The pattern of continuing EUC claims reflects the large number of claimants who began receiving
benefits when the EUC was enacted in July and who now have exhausted their 13 weeks of EUC benefits.

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

Component

Proportion
2007
(percent)

2008

20071
Q2

2008
Q3

Aug.

Annual rate
Total
Previous

Sept.

Oct.

Monthly rate

100.0
100.0

2.1
2.1

-3.4
-3.1

-7.6
-6.0

-1.2
-1.0

-3.7
-2.8

1.3
...

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

78.7
73.6
69.3

2.3
2.6
1.3

-4.0
-2.2
-3.7

-7.8
-7.9
-8.5

-1.0
-.4
-.4

-3.7
-3.9
-4.2

.6
.8
.9

Mining
Utilities

11.6
9.7

.2
3.1

2.0
-4.5

-5.7
-8.4

-.2
-4.1

-8.5
2.4

6.1
.4

Selected industries
Energy

24.7

2.3

-1.6

-9.0

-1.8

-5.1

5.0

High technology
Computers
Communications equipment
Semiconductors2

4.3
1.0
1.3
2.0

22.3
16.7
20.6
25.9

20.7
13.3
25.4
21.4

2.2
-3.2
4.2
3.4

-.5
-.6
.2
-1.0

-.7
-.8
.4
-1.5

-.9
-1.1
-.3
-1.2

Motor vehicles and parts

5.1

-2.2

-28.6

-6.8

-11.1

1.3

-3.5

Aircraft and parts

2.3

13.6

1.5

-25.9

-.1

-23.9

-5.6

63.6
19.9
3.6
16.3

.7
.3
-2.4
.9

-3.8
-1.7
-6.2
-.7

-7.0
-3.5
-12.7
-1.6

-.3
-.4
-2.2
.0

-3.0
-.7
-2.8
-.2

.4
.1
-.9
.3

Business equipment
Defense and space equipment

6.4
1.2

1.0
7.2

-7.5
-4.3

-.8
-6.8

.9
.3

-1.8
-3.2

-1.2
1.4

Construction supplies
Business supplies

4.2
7.4

-1.9
-.1

-5.2
-5.5

-2.8
-8.5

-1.0
.2

-2.0
-2.8

-1.2
.4

24.5
12.8
11.7

1.2
1.8
.6

-3.5
-3.1
-4.0

-11.4
-5.8
-17.1

-.6
-.4
-.8

-5.3
-2.1
-8.8

1.3
-1.6
4.6

Total ex. selected industries
Consumer goods
Durables
Nondurables

Materials
Durables
Nondurables

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

Capacity Utilization
(Percent of capacity)
19722007
average

199495
high

200102
low

Sept.

Oct.

Total industry

81.0

85.1

73.6

80.7

79.7

77.9

75.5

76.4

Manufacturing
Mining
Utilities

79.7
87.5
86.8

84.6
88.7
93.9

71.5
84.8
84.6

78.7
90.5
87.1

77.5
90.8
85.6

75.7
89.3
83.3

73.5
84.0
83.3

73.8
89.0
83.5

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.6
82.2
77.7

89.5
88.2
80.4

81.9
74.6
69.9

89.5
80.9
77.2

89.2
79.8
76.0

86.4
77.7
74.8

80.1
75.9
73.3

85.6
76.5
72.7

Sector

2008

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

II-7

The available data for November, such as manufacturing production worker hours and
the physical product data available at the weekly frequency, suggest that, aside from the
hurricane- and strike-related rebounds in output, the pace of production declines has
intensified. For example, steel production has plummeted, and industry reports suggest
that at least one-fourth of that industry’s domestic capacity has been idled. Similarly, the
output of organic chemicals, which are used for a variety of industrial purposes, also has
contracted sharply.
The return to operation of oil and gas extraction capability that had been shut down by
the hurricanes appears to have contributed nearly 0.4 percentage point to the rate of
change in IP in November. As of December 3, 15 percent of the oil extraction capability
in the Gulf of Mexico remained offline, while about 20 percent of natural gas extraction
in the Gulf was still idled. Although capacity in most other hurricane-affected industries
has come back online, production in a few of these industries, most notably
petrochemicals, remains below pre-hurricane levels, likely because of weak demand.
The restart of commercial aircraft production at Boeing in early November also boosted
IP last month. While pre-strike assembly rates will not likely be fully achieved until
December, the resumption of production last month likely boosted the rate of change in
IP in November about 0.4 percentage point.4
The output of high-technology products declined in the third quarter and again in
October. Although domestic unit sales of personal computers (PCs) rose modestly in the
third quarter, a marked shift toward lower-end PCs yielded a decline in real output. Unit
sales of servers fell last quarter, and nominal spending on voice and data networking
equipment was about flat for this large category of communications equipment. Declines
in semiconductor output averaged 1¼ percent per month over the three months ending in
October, as weak demand and excessive inventories for some types of chips weighed on
output. Although production declines have been fairly broad based across chip types, the
output of both flash memory and microprocessors has been particularly weak. In
addition, the production of circuit boards has declined in recent months, and orders
continue to run below shipments.

Despite the resumption of production on November 2, Boeing delivered only four aircraft in
November, as a faulty connector was discovered that required each aircraft under construction to be
inspected and the faulty connectors to be replaced (previously delivered aircraft will have these connectors
replaced during planned maintenance). Production rates in November, particularly of the 737, were
reduced, although by significantly less than deliveries of completed aircraft.

II-8
Indicators of High-Tech Manufacturing Activity

Enterprise Spending on Voice
and Data Networking Equipment

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

Millions of units, ratio scale

Billions of 2004 dollars

0.80

19.0

0.75

18.0

0.70

Servers (left scale)

PCs (right scale)

0.55

18
16

16.0
15.0

0.60

14.0
12

0.50
0.45
0.40

17.0

+ Q4

0.65

2002
2003
2004
2005
2006
2007
2008
Note: FRB seasonals. Q4 PC units are an IDC forecast.
Source: International Data Corporation (IDC).

2009

13.0
12.5
12.0
11.5
11.0
10.5

High-Tech Spending Plans

10
8
2003
2004
2005
2006
Note: FRB seasonals.
Source: Synergy Research Group.

2007

2008

MPU Shipments and Intel Revenue
Diffusion index

Billions of dollars, ratio scale
85

11.0

10.0
9.5
9.0
8.5
8.0

75
70

Intel revenue

7.5

7.0

Worldwide MPU shipments

6.5
55
50

2003
2004
2005
2006
2007
2008
Note: Based on survey question on firms’ plans to increase or
decrease their spending on high-tech equipment in the next 12 months.
Source: NABE Industry Survey.

6.0
2002
2003
2004
2005
2006
2007
2008
2009
Note: FRB seasonals. MPU is a microprocessor unit. Q4 Intel
revenue is the midpoint of the company’s guidance as of
November 12, 2008.
Source: Intel; Semiconductor Industry Association.

5.5

Bookings and Billings for Semiconductor
Equipment

Circuit Board Orders and Shipments

Billions of dollars

1.8

180

Orders

Bookings
Billings

1.6

160

1.4
140
1.2

Sept.
120

1.0
100

Oct.
0.8

Shipments
2002
2003
2004
2005
2006
2007
2008
2009
Note: U.S. and Canadian shipments of bare and loaded circuit
boards.
Source: Institute for Printed Circuits.

2002
2003
2004
2005
2006
2007
2008
2009
Note: FRB seasonals.
Source: Semiconductor Equipment and Materials International.

0.6

II-9

Looking ahead, several indicators point to a further weakening in high-tech output. For
example, survey-based measures of high-tech capital spending plans (such as the industry
survey by the National Association of Business Economists and the Empire State survey)
were very soft; private-sector forecasts (such as IDC, Gartner, and the Semiconductor
Industry Association) have been revised down; and high-tech company revenue guidance
from Cisco, Advanced Micro Devices, and Intel has been very downbeat. In particular,
Intel sharply revised downward its projections for fourth-quarter revenue to a level
consistent with a substantial decline in real semiconductor output this quarter, and the
company noted unexpectedly weak demand in all geographic areas and market segments,
including the PC supply chain. A number of high-tech companies (including Sun
Microsystems, National Semiconductor, and Nortel) have recently announced layoffs,
and others (such as HP and Micron) have extended holiday shutdowns. Planned capital
spending by semiconductor manufacturers also continues to be scaled back; orders and
shipments of semiconductor fabricating equipment are down more than 30 percent from
their year-earlier levels.
Excluding energy, motor vehicles, aircraft, and high-tech products, production in other
market groups weakened considerably in September and October, although the monthly
pattern has been affected by the hurricanes. The pace of declines steepened for a variety
of consumer durables, such as appliances, furniture, and products related to home
improvement. The output of construction supplies resumed falling after a brief pause in
the middle of the year, and declines in the production of materials intensified, which
likely reflected a widening of the weakness in demand for materials beyond the motor
vehicle-related and construction-related sectors.
The available forward-looking indicators of manufacturing activity suggest significant
contractions in manufacturing output in coming months. The three-month moving
average of the staff’s measure of real adjusted durable goods orders plummeted in
October, and the new orders indexes from the Institute for Supply Management (ISM)
and the regional surveys plunged to exceptionally low levels between September and
November. In addition, recent data and indicators of trade, such as the ISM new export
orders index and the JPMorgan Global new orders index, suggest that foreign demand,
which had boosted domestic production considerably over the past year, is no longer
providing much impetus to IP.
Regarding capacity in manufacturing, the ISM's semiannual diffusion index of capital
spending plans by manufacturers, which correlates well historically with manufacturing
investment, fell to 28.0 for 2009, its lowest level since the series’ inception in 1961. This

II-10
Indicators of Industrial Activity

Industrial Production Diffusion Index

Weekly Steel Production
Diffusion index

Thousands of tons

2400
2200

2000
50
1800
1600

1400
30

Dec. 6

Oct.
20

2006

2007

1000
2009

2008

Note: FRB seasonals.
Source: American Iron and Steel Institute.

Motor Vehicle Assemblies

Energy Industrial Production

Millions of units

2002 = 100

Millions of units

0.8

13.5

0.7
0.6

140
Crude oil
Natural gas extraction
Petroleum refining

12.5

130

11.5

0.5

0.3
0.2
0.1

120
+

Autos and light trucks
(right scale)

+ Nov.

10.5

110
100

0.4

Content partially redacted.

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

1200

9.5

8.5

Medium and heavy trucks
(left scale)

+
+ Dec.

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

90
80

7.5

6.5

2002 2003 2004 2005 2006 2007 2008 2009
Note: November values based on available weekly data from
the Dept. of Energy (DOE) and estimates of facilities that remain
offline from DOE and Dept. of the Interior.
Source: Federal Reserve, G.17 Statistical Release, "Industrial
Production and Capacity Utilization."

Boeing Commercial Aircraft Completions:
Actual

ISM New Orders Diffusion Index and
Change in Real Adjusted Durable Goods Orders
2002 = 100

Actual

Diffusion index

Percent
180
160

80
ISM (right scale)

140
120
100
80
60
Boeing strikes

-2

-4

20
0

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: 1998 price-weighted index. Actual completions equal
deliveries plus the change in the stock of finished aircraft.
.
Source: Boeing.

-6
-8

RADGO (left scale)
Nov.
Oct.

2002 2003 2004 2005 2006 2007 2008 2009
Note: The measure for real adjusted durable goods orders
(RADGO) is a 3-month moving average.
Source: Institute for Supply Management (ISM). RADGO is
compiled by FRB staff based on data from the Bureau of Labor
Statistics and the U.S. Census Bureau.

30
20
10

II-11
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2008
Category

2007

Total

Sept.

Oct.

Nov.

16.1

15.2

14.1

12.9

12.5

10.5

10.1

7.6
8.5

7.4
7.8

7.6
6.5

6.6
6.3

6.2
6.3

5.6
4.9

5.0
5.2

North American1
Autos
Light trucks

12.3
5.2
7.1

11.5
5.1
6.5

10.4
5.0
5.3

9.7
4.4
5.3

9.5
4.3
5.2

7.7
3.7
4.0

7.6
3.3
4.3

Foreign-produced
Autos
Light trucks

3.8
2.4
1.4

3.7
2.4
1.3

3.7
2.6
1.1

3.2
2.2
1.0

2.9
1.9
1.0

2.8
1.9
.9

2.6
1.7
.9

51.4

50.2

45.9

46.7

51.8

46.0

47.7

Autos
Light trucks

Memo:
Detroit Three domestic
market share (percent)2

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

Content redacted.

Car-Buying Attitudes

Market Share of Light Vehicles by Segment
Index

Percent

Percent
180

Appraisal of car-buying conditions (right scale)

Large and
midsize cars

160
40

140
30
Nov.

120

Pickup/van/SUV

Cross utility

Rates are high/credit is tight
(left scale)

2002 2003

2004

2005

2006 2007

2008

Source: Reuters/University of Michigan Survey.

2009

22
18

Nov.

Small cars

60
0

100

14
2006

2007

2008

2009

Note: Data through November. FRB seasonals.
Source: Ward’s Communications. Adjusted using FRB seasonals.

II-12
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2008
Item

2009
Q4

2008
Sept.

Oct.

Nov.

Dec.

U.S. production1
Autos
Light trucks

8.5
3.7
4.9

8.6
4.2
4.3

7.6
3.6
4.0

7.6
3.3
4.3

8.2
4.0
4.2

7.9
3.8
4.0

7.3
3.4
3.9

7.7
3.6
4.1

Days’ supply2
Autos
Light trucks

72
48
94

76
67
84

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

77
68
85

97
88
105

100
103
98

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

Inventories3
Autos
Light trucks

2.41
0.78
1.63

2.40
0.96
1.44

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

2.40
0.96
1.44

2.45
1.06
1.39

2.46
1.11
1.36

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

8.8

7.8

7.9

8.4

8.1

7.5

7.9

Memo: U.S. production,
total motor vehicles4

Note: FRB seasonals. Components may not sum to totals because of rounding.
1. Production rates for December, the fourth quarter of 2008 and the first quarter of 2009 reflect the latest industry schedules.
2. Quarterly values are calculated with end-of-period stocks and average reported sales.
3. End-of-period stocks.
4. Includes medium and heavy trucks.
n.a. Not available.
Source: Ward’s Communications
.

Inventories of Light Vehicles
Millions of units
3.50
3.25
3.00
2.75
2.50

Nov.

2.25
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2.00

2009

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

Days’ Supply of Light Vehicles
Days
110
Using sales in current month
Using 3-month moving average of sales

Nov.

100
90
80
70
60
50
40

1998

1999

2000

2001

2002

2003

2004

2005

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

2006

2007

2008

2009

II-13

measure, together with the low current operating rates in manufacturing, points to a
sizable drop in capital spending by manufacturers next year that would leave
manufacturing capacity little changed in 2009 after it had increased 1¾ percent this year.
Motor Vehicles
Sales of automobiles and light trucks collapsed to an annual rate of 10.5 million units in
October and fell further in November to a 10.1 million unit rate, more than 2 million units
below September’s already anemic pace.
domestic nameplates, in particular, lost market share.
The sharp weakening in automobile demand likely reflects stagnant incomes, declining
household wealth, and concerns about the overall economy. Credit conditions also have
remained unfavorable, as some automakers have continued to restrict leasing activity and
financing has remained very difficult to come by for borrowers with low credit ratings.
Indeed, an unusually high percentage of respondents to the Reuters/Michigan Survey
reported that tight credit conditions made it a bad time to buy a car in October and
November. Overall, however, the Reuters/Michigan Survey’s measure of car-buying
attitudes improved slightly, reflecting lower gas prices and, with the most generous
consumer incentives in years, a greater number of consumers who viewed prices as being
low.
Light vehicle assemblies stepped down in November to an annual rate of 7¼ million units
after having averaged a paltry 8.0 million units over the previous three months. Even
with these cutbacks, the level of vehicle inventories has crept up in recent months.
Although the level is still relatively low by historical standards, the anemic pace of sales
pushed days’ supply to around 100 days in October and November, well above the
automakers’ desired levels. In response, automakers have announced that they now
expect to continue production at a very low annual rate of just under 7¾ million units for
the next four months.
Consumer Spending
Consumer spending has recorded large and broad-based declines in recent months. Real
personal consumption expenditures (PCE) fell 0.5 percent in October, the fifth
consecutive monthly decline, with weakness evident in nearly all broad spending
categories. In addition to the aforementioned drop in light vehicle sales, real spending on
goods other than motor vehicles plunged at an annual rate of more than 9 percent over the
three months ending in October. The pace of spending on services also weakened
through October with the three-month increase, at an annual rate of 0.6 percent, down

II-14
Real Personal Consumption Expenditures
(Percent change from preceding comparable period)
Category

2007

2008
Q2
Q3
Annual rate

Aug.

2008
Sept.
Oct.
Monthly rate

Total real PCE

2.8

1.2

-3.7

-.1

-.4

-.5

Motor vehicles
Goods ex. motor vehicles
Ex. energy
Services
Ex. energy
Memo:
Nominal retail control1

2.0
3.2
3.5
2.6
2.6

-19.7
4.8
6.4
.7
1.2

-26.4
-7.3
-6.9
.0
.7

7.9
-.7
-1.1
-.2
-.2

-6.5
-.9
-1.1
.2
.1

-8.0
-.8
-.9
.2
.0

5.2

10.0

-1.0

-.5

-2.3

1. Total sales less outlays at building material and supply stores and automobile and other motor
vehicle dealers.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Goods
Percent

1.0

1.0
0.8

1.6

0.6

1.2

0.4

0.2

-0.0

Percent

2.0

-0.0

NBER peak

0.8

-0.2

6-month moving average

-0.4

1.6
6-month
moving average

0.8

0.4
-0.0

-0.4

-0.6

-0.8

-0.8
-1.0

-1.6

-0.4

Monthly

-1.2

1990
1992 1994 1996 1998
2000 2002 2004 2006 2008
Note: Shaded bars indicate periods of business recession as defined by the
National Bureau of Economic Research (NBER). The NBER peak is the last business
cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

0.8

0.4

-0.6
Oct.

1.2

-0.0

-0.8

-1.0

2.0

Oct.

-0.8
-1.2

2006

2007

-1.6

2008

Change in Real PCE Services
Percent

0.5

Percent

1.0

6-month
moving average

0.8

NBER peak
0.4

0.4

0.6

0.8
0.6

0.4
0.3

0.3

0.2

0.0

Oct.
1990
1992 1994 1996 1998
2000 2002 2004 2006 2008
Note: Shaded bars indicate periods of business recession as defined by the
National Bureau of Economic Research (NBER). The NBER peak is the last business
cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

0.1

0.4

0.2

Oct.

-0.0
-0.2

6-month moving average
0.1

-0.4
-0.8

0.2
-0.0
-0.2

Monthly

-0.4

-0.6
0.0

1.0

-0.6
2006

2007

2008

-0.8

II-15
Fundamentals of Household Spending

Change in Real Disposable Personal Income

Personal Saving Rate

12-month percent change

Percent

8
6
4

Oct.
2

-2

-4

-4
1998
2000
2002
2004
2006
2008
Note: Values for December 2004 and December 2005
exclude the effect on income of the one-time Microsoft dividend
in December 2004.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

-4

Oct.

1998
2000
2002
2004
2006
2008
Note: The value for December 2004 excludes the effect
on income of the one-time Microsoft dividend in that month.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

Target Federal Funds Rate
and 10-Year Treasury Yield

Household Net Worth and Wilshire 5000
18000

Index

Ratio

7.0

Percent

7
6

15600

5.6

Wilshire 5000
(left scale)

6000

4.8
Dec. 9

1998
2000
2002
2004
2006
2008
* The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.
Source: Federal Reserve Board; U.S. Department of
Commerce, Bureau of Economic Analysis; Wall Street Journal.

4
Federal
funds
rate

8400

Treasury
yield

13200

1
4.0

7
6

6.4

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

10800

-4

Dec. 9
1998

2000

2002

2004

2006

2008

1
0

Source: Federal Reserve Board.

Consumer Confidence
180

1985 = 100

1966 = 100
Reuters/
Michigan
(right scale)

160
140

120
110

NBER peak
100

120

100

80
60
40
20

70
Conference Board
(left scale)

60
Nov.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER). The NBER peak
is the last business cycle peak as defined by the NBER.
Source: Reuters/University of Michigan Surveys of Consumers; Conference Board.

50
40

II-16

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

2007

1.36
1.40

1.05
.99

1.03
1.03

1.05
.98
.99
.108

.73
.65
.67
.096

.78
8.40

Aug.

Sept.

Oct.

.88
.87

.85
.86

.83
.81

.79
.73

.68
.63
.65
.089

.60
.56
.57
.083

.62
.55
.57
.082

.55
.54
.55
.083

.53
.47
.48
.079

.56
10.24

.52
10.55

.47
10.82

.45
11.29

.46
10.87

.43
10.56

4.94
8.67

4.39
10.24

4.34
10.28

4.45
9.54

4.35
9.59

4.58
9.27

4.43
9.49

.309
.419
.075

.325
.341
.067

.350
.400
.068

.274
.308
.062

.239
.304
.065

.279
.267
.062

.260
.260
.057

.096

.092

.088

.081

.077

.070

.713

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

.560

.573

.577

.560

.550

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

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

Millions of units

2.0

1.0

1.8

Single-family starts (right scale)
1.6

.8
1.4
.7

1.2
Single-family adjusted permits (right scale)
1.0

.6
Oct.

.4
.3
Oct.

Multifamily starts (left scale)
.2

1999

2000

2001

2002

2003

2004

2005

2006

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

2007

2008

.2
.0

II-17

considerably from the 1¼ percent increase in the first half of 2008. The latest readings
on chain store sales suggest that spending on goods declined further in November.
However, U.S. Department of Energy data for October and November suggest that
overall fourth-quarter spending will receive a modest boost from a bounceback in real
spending on gasoline, likely related to the recent price declines.
Consumer demand fundamentals have shown little improvement of late. The one bright
note has been the boost to real income provided by the sharp reversal in energy prices; in
October, despite the sizable employment declines, the Bureau of Economic Analysis
reported that real disposable income increased $86 billion. Continued declines in equity
and house prices likely have pushed the ratio of wealth to income down further, and
measures of consumer sentiment from the Reuters/University of Michigan and
Conference Board surveys remained at recessionary levels in November. In addition, the
available evidence suggests a considerable further tightening in consumer credit
conditions in recent months.
Housing
Housing activity continued its steep descent early in the fourth quarter. In October,
single-family housing starts moved down 3 percent, and adjusted permit issuance—a
useful month-ahead indicator of starts—plunged to a level more than 11 percent below
starts. So far this year, single-family starts have fallen at an annual rate of 37 percent, the
same rate of decline as in 2007. Multifamily starts fell to 260,000 units in October, a
value near the lower end of the range occupied over the past two years.
Housing demand remains very weak. The Census Bureau’s measure of new singlefamily home sales fell 5 percent in October and has declined at an annual rate of
32 percent so far this year. Although the number of unsold new single-family homes
continued to move lower in October—indeed, the stock has declined by one-third since
its peak in mid-2006—inventories remained extremely elevated relative to the current
pace of sales.
By contrast, sales of existing single-family homes changed little, on balance, for the year
ending in October, although a step-down in pending home sales in October points to
further declines in existing home sales in the near term. The comparative strength of

II-18

Content partially redacted.

Indicators of Single-Family Housing

New Single-Family Home Sales

Existing Single-Family Home Sales

Millions of units
_ (annual rate)
15

Millions of units
_ (annual rate)
65

Index (2001=100)

140
130

1.3

6.0
120

1.1
5.5

110

0.9
100

5.0

0.7

90
4.5

0.5

Source: For sales agreements, Census Bureau;

Inventories of New Homes
and Months' Supply
600

Source: National Association of Realtors.

Mortgage Rates

Thousands of units

Percent

550

500

450

400

350

5
5

300

250
200

2
u...o........,~~.LJ...~*.LLJ~"""'.LLJL..L.I:*b,\.'-'...L.L~"""'.LJ...L.L..I

Note: Months' supply is calculated using the 3-month moving
average of sales.

Note: The December reading is a 2-week moving average of data
available through Dec. 3, 2008.
Source: Federal Home Loan Mortgage Corporation.

Source: Census Bureau.

Prices of Existing Homes

Price of New Homes

Percent change from year earlier

-5
-10

-6

-15
~~~~~~~LL~~~~~~~~~LU-20

Source: For purchase-only index, Federal Housing
Finance Agency; for S&P/Case-Shiller;_ Standard &-Poor's;
for Loan Performance, First American c-ore Logic.

-3

-9
~~~~~~~LL~6L~~~LL~~~LU-12

Source: Census Bureau.

II-19

existing home sales is partly attributable to increases in foreclosure-related and other
distressed sales, which tend to be sold at much lower prices than owner-occupied homes.5
Financing conditions for prime borrowers have eased lately, as rates for conforming
30-year fixed-rate mortgages fell 50 basis points in late November after the Federal
Reserve’s announced decision to purchase agency debt to support mortgage financing. In
early December, the nominal 30-year fixed mortgage rate was lower than it had been
since 2005 (except for a short-lived dip in early 2008). Meanwhile, the market for
nonconforming loans (that is, loans that cannot be purchased by Fannie Mae or Freddie
Mac) remains severely impaired. Although the Federal Housing Administration (FHA)
has offered an alternative source of mortgage finance for some nonprime and near-prime
borrowers, FHA’s relatively strict lending standards and higher costs suggest that such
lending is likely to have replaced only a small part of the reduction in credit from other
sources.
House prices remain on a downward trajectory. For existing homes, the repeat-sales
price index calculated by LoanPerformance—a recently developed index that we think is
more representative than either the Federal Housing Finance Agency (FHFA) or
S&P/Case-Shiller indexes—decreased 10 percent over the 12 months ending in October.6
Although these lower prices are making homes more affordable, survey evidence and
anecdotal reports suggest that expectations of further house price declines remain quite
prevalent, a consideration that may make many potential buyers reluctant to purchase
homes until prices show signs of stabilizing.
Equipment and Software
After having fallen at an annual rate of nearly 6 percent in the third quarter, real spending
on equipment and software (E&S) appears to be contracting at an even faster rate so far
in the fourth quarter. Moreover, while the downturn last quarter was concentrated in
computers and transportation equipment, this quarter’s decline in spending appears to be
more widespread. Shipments of nondefense capital goods excluding aircraft tumbled in
5

Estimates of foreclosure-related sales (based on data on foreclosure starts and inventories) suggest
that non-foreclosure-related sales declined about 10 percent (not at an annual rate) over the first three
quarters of 2008. Although the data on existing home sales include only sales handled by real estate
agents, most foreclosure-related sales are included in the existing home sales statistics because banks
frequently hire real estate agents to sell a property after obtaining ownership through a public foreclosure
auction.
6
Unlike the FHFA index (formerly known as the OFHEO index), the LoanPerformance (LP) index
includes both conforming and nonconforming loans. In addition, the LP index has better geographic
coverage than the S&P/Case-Shiller (CS) index. The LP and CS indexes showed similar movements from
2002 to 2007, but more recently the LP index has declined by less than the CS index.

II-20
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2008
Category

Aug.

Annual rate

Sept.

Oct.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

3.4
5.9
-19.0
5.8
8.8

-.8
-.3
-28.7
-10.7
4.0

-3.3
-2.1
-3.7
-7.5
-1.4

1.1
1.7
-1.3
.7
2.1

-4.3
-3.5
2.0
-5.7
-3.7

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

-6.8
10.2
-5.3
.2
12.9

-14.0
-5.2
-36.6
16.7
-3.5

-7.8
-2.3
.7
1.7
-2.9

-1.1
-3.4
-2.5
-19.4
-1.9

-4.5
-5.0
-5.5
9.6
-6.2

Memo:
Shipments of complete aircraft1

43.1

38.1

47.9

24.6

16.8

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

Communications Equipment
20
17
14

Non-High-Tech,
Nontransportation Equipment

Billions of chained (2000) dollars, ratio scale
Shipments
Orders

20
17
14

Oct.
5

47
Oct.

Shipments

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

210
190
170

2000 = 100

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

Medium and Heavy Trucks

Billions of chained (2000) dollars

Industrial production
(left scale)

Computers and Peripherals
240

Orders

Billions of chained (2000) dollars, ratio scale

Oct.

24
21
19

Thousands of units, ratio scale

1240
1060
940
820

Net new orders
of class 5-8 trucks

130
110

700
580

460

700
580

150

460

13
Real M3
shipments
(right scale)

11
9

340

340
Sales of class 4-8 trucks

2006
2000
2002
2004
2006
2008
Note: Ratio scales. Shipments are deflated by the staff
price index for computers and peripheral equipment, which
is derived from the BEA’s quality-adjusted price indexes.
Source: Census Bureau; FRB Industrial Production.

220

2000

2002
2002

2004

2006

Oct.
2008

220

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

II-21

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change

NBER peak
6

2
Q3

0
-2
-4

0
-2

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER).
The NBER peak is the last business cycle peak as defined by the NBER.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

User Cost of Capital

Corporate Bond Yields
4-quarter percent change

NBER peak

15
10

Percent

Dec.

20
18

NBER peak
16

Non-high-tech

-4

10-year high-yield

Q3
-5

-5

-10

-10
High-tech

-15

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
1995
2005
1990
2000

-15

6
4

NFIB: Survey on Loan Availability

Percent
NBER peak

Surveys of Business Conditions
Percent
18
Nov.

Nov.

ISM
Philadelphia Fed

NBER peak

70
60

-2

-6
0
Credit more difficult to obtain (left scale)
1990 1992 1994 1996 19982000 2002 2004 2006 20082010
1995
2005
1990
2000
Note: Of borrowers who sought credit in the past three
months, the proportion that reported (expected) more difficulty
in obtaining credit less the proportion that reported (expected)
more ease in obtaining credit. Seasonally adjusted.
Source: National Federation of Independent Business.

40
Nov.

-10
-14

6
2

Diffusion index

Credit expected to be tighter (right scale)

-4

4
1990 1992 1994 1996 19982000 2002 2004 2006 20082010
1995
2005
1990
2000
Note: End-of-month. December value as of Dec. 9.
Source: Merrill Lynch.

Source: Staff calculation.

10-year BBB

20
1990
1995
2000
2005
2010
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Manufacturing ISM Report on Business;
Philadelphia Fed Business Outlook Survey.

II-22

Nonresidential Construction and Indicators
(All spending series are seasonally adjusted at an annual rate; nominal CPIP deflated by
BEA prices through Q2 and by staff projection thereafter)

Total Structures

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

290

Oct.
270

270

250

230

210

Oct.

230

210

Billions of chained (2000) dollars

60
Oct.

2006

2008

Office
30

170

30
2000

2002

2004

2006

2008

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

Manufacturing
and Power & Communication

Architectural Billings and
Nonresidential Construction Employment

Billions of chained (2000) dollars

Commercial

190

2000
2002
2004
Source: Census Bureau.

Oct.

170

80
70

Other

190

3.0
2.5

Power & communication

Percent

Diffusion index
Billings (right scale)

60
55

2.0
Oct.

1.5

1.0
40

45
0.5
Oct.

Manufacturing

0.0

40
Change in
employment (left scale)

-0.5
20

Nov.

-1.0
10

2000

2002

2004

2006

2008

-1.5

Source: Census Bureau.

Vacancy Rates
Percent

Industrial

Office

30
2000
2002
2004
2006
2008
Note: Both series are 3-month moving averages. Employment
consists of industrial, commercial, and specialty trade construction.
Source: For billings, American Institute of Architects;
for employment, Bureau of Labor Statistics.

Drilling and Mining Indicators

18
15

Number

Retail

2200
2000

Dec.

2600
2400

Oct.

25
20

Millions of feet

Footage drilled
(left scale)

1800
1600

Drilling rigs
(right scale)

1400
1200

1000
800
600

2000

2002

2004

2006

2008

Note: Industrial space includes both manufacturing
structures and warehouses.
Source: Torto Wheaton Research.

400
2000
2002
2004
2006
2008
Note: The December readings for drilling rigs are based on
data through December 5, 2008. Both series are seasonally
adjusted by FRB staff.
Source: For footage drilled, U.S. Department of Energy, Energy
Information Agency; for drilling rigs, Baker Hughes.

II-23

October, and orders continued to plunge. Orders have declined more than 10 percent
since July and were well below shipments in October, pointing to further declines in
shipments in coming months.
Investment demand appears to have been weighed down by weak fundamentals and
heightened uncertainty about the future course of the economy. Business output turned
down noticeably in the third quarter, and prospects for business activity, as reflected in
surveys of business conditions and sentiment, have become considerably gloomier in
recent months. In addition, credit conditions remain tight, with corporate bond yields
high, essentially no speculative-grade issuance, and widespread anecdotal reports of firms
facing a challenging credit environment. According to the ISM semiannual report and
other recent surveys, these adverse developments have apparently led to aggressive
cutbacks in businesses’ capital spending plans.
Real outlays for transportation equipment continued to sink in the third quarter and so far
in the fourth quarter. Real purchases of aircraft dropped sharply in the third quarter as
the machinists’ strike caused Boeing to make only a fraction of its planned deliveries in
September. Aircraft purchases appear to have remained low so far this quarter; Boeing
made no deliveries in October, and deliveries in November were severely limited by the
aforementioned problem with a faulty connector. Meanwhile, business purchases of light
vehicles fell sharply in October and November, and although sales of medium and heavy
trucks were little changed in those two months, orders for these trucks tumbled in
October, a sign that purchases will move lower in the period ahead.
Real spending on high-tech E&S dropped in the third quarter as a result of a sharp decline
in outlays on computers and peripherals. Software companies also reported considerable
revenue losses in the third quarter. High-tech spending appears to have entered the fourth
quarter on a similarly weak note, as industrial production of computers and shipments of
high-tech equipment fell again in October. These data are consistent with reports from
several producers of high-tech equipment of a pullback in business demand for their
products.
Nonresidential construction
Real nonresidential investment (other than drilling and mining) declined in the third
quarter after nearly three years of robust expansion, and nominal expenditures edged
down further in October. The downturn in this sector is consistent with weakening
fundamentals. Vacancy rates rose and property values fell in the first three quarters of
the year. In addition, surveys of loan officers through October, and anecdotal reports

II-24
Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2008
Measure and sector

Aug.

Sept.

Oct.

-17.9
-15.3
-2.6

-55.1
-10.9
-44.2

-29.5
9.9
-39.3

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

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

5.6
13.7
.0
-8.2

-24.1
-26.0
4.9
-3.1

-17.7
-26.4
10.4
-1.7

-5.9
-5.1
14.9
-15.6

-42.5 e
-47.5e
-.9 e
5.9

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

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

95.8
60.5
39.0
-3.7

97.5
39.3
48.5
9.6

46.6
10.7
24.8
11.2

65.0
44.5
27.6
-7.1

-57.8
-53.8
-21.0
17.0

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

n.a.
-37.9
-54.9
n.a.

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

ISM Customers’ Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.9
1.8

1.9

Index

1.8

Staff flow-of-goods system

Nov.

55
1.7

1.7
Oct.

1.6

1.4

1.3

1.5

1.4

1.5

1.3
Sept.

1.2

Census book-value data
1.1

2000

2002

2004

2006

2008

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

1.1

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

Note: A number above 50 indicates inventories are "too high."
Source: Manufacturing ISM Report on Business.

II-25

more recently, suggest that financing for new construction projects has become extremely
difficult to acquire. The architectural billings index dropped again in October, an
indication of further deterioration in nonresidential investment in the future. Moreover,
declines in nonresidential construction employment have accelerated considerably in
recent months.
The latest readings on footage drilled and the number of drilling rigs in operation suggest
that real expenditures on drilling and mining structures decelerated sharply in the fourth
quarter. The recent deceleration likely reflects the sizable drop in oil and natural gas
prices since July.
Business Inventories
Firms continued to draw down their inventory stocks at a fast pace in the third quarter,
and book-value data for manufacturing and wholesale trade (other than motor vehicles)
point to further drawdowns in October. Despite firms’ attempts to keep their inventories
under control, stocks in some industries appear to have moved above desired levels. In
particular, the ratio of book-value inventories to sales in the manufacturing and trade
sectors, excluding motor vehicles, moved up in August and September, and this ratio
continued to rise at the manufacturing and wholesale levels in October. Months’ supply
in the flow-of-goods system edged down in October after having risen in September,
when shipments in some industries (such aerospace and shipbuilding) were temporarily
disrupted by the hurricanes and the strike at Boeing. That said, this measure of months’
supply seems somewhat elevated for durable goods excluding transportation equipment
and is clearly elevated for some nondurables industries, such as plastics and rubber
products. Finally, the ISM index of customers’ inventories remained above 50 for the
fourth consecutive month in November, an indication that many purchasing managers see
their customers’ inventories as too high.
Federal Government Sector
The deficit in the federal unified budget continued to widen markedly in October and
November. Receipts in the past two months, adjusted for payment-timing shifts and
financial transactions, fell 6 percent relative to the same period a year earlier, with
declines recorded for both personal and corporate tax payments. The reduction in
receipts likely reflects the slower rise in nominal personal incomes, reduced capital gains
realizations, and declining profits for corporations. On the expenditure side, adjusted
outlays in October and November increased 10 percent relative to the same period a year

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

Surplus or Deficit (-)
300

Billions of dollars
300

12-month moving sum

-300

Nov.

-600

-900

-600

-900

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Note: Thin line includes deficit effects of transactions related to TARP (Troubled Asset Relief Program) and government-sponsored
enterprise equity purchase programs.

Outlays and Receipts

Percent change from year earlier

20
Receipts

12-month moving sum
15

Outlays

Nov.

-5

-10

-15

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-15

2009

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

October-November

12 months ending in November

2007

2008

Percent
change

2007

2008

Percent
change

Outlays
Net interest
National defense
Major transfers1
Other

464.4
39.8
109.3
248.5
66.8

509.8
41.7
117.0
271.5
79.6

9.8
4.8
7.1
9.2
19.2

2,775.7
241.7
569.8
1,531.4
432.8

3,006.9
250.8
632.2
1,665.0
459.0

8.3
3.8
10.9
8.7
6.1

Receipts
Individual income and payroll taxes
Corporate income taxes
Other

329.2
284.7
8.7
35.9

309.6
275.2
2.1
32.4

-6.0
-3.3
-76.0
-9.7

2,583.3
2,005.2
365.1
213.0

2,504.0
1,987.0
297.8
219.3

-3.1
-.9
-18.4
2.9

-135.2

-200.2

...

-192.4

-502.9

...

-155.1

-401.6

...

-194.2

-701.3

...

Function or source

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

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

II-27

earlier.7 Spending rose for low-income support programs, which reflected the ramp-up of
the Emergency Unemployment Compensation (EUC) program and, more generally, the
weaker economic conditions relative to a year ago. Meanwhile, spending for defense,
Social Security, and Medicare continued to post solid gains relative to a year earlier.
On November 21, new legislation expanded the EUC program for workers who have
exhausted, or will exhaust, the previously available 13 weeks of EUC benefits.8 The new
law extends EUC benefits for an additional 7 weeks for all eligible individuals and a
further 13 weeks for individuals in states with high unemployment rates—defined as a
state unemployment rate of 6 percent or above.9 This expansion of the EUC program is
estimated to cost $6 billion.
State and Local Government Sector
Although state and local governments are facing mounting fiscal pressures, the incoming
data have not yet shown a dramatic reduction in outlays. On average, state and local
employment rose 15,000 in October and November, about the same pace as was recorded
over the first nine months of the year. Meanwhile, after factoring in the sizable upward
revisions to the data for August and September in the latest monthly construction report,
we estimate that real construction outlays rose at an annual rate of 3½ percent in the third
quarter.10 In October (the latest available data), nominal construction spending edged up
to a level nearly 1 percent (not at an annual rate) above its third-quarter average;
however, given the sizable increases in the state and local construction deflator in recent
7

These adjusted outlay figures exclude financial transactions and so do not include the equity
purchases related to the Troubled Assets Relief Program (TARP) or the government-sponsored enterprise
(GSE) equity purchase program for Fannie Mae and Freddie Mac. In October and November, TARPrelated equity purchases totaled $192 billion, while GSE-related equity purchases equaled $14 billion. The
Office of Management and Budget (OMB) scores both types of transactions as outlays in the unadjusted
unified federal budget. Including these transactions in federal outlays significantly increases the budget
deficit in the past two months (as shown by the thin line in the “Surplus or Deficit” chart and the
unadjusted deficit figures in the memo line of the table). In contrast to OMB, the Congressional Budget
Office believes that these asset purchases should be recorded on an accrual basis and calculates that the
present value cost of these transactions equals about $64 billion, or $142 billion less than the cash
disbursements recorded by the Treasury.
8
The new expansion is scheduled to expire in March 2009, along with the original EUC benefit
program.
9
In October, 22 states plus the District of Columbia (about 58 percent of the total labor force) had
unemployment rates at or above 6 percent.
10
In the preliminary national income and product accounts (NIPA) release for the third quarter, the
Bureau of Economic Analysis (BEA) had estimated that real construction outlays fell at an annual rate of
0.4 percent. Because of the stronger construction data, we expect the BEA to raise its estimate of the
increase in total state and local purchases from 0.8 percent to 1.4 percent.

II-28

State and Local Indicators

Real Spending on Consumption & Investment

Net Change in Employment

Percent change, annual rate
12

Thousands of jobs, monthly average
12

Spending
4-quarter moving average

2
Q3

0
-2
-4

2000

2002

2004

2006

2008

-4

-10

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

1998

2000

2002

2004

2006

2008

-10

Note: Q4 is the average of October and November.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics,
Employment Situation.

Real Construction
Annual rate

0
-2

1998

Net Saving
Percent of nominal GDP

Billions of chained (2000) dollars

200

200
Oct.

1.0

0.5

0.0

-0.5

190

1.0

-0.5

190

180

170

160

150

140

Q3
1998

2000

2002

2004

2006

2008

-1.0

Note: Nominal CPIP deflated by BEA prices through
Q3 and by a staff projection thereafter.
Source: Census Bureau, Construction Spending.

1988

1993

Total
revenues

Individual and
corporate income
taxes

-1.0

Percent change from year earlier
20

4-quarter moving average

2008

Local Revenues

Percent change from year earlier

2003

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

State Revenues
20

1998

4-quarter moving average

12
10
Property taxes

-5

-10

-15

1998

2000

2002

2004

2006

2008

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

Total revenues
1998

2000

2002

2004

2006

2008

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

II-29

quarters, the increase in nominal spending in October probably implies little—if any—
gain in real terms.
The state and local revenue picture remains grim. On the basis of information from 42
states, the Rockefeller Institute of Government estimated that state tax collections were
flat in nominal terms on a year-over-year basis in the third quarter of 2008, compared
with an increase of 3 percent for the preceding year. State personal income taxes rose
just 1½ percent over the year ending in the third quarter, while sales taxes fell ¾ percent
and corporate income taxes fell more than 8 percent. Since the end of the third quarter,
the bad news has continued to pile up as revenues in many jurisdictions have fallen short
of expectations and budget gaps have ballooned. Indeed, when surveyed by the National
Conference of State Legislatures (NCSL) in November, many states reported that
revenues in every major category were running below projections, and some states that
had previously enjoyed strong revenue collections were scaling back their expectations
because of the recent declines in oil and commodity prices. According to the NCSL, a
number of states have already trimmed spending during the current fiscal year (which
began on July 1 in most states), although more-significant budget-repair actions will
likely be deferred until legislatures meet in early 2009. Actions to date have included
across-the-board cuts in spending (10 states), cuts in education programs (8 states), and
hiring freezes (19 states); 11 states have tapped rainy day and other funds to help close
budget gaps.
Prices
Both headline and core consumer price inflation slowed further in recent months. With
energy prices falling sharply, overall PCE prices decreased 0.6 percent in October after
being little changed in August and September; over the preceding three-month period,
overall PCE prices increased at an annual rate of more than 7 percent. Excluding food
and energy, PCE prices were unchanged in October, bringing their three-month change to
an annual rate of 1.4 percent, down from the 2.7 percent rate of increase recorded over
the preceding three months. The 12-month change in core PCE prices slowed to
2.1 percent, the same as in the year-earlier period. Meanwhile, prices of goods at earlier
stages of production, both intermediate products and commodities, have continued to
decline.
Consumer energy prices continued their recent slide, falling almost 9 percent in October
after a cumulative 5 percent decline over August and September. Survey data suggest
that retail gasoline prices, which dropped 13½ percent in October, fell even more sharply
in November and the beginning of December. Crude oil prices have also moved down

II-30

Price Measures
(Percent change)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Oct.
2007

Oct.
2008

July
2008

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

3.5
4.4
14.5
2.2
-.5
3.2
3.3
3.1
3.2
1.8

3.7
6.3
11.5
2.2
.1
3.0
2.2
4.2
3.3
1.9

10.6
8.4
79.4
3.5
1.7
4.1
2.9
6.0
...
...

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

3.1
4.2
15.6
2.1
-.9
3.3
3.2
3.4
1.7
4.1

3.2
6.2
11.8
2.1
.2
2.8
2.5
2.9
2.0
2.6

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

6.1
7.1
16.3
2.6
2.9
2.1
5.7
2.1
26.8
18.1

5.2
6.5
5.5
4.4
4.7
4.1
10.2
9.7
-1.4
-3.1

Measures

Oct.
2008

Sept.
2008

Oct.
2008

-4.4
5.8
-43.1
1.1
-1.9
2.2
1.6
3.0
...
...

.0
.6
-1.9
.1
-.2
.3
.3
.2
...
...

-1.0
.3
-8.6
-.1
-.4
.0
.0
.0
...
...

7.4
7.5
80.7
2.7
.5
3.6
2.6
4.0
2.7
3.1

-1.8
6.5
-43.6
1.4
-.6
2.1
2.0
2.2
1.5
1.0

.1
.7
-1.8
.2
.0
.2
.3
.2
.2
.1

-.6
.4
-8.8
.0
-.2
.1
.1
.1
.0
-.1

18.9
10.4
71.8
4.9
5.4
4.8
34.3
21.0
75.7
26.2

-15.1
1.3
-57.3
4.4
4.1
4.2
-21.6
-1.7
-81.0
-70.3

-.4
.2
-2.9
.4
.5
.5
-1.2
-.3
-7.9
-9.4

-2.8
-.2
-12.8
.4
.3
.5
-3.9
-1.7
-18.6
-17.0

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
... Not applicable.
Source: For consumer price index (CPI) and producer price index (PPI), U.S. Dept. of Labor, Bureau of
Labor Statistics; for personal consumption expenditures (PCE), U.S. Dept. of Commerce, Bureau of
Economic Analysis.

II-31

Consumer Prices
(12-month change except as noted)

PCE Prices

CPI and PCE ex. Food and Energy
Percent

Total PCE
3

CPI

3
Oct.

Percent

Oct.
Oct.

Core PCE

2000
2002
2004
2006
2008
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

PCE excluding Food and Energy

2000
2002
2004
2008
2006
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor
Statistics; for PCE, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

PCE Goods and Services
Percent

PCE
CPI
chained

Percent

4
3

Oct.

Oct.
Services ex. energy

4
3
2

1
Oct.

0
1

Market-based components

-1
-2

2000
2002
2004
2006
2008
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-3

PCE excluding Food and Energy

-1
Goods ex.
food and energy

-2

2000
2002
2004
2008
2006
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-3

CPI excluding Food and Energy
Percent

Percent

3-month change, annual rate

2
Oct.

3-month change, annual rate

3
2
Oct.

-1

2000
2002
2004
2006
2008
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

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

-1

II-32

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

Total Gasoline Margin
180

Gasoline Price Decomposition
Cents per gallon

Retail price less average spot crude price*

160

180
160

Cents per gallon

450
400

400

350
140

140

120

100

100
Dec. 1

80
60

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

300

Retail price*
300

250

200

100
50

Gasoline Inventories

Dec. 1

Millions of barrels

2005
2006
2007
2008
2009
* Regular grade seasonally adjusted by FRB staff.
** 60% West Texas intermediate, 40% Maya heavy crude.

Dollars per million BTU

245

16
14

225

215

Dec. 5

215

8
205

205

195

185
175

2005
2006
2007
2008
2009
Note: Shaded region is average historical range as
calculated by U.S. Dept. of Energy. Monthly data through
September 2008, weekly data thereafter.
* Adjustment for approximate amount of fuel ethanol to be
blended with RBOB component of inventories; estimated by
FRB staff.

12-month percent change

175

7
6

9
8
7

Food and beverages

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

2008

2009

Oct.

Dollars per bushel

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

12
10

16
14

Dec. 9

Ex. food and energy

Spot Agricultural Commodity Prices

Dec. 9

185

PCE Food Prices

235

Excluding ethanol
Adjusted for ethanol use*

225

150
100

Average spot crude price**

Natural Gas Prices

245
235

350
Rack price

150
80

450

1
0
2005
2006
2007
2008
2009
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

2005
2006
2007
Source: Commodity Research Bureau.

2008

2009

II-33

substantially since the October Greenbook, although not as sharply as gasoline prices:
Gasoline margins have moved down toward normal levels as gasoline inventories have
begun to recover from their low levels after the refinery outages due to Hurricanes
Gustav and Ike.
In contrast, consumer food prices have continued to trend up. Although the increase of
0.4 percent in consumer food prices in October was less than in preceding months, the
change was held down by price declines in the volatile category of fruits and vegetables.
Prices of other foods at home and of restaurant meals posted further sizable increases.
Over the 12 months ending in October, food prices increased 6¼ percent after having
risen 4¼ percent over the previous 12 months. However, prices for most agricultural
commodities have fallen further since the October Greenbook, and the Commodity
Research Bureau (CRB) index of spot foodstuffs is down by more than one-third since
early July.
As noted, core PCE prices have continued to increase at slower rates than they did in the
summer, with an especially low reading in October. Some of the more erratic categories
of prices (such as lodging away from home and used cars) experienced especially large
price declines in October. But the recent slowing has generally been as widespread as
was the acceleration of these prices back in the spring. That earlier pickup in core PCE
inflation likely reflected an acceleration in import prices and the pass-through of the
previous large increases in the costs of energy and materials. The recent reversal of these
influences, as well as the weak pace of economic activity, likely has started to show
through to core consumer prices, but given the long lags of pass-through, the full effects
of the recent abatement of these cost pressures may take some time to fully materialize.
Prices at earlier stages of processing have continued to retreat. After having risen
significantly in each of the first eight months of this year, the producer price index for
core intermediate materials fell 1.7 percent in October, the second consecutive monthly
decline. This drop likely reflects some pass-through of declining commodity prices,
which started falling in mid-July and have dropped further since the close of the October
Greenbook. Since late October, the Journal of Commerce index of industrial materials
prices has plunged 24 percent, and the CRB index of spot industrials has fallen
12 percent. These two indexes now stand about 50 percent and 40 percent, respectively,
below their levels in mid-July.
Survey-based measures of inflation expectations have continued to fall or hold steady.
Median expected inflation over the next 5 to 10 years, as measured by the

II-34

Commodity Price Indexes
Journal of Commerce

Ratio scale, 2006 = 100
180
140

100

100
Industrials
Dec. 9

Metals
1992
1992

1994
1994

1996
1996

1998
1998

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

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

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

600
500

450
Dec. 9

400

Spot industrials
350
300

300
250

200

Futures

200

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

Selected Commodity Price Indexes
(Percent change)

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

2007 1

12/18/07
to
10/21/08 2

7.6
2.1
11.1
25.5
18.2

-21.0
-33.4
-23.9
-3.7
-18.1

2
10/21/08
to
12/9/08

-26.8
-17.7
-16.1
-15.7
-12.8

52-week
change to
12/9/08
-42.8
-47.1
-36.6
-18.8
-28.3

1. From the last week of the preceding year to the last week of the year indicated.
2. October 21, 2008, is the Tuesday preceding publication of the October Greenbook.

150

II-35

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

2005

2006

2007

2008

Product prices
GDP price index
Less food and energy

3.4
3.2

3.2
3.2

2.5
2.3

2.7
2.3

Nonfarm business chain price index

3.5

3.1

1.8

2.5

Expenditure prices
Gross domestic purchases price index
Less food and energy

3.9
3.1

3.3
3.1

2.4
2.3

4.1
2.4

PCE price index
Less food and energy

3.2
2.1

2.9
2.5

2.2
2.0

4.3
2.4

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

3.1
1.7

2.7
2.1

2.0
1.6

4.5
2.2

CPI
Less food and energy

3.8
2.1

3.3
2.8

2.4
2.1

5.3
2.5

Chained CPI
Less food and energy

3.4
1.8

3.1
2.6

2.0
1.7

4.6
2.2

Median CPI
Trimmed mean CPI

2.4
2.5

3.1
2.8

3.0
2.5

3.3
3.5

Trimmed mean PCE

2.4

2.9

2.4

2.7

Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for all else, U.S. Dept. of Commerce,
Bureau of Economic Analysis.

Surveys of Inflation Expectations
(Percent)
Reuters/Michigan Survey

Period

Actual
CPI
inflation 1

1 year 2

Professional
forecasters
(10 years) 4

5 to 10 years 3

Mean

Median

Mean

Median

CPI

PCE

2007:Q1
Q2
Q3
Q4

2.4
2.7
2.4
4.0

3.6
4.2
4.1
4.1

3.0
3.3
3.2
3.3

3.4
3.5
3.5
3.3

2.9
3.0
3.0
2.9

2.4
2.4
2.4
2.4

2.0
2.0
2.1
2.1

2008:Q1
Q2
Q3
Q4

4.1
4.4
5.3
n.a.

4.2
6.4
5.4
n.a.

3.8
5.0
4.7
n.a.

3.3
3.8
3.6
n.a.

3.0
3.3
3.1
n.a.

2.5
2.5
2.5
2.5

2.2
2.2
2.2
2.2

2008:July
Aug.
Sept.
Oct.
Nov.

5.6
5.4
4.9
3.7
n.a.

6.3
5.3
4.6
4.3
2.9

5.1
4.8
4.3
3.9
2.9

3.5
3.9
3.3
3.1
3.1

3.2
3.2
3.0
2.9
2.9

...
2.5
...
...
2.5

...
2.2
...
...
2.2

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

II-36

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

Percent

Percent
12

Quarterly

Monthly

Median, next 5 to 10 years
6

3
Nov.

0
2005 2008
2010
2004

Q3
2
0

Median, next 12 months

1980
1985 1988
1990
1972 1975
1976
1980
1984
1992 1995
1996
Source: Reuters/University of Michigan.

2000
2000

Inputs to Models of Inflation
12

2005

Percent

2007

2008

2009

Percent
12

Quarterly

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

6
2

4
Q4

Distributed lag of
core PCE inflation

2
0

2006

0
0
0
1980
1985 1988
1990
2000
2005 2008
2010
2005 2006 2007 2008 2009
1972 1975
1976
1980
1984
1992 1995
1996
2000
2004
Note: The distributed lag of core PCE inflation is derived from one of the reduced-form Phillips curves used by Board staff.
Source: For the distributed lag of core PCE inflation, FRB staff calculations; for the FRB/US measure, for 2007 forward, the median
projection for PCE inflation over the next 10 years from the Survey of Professional Forecasters (SPF); for 1990 to 2006, the equivalent
SPF projection for the CPI; for 1981 to 1989, a related survey for the CPI conducted by Richard Hoey; and for the period preceding 1981,
a model-based estimate constructed by Board staff. The survey data before 2007 are adjusted down 0.5 percentage point to put the CPI
projections approximately on a PCE basis.

Inflation Compensation from TIPS
Percent
4

Percent
4

4 Weekly

-1

Quarterly
5 to 10 years ahead
Q3

-2

Next 5 years

Dec. 9

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

II-37

Reuters/Michigan Survey, held at 2.9 percent in the November final release; this reading
was down from a high of 3.4 percent in May and June but similar to its levels from a year
ago and within the narrow range in which it fluctuated over the previous few years.
Median expected inflation over the next 12 months fell to 2.9 percent in the November
Reuters/Michigan Survey, its lowest reading of the year. As discussed in the “Domestic
Financial Developments” section, Treasury inflation-protected securities (TIPS) have
exhibited heightened volatility in the past few months. As a result, the staff’s measure of
inflation compensation based on these yields is probably not very informative at this time
about movements in inflation expectations or in inflation risk premiums.
Labor Costs
Labor cost increases have remained moderate. The employment cost index (ECI) for
hourly compensation of private industry workers rose at an annual rate of 2.6 percent
over the three months ending in September. The 12-month change in the ECI was
2.8 percent, a little lower than the increase seen over the preceding 12-month period.
Similarly, compensation per hour in the nonfarm business sector increased at an annual
rate of 4.1 percent in the third quarter after a downward-revised rise of 0.9 percent in the
second quarter. The increase over the most recent four quarters, at 3½ percent, was down
1 percentage point from the increase over the previous four quarters.
The staff estimates that productivity in the nonfarm business sector rose at an annual rate
of 1.4 percent in the third quarter.11 Over the four quarters ending in the third quarter of
this year, productivity rose 2 percent, down from 2½ percent over the previous four
quarters. Combining the information on hourly output and compensation, the staff
estimates that unit labor costs increased 1½ percent over the most recent four quarters,
somewhat less than its average rate over the past several years.
More recently, average hourly earnings of production and nonsupervisory workers on
private nonfarm payrolls rose 0.4 percent in November, thereby bringing the year-overyear change to 3¾ percent—about the same as its increase over the previous 12 months.
According to the ECI, employer contributions for health insurance rose about 4 percent
over the 12 months ending in September; this rise followed back-to-back increases of
slightly less than 5 percent over the preceding two years. Taken together, the available
indicators thus far provide no evidence that any dramatic change in the rate of increase of
11

According to the productivity and cost data based on the preliminary GDP release, productivity in
the nonfarm business sector increased at an annual rate of 1.3 percent last quarter. The staff estimate is
based on source data that became available after the GDP release.

II-38
Change in Employment Cost Index of Hourly Compensation
for Private-Industry Workers
2007
Measure

2008

Sept.

Dec.

3.1
3.1
3.1

3.5
3.1
3.1

Total hourly compensation
Wages and salaries
Benefits

Mar.
June
Quarterly change
(compound annual rate) 1
3.0
3.4
2.3

Sept.

2.3
3.0
1.9

2.6
2.2
2.3

3.0
3.1
2.6

2.8
2.9
2.4

12-month change
Total hourly compensation
Wages and salaries
Benefits

3.1
3.4
2.4

3.0
3.3
2.4

3.2
3.2
3.2

1. Seasonally adjusted by the Bureau of Labor Statistics.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Change in ECI Benefits (confidential)
Health Insurance

(Private-industry workers; 12-month change)
Nonproduction Bonuses
Percent

Percent

20
15

-5

-10

10
Sept.

Sept.
0

-5

1990 1992
1995 1997
2000 2002
2005 2007
2010
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-5

-15

Retirement and Savings
30

1990 1992
1995 1997
2000 2002
2005 2007
2010
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-15

Workers’ Compensation Insurance
Percent

Percent

Sept.

-5

-10

1990 1992
1995 1997
2000 2002
2005 2007
2010
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-10

0
Sept.

-5

-5
-10

-5

1990 1992
1995 1997
2000 2002
2005 2007
2010
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-10

II-39

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

Category

2006:Q3 2007:Q3
to
to
2007:Q3 2008:Q3e

2007

2008

Q3 e

Compensation per hour
Nonfarm business

4.5

3.5

5.3

3.8

4.1

Output per hour
Nonfarm business

2.5

2.1

2.6

3.6

1.4

Unit labor costs
Nonfarm business

2.0

1.4

4.5

1.2

-2.6

2.6

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

Compensation per Hour

Unit Labor Costs

(Percent change from year-earlier period)

(Percent change from year-earlier period)
Percent

Productivity and costs*

6
5

4
3

Percent

4
3

ECI

2
Q3

-1

-2

-3

1996
1998
2000
2002
2004
2006
2008
*Value for 2008:Q3 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Average Hourly Earnings

1996
1998
2000
2002
2004
2006
2008
Note: Value for 2008:Q3 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-3

Markup, Nonfarm Business

(Percent change from year-earlier period)
4.5

Percent

Nov.

Ratio

1.68

4.0

4.5

1.66

1.68

3.0

3.5

1.66

3.0

1.64

1.62

1.60

3.5

1.60

2.5

2.0

1.5

1.54

1.0

1.52

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

1.58
1.56

1.58
Average,
1968-present

1.56
1.54

1996
1998
2000
2002
2004
2006
2008
Note: The markup is the ratio of output price to unit
labor costs. Value for 2008:Q3 is a staff estimate.
Source: For output price, U.S. Dept. of Commerce, Bureau
of Economic Analysis; for unit labor costs, U.S. Dept. of Labor,
Bureau of Labor Statistics.

1.52

II-40

health insurance costs is in the offing. Private surveys—which typically show somewhat
larger increases than the ECI—suggest that overall premiums (that is, the shares paid by
both employers and employees) will rise in the neighborhood of 5 percent to 6 percent in
2009, similar to the survey results for 2008.12 Among the major plans for public
employees, premiums in the Federal Employees Health Benefits Program are expected to
increase 7 percent in 2009 after a rise of just 2 percent in 2008. The premiums for the
California Public Employees’ Retirement System are expected to move up 5 percent in
2009 after a 7 percent increase in 2008.

Last Page of Domestic Nonfinancial Developments

The private surveys were released in September and thus predate the sharp deterioration in economic
conditions, which may be leading some firms to purchase less expensive health plans or to require
employees to shoulder a greater share of the premiums.

Domestic Financial
Developments

III-T-1

Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2007

Change to Dec. 9 from
selected dates (percentage points)

2008

Instrument
Aug. 6

Sept. 15

Oct. 28

Dec. 9

2007
Aug. 6

2008
Sept. 15

2008
Oct. 28

5.25

2.00

1.50

1.00

-4.25

-1.00

-.50

4.74
4.72

1.03
1.52

.76
1.23

.03
.25

-4.71
-4.47

-1.00
-1.27

-.73
-.98

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

5.26
5.29

2.47
2.73

2.71
2.89

.79
1.35

-4.47
-3.94

-1.68
-1.38

-1.92
-1.54

Large negotiable CDs1
3-month
6-month

5.34
5.27

3.45
3.85

3.63
3.73

2.13
2.55

-3.21
-2.72

-1.32
-1.30

-1.50
-1.18

Eurodollar deposits3
1-month
3-month

5.33
5.35

2.70
3.00

3.75
4.50

2.15
3.00

-3.18
-2.35

-.55
.00

-1.60
-1.50

Bank prime rate

8.25

5.00

4.50

4.00

-4.25

-1.00

-.50

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

4.49
4.52
4.82

1.78
2.60
3.68

1.49
2.81
4.43

.58
1.71
3.18

-3.91
-2.81
-1.64

-1.20
-.89
-.50

-.91
-1.10
-1.25

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

2.43
2.48

1.25
1.70

3.64
3.29

2.82
2.61

.39
.13

1.57
.91

-.82
-.68

Municipal general obligations (Bond Buyer)6

4.51

4.54

5.32

5.58

1.07

1.04

.26

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

5.44
5.34
6.12
6.57
9.21

4.24
4.19
6.63
7.11
10.86

4.26
5.36
8.26
9.77
16.27

2.98
3.79
7.05
9.64
18.03

-2.46
-1.55
.93
3.07
8.82

-1.26
-.40
.42
2.53
7.17

-1.28
-1.57
-1.21
-.13
1.76

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

6.59
5.65

5.78
5.03

6.46
5.38

5.53
5.02

-1.06
-.63

-.25
-.01

-.93
-.36

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

Record high

Change to Dec. 9
from selected dates (percent)

2008

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

Date

Sept. 15

Oct. 28

Dec. 9

Record
high

2008
Sept. 15

2008
Oct. 28

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

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

10,918
1,193
2,180
690
12,184

9,065
941
1,649
483
9,341

8,691
889
1,547
466
8,870

-38.64
-43.22
-69.35
-45.58
-43.88

-20.39
-25.49
-29.02
-32.48
-27.20

-4.12
-5.51
-6.19
-3.49
-5.04

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect.
6. Most recent Thursday quote.
7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
9. Home mortgage rates for December 9, 2008, are for the week ending December 4, 2008.
_______________________________________________________________________
NOTES:
August 6, 2007, is the day before the August 2007 FOMC meeting.
September 15, 2008, is the day before the September 2008 FOMC monetary policy announcement.
October 28, 2008, is the day before the most recent FOMC monetary policy announcement.
Data for the 3-month commercial paper on December 9, 2008, are from December 4, 2008, the most recent date for which a sufficient volume of
new issues was available to calculate this rate.
_______________________________________________________________________

III-C-1

Financial Institutions and Market Functioning
AAA-rated Subprime Mortgage CDS Index Spreads

Investment-Grade CDS Spreads for Financial Firms
Basis points
Oct.
FOMC

Daily

Basis points
Daily

350
300

Oct.
FOMC
Dec.
9

January 2006
July 2006

Dec.
9
250

1600
1400
1200
1000

200

800

150

600

100

400

200
0

0
Feb.

June
Oct.
Feb.
June
2007
2008
Note: Median spreads for 179 financial firms.
Source: Markit.

Oct.

Feb.

June
2007
Source: JPMorgan.

CMBX Indexes

Feb.

June
2008

Oct.

LCDX Index

Basis points
1000

Oct.

Basis points
Oct.
FOMC

Daily

800

Basis points
5000

Series 8
Series 9
Series 10

4000

600

Oct.
FOMC

Daily

2000

1500

3000

BBB- (right scale)
Dec.
9

400

Dec.
9

2000

1000

500

200

1000
AAA (left scale)

0
May
Aug.
2007

Nov.

Feb.

May
Aug.
2008

May

Aug.
Nov.
Feb.
May
Aug.
Nov.
2007
2008
Note: The LCDX index rolls semi-annually when credits that
experienced a credit event or exhibited poor liquidity are excluded
from the index.
Source: Markit.

Nov.

Note: Origination date is April 2007.
Source: JPMorgan.

Fannie Mae Spreads

CDS Spreads for U.S. Commercial Banks
Basis points
Daily

Basis points

400

Oct.
FOMC

Daily

Regional banks
Bank holding companies

350
300

Basis points

250

200

30-year OAS (left scale)
10-year debt spread*
(right scale)

180

Oct.
FOMC

160
140
120

250
150
Dec.
9

100

200
150

80
100

60
Dec.
9

100
50
June

July

Aug.

Sept.
2008

Oct.

Nov.

Dec.

Note: Median spreads for 5 regional banks and 6 large bank holding
companies (Bank of America, Citigroup, Goldman Sachs,
JPMorgan Chase, Morgan Stanley, and Wells Fargo).
Source: Markit.

40
20

June

July

Aug.

Sept.
Oct.
Nov.
Dec.
2008
* Spread over Treasury securities of comparable maturity.
Source: Bloomberg.

Domestic Financial Developments
Overview
Investor concerns about the prospects of a deep and prolonged recession intensified over
the intermeeting period. As a result, the expected trajectory of the federal funds rate
dropped, and yields on Treasury securities plummeted. Broad equity price indexes fell,
and risk spreads on corporate bonds ballooned. Although interest rates on most types of
household loans were unchanged or moved down over the intermeeting period,
households appeared to face tighter credit supply conditions amid further deterioration in
credit quality. The available information suggests that credit flows to businesses and
households have slowed further this quarter, likely a reflection of both the tighter
financial conditions and reduced borrower demand that has accompanied the weakening
of the economy. There were a few signs of improvement in some short-term funding
markets, but conditions remained strained. In particular, year-end pressures emerged in
the commercial paper and some interbank term funding markets.
Financial institutions remained under stress during the intermeeting period. Heightened
concerns about the possible insolvency of Citigroup and the potential systemic
implications prompted the U.S. government to offer a rescue package. The Federal
Reserve and other authorities took broader steps as well to address the weakening
economic outlook and the persistent problems in financial markets. These actions
included a program to purchase $500 billion in mortgage-backed securities (MBS) issued
by the housing-related government-sponsored enterprises (GSEs) and Ginnie Mae as well
as $100 billion in debt issued by the GSEs; the actions also included the announcement of
a facility to support issuance of certain asset-backed securities.
Financial Institutions and Financial Market Functioning
On balance, investor concerns about the condition of financial institutions seemed to
intensify over the intermeeting period, with credit default swap (CDS) spreads for
investment-grade financial sector firms rising to record highs. After the Treasury
Department’s announcement on November 12 that funds from the Troubled Asset Relief
Program (TARP) would not be used to purchase troubled mortgage-related and other
securities, investors pulled back from assets they previously thought might be supported
by the program. Spreads for CDS indexes of subprime MBS, commercial mortgagebacked securities, and leveraged loans all increased substantially. The deterioration in
asset prices further increased concerns about the solvency of financial institutions with
significant holdings of such securities.

III-1

III-2

Short-Term Funding Markets
Spread of Libor over OIS Rates

Repo Rates on Treasury General Collateral
Basis points
Oct.
FOMC

Daily

1-month
3-month

Percent
400

Oct.
FOMC

Daily

Overnight

300

4
1-month

Dec.
10

3
200
2
Dec.
9

100

1
0

0
July

Oct.
2007

Jan.

Apr.

July
2008

-1

Oct.

July

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

Oct.
2007

Jan.

Apr.

Source: Bloomberg.

Fails to Deliver

July
2008

Oct.

Spreads over Treasury GC Repos
Basis points

Billions of dollars
3000

Weekly (Wed.)

Treasury
Agency
MBS

1-month agency repo
1-month MBS repo

2500

250

Oct.
FOMC

Daily

200

2000
1500

Nov.
26

150
100

1000

500

0
Dec.
9

0
2003

2004

2005

2006

2007

2008

July

Source: FR 2004 Primary Government Securities Dealers
Reports.

Apr.

July
2008

-50

Oct.

Commercial Paper Outstandings

Basis points

ABCP
A2/P2

Jan.

Note: Spread over 1-month Treasury general collateral (GC) repo.
Source: Bloomberg, Federal Reserve Bank of New York.

Spreads on 30-Day Commercial Paper
Daily

Oct.
2007

Billions of dollars
700 1000

Oct.
FOMC

Nonfinancial (left scale)
Financial (right scale)
ABCP (right scale)

600
800
500
400

Billions of dollars

Weekly, seasonally adjusted

Oct.
FOMC

200

1200
1000

600

Dec.
3

300
Dec.
9

1400

800
400
600

100
200
0

July

Oct.
Jan.
Apr.
July
Oct.
2007
2008
Note: The ABCP spread is the AA ABCP rate minus the AA
nonfinancial rate. The A2/P2 spread is the A2/P2 nonfinancial
rate minus the AA nonfinancial rate.
Source: Depository Trust & Clearing Corporation.

400
July

Oct.
Jan.
Apr.
July
Oct.
2007
2008
Source: Depository Trust & Clearing Corporation.

III-3

Investor anxiety intensified after Citigroup’s announcement on November 19 that it
would bring more than $17 billion of distressed assets onto its books from a structured
investment vehicle, which led to increased speculation about its possible insolvency and
an increase in commercial bank CDS spreads more broadly. On November 23, after the
Federal Reserve, the Treasury Department, and the Federal Deposit Insurance
Corporation (FDIC) announced a joint rescue package for Citigroup, stock prices rose
and CDS spreads for financial institutions narrowed some.
On November 25, the Federal Reserve announced that it would initiate a program to
purchase MBS issued by the housing-related GSEs and Ginnie Mae and debt issued by
the GSEs in an effort to reduce the cost and increase the availability of mortgage credit.
Agency debt spreads and option-adjusted spreads on agency MBS fell on the
announcement, but option-adjusted spreads have been volatile since then amid reports
that the Treasury is considering a plan to finance mortgages at significantly lower-thanmarket rates. The Federal Reserve simultaneously announced the creation of the Term
Asset-Backed Securities Loan Facility (TALF) to support issuance of securities backed
by auto loans, student loans, and government-guaranteed small business loans, but the
terms of the TALF have not yet been finalized, and conditions in those markets have
shown little improvement.
Short-Term Funding Markets
Conditions in money markets remained strained, although there were a few signs of
modest improvement. Spreads of London interbank offered rates (Libor) over
comparable-maturity overnight index swap (OIS) rates remain extremely wide. These
spreads moved lower in early November, but some of this improvement was reversed
when the maturity date on one-month deposits crossed into the new year. Trading in term
funding markets past one month reportedly remained thin. With market participants
anticipating a cut in the target rate at the December meeting, federal funds began trading
at record low rates in early December. Throughout the intermeeting period, the effective
federal funds rate was well below the target rate in response to the extraordinary level of
reserve balances resulting from the Federal Reserve’s liquidity programs.
Strains remained in repurchase agreement (repo) markets over the period. Rates on
Treasury general collateral (GC) repos were near zero. Fails to deliver in the Treasury
market dropped sharply, in part because of a decline in transaction volume as well as
industry efforts to resolve outstanding fails amid discussions of potential regulatory
changes to address the issue. Spreads on repo transactions backed by agency and MBS

III-4
Federal Reserve Liquidity Provision

Total Federal Reserve Assets
Billions of dollars
Oct.
FOMC

Weekly

Dec.
3

2400
2200
2000
1800
1600
1400
1200
1000

Jan.

Mar.

May

July
Sept.
Nov.
Jan.
Mar.
May
July
Sept.
2007
2008
Source: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, "Factors Affecting Reserve Balances."

Primary Credit

Nov.

Term Auction Facility
Billions of dollars

Billions of dollars
150

Oct.
FOMC

Daily

Dec.
9

550

Dec.
9

125

Total

600

Oct.
FOMC

Daily

100

500
450
400
350

Foreign

300
250

200

Total

150

100

Foreign

0
Mar.

May

July
2008
Source: Federal Reserve Board.

Sept.

Nov.

0
Dec.
Feb.
Apr.
June
2007
2008
Source: Federal Reserve Board.

Primary Dealer Credit Facility

Aug.

Oct.

Dec.

Other Credit Extensions
Billions of dollars

Daily

Billions of dollars
180

Oct.
FOMC

350

Oct.
FOMC

Daily

160

300

140
250

120

CPFF
200

100

AMLF

150

Dec.
9

AIG

20
0

Mar.

May

July

Source: Federal Reserve Board.

Sept.

Nov.

100
50
0

Sept.

Oct.

Nov.

2008
Note: AMLF is Asset-Backed Commercial Paper Money Market
Mutual Fund Lending Facility; AIG is American International Group, Inc.;
CPFF is Commercial Paper Funding Facility.
Source: Federal Reserve Board.

III-5

collateral over Treasury GC rates declined, on net, but bid-ask spreads and haircuts
continue to be very elevated.
The Commercial Paper Funding Facility (CPFF), which purchases 90-day A1/P1-rated
commercial paper (CP), began operation on October 27. Spreads on 30-day asset-backed
commercial paper (ABCP) continued to narrow after the CPFF came on line but
subsequently reversed part of the decline as that maturity extended over year-end.
Spreads on A2/P2 paper, which is not eligible for the CPFF, remained extremely
elevated. Reflecting heavy issuance into the CPFF, unsecured financial CP and ABCP
outstanding bounced back from their respective October lows. Meanwhile, unsecured
nonfinancial CP outstanding has increased only modestly over the period.
Federal Reserve Liquidity Provision
The level of total Federal Reserve assets rose significantly over the intermeeting period
as financial institutions continued to tap liquidity facilities and purchases of commercial
paper through the CPFF ramped up. Depository institutions made heavy use of the
discount window, and credit outstanding from the Term Auction Facility (TAF) increased
about $150 billion, to about $450 billion. However, the TAF auctions held during the
intermeeting period—including two 84-day auctions and two forward auctions covering
year-end—were all undersubscribed. Balances at the Primary Dealer Credit Facility and
the ABCP Money Market Mutual Fund Liquidity Facility (AMLF) both declined
substantially, but the CPFF purchased more than $300 billion of securities. Draws by
foreign central banks under swap arrangements increased about $90 billion over the
intermeeting period.
The Treasury and the Federal Reserve also announced on November 10 a modification of
the special lending facility for American International Group, Inc. (AIG). Under the new
arrangement, the Treasury will purchase $40 billion of preferred shares in AIG using
TARP funds, and the rates on outstanding loans from the Federal Reserve will be
reduced. In addition, the Federal Reserve Bank of New York will create two limited
liability corporations (LLCs), one to purchase residential MBS from AIG and the other to
purchase collateralized debt obligations on which AIG Financial Products has written
CDS contracts. The assets of the LLCs will be funded by AIG and the Federal Reserve,
with AIG purchasing subordinated debt of the LLCs and the Federal Reserve providing
senior loans to these LLCs.

III-6

Policy Expectations and Treasury Yields
Interest Rate Futures
Percent
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2

Percent

FOMC
statement

Oct.
employment
report

AIG
restructuring

Citi
guarantee
package
December 2009
Eurodollar
(right scale)

Announcement of
TALF and GSE debt
& MBS purchases

3.0

Nov.
employment
report

2.8
2.6
2.4
2.2

December 2008
federal funds
(left scale)

2.0
1.8
1.6
1.4

Oct. 28

Oct. 31

Nov. 5

Nov. 10

Nov. 13

Nov. 18

Nov. 21

Nov. 26

Dec. 1

Dec. 4

Dec. 9

Note: 5-minute intervals. 8:00 a.m. to 4:00 p.m. No adjustments for term premiums. TALF is Term Asset-Backed Securities Loan Facility;
AIG is American International Group, Inc.; GSE is government-sponsored enterprise; MBS are mortgage-backed securities; FOMC is Federal
Open Market Committee.
Source: Bloomberg.

Implied Federal Funds Rate

Treasury Yield Curve
Percent

Percent
3.5

5.0
4.5

3.0

4.0

October 28, 2008
2.5

October 28, 2008

3.5
3.0

2.0

2.5

December 9, 2008

1.5

2.0
1.5

1.0

December 9, 2008

0.5

0.0
Feb.

June

Oct.

Feb.

2009

June

0.0
1

Oct.

Years ahead

2010

Note: Estimated from federal funds and Eurodollar futures, with an
allowance for term premiums and other adjustments.
Source: Chicago Mercantile Exchange; CBOT.

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

Inflation Compensation

Inflation Swaps Yield Curve
Percent
Oct.
FOMC

Daily

5 to 10 years ahead

Percent

3.0

12/9/2008
Day before last FOMC 10/28/2008

2.5

3
2
1

1.0
0.5

-1

Dec.
9

1.5

Next 5 years*

2.0

0.0
-0.5

-2
Jan.

Apr.

July

2007

Oct.

Jan.

Apr.

July

Oct.

2008

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

Maturity in years
Source: Barclays PLC.

III-7

The four Term Securities Lending Facility (TSLF) auctions held over the period had
relatively tepid receptions, which reportedly reflected the large amount of liquidity
currently in the financial system and further dealer liquidation of difficult-to-finance
assets. Market participants exercised only $8 billion of options on $50 billion of TSLF
loans against schedule 2 collateral on their November 28 exercise date.
Policy Expectations and Treasury Yields
The decision by the Federal Open Market Committee (FOMC) on October 29 to lower
the target for the federal funds rate 50 basis points and the language in the accompanying
statement were broadly in line with market expectations. Since then, the expected path
for policy has shifted down substantially on worse-than-anticipated economic data and
concerns about the weaker economic outlook. Surveys of primary dealers indicate that
they place significant odds on a 50 basis point cut in the federal funds rate target at the
December FOMC meeting and that they expect that target to remain flat over 2009.
Quotes on federal funds futures suggest that market participants expect the effective
federal funds rate to trade at about 25 basis points after the December meeting. Looking
further ahead, futures quotes suggest that the FOMC is expected to begin gradually
raising the target federal funds rate next spring. Under our standard assumptions about
term premiums, the market appears to be pricing in a rise in the effective rate to about
¾ percent by the end of 2009 and to about 1¾ percent by the end of 2010. That said,
heightened uncertainty about the magnitude of term premiums and the persistent softness
in the federal funds rate relative to the target make it difficult to estimate the market’s
expected policy path with any precision.
Two-year nominal Treasury yields fell about 90 basis points over the intermeeting period,
while 5- and 10-year yields dropped about 110 and 125 basis points, respectively, in
response to the downward shift in the expected policy path, the deterioration in the
economic outlook, and a strong flight to safe and liquid assets. Inflation compensation
based on TIPS (Treasury inflation-protected securities) for the next 5 years declined
sharply over the period, as did inflation compensation 5 to 10 years ahead. Although
these declines appear to have reflected softer energy prices and lower-than-expected
inflation readings, they likely have been exacerbated by especially poor liquidity in the
TIPS and nominal Treasury markets. Inflation compensation measured by inflation
swaps changed little over the period.

III-8

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

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

Oct. 28, 2008 = 100
250

Daily
Oct.
FOMC

Monthly

225

200

S&P Financial

175

(Trend earnings) /

*
P

Dec.
9

150
125

S&P 500
Dec.
9

Apr.

June
Aug.
2008

Oct.

8
6
4

100
Long-run real Treasury yield

50
Feb.

Dec.

1988

1992

1996

2000

2004

2008

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

Source: Standard & Poor’s.

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Weekly Friday*

Percent
80

Oct.
FOMC

Daily
Oct.
FOMC

18
16

Dec.
9

60
Dec.
9

14
12

40
10

10-year high-yield

8
20
6

10-year BBB

4
2002 2003 2004 2005 2006 2007 2008

2002 2003 2004 2005 2006 2007 2008

* Latest observation is for most recent business day.
Source: Chicago Board of Exchange.

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

Estimated Median Bid-Ask Spread
for Corporate Bonds

Corporate Bond Spreads
Basis points
1600

Daily
Oct.
FOMC

Basis points
450

Daily
Oct.
FOMC

1400

400
350

1200
Dec.
9

300

1000

250
800
10-year high-yield

Dec.
9

High-yield

600
400
200

0
2002 2003 2004 2005 2006 2007 2008
Note: Corporate yields from smoothed yield curves based on
Merrill Lynch bond data and spreads measured relative to
comparable-maturity Treasury securities.

150
100

Investment-grade
10-year BBB

200

0
2005

2006

2007

2008

Source: Staff estimate using data from NASD’s TRACE.

III-9

Stock Prices, Corporate Yields, and Risk Spreads
Broad equity-price indexes declined about 5 percent, on net, over the intermeeting period,
on continuing concerns about the likelihood of a deep and prolonged recession. Financial
stocks led the declines, dropping about 15 percent. The spread between the 12-month
forward trend-earnings-price ratio for S&P 500 firms and an estimate of the real long-run
Treasury yield—a rough gauge of the equity premium—widened markedly in November
but narrowed somewhat in early December. The option-implied volatility on the S&P
500 index remained extremely elevated.
Yields and spreads on speculative- and investment-grade corporate bonds soared to
multidecade highs over the intermeeting period. Also, loan price data from the Survey of
Terms of Business Lending in November indicated that commercial and industrial (C&I)
loan rate spreads increased moderately from the August survey after having been
relatively flat over the previous year. Liquidity in the secondary market for corporate
bonds remained subpar, particularly for the speculative-grade segment.
Corporate Earnings and Credit Quality
Operating earnings per share for S&P 500 firms in the third quarter came in about
20 percent below their year-earlier levels. Profit declines were concentrated in the
financial sector; earnings per share for nonfinancial firms rose about 10 percent, with
firms in the oil and gas industry accounting for virtually all of the increase. In midNovember, an index of analysts’ revisions to year-ahead earnings for S&P 500 firms
logged its most negative level on record, reflecting substantial markdowns of profit
forecasts for both financial and nonfinancial firms.
The credit quality of nonfinancial firms deteriorated somewhat in recent months. In the
third quarter, the aggregate leverage ratio of nonfinancial firms climbed further, and the
aggregate liquid-asset ratio continued to trend down. The volume of nonfinancial
corporate bonds downgraded by Moody’s in the third quarter rose to a moderate level,
while the volume of upgraded bonds was small. The share of corporate bonds
outstanding rated “deep junk”—that is, bonds rated B3 or below—increased to about
6½ percent. The C&I loan delinquency rate remained at a low level in the third quarter,
and the realized six-month trailing bond default rate was little changed in October after
having shot up in September on the defaults of two large financial companies.

III-10
Corporate Earnings and Credit Quality
S&P 500 Earnings Per Share

Revisions to Expected S&P 500 Earnings
Percent

Percent
40

Change from 4 quarters earlier

Monthly

20
Q3

-2
10

-4

-6
-8

-10
All firms
Nonfinancials

All firms
Nonfinancials

-20

-10
MidNov.

-30

-12
-14

1998

2000

2002

2004

2006

2008

2002 2003 2004 2005 2006 2007 2008
Note: Index is a weighted average of the percent change in the
consensus forecasts of current-year and following-year earnings per
share for a fixed sample.
Source: Thomson Financial.

Source: Thomson Financial.

Bond Ratings Changes of Nonfinancial Companies

Financial Ratios for Nonfinancial Corporations
Ratio

Percent of outstandings

Ratio
0.14
Debt over
total assets
(left scale)

0.33

Liquid assets over
total assets
(right scale)

0.30

Annual rate
Upgrades

0.12
H1
Q3

0.10

Q3
Q3

0.27

10
0.08
20
0.06

0.24

Downgrades

0.04
1990 1993

1996 1999

2002

2005 2008

Note: Data are annual through 1999 and quarterly starting in
2000:Q1.
Source: Calculated using Compustat data.

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

Deep Junk Share of Bonds Outstanding

Selected Default and Delinquency Rates
Percent

Percent of outstandings
10

Quarterly

7
Oct.

6
5

8
C&I loan delinquency rate

7
Q3

6
Q3

5
Bond default rate*

2
1

4
0
3
1990

1993

1996

1999

2002

2005

2008

Note: Nonfinancial bonds outstanding rated B3 or below over total
bonds outstanding.
Source: Moody’s Investors Service.

1990

1993

1996

1999

2002

2005

2008

* 6-month moving average.
Source: For default rate, Moody’s Investors Service; for
delinquency rate, Call Report.

III-11

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

Sept.

Oct.

Nov. p

3.0
.1
2.9

1.9
.0
1.9

12.2
.0
12.2

1.9
.1
1.8

34.7
24.9
3.1
6.7

14.5
10.5
.7
3.3

12.4
8.6
1.0
2.9

22.9
19.1
.0
3.8

22.2
18.3
.0
4.0

-.4

-.5

6.2

-8.4

6.2

2.2

11.4

21.0

12.5

19.3

55.5

35.1

-6.4

5.3
180.6

8.6
151.7

17.2
66.0

10.5
20.0

20.2
18.4

13.8
2.4

11.6
21.1

2004

4.7
1.8
2.9

5.5
1.6
3.8

3.5
.6
2.9

18.7
8.7
5.2
4.8

29.3
13.1
6.2
10.1

35.1
17.5
7.5
10.0

-.2

2.4

9.6

6.9
134.1

Financial corporations
Stocks1
Bonds2

4.6
1.7
2.8

1.7

Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3

2007

22.4
8.3
8.2
5.9

Bonds2
Investment grade
Speculative grade
Other (sold abroad/unrated)

2006

5.4
1.6
3.8

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

2005

5.0
170.4

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.
p Forecast based on preliminary data.
Source: Depository Trust & Clearing Corporation; Thomson Financial; Federal Reserve Board.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

70
Monthly rate, nonfinancial firms

Commercial paper*
C&I loans*
Bonds

Public issuance
Private issuance
Repurchases
Cash mergers

60
50

50
40

Total

30
20

10
0

-10
20

-20
-30

-40
-50

0
H1

-60

Q3 Oct.
p

Nov.

-70

-10

-80
-20
2004

2005

2006

2007

2008

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

-90
2004

2005

2006

2007

2008

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

III-12

Commercial Real Estate
Rents and Vacancy Rates on Commercial
Properties

Commercial Mortgage Debt
Percent change, annual rate

Percent change from year earlier
24

Quarterly

Rents
(left scale)

Percent
18

Quarterly

12
9
6

16
14

2
Q3

0
-2

12
10

3
-4
0
Q3

-3

Vacancy rates
(right scale)

-6
-8

2000

2002

2004

2006

2008

6
1992

1995

1998

2001

2004

2007

Note. Average of series for office, industrial, and retail
properties.
Source. Torto Wheaton.

Source: Federal Reserve.

Sales of Commercial Real Estate

Prices
Index, 1996:Q4=100

Billions of dollars
140

Quarterly

250
Transacted
property

3-month moving average
Monthly

120

Q3
100

200

80
60

150
All property

40
100

Oct.

20
0

1990

1993

1996

1999

2002

2005

2008

2002

Note: All-property index based on entire NCREIF portfolio.
Transacted-property index based on sales involving NCREIF portfolio.
Source: NCREIF; MIT Center for Real Estate.

Delinquency Rates on Commercial Mortgages

2004

2006

2008

p Preliminary.
Source: Real Capital Analytics.

Delinquency Rates on Commercial Mortgages
at Banks

Percent
Q3

Percent
5

Quarterly

12
Residential
construction

3
At commercial
banks*

CMBS

2
Nov.

At life
insurance
companies

9
Commercial
construction

Existing
properties

3
0

1996

1998

2000

2002

2004

*Excluding farmland.
Source: Citigroup; Call Report; ACLI.

2006

2008

Q2
Q3
2007

Q2
Q3
2008

Note: Data series for residential and commercial construction
begin in 2007:Q1. Existing properties include nonresidential and
multifamily.
Source: Call Report.

III-13

Business Finance
In the nonfinancial corporate sector, gross investment-grade bond issuance remained
solid in November, but there was again no speculative-grade issuance. Issuance of
syndicated loans also continued to be very weak. Nonfinancial commercial paper
outstanding inched up further in November after posting a modest rise in October, while
C&I loans declined somewhat in November after outsized increases in the previous two
months that were mostly attributable to draws on existing credit lines. Overall, net debt
financing by nonfinancial businesses slowed appreciably in November, which reflected
tighter credit conditions—especially for lower-rated credits—and probably also lower
demand for credit as companies pared spending plans.
In October and November, both seasoned and initial equity offerings by nonfinancial
corporations outside the energy sector remained weak. In the third quarter, equity
retirements by nonfinancial firms continued to outpace the combined amount of private
and public issuance, as equity retirements from cash-financed mergers picked up
somewhat with the completion of a few large deals. However, share repurchases are
estimated to have moderated a bit in recent months, and announcements of future cashfinanced mergers have slowed significantly, likely owing to the weaker economic
outlook.
For financial firms, public equity issuance edged down in November. In contrast, gross
bond issuance by financial corporations surged in late November and early December,
with nearly all issuance at maturities less than three years, as some large banking
organizations made use of the FDIC’s temporary liquidity guarantee program.
Commercial Real Estate
Conditions in commercial real estate markets have deteriorated considerably in recent
months. Commercial real estate debt contracted at an annual rate of 2 percent in the third
quarter, held down by declines in property prices, sluggish sales of commercial real
estate, and tight credit conditions. Amid rising vacancies and soft rent growth, the thirdquarter reading of the price index for recently sold commercial properties fell to a level
10 percent below its peak in 2007. In October, sales dropped to their lowest level since
2003. The delinquency rate on commercial mortgages held by banks rose to nearly
5 percent in the third quarter, which mainly reflected a further deterioration in the
performance of residential and commercial construction loans. The delinquency rate on
commercial mortgages held in commercial mortgage-backed securities moved up in
October but remained well below its peak in 2003.

III-14

Residential Mortgages
30-Year Fixed Mortgage Rates

30-Year Conforming Fixed-Rate Mortgage Spread
Percent

Basis points
10.0

Oct.
FOMC

Weekly

9.5

325

Weekly

Oct.
FOMC

300

9.0

Dec.
3

8.5
Nonconforming jumbo

Dec.
3

8.0

275
250

7.5

225

7.0
6.5
Dec.
3

Conforming

200

6.0

175

5.5
150

5.0
4.5

Oct.
Feb.
2006

June
Oct.
2007

Feb.

June
Oct.
2008

125
Oct.
Feb.
2006

Source: Freddie Mac; Inside Mortgage Finance.

June
Oct.
2007

Feb.

June
Oct.
2008

Note: Spread is quoted relative to the on-the-run 10-year Treasury
yield.
Source: Bloomberg; Freddie Mac.

Mortgage Debt

Agency and Non-Agency MBS Issuance
Billions of dollars

Percent change, annual rate
300

Monthly rate
GSEs
Ginnie Mae
Non-agency

Quarterly

250

200

H1
150

100

Q2
Q1
Q3
Oct.

50
Q3

0
2002 2003 2004 2005 2006

2007

2008

2001

2003

2005

Source: Federal Reserve.

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

National Indexes of House Prices

Delinquencies on Mortgages

Percent change, annual rate
Quarterly, seasonally adjusted
FHFA purchase-only
S&P/Case-Shiller
LoanPerformance

1996

1998

2000

2002

2004

-3

2007

2006

2008

Source: Federal Housing Finance Agency; Standard & Poor’s;
LoanPerformance, a division of First American CoreLogic.

Percent of loans
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30

Sept.

Monthly

Subprime*
Alt-A*
Prime

Sept.

2002

2004

2006

2008

Note: Percent of loans 90 or more days past due or in
foreclosure. Prime includes near-prime mortgages.
* Among securitized loans only.
Source: LoanPerformance, a division of First American
CoreLogic.

24
22
20
18
16
14
12
10
8
6
4
2
0

III-15

Consumer Credit and Household Wealth
Consumer Loan Rates

Delinquencies on Consumer Loans
Percent

Percent
6

Credit card loans
in securitized pools

Sept.

Weekly

Credit cards

Nonrevolving
consumer loans at
commercial banks

12
Q3
Oct.

Nov.
30

3
New auto loans

Auto loans at captive
finance companies

2000

2002

2004

2006

8
6
4

1
1998

2008

2001

2003

2005

2007

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

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

Revolving Consumer Credit

Nonrevolving Consumer Credit

Percent change, annual rate
1-month change
3-month change

Oct.

2004

2005

2006

2007

Percent change, annual rate
16
14
12
10
8
6
4
2
0
-2
-4
-6

1-month change
3-month change

Oct.

2008

2004

Source: Federal Reserve.

2005

2006

2007

2008

Source: Federal Reserve.

Net Flows into Mutual Funds
(Billions of dollars, monthly rate)
Fund type
H1
Total long-term funds
Equity funds
Domestic
International
Hybrid funds
Bond funds
High-yield
Other taxable
Municipals
Money market funds

2007
H2

2008
Q2

Oct.

Nov.e

Assets
Oct.

31.5
14.3
0.8
13.5
2.6
14.6
0.2
12.0
2.4
26.3

5.9
1.2
-8.4
9.6
1.1
3.5
-0.7
4.8
-0.6
98.8

1.7
-14.9
-13.4
-1.5
0.7
16.0
-1.3
15.2
2.1
126.9

22.6
7.8
3.3
4.4
2.0
12.9
0.9
8.2
3.7
-14.8

-34.3
-34.5
-18.5
-16.0
-2.7
2.9
-0.3
1.8
1.4
-7.9

-126.8
-72.3
-47.3
-25.0
-14.0
-40.6
-1.4
-30.8
-8.4
146.8

-49.0
-26.4
-17.6
-8.8
-5.6
-17.0
-0.2
-15.6
-1.3
122.1

6,009
3,935
3,048
888
511
1,563
113
1,099
351
3,603

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

16
14
12
10
8
6
4
2
0
-2
-4
-6

III-16

Problems in the Market for Asset-Backed Securities
and the Availability of Auto and Credit Card Loans
The market for consumer loan asset-backed
securities (ABS) has come under severe
strain, with a sharp jump in spreads this fall
and virtually no new issuance since
September.

appear to be funding new loans by stepping
up loan sales to banks and tapping existing
bank credit lines. Finance companies also
appear to be raising interest rates and lending
more selectively—indeed, in mid-October,
GMAC Financial Services announced new
restrictions on lending to higher-risk
customers. Loan originations by the finance
companies associated with the Detroit Three
automakers declined sharply in October,
although this pullback mirrored the drop-off
in sales and likely reflects reduced demand as
well as credit constraints. While some
prospective vehicle buyers may be able to
obtain financing instead from depository
institutions, the majority of loan officers at
commercial banks have reported a tightening
of terms and standards on consumer loans.

In recent years, about one-half of credit
card debt has been funded through the ABS
market. The strains of late in this market
have increased issuers’ funding costs,
which, along with deteriorating household
credit quality, have led lenders to tighten
terms and standards. Although the
aggregate interest rate on variable-rate
credit cards has generally fallen with the
prime rate over the past year, several large
issuers have recently announced rate
increases, particularly for higher-credit-risk
customers. In addition, loan officers are
increasingly reporting that they have
reduced credit limits and are tightening
standards for approving new credit
applications.

Reports of a tighter supply of vehicle loans
may also be discouraging households from
even seeking financing. The share of
respondents to the Reuters/University of
Michigan Surveys of Consumers who
reported that it was a bad time to buy a car
because credit is hard to get has recently
climbed to a level well beyond that seen
during the credit crunch in the early 1980s.

In the auto loan market, finance companies,
which currently account for almost one-half
of the outstanding loans, have used ABS to
fund about one-third of their loans. Now
unable to securitize, finance companies

One Factor That Discourages Households’ Auto Purchases:
Percent
Credit Is Hard to Get

Gross Issuance of Consumer Loan ABS by Type
Billions of dollars

Monthly

Monthly rate
20

Credit card
Auto

15
Nov.

H2 Q1 Q2

10
5

Q4*
2005

2006

2007

2008

Note: Auto includes car loans, leases, and financing for buyers of
motorcycles, trucks, and other vehicles. ABS are asset-backed securities.
*Through Nov. 21.
Source: Inside Mortgage Finance; Merrill Lynch.

0
1978

1984

1990

1996

2002

2008

Note: The series is calculated as the number of consumers citing this
particular factor divided by the number of consumers thinking that
now is a bad time to buy a car. Shaded bars indicate periods of business
recession as defined by the National Bureau of Economic Research.
Source: Reuters/ University of Michigan Surveys of Consumers.

III-17

Household Finance
Over the intermeeting period, interest rates on 30-year fixed-rate conforming mortgages
fell about ¾ percentage point, with most of the decline following the November 25
announcement of the Federal Reserve’s program to purchase MBS issued by the housing
GSEs and Ginnie Mae. Even so, the spread of the conforming mortgage rate over the
10-year Treasury yield rose well above the elevated level posted just before Fannie Mae
and Freddie Mac were taken into conservatorship in early September.
In secondary mortgage markets, issuance of MBS by the housing GSEs slipped further in
October, in part because of reduced primary borrowing amid lower house prices.
Issuance by Ginnie Mae continued to be very strong in October, but the non-agency MBS
market remained closed. Total mortgage debt decreased in the second and third quarters,
the first declines in the history of the series, which extends back to the 1950s.
The national house price index released by the Federal Housing Finance Agency fell
about 6 percent in the third quarter, while the S&P/Case-Shiller and LoanPerformance
national indexes decreased more than twice as much. Falling home prices and the
slowing economy have continued to weigh on mortgage credit quality. In September,
2 percent of prime mortgages, 11 percent of alt-A mortgages, and 24 percent of subprime
mortgages were 90 or more days past due or in foreclosure. These rates are well above
their levels at the start of the year, and the increases have shown no sign of abating.
The credit quality of consumer loans has also continued to deteriorate, albeit less starkly
than for mortgages. The delinquency rates on credit cards in securitized pools, on
nonrevolving loans at commercial banks, and on auto loans at captive finance companies
have all risen significantly, on net, over the course of this year. At this point, though,
none of these delinquency rates has yet reached the level of the last recession.
Interest rates on consumer loans fell over the intermeeting period but by less than
comparable-maturity Treasury yields, leaving spreads a bit wider. Annualized growth in
revolving credit over the three months ending in October was just 1¾ percent, while
nonrevolving credit contracted moderately. Some part of the drop-off is likely related to
weaker demand for loans, but the available evidence also suggests that lenders are
restricting supply and that conditions may tighten yet further in response to the recent
strains in market for asset-backed securities (ABS) (see box “Problems in the Market for
Asset-Backed Securities and the Availability of Auto and Credit Card Loans”). The
recently announced Term Asset-Backed Securities Loan Facility, which is designed to

III-18

Treasury Finance
Foreign Participation in Treasury Auctions

Foreign Custody Holdings

Percent of total issue

Billions of dollars
50

6-month moving average

2000

Oct.
FOMC

Weekly average

Indirect bids

Dec.
3

Treasury

1500

1000

Dec. 1

20
Dec. 1

500

Agency

Actual foreign allotment
0
2000

2002

2004

2006

2008

0
2003

2004

2005

2006

2007

2008

2009

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

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

Treasury On-the-Run Premium

Average Absolute Nominal Yield Curve
Basis points
Fitting Error

Basis points
Oct.
FOMC

Monthly average

Dec.

Daily

Dec.
9

30
25
20

50
40

30
10

10-year note
20

10
0
2001 2002 2003 2004 2005 2006 2007 2008

0
2001 2002 2003 2004 2005 2006 2007 2008

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

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

Treasury Bid-Asked Spread

Daily Treasury Market Volume

Cents per
$100 face value
Oct.
FOMC

5-day moving average

Billions of dollars
300
1.60

Monthly average

250

1.50
1.40

200

1.30
150

1.20
1.10

100

1.00

2-year on-the-run
Treasury notes

Dec.
9

Dec.

0.90
0.80

Feb.

June

2007

Oct.

Feb.

June

2008

Source: BrokerTec Interdealer Market Data.

Oct.

0
2001

2003

2005

2007

2009

Note: December observation is average for month to date.
Source: BrokerTec Interdealer Market Data.

III-19

encourage new issuance in this market, is not likely to be implemented until early next
year.
Amid further drops in asset prices, investors, on net, withdrew substantial amounts from
long-term mutual funds in October and November. Redemptions were widespread
among fund types. Money market funds saw large net inflows in October and November,
and heavy inflows have continued into early December. Inflows to prime funds picked
up in early November after several weeks in which government funds had attracted most
of the new cash.
Treasury Finance
Over the intermeeting period, the Treasury conducted several auctions of nominal coupon
securities but held no auctions of inflation-indexed securities. Issuance of Treasury bills
totaled about $800 billion, including about $250 billion of cash management bills.
However, the decline in the outstanding quantity of bills under the Supplementary
Financing Program led to a drop in Treasury deposits placed at the Federal Reserve.
Market demand for bills remained extremely strong, and the auctions of longer-term
nominal securities were generally well received, with low stop-out rates and high bid-tocover ratios. The reopening of the 30-year bond, however, attracted only tepid interest.
Foreign participation in Treasury auctions was at or above normal levels.
Treasury market functioning continued to be poor over the intermeeting period. Spreads
between on- and off-the-run securities increased to record levels, and bid-asked spreads
remained wide. Volume in the Treasury cash market decreased notably amid ongoing
dislocations in financing markets and reports that market participants are hoarding safe
securities ahead of year-end.
State and Local Government Finance
Conditions in the municipal bond market deteriorated, on net, over the intermeeting
period, despite some improvements in early November. Long-term issuance continued to
rebound in November, mostly for education and transportation projects. Meanwhile,
short-term issuance slowed in November, a development consistent with typical seasonal
patterns.
The credit quality of municipal bonds deteriorated further over the intermeeting period
amid a worsening outlook for the fiscal positions of state and local governments. The
number of municipal bonds downgraded in the third quarter was substantial by historical

III-20

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

2008
Type of security

2004

2006

2007

34.7
29.8
10.8
19.0
4.9

38.4
34.2
15.6
18.6
4.2

36.1
32.5
10.6
21.9
3.7

2.0

Total
Long-term 1
Refundings 2
New capital
Short-term

2005

2.1

2.5

Memo: Long-term taxable

Sept.

Oct.

Nov. p

36.2
29.8
13.0
16.8
6.4

25.1
20.8
9.2
11.6
4.3

30.8
21.6
8.6
13.0
9.3

33.8
29.2
11.8
17.4
4.6

2.4

40.4
35.5
12.6
22.9
4.9

41.5
37.9
17.9
20.0
3.5

2.4

2.7

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.
p Forecast based on preliminary data through December 4, 2008.
Source: Thomson Financial.

Ratings Changes
Number of ratings changes
2400

Annual rate
Upgrades

1800
H1

1200
Q3

600
0
600

Downgrades

1200
1800
2400

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: S&P’s Credit Week Municipal; S&P’s Ratings Direct.

Municipal Bond Yields

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
9

Weekly

Ratio
1.7

Weekly

Dec.
4

1.5

7
20-year general
obligation

Dec.
4

1.6

1.4

1.3

1.2
4

1.1

3
20-year

7-day SIFMA
swap index*
Nov.
26

2005

2006

2007

1.0

2008

* SIFMA is the Securities Industry and Financial Markets
Association.
Source: Municipal Market Advisors; Bond Buyer.

0.9

0.8

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

III-21

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)1

Aggregate and components

(billions
of dollars),

2006

2007

5.1

5.7

7.2

3.6

17.0

8.4

7,934

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

3.5
1.0
18.6
13.1

2.0
4.1
4.3
20.3

.9
7.4
-1.3
22.4

6.8
3.7
9.3
-5.5

22.9
.8
55.8
39.2

14.9
3.6
33.4
-6.6

805
4,719
1,351
1,054

Memo:
Institutional money market funds
Monetary base

15.8
3.1

39.3
2.0

41.8
.8

2.2
16.1

-26.4
298.8

51.9
324.4

2,243
1,434

2008
Q3
Oct.

Level

Nov.

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

III-22
Commercial Bank Credit
(Percent change, annual rate, except as noted; seasonally adjusted)
Type of credit

Level1
Nov. 2008e

2006

H1
2008

Q3
2008

Sept.
2008

Oct.
2008

Nov.
2008e

10.3

Total

2007

11.2

4.6

3.6

14.2

20.7

-13.0

9,545

Loans2
Total
To businesses
Commercial and industrial
Commercial real estate

12.0

12.1

6.5

2.3

11.6

9.8

-10.9

7,175

14.3
13.6

19.1
10.4

13.7
10.2

6.0
1.4

21.7
-1.2

49.5
3.3

-2.4
4.1

1,598
1,724

To households
Residential real estate
Revolving home equity
Other
Consumer
Originated3
Other4

9.9
3.1
12.3
2.9
3.9
21.1

8.4
7.1
8.8
7.9
7.1
17.6

2.4
13.7
-1.2
7.3
7.5
-2.5

-4.9
12.0
-10.8
8.4
5.7
8.7

-5.8
16.7
-13.9
6.3
7.3
62.3

-5.4
22.4
-15.8
10.6
12.3
-9.9

-7.5
5.2
-12.4
6.5
-3.1
-73.8

2,061
580
1,480
875
1,294
917

5.4
2.0
10.7

8.4
-5.8
29.1

-1.0
-1.0
-1.0

7.9
24.1
-9.3

22.4
30.4
13.0

54.6
80.1
24.3

-19.3
59.4
-117.1

2,370
1,401
969

Securities
Total
Treasury and agency
Other5

Note: Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data
have been adjusted to remove the effects of mark-to-market accounting rules (FIN 39 and FAS 115), the initial consolidation of
certain variable interest entities (FIN 46), the initial adoption of fair value accounting (FAS 159), and the effects of sizable
nonbank structure activity in October 2006, March 2007, October 2007, September 2008, and December 2008. Data also
account for breaks caused by reclassifications.
1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels.
2. Excludes interbank loans.
3. Includes an estimate of outstanding loans securitized by commercial banks.
4. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified.
Also includes lease financing receivables.
5. Includes private mortgage-backed securities; securities of corporations, state and local governments, and foreign
governments; and any trading account assets that are not Treasury or agency securities.
e Estimated.
Source: Federal Reserve.

C&I Loan Rate Spreads

Growth of Unused Commitments

Basis points
240

Quarterly

105

Quarterly
Top 25

220
Weighted
average

Mark-to-Market of Non-Agency
Percent
MBS

Percent

100
10

Other

200
5

180

160

-5

Q4
Weighted
average
adjusted*

85
-10

140

-15
1999

2002

2005

2008

Note: Spreads over market interest rate
on an instrument of comparable maturity
on loans less than $25 million (2006$).
*Adjusted for changes in nonprice loan
characteristics.
Source: Survey of Terms of Business
Lending.

1992

2000

2008

Note: Data for 2008:Q3 are adjusted to
remove the effect of JPMorgan Chase’s
acquisition of Washington Mutual.
Source: Call Report.

80
2004

2005

2006

2007

2008

Note: The mark-to-market value of nonagency mortgage-backed securities (MBS)
is defined as the fair value over historical
cost for those banks that hold non-agency
securities.
Source: Call Report.

III-23

standards and far outpaced the number of upgrades. Yields on long-term municipal
bonds rose over the intermeeting period, and ratios of municipal-bond yields to those on
comparable-maturity Treasury securities soared to record highs.
Money and Bank Credit
In November, the growth of M2 slowed markedly from the rapid October pace to an
annual rate of about 8 percent. The deceleration last month was widespread across most
components of M2, with the notable exception of liquid deposits. Growth of small time
deposits stepped down a bit to a still-striking pace of more than 30 percent (annual rate)
as banks continued to bid aggressively for these deposits to buttress their funding. Liquid
deposits expanded moderately in November. Within the liquid deposits component,
flows into demand deposits, which are covered by the FDIC’s new Temporary Liquidity
Guarantee Program, were extremely strong, with an annualized growth rate of more than
150 percent. These funds came in part from shifts out of savings accounts and reportedly
also partly reflected investors’ reallocation of funds from money market instruments.
Currency growth also remained strong, with data suggesting continued strong demand for
U.S. banknotes from abroad. The rapid expansion of the monetary base in recent months
reflects the provision of balances through the Federal Reserve’s liquidity programs.
The surge in bank credit in October gave way to broad weakness in November. C&I
loans outstanding fell slightly in November after having expanded at an annual rate of
50 percent in October, largely because of the financial market turmoil, which led some
nonfinancial companies to draw heavily on their bank lines.1 Consumer loans originated
by banks also declined in November after showing surprising strength in October. A
significant step-down in November in the growth of home equity lines of credit
contributed to weakness in real estate lending. The volatile series “other loans,” which
includes unplanned overdrafts, loans to nonbank financial institutions, and security loans,
continued to reverse the run-up over the previous intermeeting period. The large swings
in securities holdings in recent months were driven mostly by a substantial purchase of
Treasury securities in October by one institution taking advantage of easier access to
funding at its commercial bank than at its broker-dealer subsidiary and to another large
bank steadily reducing its participation in the AMLF since mid-October.
The third-quarter Call Reports for commercial banks showed a further drop in unused
commitments to extend loans, consistent with reports of widespread tightening of credit
1

The share of loans made under commitment in the November STBL increased slightly to a new high
of 91 percent, in line with other reports of heavy draws from credit lines.

III-24

standards. The banking industry’s return on assets fell to 0.26 percent, its lowest level
since the fourth quarter of 1990. Profits were eroded by realized losses on available-forsale securities and higher loan-loss provisions. The overall delinquency rate rose to
3½ percent, with an increase in almost all loan categories, and the ratio of charge-offs to
assets increased to nearly 1 percent. In addition, the fair value of non-agency mortgagebacked securities declined significantly further to 85 percent of book value in the third
quarter. Dividends exceeded net income for the second consecutive quarter.
Last Page of Domestic Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit narrowed to $56.5 billion in September, as a large
decline in imports more than offset a sizable fall in exports.

In September, the value of exports of goods and services declined 6 percent; declines
were widespread but largely concentrated in industrial supplies and capital goods. The
fall in exports of industrial supplies primarily reflected a decrease in the value of exports
of fuels and chemicals due to both lower prices and transportation disruptions caused by
Hurricanes Gustav and Ike. The fall in exports of capital goods primarily reflected a
decline in exports of aircraft and parts due to a strike at Boeing. Exports of automotive
products, consumer goods, and services also moved down.
Although exports declined in both August and September, rapid increases in previous
months boosted the average value of exports in the third quarter by 12.3 percent at an
annual rate. The increase was supported by strong exports of industrial supplies,
although other major categories of exports also exhibited large gains.

IV-1

IV-2

IV-3

IV-4

The value of imports of goods and services fell 5.6 percent in September, with imports of
oil and consumer goods recording particularly large declines. The decline in oil imports
reflected both a decrease in the volume of oil imports, partly on account of hurricanerelated shipping disruptions, and a decrease in prices. The decline in consumer goods
partly reflected a large fall in imports of pharmaceuticals, which tend to be volatile.
Imports of non-oil industrial supplies and automotive products also moved down.
Imports of services fell back after being boosted in August by royalty payments
associated with the 2008 Summer Olympics. In contrast, imports of capital goods
recorded a small increase following a decrease in August.
Despite declines in August and September, the average value of imports in the third
quarter increased 6.4 percent at an annual rate. The increase largely reflected increased
imports of oil, on account of higher prices (early in the quarter) as volumes declined.
Industrial supplies, consumer goods, and services also recorded sizable gains. In
contrast, imports of capital goods, particularly aircraft and computers, as well as
automotive products exhibited declines.
Prices of Internationally Traded Goods
Non-oil imports. In October, prices of core imports fell 0.9 percent, the largest onemonth decline over the 14-year history of the index. This decline, combined with the
0.5 percent decline in September, reversed much of the increases reported in the previous
three months. The October decline reflected a 2.8 percent drop in the prices for materialintensive goods, which was due to both falling food prices and, more important, falling
metals prices. In contrast, prices for finished goods were little changed, as slightly higher
prices for consumer goods and automotive products were offset by falling prices for
capital goods excluding computers and semiconductors.
Oil. The Bureau of Labor Statistics (BLS) price index of imported oil fell nearly
17 percent in October, marking the third consecutive monthly decline. The index has
fallen more than 32 percent since July, the largest three-month decline since early 1991.
The spot price of West Texas Intermediate crude oil (WTI) also declined in October,
falling 26 percent to an average of $77 per barrel for the month as a whole. Since that
time, the spot price of WTI has continued to decline, closing most recently on December
9 at $42.07 per barrel. The continued decline in oil prices reflects the worsening
prospects for global economic activity and global oil demand.

IV-5

IV-6

IV-7

Exports. Following a 0.9 percent decline in September, prices of exported core goods
fell 2.2 percent in October. The sharp decline in October largely reflected an 8.7 percent
fall in prices of agricultural goods. Prices of non-agricultural industrial supplies fell
3.8 percent in October, following a 2.7 percent drop in September. In contrast to prices
for material-intensive goods, prices for finished goods rose 0.4 percent in October, a stepup from the 0.1 percent increase recorded in September. All major categories within
finished goods saw comparable increases. According to the BLS, the 0.4 percent price
increase for automotive products is partially attributable to year-end model changeovers.

IV-8

U.S. International Financial Transactions
Since the October Greenbook, we have received data on U.S. international financial
transactions for September and October, along with partial and confidential data on
custody accounts at the Federal Reserve Bank of New York (FRBNY) through
November. During these months of intensified turmoil, exchange market intervention
affected foreign official flows, the reciprocal currency swaps, (which enhanced dollar
liquidity abroad) led to increased private banking inflows, and the strong preference of
foreigners for Treasury securities over other U.S. securities became still more apparent.
Foreign official flows changed from robust net purchases of U.S. securities in September
to unusual net sales in October (line 1 of the “Summary of U.S. International
Transactions” table and the chart “Foreign Official Financial Inflows through October
2008”) as several countries intervened in foreign exchange markets.
.
. China’s
acquisitions of Treasury securities jumped in September but then fell back in October and
November to more typical rates, thereby contributing to the October swing to official net
sales.
Stepped-up drawings on the reciprocal swap facilities (included in line 2) generated
significant official outflows in September and October as the Federal Reserve acquired
deposit claims on partner central banks. The corresponding, or “offsetting,” inflows
could appear anywhere in the financial accounts, but, given the nature of the funding
pressures abroad, we would anticipate a sizable reduction in U.S. net lending to foreign
banks to generate some of these inflows. Indeed, from August 2007 to August 2008,
banking positions with foreigners (line 3) had been posting consistent outflows averaging
about $45 billion per month, but these changed to inflows of $6 billion in September and
an unprecedented $204 billion in October. This shift in funding flow was more than
accounted for by reduced U.S. bank lending to foreign banks (as distinct from other
foreign entities) of $132 billion in September and $266 billion in October.
Foreign private purchases of U.S. securities totaled $42 billion in September and
$48 billion in October (line 4), exceeding their pace from earlier in the year. However,
the composition of these inflows was even more heavily weighted toward Treasury
securities than was the case earlier. In particular, private foreigners, on net, purchased a
staggering $104 billion in Treasury securities in October (line 4a), more than double the

IV-9

previous high of April 2008. In contrast, private foreigners continued to sell corporate
bonds in September and October (line 4c). Private foreign transactions in agency bonds
returned to net sales in October after a brief renewal of net purchases in September, the
month that conservatorship was announced for Fannie Mae and Freddie Mac (line 4b).
Finally, foreign net purchases of equity were relatively strong in September, following
weakness earlier in the quarter, but returned to net sales in October (line 4d).
After many years of quarterly net purchases, U.S. residents, on net, sold $85 billion in
foreign long-term securities in the third quarter of 2008 (line 5). The pace of net sales
then increased in October to $34 billion for the month. In addition, U.S. residents
reduced investments in foreign short-term securities by $35 billion and in foreign
deposits by $62 billion during the third quarter. (These data, not shown, will be included
in line 10 upon the release of the third-quarter balance of payments accounts.)
Reductions in these financial sector investments are consistent not only with a reduced
desire for foreign exposure but also with the easing effect of the currency swaps on
foreign banks’ dollar funding needs. Overall, the third-quarter reduction in all types of
U.S. investments abroad totaled more than $180 billion, generating a significant portion
of the quarter’s net inflows.

IV-10

IV-11

IV-12

IV-13

Foreign Financial Markets
Clear evidence of a slowdown in activity and the rapid waning of inflationary pressures
prompted central banks in advanced foreign economies to lower their policy interest
rates, and long-term sovereign bond yields in these economies dropped sharply. Net
movements in equity prices and exchange rates were more moderate, although the
volatility of these asset prices continued to be high amid further uncertainty about the
severity and the duration of the ongoing global recession
Conditions in interbank funding markets have improved on net since the October
Greenbook, with one-month Libor-OIS spreads in euro, sterling, and dollars narrowing,
particularly in dollars. The basis spread implied by foreign exchange swaps between the
dollar and the euro rose slightly in November, consistent with continued dollar funding
pressure for some institutions, but the spread has declined sharply in the past few days as
funding pressure seems to have abated since early December. There were relatively few
new initiatives by governments in the major foreign economies aimed at stabilizing
funding markets, but a number of European governments did clarify the debt guarantee
programs they had initiated in October, and a few banks began to issue debt backed by
those programs.
Ten-year nominal sovereign bond yields, which changed relatively little in the previous
period, dropped about 90 basis points in the United Kingdom, and 50 to 60 basis points in
Germany and Canada. Corporate spreads (both investment-grade and lower-rated)
changed little in the euro area, but they rose in the United Kingdom, Canada, and Japan.
Equity indexes, which suffered very large drops in September, remained highly volatile
but registered more moderate net movements in October. The FTSE 100 rose 8 percent,
and the Dow Jones Euro Stoxx changed little on net. Japan’s TOPIX index dropped
6 percent, about as much as the S&P 500. Banking sector share prices fell sharply in the
euro area and in the United States.
The major currencies index of the dollar has changed little on net since the time of the
October Greenbook, but some bilateral exchange rate movements have been more
substantial. The dollar depreciated 1 percent on net versus the euro and 6 percent against
the Japanese yen, which seemed to be boosted by a continued reduction in carry trades.
But the dollar appreciated 9 percent versus sterling. Implied volatilities in most currency
pairs remained elevated, although well below the multiyear highs reached in the previous
intermeeting period.

IV-14

On October 29, the Federal Reserve announced the establishment of temporary reciprocal
currency agreements (swap lines) with the central banks of Brazil, Mexico, and Korea,
and with the Monetary Authority of Singapore. These facilities, designed to address
dollar funding pressure in these economies, can support the provision of dollar liquidity
in amounts of up to $30 billion to each of the central banks. Financial markets in the four
countries reacted positively to the announcements, including, in most cases, a narrowing
of their sovereign spreads and an appreciation of their domestic currencies. By the end of
the intermeeting period, only the Bank of Korea had drawn on its swap line and auctioned
dollar funding to its banks. The Bank of Korea auctioned $4 billion of 84-day funds on
December 2 at a weighted-average interest rate of 6.84 percent, and $3 billion of 84-day
funds on December 9 at a weighted-average interest rate of 5.58 percent; the interest rates
in both auctions were well above 3-month dollar Libor.
Exchange rate movements against emerging market currencies were much more moderate
than in the previous period. In aggregate, the dollar has changed little against the
currencies of our other important trading partner since the October Greenbook. The
dollar appreciated 5 percent versus the Brazilian real, was little changed on net against
the Mexican peso and the Chinese renminbi, and depreciated 3 percent versus the Korean
won. There continued to be reports of foreign exchange intervention by a number of
emerging market countries in support of their domestic currencies. Following a few days
when Chinese authorities let the renminbi depreciate a bit more than had previously been
allowed, some concerns arose that the Chinese government was considering guiding the
renminbi to depreciate against the dollar to help boost exports. By the end of the period,
nondeliverable forward renminbi exchange rates were pricing in a 4 percent depreciation
of the renminbi against the dollar over the next 12 months.
Equity indexes were mixed in Latin American and Asian markets over the period. The
Chinese government’s announcement of a large fiscal stimulus package may have helped
support Chinese equity prices, which rose 10 percent on net. Equity markets in the
emerging market economies were likely supported as well by further steps by a number
of governments to help stabilize funding markets and to increase spending. Sovereign
yield spreads in Latin America and emerging Asia declined from their peaks of
mid-October, but remained quite elevated.

IV-15

IV-16

IV-17

IV-18

IV-19

IV-20

Developments in Advanced Foreign Economies
Economic activity in most advanced foreign economies contracted in the third quarter,
driven by sharp declines in investment and significant negative contributions of net
exports, as the recession took hold more strongly. Real GDP in Canada increased at a
faster-than-expected pace, although consumption and investment continued to soften.
Incoming data point to an even weaker pace of activity in the fourth quarter. Confidence
indicators plunged and have now reached levels not observed since the early 1990s. In
November, the euro-area and U.K. purchasing managers indexes (PMI) fell to levels
associated with severe contractions in economic activity. Labor market conditions
deteriorated further, with rising unemployment rates in most countries.
After peaking during the third quarter, consumer price inflation has moderated in all
advanced foreign economies, primarily as a result of falling energy and food prices.
Faced with clear evidence of a slowdown in economic activity and rapid waning of
inflationary pressures, all major central banks lowered policy rates in the intermeeting
period. The Bank of England slashed its base rate a total of 250 basis points and the
European Central Bank by 125 basis points. The Bank of Canada lowered its overnight
target rate by 75 basis points. The Bank of Japan lowered its target for the overnight call
rate by 20 basis points, to 30 basis points.
Since the last Greenbook, a number of countries have announced fiscal stimulus packages
to cope with the slowdown in economic activity. However, given the nature of the
measures announced – mostly tax exemptions for private investment and increased
spending for public infrastructure – fiscal policy will likely have limited impact in the
current and upcoming quarters.

IV-21

IV-22

In Japan, GDP fell 1.8 percent (s.a.a.r.) in the third quarter after falling a downwardly
revised 3.7 percent in the second quarter. Domestic demand declined, as a modest
rebound in private consumption was offset by a sharp drop in private investment. Private
investment has fallen in five out of the past six quarters. Net exports subtracted
0.5 percentage point from GDP growth, with a bounceback in imports outpacing that of
exports.

More recently, exports fell 3.2 percent in October following declines in August and
September. Household spending has been anemic, and housing starts fell almost
9 percent in October from the previous month, continuing a long decline. Industrial
production plummeted in October and is currently 7 percent below its October 2007 peak.
The job openings-to-applicants ratio (the number of officially posted job openings
relative to the number of officially registered job seekers) in October hit its lowest level
since May 2004.

IV-23

IV-24

Japanese twelve-month consumer price inflation was 1.7 percent in October, down
sharply from 2.1 percent in September, reflecting a decline in food and energy prices.
Excluding food and energy prices, consumer prices rose 0.2 percent from the previous
year.
On October 31, the Bank of Japan lowered its policy rate 20 basis points to 0.3 percent.
Market participants seem to expect further easing by the Bank of Japan in 2009, although
Governor Shirakawa has repeatedly expressed concerns about the negative impact of a
policy rate near zero on the functioning of money markets.
The Japanese government announced an ¥26.9 trillion fiscal stimulus on October 30
(5.2 percent of GDP). The majority of the package is allocated to credit guarantees for
small and medium-sized enterprises. The remaining measures include modest taxpayer
rebates, increased tax breaks on mortgages, and a decrease in highway tolls. Actual
government expenditure is expected to increase by ¥5 trillion (1.0 percent of GDP).

IV-25

In the euro area, real GDP contracted 0.8 percent (s.a.a.r.) in the third quarter, with GDP
for Germany and Italy falling about 2 percent. Domestic demand rebounded somewhat
from the poor second-quarter performance; additional declines in investment were offset
by increases in total consumption and inventories. A surge in imports provided sizable
negative contribution of net exports to headline growth.
Recent indicators suggest considerable weakness in the current quarter. In October, the
volume of retail sales fell 0.8 percent, with marked declines in Germany and Spain, and
the unemployment rate increased to 7.7 percent. November PMI figures for
manufacturing and services dropped sharply to the lowest level since the early 1990s.
Consumer and industrial confidence indicators continued to plunge in November.
Twelve-month consumer price inflation in the euro area in November fell to 2.1 percent,
according to the flash estimate, down from 3.2 percent in October and a peak of 4 percent
in July. Although components are not yet available, the marked moderation in November
appears to reflect the recent fall in oil and other energy prices.
The European Central Bank cut its policy rate 50 basis points in early November and an
additional 75 basis points on December 4. The policy rate now stands at 2.5 percent.
The central bank stated that the downside risks to growth have increased in response to
the recent financial developments and inflationary pressures have diminished further.
In the last month, the European Commission has officially stated that it will allow
national governments to temporarily breach the 3 percent budget deficit limit imposed by
the Stability and Growth Pact, in application of the “exceptional circumstances” clause.
Several governments—including Germany, France, Italy, and Spain—have announced
fiscal stimulus packages. However, the measures adopted so far only include modest
corporate tax credits for new investments or increases in expenditures for public
infrastructure.

IV-26

IV-27

Real GDP in the United Kingdom shrank 2.0 percent (a.r.) in the third quarter.
Domestic demand plummeted, decreasing for the third consecutive quarter, and net
exports made a negative contribution.

Incoming data point to further weakness in the fourth quarter. Unemployment claims
continued to rise in October, and retail sales posted a small decline. In November,
business confidence plummeted to a level not seen since the trough of the early 1980s
recession, and consumer confidence was at its lowest level since 1992. The November
readings of the PMIs are consistent with a severe contraction in the manufacturing,
services, and construction sectors. The housing sector is still under significant stress;
housing prices have fallen 15 percent since their peak, and mortgage lending remains
constrained.
On November 24, the U.K. government unveiled a £20 billion (1.4 percent of GDP) fiscal
stimulus package effective over the current and next fiscal year. The value-added tax
(VAT) rate was temporarily lowered from 17.5 percent to 15 percent until December 31,
2009. The measure is expected to cost £12.5 billion in lost revenues. In addition, the
government permanently increased tax exemptions for individuals and brought forward
almost £3 billion of spending in public infrastructure to 2009.

IV-28

Twelve-month consumer price inflation in October moderated from 5.2 percent to
4.5 percent as a result of falling commodity and energy prices. The Office for National
Statistics estimates that the reduction in the VAT will shave an additional 1.3 percentage
points from inflation in December.
On December 4, the Bank of England cut its main policy rate 100 basis points to
2.0 percent, citing additional deterioration in economic activity and considerable stress in
credit markets as important factors contributing to the monetary policy decision.
The rate cut followed a 150 basis-point reduction in the policy rate in November.

IV-29

IV-30

In Canada, real GDP rose an unexpectedly rapid 1.3 percent (s.a.a.r.) in the third quarter,
following a 0.6 percent increase in the second quarter. Both consumption and investment
provided softening, yet positive, contributions to growth. Net exports provided no
contribution to growth with a marked decline in imports balancing a reduction in exports.

Third-quarter strength does not appear have continued into the fourth quarter.
In November, employment declined 0.4 percentage point, posting the largest monthly
loss since 1982. The unemployment rate increased to 6.3 percent, and housing starts fell
almost 19 percent from the previous month. The PMI dropped sharply into the
contraction region after a weak October reading.
Twelve-month consumer price inflation slowed to 2.8 percent in October and
core inflation remained at 1.7 percent. The reduction in consumer price inflation reflects
primarily the recent fall in food and energy prices. On December 9, the Bank of Canada
lowered the overnight rate target 75 basis points to 1.5 percent, stating that the country is
entering a recession.

IV-31

IV-32

Economic Situation in Other Countries
Economic activity in most emerging market economies decelerated sharply in the third
quarter. In Mexico and India, however, a surge in agricultural output helped to support
growth. Recent data on industrial production, retail sales, PMIs, and business and
consumer confidence suggest that growth has likely remained depressed in the current
quarter as well. Headline inflation generally declined across emerging market
economies, due primarily to lower food and energy prices and, in some cases, to weaker
economic activity, but Brazil and Mexico are notable exceptions. With inflation
moderating and growth slowing significantly, authorities in several countries loosened
monetary policy and announced fiscal stimulus packages.
In China, growth slowed to an estimated 5.4 percent (a.r.) in the third quarter, half the
pace of the previous quarter. Indications are that growth has likely continued to slow in
the current quarter. In October, industrial production contracted for the fourth straight
month. The trade surplus widened in October and November as exports fell less than
imports. However, exports in November were below year-ago levels for the first time
since 2001. Domestic demand has held up well, with retail sales in October up
22 percent from a year earlier, roughly the pace recorded in September. With the slowing
of the economy and declines in commodity prices, twelve-month headline inflation
dropped sharply to 4 percent in October.
Over the past few months, Chinese authorities have shifted their focus from containing
price pressures to supporting growth. Since the time of the October Greenbook, the
People’s Bank of China has lowered the one-year benchmark bank lending rate by
135 basis points and has also lowered deposit rates and reserve requirements. In addition,
the government announced a large fiscal stimulus package totaling 16 percent of 2007
GDP over the next two years. Nearly half of the spending is slated for infrastructure
investment, and the remainder is to be allocated to rural development, health care,
education, and various projects to protect the environment and spur technological
innovation. It is unclear, however, how much new stimulus is included in the package,
particularly given uncertainties over the funding and timing of the expenditures.
Moreover, the total value of the package includes projects that had been previously
announced, including the reconstruction of areas affected by the Sichuan earthquake in
May.

IV-33

India’s real GDP grew at a surprisingly strong 8¼ percent pace in the third quarter.
Manufacturing production was weak and exports contracted, but activity in the
agricultural, mining, and construction sectors rebounded sharply from their depressed
second-quarter levels. Little hard data are yet available for the fourth quarter, but
anecdotal evidence suggests that exports fell sharply in October and that overall
economic activity is slowing. Although consumer price inflation moved up, the closely
watched wholesale price inflation declined further, to 11 percent in the twelve months
ended in October.
The Reserve Bank of India cut its policy rate a total of 150 basis points, to 6½ percent, in
two consecutive meetings in November and December. In addition, the central bank took
a number of measures aimed at increasing liquidity and access to credit, including a
350 basis point reduction in the reserve requirement ratio, an increase in the ceiling on
foreign borrowing for non-bank financial companies and mutual funds, and a repurchase
of sterilization bonds. In early December, the government announced a fiscal stimulus
package valued at approximately 1 percent of GDP, which includes expenditures on
public infrastructure, a reduction in the value added tax, and assistance to small and
medium enterprises. The government also announced a 10 percent reduction in retail fuel
prices.

IV-34

IV-35

IV-36

In the NIEs 1, economic activity fell sharply in the third quarter as the slowdown in global
activity weighed significantly on the region’s exports and the deterioration in financial
conditions adversely affected sentiment and domestic demand. Real GDP contracted in
both Singapore and Hong Kong for the second consecutive quarter, plunged over
10 percent (a.r) in Taiwan, and expanded only 2 percent in South Korea. Recent data
suggest that activity has remained weak in the current quarter. Industrial production for
Singapore, Korea, and Taiwan fell in October. Other indicators of activity, such as PMI
surveys, retail sales, and consumer and business sentiment, also point to weak activity.
Incoming trade data for the current quarter generally show significant improvements in
trade balances, including a swing to surpluses in Korea and Taiwan from deficits in
previous months. Exports generally contracted, but this was more than offset by declines
in imports owing to lower commodity prices and weaker domestic demand.
Inflation declined further across the NIEs as food and energy prices continued to retreat.
With inflation rates falling and economic growth slowing rapidly, central banks
continued to ease monetary policy. The monetary authorities of Taiwan and Hong Kong
cut their policy rates by 50 basis points. The Bank of Korea cut its policy rate by 75 basis
points in late October and again by 25 basis points in early November. In addition,
governments are loosening fiscal policy. South Korea is implementing a previously
announced fiscal stimulus package estimated at 3¾ percent of GDP. Taiwan announced
the distribution in January of consumption vouchers worth nearly 1 percent of GDP, and
Hong Kong is proceeding with implementing previously announced infrastructure
spending.

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

IV-37

IV-38

IV-39

IV-40

In the ASEAN-4 2 region, growth fell significantly in the third quarter owing primarily to
a contraction in exports. Early indicators for the fourth quarter suggest that activity
remains weak. In October, exports fell in Indonesia, Malaysia, and Thailand. Indicators
of business and consumer confidence as well as retail sales data have been weak. Across
the region, twelve-month headline inflation has continued to decline, reflecting the
moderation in food and energy prices. In response to slowing growth and moderating
inflation, the Bank of Thailand cut its policy rate 100 basis points in early December. In
a surprise move, the central bank of Malaysia cut its policy rate 25 basis points, the first
rate change since April 2006. Bank Indonesia began to loosen policy, lowering its policy
rate 25 basis points to 9¼ percent in early December.
In early November, the Malaysian government announced a $2 billion fiscal stimulus
package to develop the country’s infrastructure. In Thailand, an already fragile political
situation deteriorated further over the past few weeks when protests caused the country’s
largest airport to shut down, stranding thousands of tourists. Subsequently, Prime
Minister Somchai Wongsawat resigned after the Constitutional Court banned him from
politics for five years and dissolved the country’s top three ruling parties for electoral
fraud. A special election is expected to be held soon.

ASEAN-4 economies: Indonesia, Malaysia, Philippines, and Thailand.

IV-41

IV-42

IV-43

IV-44

In Mexico, third-quarter real GDP grew at a higher-than-expected pace of 2½ percent,
owing primarily to a surge in agricultural output. Activity in other sectors generally
remained weak; industrial production fell, and the trade deficit widened. The impetus
from the agricultural sector will likely wane, and recent indicators of activity have
deteriorated, suggesting that growth will fall in the current quarter. In October, exports
contracted on account of weak U.S. demand, and business and consumer confidence as
well as the manufacturing PMI plunged. Despite tepid domestic activity and the fall in
global commodity prices, twelve-month headline and core inflation remain elevated,
reflecting the pass-through of previous increases in food and energy prices as well as the
effect of the sharp depreciation of the peso against the U.S. dollar.
Mexico has taken a number of steps to contain the effect of the financial turmoil. The
Bank of Mexico intervened in the foreign exchange market to support the depreciating
peso. The Mexican government unveiled a fiscal stimulus package estimated at 1 percent
of GDP, and the lower house of Congress passed a bill that authorizes private investment
in PEMEX, the state’s oil monopoly. Mexico’s oil export revenues are partially shielded
from the recent declines in crude oil prices because of put options that give the country
the right to sell its oil production for at least $70 per barrel over the next year.

IV-45

In Brazil, third-quarter real GDP grew at an annual rate of 7½ percent, up 1 percentage
point from the pace in the first half of the year. Growth was supported by strong
domestic demand, with consumption and investment up 11½ percent and nearly
30 percent, respectively. Indications are that activity has slowed significantly in the
current quarter. In October, industrial output fell nearly 2 percent. The decline was
broad-based and led by a sharp fall in production of consumer durables. In addition,
preliminary data indicate that auto production and sales, which fell sharply in October,
continued to decline in November. Signs of the weakening economy are also apparent in
the external sector where exports have plummeted. Headline inflation remained elevated;
with consumer prices rose 6.4 percent for the twelve months ending in October. Since
the October Greenbook, the central bank has continued to relax reserve requirements in
an attempt to improve access to credit for smaller banks and to the private sector, but it
has kept its target policy rate on hold at 13¾ percent since September.

IV-46

In Argentina, indicators for the third quarter have generally been mixed, but on balance
point to a moderation of activity. Exports improved following a resolution of the conflict
between farmers and the government over a proposal to tax exports, and industrial
production was up, but other indicators such as retail sales suggest that domestic demand
was lackluster. In October, industrial production fell and exports contracted sharply.
Confidence indicators deteriorated further, weighed down by rapid declines in
commodity prices and the government’s decision to nationalize the private pension funds,
which prompted large capital outflows. In November, the government unveiled a fiscal
stimulus plan, calling for expenditure of more than $21 billion on public infrastructure
beginning in mid-December. In addition, the government announced tax breaks for
Argentineans who repatriate their funds and debt relief for small businesses and firms
that encourage employment. Twelve-month consumer price inflation fell to 8.4 percent
in October due to weak domestic demand and declines in commodity prices; however, the
reliability of the official inflation data remains questionable.

IV-47

Venezuelan real GDP growth slowed sharply in the third quarter to 2¾ percent as nonpetroleum output stagnated. Twelve-month headline inflation remained elevated at over
30 percent in November. The Venezuelan government repurchased $800 million of its
external debt. As expected, Chavez supporters won the majority of governorship and
local posts during the November elections because the Chavez-controlled Supreme Court
barred roughly 300 opposition candidates from running. Since the election, Chavez has
called for additional nationalizations and for another referendum to allow him to stay in
power indefinitely.

IV-48

IV-49

In Russia, third-quarter growth fell to 2¼ percent, down from 6 percent in the second
quarter, due to the declines in oil and other commodity prices, and the effect of stresses in
financial markets. Since then, conditions appear to have deteriorated further. In October,
retail sales and industrial production declined, and business confidence sank. Inflation
remained high, at more than 14 percent over the twelve months ending in October.
Russia’s financial system has been under considerable stress, as the global crisis revealed
the Russian corporate sector’s dependence on foreign borrowing. The central bank raised
interest rates 100 basis points to 13 percent in early December and intervened in the
foreign exchange market to support the ruble. Reflecting the interventions, the provision
of dollar funding to Russian banks and corporations, and valuation effects of the eurodenominated portion of the reserves, international reserves fell to $450 billion at the end
of November, down from a peak of $600 billion last summer.

Last Page of Part 2

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 15-16, 2008 : Greenbook Part 2

FRASER