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Class III FOMC - Internal (FR)

Part 2

December 9, 2009

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 9, 2009

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
The recovery in economic activity appears to be gaining momentum. Consumer
spending posted a robust gain in October, and sales of light vehicles climbed again in
November. Sales of both new and existing homes also registered solid increases in
October, and inventories of unsold new homes fell further. Although spending on
nonresidential structures continued to contract sharply in October, shipments of capital
goods have leveled off, on balance, in recent months. At the same time, industrial
production has continued to rebound from the low level reached earlier in the year.
Moreover, the decline in private payroll employment in November was the smallest since
the start of the recession, and the unemployment rate ticked down. Nonetheless, the
jobless rate and other estimates of slack in resource utilization remained substantial in
recent months, and consumer sentiment indexes were still at low levels. Meanwhile, a
sharp rise in energy prices pushed top-line inflation higher, even as the rise in core
consumer prices remained subdued.
Labor Market Developments
The pace of job loss has slowed considerably in recent months relative to the steep drops
that occurred in the first half of the year. Private nonfarm payroll employment declined
an estimated 18,000 in November after three months in which declines averaged about
140,000 per month. Moreover, the recent improvement in the employment situation was
widespread across most industries. Of particular note, the temporary help services
industry—often considered a bellwether of developments in the labor market—added
nearly 40,000 jobs per month during the past three months. Employers also appear to
have begun lengthening workweeks, which can be a precursor to a pickup in hiring. The
average workweek for production and nonsupervisory workers rose 0.2 hour to
33.2 hours in November, and aggregate hours worked for this group increased 0.6
percent, the first significant increase since the recession began.
As with the payroll data, key measures of labor market slack from the household survey
have continued to weaken over the past several months, on balance, but more gradually
than earlier in the year. Between June and November, the unemployment rate moved up
½ percentage point to 10 percent after having risen more than 2 percentage points in the
first half of the year. Likewise, the fraction of workers working part time for economic
reasons has increased only slightly in the second half of the year. However, the labor
force participation rate, which held steady earlier in the recession, has moved down
steeply since the spring.
__________________________
Note: A list of abbreviations is available at the end of Part 2.

II-1

II-2

Changes in Employment
(Thousands of employees; seasonally adjusted)
2009
Measure and sector

2008

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
Federal 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

-257
-270
4
-73
-58
-57
-35
-22
-16
-44
-19
-44
19
14
3
-246

-691
-695
-12
-202
-176
-124
-53
-71
-36
-55
-51
-73
-25
4
10
-817

-428
-425
-11
-140
-117
-80
-26
-54
-20
-27
-35
-28
19
-3
3
-230

-199
-171
-5
-46
-55
-63
-15
-48
-9
-35
-16
5
25
-28
3
-444

-139
-100
-1
-41
-40
-53
-6
-46
-7
-40
-11
17
39
-39
2
-785

-111
-157
-6
-51
-56
-56
-9
-47
-3
-44
-10
44
-11
46
17
-589

-11
-18
-1
-41
-35
-27
-3
-24
-12
-15
-10
52
26
7
1
227

-3.3
33.6
40.8

-8.9
33.2
39.6

-7.8
33.1
39.5

-2.5
33.1
39.9

-.1
33.1
40.0

-.4
33.0
40.1

.6
33.2
40.4

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

200

400

200

35.0

Hours

2002 = 100
Aggregate
hours
(right scale)

110
108

34.5
106

Nov.

0
34.0

-200

-400

104

Workweek
(left scale)

102

-400

33.5

100
98

-600

33.0

Nov.
96

-800

2000

2002

2004

2006

2008

2010

-800

32.5

2000

2002

2004

2006

2008

2010

Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical lines
represent the last business cycle peak as defined by the NBER.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

II-3

Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2009
Rate and group

2008

Sept.

Oct.

Nov.

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

5.8
18.7
10.2
4.8
4.4

8.1
21.3
13.0
7.4
6.2

9.2
22.7
15.0
8.8
6.9

9.6
25.1
15.1
9.4
7.1

9.8
25.9
14.9
9.7
7.3

10.2
27.6
15.6
9.7
7.6

10.0
26.7
16.0
9.6
7.3

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

66.0
40.2
74.4
75.4
60.0

65.6
38.3
73.7
74.6
60.0

65.8
38.4
74.1
74.9
60.3

65.4
37.5
72.9
74.9
59.9

65.2
36.9
72.3
74.8
59.7

65.1
36.2
71.5
74.7
59.7

65.0
35.8
71.8
74.4
59.6

Unemployment Rate and Persons Working
Part Time for Economic Reasons
11

Percent of household employment

Percent of labor force

Labor Force Participation Rate
11

Percent

67.5

Nov.
10

67.0

66.5

66.0

65.5

6
5

Persons working part
time for economic
reasons (left scale)

4
65.0

3
2

66.5

Unemployment rate (right scale)

6
5

67.0

65.0

3
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Nov.
64.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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

1.8

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

Job Losers Unemployed
Less Than 5 Weeks

64.5

Layoffs and Initial Claims

Percent of household employment

1.8

3.0

Percent of private employment

Thousands

700
650

1.6

1.4

600

2.5

1.2

Nov.

1.2

2.0

Nov.
28

500

Layoffs and discharges
(left scale)
Oct.

1.0

0.6

0.8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Thick line is the 3-month moving average.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

0.6

450
400

1.5
0.8

550

350
Initial claims
(right scale)

1.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

300
250

Note: Data for initial claims are 4-week moving averages.
Source: For layoffs and discharges, Job Openings and
Labor Turnover Survey; for initial claims, U.S. Dept.
of Labor, Employment and Training Administration.

II-4

Labor Market Indicators

Hires and Hiring Plans

Job Openings
110

Percent of private employment
plus job openings

Index, 1980=100

100

4.5

4.0
3.5

2.0

1.5

0
-5

0.5

-10

4.5

4.0

70
60
Composite
Help Wanted
Index* (left scale)

50
40

Oct.
Nov.

30
20

2000

2002

2004

2006

2008

2010

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

Weeks

Hiring plans*
(left scale, 3-month moving average)

Percent of unemployed

45
40

Nov.

Mean (left scale)
30

Nov.

2000
2002
2004
2006
2008
2010
*Percent planning an increase in employment minus
percent planning a reduction. Seasonally adjusted by
FRB staff.
Source: For hires, Job Openings and Labor Turnover Survey;
for hiring plans, National Federation of Independent Business.

Millions

Nov.
14

2004

2006

2010

Nov.
21

3
2

3
Regular state programs
2000

2002

2004

2006

2
2008

2010

Expected Labor Market Conditions

Percent

Index

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

Job Availability and Hard-to-Fill Positions

5
4

*Unemployed more than 26 weeks.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Incl. extended and
emergency benefits

10
2008

Long-term unemployed*
(right scale)
2002

2.5

2000

3.0

3.5

Oct.

Insured Unemployment

Duration of Unemployment
30

5.0

1.0

3.0

Job openings
(right scale)

Percent of private employment
Hires
(right scale)

2.5

Percent

150
130

Job availability*
(right scale)

110

Index

Index
Conference Board
(left scale)

105

120
110

100

Nov.
90

90
90

25
20
15
10
5

75
Hard-to-fill**
(left scale, 3-month moving average)

Nov.

50
30

Reuters/Michigan
(right scale)

60
2000
2002
2004
2006
2008
2010
*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.

2000

2002

2004

2006

2008

2010

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
Surveys of Consumers.

II-5

The slower rise in the unemployment rate since midyear primarily reflects a moderation
in layoffs rather than an improvement in hiring. Both initial claims for unemployment
insurance and the number of new job losers have fallen over the past several months.
The rate of layoffs and discharges from the Job Openings and Labor Turnover Survey has
also moved down from its highs last winter, but its progress has been more erratic.
In contrast, hiring conditions remain weak. Measures of job openings have been
basically unchanged since April, and indicators of both actual and planned hiring are still
near the depressed levels seen at the start of the year. As a result, the average length of
ongoing unemployment spells has risen steeply, and joblessness has become increasingly
concentrated among those out of work for more than 26 weeks. Rising unemployment
duration is also reflected in the increasing share of total claimants for unemployment
insurance who are receiving extended or emergency benefits. Indeed, even as the number
of persons receiving unemployment insurance benefits through regular state programs has
been declining for some time, the total number of individuals receiving unemployment
insurance—including extended and emergency benefits—only recently appears to have
leveled off.
Other indicators of the labor market have continued to deteriorate, including the number
of firms reporting hard-to-fill positions in the NFIB survey and individuals’ perceptions
of current job availability from the Conference Board Survey. However, households’
expectations of future labor market conditions have changed little, on net, in recent
months and remain well above the low point reached earlier this year.

II-6

The staff estimates that output per hour of all persons in the nonfarm business sector rose
at an annual rate of 7.3 percent in the third quarter—as hours declined sharply and output
expanded—following a similarly large increase in the second quarter. Over the four
quarters ending in the third quarter of this year, labor productivity is estimated to have
increased 3.8 percent.
Industrial Production
Industrial production (IP) edged up in October after increasing at an annual rate of
5.6 percent in the third quarter. In November, data on production worker hours as well as
the available data on physical output suggest that IP rose solidly. Since the June trough
in IP, production gains have been widespread; indeed, in well over half of the individual
series that make up the index, the level of production in October was higher than three
months earlier. Recent production gains have reflected a surge in output for motor
vehicles and parts (and the resulting demand for intermediate materials), a slowing pace
of inventory liquidation elsewhere, and rising export demand.
Despite the gains in production, the degree of manufacturing slack remains considerable.
Although the factory operating rate in October, at 67.6 percent, was 2½ percentage points
above its all-time low in June, it nevertheless remained 1 percentage point below its
previous low (reached in December 1982).
After having moved up in September, the production of light motor vehicles fell back to
an annual rate of 6.8 million units in October and appears to have edged up in November.
Although stocks of domestic light vehicles expanded in both October and November, the
recent increases in the pace of sales reduced days’ supply at the end of November to
55 days, a level that is significantly below the industry target of about 65 days.
Production schedules call for output to climb to an annual rate of 7.4 million units in
December and then to remain at that level in the first quarter of 2010.
Industrial production in the high-tech sector edged up, on balance, over the three months
through October as solid increases in semiconductor output outweighed the weakness in
production of computers and communication equipment. However, recently released
data on shipments of PCs and servers, which have not yet been incorporated in published
IP, suggest that the production of mobile computers and servers jumped in the third
quarter and that computer production is likely to be revised up. In contrast, production in
the communications equipment segment of the industry has been weak, partly reflecting a

II-7

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

Component

Proportion
2008
(percent)

2009

20081
Q2

2009
Q3

Aug.

Annual rate
Total
Previous

Sept.

Oct.

Monthly rate

100.0
100.0

-6.7
-6.7

-10.3
-10.3

5.6
5.2

1.3
1.2

.6
.7

.1
...

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

79.0
74.5
70.3

-8.7
-7.8
-7.8

-8.7
-8.6
-9.0

7.7
4.1
4.0

1.4
1.2
1.2

.8
.4
.4

-.1
-.1
-.1

Mining
Utilities

10.6
10.4

.8
.3

-21.6
-11.2

4.2
-6.6

1.1
.8

.6
-.2

-.2
1.6

Selected industries
Energy

23.9

1.3

-14.4

-2.5

High technology
Computers
Communications equipment
Semiconductors2

4.2
1.0
1.3
1.8

-6.9
-11.9
10.4
-15.0

-1.3
-25.1
-4.5
19.0

5.4
-17.8
-6.7
34.0

-.3
-1.4
-.9
.8

.1
-1.4
-2.3
3.1

.6
-1.2
.9
1.2

Motor vehicles and parts

4.5

-23.3

-10.4

116.8

6.3

8.1

-1.7

Aircraft and parts

2.3

-13.2

-18.6

2.9

-.7

2.0

-.6

65.1
20.7
3.5
17.1

-8.3
-4.2
-14.7
-1.8

-9.0
-4.8
-12.7
-3.3

4.2
2.5
2.9
2.4

1.4
1.6
-.2
2.0

.2
.4
.4
.4

.0
.4
-.7
.6

Business equipment
Defense and space equipment

6.6
1.1

-4.8
-2.1

-22.5
3.8

-.7
16.6

1.5
1.4

-.8
1.5

-.4
-.6

Construction supplies
Business supplies

4.8
7.3

-11.8
-9.8

-10.5
-10.6

2.9
-.5

.7
.7

-1.1
-.5

-1.2
-.3

24.6
12.4
12.2

-11.7
-11.4
-12.0

-8.4
-23.9
8.1

8.5
8.4
8.6

1.6
1.4
1.7

.6
.9
.3

.1
.2
.1

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)
19722008
average

199495
high

200102
low

Sept.

Oct.

Total industry

80.9

84.9

73.5

70.4

68.7

69.9

70.5

70.7

Manufacturing
Mining
Utilities

79.6
87.6
86.8

84.5
89.1
93.3

71.4
84.9
84.2

66.7
86.8
82.4

65.4
81.8
79.6

66.9
82.9
77.9

67.6
83.6
77.9

67.6
83.5
79.0

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.6
82.0
77.7

89.9
87.9
80.3

81.7
74.3
70.0

80.9
68.4
68.4

79.6
66.2
67.1

81.7
66.9
68.5

83.0
67.3
69.4

83.1
67.4
69.5

Sector

2009

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

II-8

Indicators of Industrial Activity

Weekly Production Index
excluding Motor Vehicles

IP Diffusion Index
Index

Index
19.0

Monthly aggregate of weekly index
Weekly index

100
NBER
peak

18.5

90
80

18.0

17.5
Oct.

17.0

16.5

40
30

16.0

15.5
Oct.Nov.Dec.Jan.Feb.Mar.Apr.MayJuneJulyAug. ept.Oct.Nov.
S
2008
2009
Note: One index point equals 1 percent of 2002 total industrial
output.
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

15.0

Manufacturing Capacity Utilization

Motor Vehicle Assemblies
Millions of units

Millions of units

1.0

Percent
90

0.9

NBER
peak

0.8
0.7
0.6

Autos and light trucks
(right scale)

0.4
Nov.

0.3
Medium and heavy trucks
(left scale)

0.2
0.1

2002 2003 2004 2005 2006 2007 2008 2009 2010
+ November values are based on latest industry schedules.
Source: Ward’s Communications.

75
6
70

Oct.
65

2
0

1998
2000
2002
2004
2006
2008
2010
Note: Horizontal line is 1972-2008 average.
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

ISM New Orders Diffusion Index and
Change in Real Adjusted Durable Goods Orders
Percent

Diffusion index
80

ISM (right scale)

NBER
peak

70
Nov.

Manufacturing Investment

Diffusion index

6
4

0.5

0.0

1998
2000
2002
2004
2006
2008
2010
Note: The diffusion index equals the percentage of series
that increased relative to 3 months earlier plus one-half the
percentage that were unchanged.
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

60
50

Percent change

90
80
70

40
Real investment (right scale)

Capital spending plans
(left scale)

30
20
10

50
-2

RADGO (left scale)

-10

-4

-20

-6

-30

10
-40
1970 1975 1980 1985 1990 1995 2000 2005 2010
Note: Manufacturing investment data are from the Annual Survey
of Manufacturers; values for 2007-09 are staff estimates.
The ISM series is a diffusion index that equals the percentage of
respondents reporting plans to increase investment plus one-half
the percentage reporting no plans to change investment.
Source: Institute for Supply Management.

-8

2002 2003 2004 2005 2006 2007 2008 2009 2010
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.

Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER). The vertical line
represents the last business cycle peak as defined by the NBER.

II-9

Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2009
Item

2010
Q4

2009
Aug.

Sept.

Oct.

Nov.

U.S. production1
Autos
Light trucks

4.5
1.9
2.5

6.4
2.5
3.8

7.0
2.9
4.2

7.4
3.1
4.3

6.3
2.5
3.8

7.1
2.8
4.3

6.8
2.9
3.9

6.9
2.8
4.1

Days’ supply2
Autos
Light trucks

70
78
64

50
46
55

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

36
32
40

63
59
66

57
56
58

55
54
55

Inventories3
Autos
Light trucks

1.63
.82
.81

1.38
.63
.75

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

1.20
.56
.64

1.38
.63
.75

1.46
.66
.79

1.48
.67
.81

4.6

6.5

7.2

7.6

6.5

7.3

7.0

7.1

Memo: U.S. production,
total motor vehicles4

Note: FRB seasonals. Components may not sum to totals because of rounding.
1. Production rates for November and the fourth quarter of 2009 and the first quarter of 2010 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
3.5
3.0
2.5
2.0
1.5

Nov.

1.0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.5

2010

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

Days’ Supply of Light Vehicles
Days
110
100
90
80
70
Nov.

60
50
40
30

1998

1999

2000

2001

2002

2003

2004

2005

2006

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

2007

2008

2009

2010

II-10

decline in the production of wireless infrastructure equipment, which had surged earlier
in the year. Upstream, the solid gains in the production of semiconductors reflect some
restocking after the enormous production declines early in the year as well as a
bounceback in global chip demand.
Looking ahead, comments from high-tech consultancies and manufacturers suggest that
global high-tech demand for computers has continued to improve this quarter.1 In
addition, orders and shipments of circuit boards—which are used in a wide variety of
electronic products—have continued to move up, on balance. Some semiconductor
producers could find a further brisk pickup in demand difficult to meet because
utilization rates at some leading-edge facilities have already rebounded to elevated levels
and days’ supply has fallen substantially. In fact, shortages of certain types of memory
chips have been reported recently.
The output of energy rose again in October. Moreover, available data for November
suggest that drilling activity moved up for a fourth consecutive month, and oil extraction
rose for a fifth consecutive month. The boost to both drilling and extraction activity was
likely spurred by the rise in oil prices this year.
Outside of energy, transportation, and high-tech industries, output was flat in October
after increasing 4¼ percent at an annual rate in the third quarter. Production of consumer
goods moved up in October, as gains in nondurables more than offset decreases in
durables. In addition, materials output edged up. By contrast, the output of construction
supplies, business supplies, and business equipment each declined for a second
consecutive month.
The available indicators of near-term manufacturing activity, on net, suggest that factory
output will expand further in the coming months. The monthly diffusion index of new
orders from the national ISM survey remained in a range that suggests solid increases in
production, while the orders indexes from the regional surveys were broadly consistent
with moderate gains in manufacturing output. By contrast, the staff series on real
adjusted durable goods orders declined in October relative to three months earlier.
1

However, because these sources anticipate that sustained demand from the business sector—the focus
of U.S. computer production—will be slow to materialize, the pickup in domestic output will likely be
delayed. Moreover, the eventual boost to domestic production from global demand is likely to be smaller
than in recent years because Dell’s recent change in business strategy—shifting toward outsourcing
production—implies greater import penetration in the U.S. computer market. For example, Dell’s North
Carolina PC production plant will completely shut down around the turn of the year.

II-11

Indicators of High-Tech Manufacturing Activity

Industrial Production in the High-Tech Sector

U.S. Personal Computer and Server Absorption

2002 = 100, ratio scale
350
300
Semiconductors
Computers

250
Oct.

200
180
160
140

0.85
0.80
0.75

2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

19.0
18.0

Servers (left scale)

+ Q4

0.70

0.60

15.0
PCs (right scale)

0.55
0.50

100
90
80

0.45
0.40

17.0
16.0

0.65

120
Communications equipment

Millions of units, ratio scale

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. PC and server units represent the most
recent U.S. data available from IDC. Q4 PC units are from the
PC forecast data release.
Source: IDC.

14.0
13.0
12.5
12.0
11.5
11.0
10.5

Circuit Board Orders and Shipments

MPU Shipments and Intel Revenue

Billions of dollars

Billions of dollars, ratio scale

140

12.0
11.0
Q4
Oct.
Intel revenue

Worldwide MPU shipments

10.0
9.5
9.0
8.5
8.0
7.5
7.0

Orders
130
120
110
100
90
Shipments

Oct.
80

6.5

6.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. MPU is a microprocessor unit. Q4 Intel
revenue is the midpoint of the range given by the company’s
guidance as of November 12, 2009. MPU shipments are a
3-month sum.
Source: Intel; Semiconductor Industry Association.

5.5

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: U.S. and Canadian orders and shipments of bare and
loaded circuit boards.
Source: Institute for Printed Circuits.

Capital Expenditures by Selected
Telecommunications Service Providers

FRB Chip Inventory Index
2006 = 100

Billions of dollars, ratio scale
75
70
65

160
Annual average
2009 guidance

140

55
50
120
45
40

Q3
100
Q3
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: The staff’s chip inventory index is a sales-weighted
chain-type index constructed from financial data for 10 major
chip manufacturers.
Source: Financial reports.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. Includes AT&T, Verizon, Sprint Nextel,
and companies related by merger, acquisition, or spinoff.
Source: Securities and Exchange Commission filings.

35
30

II-12

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

Total real PCE
Motor vehicles
Goods ex. motor vehicles
Services
Ex. energy
Memo:
Real PCE control1
Nominal retail control2

2009
Q2
Annual rate

Aug.

2009
Sept.
Oct.
Monthly rate

-.9

2.9

1.0

-.7

9.6
-2.8
-.3
-.2

-6.3
-5.9
.2
.7

53.7
3.0
1.0
1.1

20.1
1.1
.1
.1

-29.8
.5
.2
.1

8.9
.1
.3
.2

1.3
2.2

-2.5
-2.8

3.0
1.1

.8
.5

.5
.4

.4
.5

1. Durables excluding motor vehicles, nondurables excluding gasoline, and food services.
2. Total sales less outlays at building material and supply stores, automobile and other
motor vehicle dealers, and gasoline stations.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Goods
Percent

0.8

0.6

2.0

0.4

Percent

2.8

NBER peak

0.2

Oct.

-0.0
-0.2

1.2

0.2

2.0

6-month
moving average

1.2
Oct.

0.4

-0.0
-0.2

6-month moving average

-0.4
-1.2

-0.4
Monthly

-1.2

-0.4

-0.6

-2.0

-0.8

-2.8

2006 2007 2008 2009 2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 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: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Services
Percent

0.5

Percent

0.6

NBER peak
0.4

0.4

0.3

6-month
moving average

0.6

0.3
0.2

0.2
0.1

0.4

6-month moving average

Oct.

0.2

0.1

0.4

0.0

-0.1

0.0

-0.1

0.2

-0.2

Monthly

-0.2
-0.4
2006 2007 2008 2009 2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 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: U.S. Department of Commerce, Bureau of Economic Analysis.

-0.2
-0.4

II-13

In the recent ISM Semiannual Economic Forecast, the diffusion index of capital spending
plans jumped to a moderate level from its record low in the spring. This reading is
consistent with little change in capital spending in the manufacturing sector next year and
with another sizable contraction in factory capacity.
Consumer Spending
Consumer spending has continued to recover. Real PCE climbed 0.4 percent in October
following a solid increase in the third quarter. Moreover, the gains in October were
broad based: Outlays for motor vehicles bounced back almost 9 percent after a sharp
decline in September, spending on other goods rose 0.1 percent, and spending on services
advanced 0.3 percent, the largest monthly increase in more than a year. More recently,
sales of new light vehicles rose an additional 500,000 units in November to an annual rate
of 10.9 million units despite less generous cash rebates and finance incentives this
quarter. Other indicators of spending in November, including data on chain store sales
and credit card transaction volumes, were mixed, but generally pointed to another
increase in outlays.
While spending has rebounded, the fundamentals of household demand have remained
soft. Although household net worth moved up in the third quarter, households have lost
wealth equivalent to more than 1½ years of income over the past two years and are likely
still adjusting their spending to that loss. In addition, real labor compensation, which
plunged in the first quarter, declined modestly, on net, over the second and third quarters,
largely reflecting decreases in aggregate hours worked.2 In the current quarter, the
available data suggest that a jump in energy prices has erased the modest gains in
nominal labor income. Nevertheless, disposable income has been supported for most of
the year by lower taxes and higher transfers. With spending on the rise, the personal
saving rate dropped back down to 4.4 percent in October but is still well above the
average rate observed before the recession. Meanwhile, credit conditions remain tight,
and measures of consumer sentiment still suggest overall weakness.
Housing
Housing demand has continued to firm. Sales of existing single-family homes jumped

Since the last Greenbook, the BEA has revised up nominal compensation by $88 billion at an annual
rate in the second quarter and by $111 billion at an annual rate in the third quarter, on the basis of newly
available data on unemployment insurance tax records for the second quarter.

II-14

Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2009
Category

2008

Total

Sept.

Oct.

Nov.

13.1

9.5

9.6

11.5

9.2

10.4

10.9

Autos
Light trucks

6.7
6.4

4.8
4.7

4.9
4.7

6.4
5.1

5.0
4.2

5.4
5.0

5.6
5.3

North American1
Autos
Light trucks

9.8
4.5
5.3

6.8
3.1
3.7

7.1
3.2
3.9

8.4
4.2
4.2

6.7
3.3
3.5

7.9
3.7
4.2

8.3
3.8
4.5

Foreign-produced
Autos
Light trucks

3.3
2.2
1.1

2.7
1.7
1.0

2.4
1.6
.8

3.1
2.1
.9

2.5
1.7
.8

2.6
1.8
.8

48.3

44.1

46.8

43.1

43.7

44.8

44.9

Memo:
Detroit Three
market share (percent)2

Content redacted.

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. Includes domestic and foreign brands affiliated with the Detroit Three.
Source: Ward’s Communications. Adjusted using FRB seasonals.

Car-Buying Attitudes
Percent
110
Appraisal of car-buying conditions (right scale)
100

Average Value of Incentives on Light Vehicles
Current dollars per vehicle, ratio scale

Index
180
160

3000
2600

140

Nov.

2200

120
Nov.
29

70
100
60

Good time to buy: low prices
(left scale)

Nov.

80
1400
60

30
20

1800

2002

2004

2006

2008

2010

Source: Reuters/University of Michigan Surveys of Consumers.

2004

2005

2006

2007

2008

2009

2010

1000

Note: Weekly weighted average of customer cash rebate
and the present value of interest rate reduction.
Source: J.D. Power and Associates. Adjusted using FRB seasonals.

II-15

Fundamentals of Household Spending
Household Net Worth
and Dow Jones Total Market Index
18000

Index

Change in Real Disposable Personal Income
Ratio

12-month percent change

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

6.5
15400

7.0

6.0
5.5

12800
Q3 Dec. 8

Total Market Index
(left scale)

5.0

2
1

-1

-2

-3

-3
1999
2001
2003
2005
2007
2009
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.

4.0

1999
2001
2003
2005
2007
2009
* 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.

3.0

Target Federal Funds Rate
and 10-Year Treasury Yield

Personal Saving Rate
Percent

3
Oct.

3.5
5000

4.5

10200

7600

Percent

5
Oct.

6
Treasury
yield

1
0

0
-1

Federal
funds
rate

1999
2001
2003
2005
2007
2009
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.

1
Dec. 8

0
-1

1999
2001
2003
2005
Source: Federal Reserve Board.

2007

2009

Consumer Confidence
1985 = 100

1966 = 100

170

Reuters/
Michigan
(right scale)

150

NBER peak

115
105

130

110

70
50

Nov.

Conference Board
(left scale)

30
10

45
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
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.

II-16

10 percent in October following a similar increase in September. These huge increases
probably reflect, in part, a greater supply of low-priced homes given the large number of
transactions involving bank-owned and distressed properties.3 Regarding the market for
new homes, sales agreements rose a solid 6 percent in October following two months of
little change.
.
The modest recovery in housing demand likely reflects improvements in the underlying
fundamentals, particularly greater affordability and the perception that house prices have
bottomed out. Interest rates for conforming 30-year fixed-rate mortgages, which have
been very low by historical standards throughout 2009, moved back below 5 percent in
recent weeks. House prices also have shown signs of firming. Although the repeat-sales
price index for existing single-family homes calculated by LoanPerformance edged down
in September and October, the level in October stood 4 percent above its trough in
March. In addition, in the Reuters/University of Michigan Surveys of Consumers, the
number of respondents who expect house prices to increase over the next 12 months
continued to exceed the number of respondents who expect prices to decrease.
Although the pace of sales is still modest, it has been ample enough, given the slow pace
of construction, to reduce the overhang of unsold new single-family houses. The stock of
unsold new homes dropped further in October and is now less than half of its peak in
mid-2006; measured relative to the October pace of sales, the months’ supply of new
homes has come down to 6¾ months, the lowest level in almost three years. More
broadly, the vacancy rate for homes intended for owner occupancy (which includes both
existing and completed new homes for sale) has come down from its peak in 2008,
although it is still high relative to pre-2006 levels.
Despite further improvements in sales and inventories, construction activity has held
steady in recent months. Single-family housing starts were essentially flat from June to
October at an annual rate of around 500,000 units. Adjusted permit issuance has also
been roughly constant since June and was a bit below the rate of starts in October.
3

Anecdotal reports suggest that the first-time homebuyer tax credit may also have provided some
support to home sales this year. However, this effect appears to have been relatively minor. The National
Association of Realtors reported that 47 percent of home purchases from July 2008 to June 2009 were
made to first-time homebuyers, only somewhat higher than the average proportion of 40 percent in the past
decade. Moreover, the rise in the first-time homebuyer share might also be due to improved housing
affordability.

II-17

Content partially redacted.

Indicators of Single-Family Housing
Inventories of New Homes
and Homeowner Vacancy Rate

Market for New Single-Family Homes
1.6

Millions of units
(annual rate)

600

Percent

Thousands of units

550

1.4

2.50

500

1.2

450

2.75

Inventories of new homes
(left scale)

2.25

1.0
2.00

400
0.8
350
0.6
0.4
0.2

Sales (left scale)

Oct.

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

6.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

1.25

Mortgage Rates

Index (2001=100)
Existing home sales
(left scale)

140
130

Percent

7.5
7.0

5.5
Oct.
Pending home sales
(right scale)

110
100
90

4.5

7.5
7.0

30-year conforming fixed rate mortgage

120

5.0

1.50
Oct.

Note: Homeowner vacancy rate is seasonally adjusted
by Board staff.
Source: Census Bureau.

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

Homeowner vacancy rate
(right scale)

250

Source: For sales, Census Bureau;

6.5

1.75

300

6.5

6.0

5.5

80
4.0
3.5

70
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: National Association of Realtors.

5.0
4.5

220

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

4.5

Note: 2-week moving average.
Source: Federal Home Loan Mortgage Corporation.

Prices of Existing Homes
240

5.0
Dec. 2

House Price Expectations
Index, 2000 = 100
240

LP price index
Monthly FHFA purchase-only index
20-city S&P/Case-Shiller monthly price index

220

200

180

Nov.

80
60
40

180

160

Diffusion index

160

5 years ahead
20

20
Nov.

0
-20
140
120
100

Sept.
Sept.
Oct.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: LP and S&P/Case-Shiller are seasonally adjusted
by Board staff. FHFA is re-indexed to 2000.
Source: For FHFA, Federal Housing Finance Agency;
for S&P/Case-Shiller, Standard & Poor’s; for LP,
LoanPerformance, a division of First American CoreLogic.

140

0
-20

1 year ahead

-40

120

-60

100

-80

2007

2008

2009

-80

Note: Diffusion index is constructed by subtracting
expectations of decrease from expectations of increase.
Source: Reuters/University of Michigan Surveys of Consumers.

II-18

Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2009
Sector

2008

All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
New homes
Sales
Months’ supply2
Existing homes
Sales
Months’ supply2
Multifamily units
Starts
Built for rent
Built for sale
Permits
Condos and co-ops
Existing home sales

Aug.

Sept.

Oct.

.91
.91

.53
.53

.54
.53

.59
.57

.58
.58

.59
.58

.53
.55

.62
.58
.58

.36
.36
.37

.43
.41
.42

.50
.46
.48

.48
.46
.47

.51
.45
.48

.48
.45
.46

.49
10.68

.34
11.61

.37
9.44

.41
7.56

.42
7.55

.41
7.41

.43
6.67

4.35
9.98

4.12
9.68

4.24
8.78

4.65
8.05

4.47
8.60

4.86
7.51

5.33
6.68

.28
.22
.07
.33

.17
.14
.03
.17

.12
.10
.01
.12

.09
.07
.02
.11

.10
n.a.
n.a.
.12

.08
n.a.
n.a.
.12

.05
n.a.
n.a.
.10

.56

.47

.52

.64

.62

.68

.77

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
2. At current sales rate; expressed as the ratio of seasonally adjusted inventories to seasonally adjusted
sales. Quarterly and annual figures are averages of monthly figures.
n.a. Not available.
Source: Census Bureau.

Private Housing Starts and Permits
(Seasonally adjusted annual rate)
Millions of units
2.0

2.0

1.8

1.8
Single-family starts

1.6

1.4

1.2

1.2
Single-family adjusted permits

1.0

.6
Oct.

.4
.2
.0

Multifamily starts
1999

2000

2001

2002

Oct.
2003

2004

2005

2006

2007

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

2008

2009

.4
.2
.0

II-19

However, the low level of inventories relative to sales suggests that increases in singlefamily construction are likely to resume in the near term. In the much smaller
multifamily sector—where tight credit conditions have persisted and vacancies have
remained elevated—starts plunged 35 percent in October to their lowest level since the
series began in 1959.
Equipment and Software
Real spending on equipment and software (E&S) is estimated to have edged up in the
third quarter after falling sharply for more than a year. The available indicators of
spending on transportation equipment suggest that outlays in this category have
continued to rise. However, outside of transportation, E&S spending appears to have
merely leveled off. Indeed, orders and shipments of nondefense capital goods excluding
aircraft were about unchanged, on balance, in September and October.
Business purchases of motor vehicles have increased thus far in the fourth quarter. Sales
of light vehicles to fleet customers moved up, on balance, in October and November, and
sales of medium and heavy trucks increased in October. Moreover, new orders for
medium and heavy trucks jumped sharply in October: With new environmental
regulations on diesel engines taking effect in January 2010, some customers likely
accelerated their orders for new trucks, a move that may pull forward some sales to
November and December from early next year.
Real spending on high-tech E&S rose moderately in the third quarter and appears to be
increasing at a subdued pace early in the fourth quarter. Although shipments of
communications equipment in October retraced some of the declines seen in the prior two
months, orders fell further. In addition, nominal orders and shipments of computers and
peripherals declined again in October.4 Nonetheless, major producers of high-tech
equipment, such as Cisco and Dell, have since reported signs of improvement in demand
this quarter.
Business investment in equipment other than transportation and high tech fell a bit further
in the third quarter after having dropped steeply during the preceding three quarters. In
October, shipments of these capital goods, which account for half of total E&S outlays,
edged down, while new orders dropped markedly, erasing the prior month’s gain in the

A report from Dell suggests that demand for computers in October may have been held down
somewhat by an unusual drop in orders in the two weeks prior to the release of Windows 7 on October 22.

II-20

Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2009
Category

Aug.

Annual rate

Sept.

Oct.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories1

-17.5
-14.4
-8.1
-3.5
-15.9

.4
-1.3
-7.9
28.9
-3.1

-2.6
-2.2
-4.6
-4.6
-1.7

2.7
.3
-2.1
-2.4
.7

-1.8
-.3
-1.7
3.9
-.6

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories1

13.3
3.8
13.0
48.2
-.6

23.3
12.1
-2.7
41.4
11.0

-7.8
-1.0
-3.1
-4.4
-.4

3.4
2.9
.3
-4.9
4.0

.7
-3.4
-7.2
-3.1
-3.0

Memo:
Shipments of complete aircraft2

36.8

36.4

33.8

43.0

31.6

1. Excludes most terrestrial transportation equipment.
2. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.
Source: Census Bureau.

Communications Equipment

Non-High-Tech,
Nontransportation Equipment

Billions of chained (2005) dollars, ratio scale

20
17
14

Shipments
Orders

20
17
14

Billions of chained (2005) dollars, ratio scale

59
54

Orders

8
Oct.

Oct. 36

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Shipments and orders are deflated by a price index
that is derived from the quality-adjusted price indexes of the
Bureau of Economic Analysis and uses the producer price
index for communications equipment for monthly interpolation.
Source: Census Bureau.

Computers and Peripherals
240
210
190

2000 = 100

Billions of chained (2005) dollars, ratio scale
24
21
19

1240

960
820
680

400

Oct.
130
Real M3
shipments
(right scale)

Thousands of units, ratio scale
1240

540

Industrial production
(left scale)

150

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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 quality-adjusted
price indexes of the Bureau of Economic Analysis.
Source: Census Bureau.

Medium and Heavy Trucks

170

110

Shipments

960
820
680

Net new orders
of class 5-8 trucks

540
400
Oct.

260

Sales of class 4-8 trucks

260

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Shipments are deflated by the staff price index for
computers and peripheral equipment, which is derived from
the quality-adjusted price indexes of the Bureau of Economic
Analysis.
Source: Census Bureau; FRB Industrial Production.

120

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Annual rate, FRB seasonals.
Source: For sales, Ward’s Communications; for orders,
ACT Research.

120

II-21

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change

NBER peak
6

-2

-2
Q3

-4
-6

-4
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1991
1993
1995
1997
1999
2001
2003
2005
2007
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: U.S. Dept. of Commerce, Bureau of Economic Analysis.

User Cost of Capital

Corporate Bond Yields
4-quarter percent change

NBER peak

Percent

15
10

-6

Non-high-tech

16
10-year high-yield

18
NBER peak

12
Q3
-5

10
-5

-10
1990
2000
2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
1995
2005

8
6

-15

Source: Staff calculation.

10-year BBB
1990
1995
2000
2005
2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Percent

Surveys of Business Conditions
Percent

NBER peak
Credit expected to be tighter (right scale)

Nov.

Diffusion index

95
85

ISM (left scale)
Philadelphia Fed (right scale)

85
75

10
6

2
8

55
Nov.

-2
-6

-10

Credit more difficult to obtain (left scale)
1990
1995
2000
2005
2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

-18
-22

Note: Of borrowers who sought credit in the past 3
months, the proportion that reported or expected more difficulty
in obtaining credit less the proportion that reported or expected
more ease in obtaining credit. Seasonally adjusted.
Source: National Federation of Independent Business (NFIB).

-14

0
-4

Note: End of month. December value as of December 8.
Source: Merrill Lynch.

NFIB: Survey on Loan Availability
20

10
Dec.

-10
High-tech

-15

35
25

35
NBER
peak

1990
1995
2000
2005
2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Source: Institute for Supply Management (ISM),
Manufacturing ISM Report on Business; Philadelphia Fed
Business Outlook Survey.

25
15

II-22

Nonresidential Construction and Indicators
(All spending series are seasonally adjusted at an annual rate; nominal CPIP deflated by
BEA prices through Q3 and by staff projection thereafter)

Office, Commercial,
Communication, and Other

Total Structures
Billions of chained (2005) dollars

380

380
360

100

340

90
80

320

Billions of chained (2005) dollars

120
110

360

100
Other

300
Oct.

280

240

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Oct.

240

20
10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Drilling and Mining Indicators

Billions of chained (2005) dollars
Manufacturing

70
65

60
Oct.
Power

Number

Millions of feet

55
50

2200
2000

1800
20

Footage drilled
(left scale)

45
15

40
35

25
20
15

1600
Drilling rigs
in operation
(right scale)

Oct.

20
15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

800

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: The December readings for drilling rigs are based on
data through December 4, 2009. 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.

Percent

3.0
2.5

Office

Percent

Diffusion index
Billings (right scale)

55
50

1.0

Oct.

0.5
9
Retail
6

-0.5

Change in
employment (left scale)

-1.0
6

-1.5

Nov.

-2.5

30
25

-2.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

45
40

0.0
9

2.0
1.5

Q3
Industrial

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

400

Architectural Billings and
Nonresidential Construction Employment

Vacancy Rates

1400

Dec. 1200
1000
600

Source: Census Bureau.

2600
2400

40
35

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

70
65

50
40
30

Communication

20
10

Manufacturing and Power

55
50

Office

Source: Census Bureau.

Commercial

50
40

260

90
80
70

60
300

120
110

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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, U.S. Department of Labor, Bureau of Labor
Statistics.

II-23

stock of unfilled orders. The drop in orders was fairly broad based, with noteworthy
declines in bookings for construction, industrial, and service machinery, as well as for
electro-medical, measuring, and controlling devices.
The fundamental determinants of investment in E&S have improved somewhat recently,
but, on balance, are consistent with only sluggish gains in business outlays in the coming
months. On the positive side, the measure of the user cost of capital that we follow fell
again in the third quarter and has now retraced the run-up that occurred late last year.
Likewise, spreads of corporate bonds over Treasury securities have decreased
considerably from their extremely high levels at the end of last year, likely reflecting less
uncertainty and better assessments of future profitability. Meanwhile, monthly surveys
of business conditions, sentiment, and capital spending plans have recovered somewhat,
but thus far only to levels suggestive of a moderate rise in business spending. And, as
noted earlier, the diffusion index of capital spending plans in the recent ISM semiannual
report jumped to a moderate level from the historically low reading recorded in the
spring. However, business output remained 4 percent below its year-earlier level, despite
turning up in the third quarter. In addition, the net share of small businesses reporting
increased difficulty in obtaining credit was unchanged in the November NFIB survey and
remained at a historically high level.
Nonresidential Construction
Conditions in the nonresidential construction sector generally remain bleak. Real outlays
on structures outside of the drilling and mining sector plunged at an annual rate of
22 percent in the third quarter, and recent data on nominal expenditures point to further
deterioration in October. The weakness has been widespread across categories and likely
reflects the drag from rising vacancy rates, plunging property prices, and difficult
financing conditions for new projects. Moreover, the nonresidential construction industry
continued to shed workers in November, and the most recent reading from the
architectural billings index remained at levels consistent with further declines in
spending.
Following steep declines in the first half of the year, real spending on drilling and mining
structures increased at an annual rate of nearly 9 percent in the third quarter. Apparently,
the rebound in oil prices this year has led to an upturn in oil drilling in the past several
months. Indeed, the number of drilling rigs in operation in early December was a good
bit above the level at the end of the third quarter.

II-24

Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2009
Measure and sector

-114.9
-63.6
-51.3

e
-163.1
-48.1
-115.1

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

-49.3
-28.9
-8.8
-11.6

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

-143.2
-77.3
-47.3
-18.6

Real inventory investment
(chained 2005 dollars)
Total nonfarm business
Motor vehicles
Nonfarm ex. motor vehicles

Aug.

Sept.

Oct.

-143.6
-4.3
e
-139.3

...
...
...

-110.9
-39.8
-52.5
-18.6

-127.1
-54.5
-51.9
-20.7

-114.7
-46.6
-52.7
-15.4

-160.8 e
-82.0 e
-51.1 e
-27.7

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

-150.2
-63.6
-62.9
-23.7

-135.3
-62.2
-50.7
-22.4

-136.4
-56.4
-54.1
-25.9

-130.9
-74.9
-34.5
-21.5

n.a.
21.1
8.9
n.a.

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

55
1.7

1.7
Oct.

1.6

1.5

1.4

1.3

1.3
Sept.

1.2

1.2
Census book-value data

1.1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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.

Nov.
1.1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000
2002
2004
2006
2008
Note: A number above 50 indicates inventories are "too high."
Source: Institute for Supply Management (ISM),
Manufacturing ISM Report on Business.

II-25

Business Inventories
After large liquidations in the first half of the year, real nonfarm inventories excluding
motor vehicles are estimated to have fallen again in the third quarter—at an annual rate of
about $130 billion. In October, however, the book value of manufacturing and wholesale
trade inventories (other than motor vehicles) increased for the first time in more than a
year, suggesting that some slowing in the pace of real inventory liquidation may be under
way. The measure of months’ supply implied by the book-value data for the
manufacturing and trade sector (which includes retail inventories and is only available
through September) remained somewhat elevated, but has fallen significantly since the
middle of the year.
The staff’s flow-of-goods inventory system suggests that inventories outside motor
vehicles continued to decline through October, though at a slower pace than in the middle
of the year. After falling sharply in the three months ending in August, months’ supply
excluding motor vehicles is estimated to have been little changed in September and
October. According to this measure, inventory-sales ratios remain above trend for most
market groups; one exception is consumer goods, where inventories in October were
relatively well aligned with sales.
In contrast, in the November ISM, the number of supply managers who described their
customers’ inventories as too low continued to exceed those who described inventories as
too high by a very wide margin. This reading suggests that managers in manufacturing
expect their customers to do some restocking in the coming months.5
Federal Government Sector
Total real purchases by the federal government rose at an annual rate of 8¼ percent in the
third quarter, led by a strong increase in real defense expenditures. Based on the Monthly
Treasury Statement for October and the daily data for November, real defense spending
appears to have dipped so far in the fourth quarter.

The question posed to purchasing managers in the ISM survey to determine whether stocks are too
high or too low does not specify the measure of sales against which respondents should compare the level
of their customers’ inventories. If the respondents currently are judging inventories against a level of
expected sales in coming months that is materially above the recent pace of sales, the low level of the
customers’ inventories measure is less obviously at odds with the inventory ratios in both the book-value
data and the staff’s flow-of-goods system.

II-26

Federal Government Indicators

Total Real Federal Purchases

Real Defense Spending

Percent change, annual rate

Current
4-quarter moving average

20
15

Billions of chained (2005) dollars

700

Unified (monthly)
NIPA (quarterly)

650

700
650

Oct.

600

550

500

-5

450

-10

400

-10

2004
2005
2006
2007
2008
2009
Note: NIPA measure.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

2004
2005
2006
2007
2008
2009
Note: Nominal unified defense spending is seasonally
adjusted and deflated by BEA prices. NIPA defense
purchases exclude consumption of fixed capital.
Source: Monthly Treasury Statement; U.S. Department
of Commerce, Bureau of Economic Analysis.

Unified Outlays and Receipts

Unified Budget Deficit
4

Percent of GDP

Billions of dollars
Billions of dollars (right axis)
Percent of GDP (left axis)

400

600
300

-2

Outlays
Receipts

Percent change from year earlier

-300

15
10

5
Oct.

-4

-600

-6

-900

-5

-8

-1200

-10

-1500

-15

-1800

-20

-10
-12

Oct.
2000
2002
2004
2006
2008
Note: Adjusted for payment-timing shifts; cumulative
deficit over the previous 12 months.
Source: Monthly Treasury Statement.

Percent of GDP

October 2009

Function or source
50

50
Oct.

2000

2002

2004

2006

Source: Monthly Treasury Statement.

-20

Recent Unified Federal Outlays and Receipts

Federal Debt Held by the Public
55

2000
2002
2004
2006
2008
Note: Adjusted for payment-timing shifts; based on
cumulative outlays or receipts over the previous 12 months.
Source: Monthly Treasury Statement.

2008

Billions
of dollars

Outlays
National defense
Major transfers1
Other primary spending
Net interest

291
67
164
42
18

-3.2
2.0
15.9
-43.8
-5.6

Receipts
Individual income and
payroll taxes
Corporate income taxes
Other

135
122

-17.9
-17.4

-5
17

...
5.1

-156

...

Deficit (-)

Percent
change*

Note: Adjusted for payment-timing shifts.
* Relative to same year-earlier period.
1. Includes Social Security, Medicare, Medicaid, and income
security programs.
... Not applicable.
Source: Monthly Treasury Statement.

II-27

The unified federal budget deficit continued to widen in October—the first month of
fiscal 2010.6 Receipts were 18 percent lower in October than in the same month last year,
mostly reflecting the ongoing weakness in taxable income and the tax cuts in the 2009
stimulus package. Meanwhile, outlays declined 3 percent in October relative to the same
month a year ago, primarily because of a drop in spending on the TARP from $33 billion
last October to almost zero this year.7 Excluding the TARP payments, federal spending
increased in October relative to a year earlier, boosted by both the effects of the weak
labor market on low-income support programs and the spending from the stimulus
package. In all, about $240 billion in stimulus funds (about 30 percent of the total
$787 billion stimulus package) had been distributed in the form of spending increases and
tax cuts by the end of November.
State and Local Government Sector
Incoming data point to some firming in real purchases by state and local governments.
According to the latest labor market report, state and local employment rose 6,000 in
November, and the data for October were revised up to show an increase of 29,000; the
increases over the past two months were concentrated in the education sector, where
payrolls had fallen especially sharply between May and September. Meanwhile, after
smoothing through the volatility in the monthly numbers, real construction expenditures
appear to be holding up after rising appreciably in the second and third quarters. Real
construction spending continues to be bolstered by the availability of federal stimulus
funds, supportive conditions in the municipal bond market, and the moderation in
construction costs this year.
Although the grants provided under the American Recovery and Reinvestment Act have
helped cushion the effects of the recession on state and local governments, the sector’s
operating budgets remain under pressure. Based on information from 44 states, the
Rockefeller Institute of Government estimates that nominal state tax collections fell
nearly 11 percent over the four quarters ending in the third quarter of this year.8 The
ongoing weakness in revenues spans all major categories of taxes and is forcing states to
6

While the expanding deficit has pushed up the ratio of federal debt to GDP above 50 percent, debt
outstanding declined a bit in October because the Treasury reduced the size of its Supplementary Financing
Program by $185 billion (which does not show up in the unified deficit figures) in order to create more
room under the current statutory debt limit.
7
In the Monthly Treasury Statement, outlays associated with the TARP are recorded on a net present
value basis, taking into account market risk; a positive outlay is associated with an expected loss.
8
The states not included in the tabulation are Missouri, Nevada, New Mexico, Rhode Island, Texas,
and Wyoming.

II-28

State and Local Indicators

Real Spending on Consumption and Investment
Percent change, annual rate
12

12
Spending
4-quarter moving average

0
Q3

-3
-6

-3

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-6

2009

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

Net Change in Employment

Real Construction
Billions of chained (2005) dollars, annual rate

Thousands of jobs, monthly average
50

30
Q4

250
Oct.

240

230

220

210

200

250

-10

-20

-30

-40

-50

1999

2001

2003

2005

2007

2009

-50

190

1999

2001

2003

2005

2007

2009

190

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

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

State Revenues

Local Revenues

Percent change from year earlier

Individual and
corporate income
taxes

Total
revenues

Property taxes

15
Total revenues

-5

-5
Q3

-10

-15

-20

-25

-30

1999

2001

2003

2005

2007

2009

Source: Census Bureau, Quarterly Summary of State
and Local Government Tax Revenue through Q2;
Q3 is a preliminary estimate from the Rockefeller
Institute of Government.

-30

-5
-10

1999

2001

2003

2005

2007

2009

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

-5
-10

II-29

make adjustments to their enacted budgets for fiscal year 2010 (which began on July 1 in
most states). Indeed, according to a tabulation released by the National Conference of
State Legislatures in mid-November, new budget gaps have emerged in at least 31 states
since the start of the current fiscal year. In response, several states have implemented
across-the-board cuts in spending to close budget gaps, while others have trimmed
outlays for specific programs and laid off or furloughed workers.
Prices
After slowing considerably over the past year, consumer price inflation has moved up in
recent months, while core inflation has remained subdued. Over the 12 months ending
in October, the headline PCE price index increased just ¼ percent, down from a
3¼ percent increase in the year-earlier period. The sharp deceleration in the 12-month
change partly reflected the plunge in energy prices at the end of 2008 and the decline in
food prices over the past year. However, PCE prices have posted considerably larger
increases in recent months as energy prices have surged. In contrast, core PCE prices
have continued to increase moderately of late, abstracting from a jump in the nonmarket
component of prices in October. Over the 12 months ending in October, core PCE prices
increased 1½ percent, well below the increase of 2¼ percent registered over the yearearlier 12-month period. Survey measures of longer-term inflation expectations have
been mixed with a small increase in the Reuters/University of Michigan survey and small
decreases in the Survey of Professional Forecasters (SPF).
Consumer energy prices climbed 1.6 percent in October after increasing 0.8 percent in
September. The surge in consumer energy prices in recent months reflects this year’s
rebound in the price of crude oil and an unusually quick pass-through of the run-up in
spot prices for natural gas that occurred in October. Indeed, consumer prices for natural
gas jumped 1.9 percent in October, boosted by fuel adjustment surcharges in several
metropolitan areas that had unusually cold October weather. Based on recent survey
data, we expect consumer gasoline prices to move up sharply in November. In contrast,
natural gas spot prices moved down significantly in November in response to ample
inventories, but they have more than retraced that decline in early December, likely
because of a cold snap in several parts of the country.
Although the sizable declines in food prices that were evident earlier in the year seem
mostly to have ended, consumer food prices remain 1½ percent below their level
12 months earlier. This 12-month decrease in consumer food prices stands in stark
contrast to the 7 percent increase over the year-earlier period. More recently, consumer

II-30

Price Measures
(Percent change)
12-month change

Oct.
2008

Oct.
2009

1-month change

Annual rate
Measures

3-month change

Monthly rate

July
2009

Oct.
2009

Sept.
2009

Oct.
2009

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

3.7
6.3
11.5
2.2
.1
3.0
2.2
4.2
2.2
3.2
1.8

-.2
-.6
-14.0
1.7
2.3
1.5
.6
2.7
1.4
-.5
1.3

3.4
-1.8
32.5
1.7
2.9
1.3
-.1
2.9
1.6
...
...

3.6
.2
30.1
1.7
1.8
1.6
.8
3.4
1.6
...
...

.2
-.1
.6
.2
.3
.1
.1
.3
.2
...
...

.3
.1
1.5
.2
.4
.1
.0
.2
.2
...
...

PCE prices
Total
Food and bev. at home
Energy
Ex. food and energy
Core goods
Core services
Housing services
Other services
Memo: core ex. tobacco
Core market-based
Core non-market-based

3.2
7.0
12.5
2.3
.4
2.9
2.7
3.0
2.2
2.4
1.3

.2
-1.6
-14.4
1.4
1.3
1.5
1.2
1.6
1.2
1.6
.5

2.5
-2.8
37.2
1.3
.4
1.7
.6
2.0
1.2
1.1
2.6

2.9
-.7
34.0
1.7
.2
2.1
-.4
2.9
1.6
1.2
4.1

.1
-.4
.8
.1
.3
.1
-.1
.1
.1
.1
.2

.3
.1
1.6
.2
.0
.3
.0
.4
.2
.1
.8

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

5.2
6.5
5.5
4.7
4.9
4.2
9.8
9.0
.1
-5.5

-1.9
-2.7
-9.4
.7
1.2
.1
-7.5
-5.6
-14.1
-1.6

3.6
-7.7
25.6
1.2
1.8
.3
5.6
.7
17.4
50.6

6.0
7.8
31.4
-1.8
-1.7
-2.0
9.7
5.5
31.5
48.6

-.6
-.1
-2.4
-.1
-.1
-.1
.2
.9
-2.1
3.6

.3
1.6
1.6
-.6
-.5
-.7
.3
-.2
5.4
.5

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted (n.s.a.).
... 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)

Measures of Core PCE

PCE Prices
Percent

5
4

PCE excluding food and energy
Market-based components
Trimmed mean

4
Total PCE

Percent

3
Oct.

2
1

Core PCE

-1

Oct.
Oct.

-1

-2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-2

CPI and PCE ex. Food and Energy

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: For trimmed mean, Federal Reserve Bank of
Dallas; for all else, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

Percent

5
4

PCE Goods and Services
Percent

CPI

3
2

3
Services ex. energy

2
Oct.

2
PCE

CPI
chained

Oct.

-1
-2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor
Statistics; for PCE, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

-3

Total PCE

-2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-3

PCE excluding Food and Energy
Percent

-1
Goods ex.
food and energy

Percent

3-month change, annual rate
3-month change, annual rate

-3

-6

-3

Oct.
0

-9

Oct.

1
0

-6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

0
-1

-1

-9

-2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-2

II-32

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

Gasoline Price Decomposition

Total Gasoline Margin
180

Cents per gallon
Retail price less average spot crude price*

180

160

140

120

Cents per gallon

450
400

400

350
300

450

350
Retail price*
Rack price

300

250

Dec. 7

250

80
60

100
80

2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff,
less average spot crude price: 60% West Texas Intermediate,
40% Maya heavy crude. Includes gasoline taxes.

200

150

Dec. 7

100

150

100
50

Gasoline Inventories

2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff.
** 60% West Texas Intermediate, 40% Maya heavy crude.

Natural Gas Prices
Millions of barrels

250

100

Average spot crude price**

250

Dollars per million BTU

Adjusted for ethanol use*

Futures price

240

Dec. 8

18
16

14
230

230
Dec. 4

220

210

200

190

180

2006
2007
2008
2009
2010
Note: Bounds are defined as the monthly mean over the
preceding five years, plus or minus the standard deviation
for each month. Monthly data through June 2009,
weekly data thereafter.
* The RBOB component of total motor gasoline inventories
is adjusted for ethanol use after 2006, boosting reported
stocks; estimated by FRB staff.

12-month percent change

Food and beverages

Oct.
Ex. food and energy

Dollars per bushel

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

10
8

-2

-1
2005
2006
2007
2008
2009
2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

Dec. 8

2
0

6
4

-1
-2

Dollars per bushel

2010

3
1

2009

Spot Prices of Agricultural Commodities

PCE: Food at Home and Core Prices
8

2005
2006
2007
2008
Note: National average spot price.
Source: Bloomberg.

2
2005
2006
2007
2008
Source: Commodity Research Bureau.

2009

2010

II-33

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

Percent

Percent
12

Quarterly

Monthly

Median, next 5 to 10 years

Nov.

6
4
Q3
2
0

Median, next 12 months

1975
1985
1990 1993
1995
1973
1977 1980
1981
1985
1989
1997 2000
2001
Source: Reuters/University of Michigan Surveys of Consumers.

Inputs to Models of Inflation
12

2005
2005

2010
2009

2005 2006 2007 2008 2009 2010

Percent

Quarterly

Percent

Quarterly

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

6
2

4
Distributed lag of
core PCE inflation

2
0

0
0
0
1975
1985
1990 1993
1995
2005
2010
2005 2006 2007 2008 2009 2010
1973
1977 1980
1981
1985
1989
1997 2000
2001
2005
2009
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. 8

-2
-2
-2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2005 2006 2007 2008 2009 2010
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-34

Commodity Price Indexes

Journal of Commerce

Ratio scale, 2006 = 100
180
140
Dec. 8

100

100
100
Industrials
60

Metals
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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 JOC data is held by CIBCR, 1994.

Commodity Research Bureau

500

Ratio scale, 1967 = 100
650
600
Dec. 8
550
500

400

600

450
Spot industrials
350
300

300
250
Futures

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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

2008 1
-41.4
-48.2
-35.1
-14.1
-24.7

12/30/08 10/27/092
to
to
10/27/09 2 12/8/09
49.4
79.1
36.8
11.7
29.5

8.4
.8
7.5
3.7
3.8

52-week
change to
12/8/09
64.1
70.8
51.0
22.6
41.9

1. From the last week of the preceding year to the last week of the year indicated.
2. October 27, 2009, is the Tuesday preceding publication of the October Greenbook.

150

II-35

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

2006

2007

2008

2009

Product prices
GDP price index
Less food and energy

3.3
3.3

2.6
2.6

2.5
2.7

.6
.3

Nonfarm business chain price index

3.0

2.1

1.9

Expenditure prices
Gross domestic purchases price index
Less food and energy

3.4
3.2

2.6
2.6

4.0
2.9

-.9
.2

PCE price index
Less food and energy

2.8
2.5

2.3
2.2

4.3
2.6

-.7
1.3

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

2.9
2.5

2.0
1.9

4.6
2.6

-.6
1.7

CPI
Less food and energy

3.3
2.8

2.3
2.1

5.2
2.5

-1.6
1.5

Chained CPI
Less food and energy

3.1
2.6

2.0
1.7

4.5
2.1

-1.6
1.1

Median CPI
Trimmed mean CPI

3.0
2.8

2.9
2.5

3.2
3.6

1.7
1.1

Trimmed mean PCE

2.8

2.5

2.9

1.6

Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for median and trimmed mean CPI,
Federal Reserve Bank of Cleveland; 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

2008:Q1
Q2
Q3
Q4

4.1
4.4
5.3
1.6

4.2
6.4
5.4
3.0

3.8
5.0
4.7
2.8

3.3
3.8
3.6
2.9

3.0
3.3
3.1
2.8

2.5
2.5
2.5
2.5

2.2
2.2
2.2
2.2

2009:Q1
Q2
Q3
Q4

.0
-1.2
-1.6
n.a.

2.4
3.4
3.1
n.a.

2.0
2.9
2.6
n.a.

3.3
3.1
3.2
n.a.

2.9
2.9
2.9
n.a.

2.4
2.5
2.5
2.3

2.2
2.3
2.2
2.1

2009:July
Aug.
Sept.
Oct.
Nov.

-2.1
-1.5
-1.3
-.2
n.a.

3.6
3.0
2.8
3.2
3.1

2.9
2.8
2.2
2.9
2.7

3.4
3.1
3.2
3.2
3.2

3.0
2.8
2.8
2.9
3.0

...
2.5
...
...
2.3

...
2.2
...
...
2.1

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 Surveys of Consumers; for professional forecasters, the Federal Reserve
Bank of Philadelphia.

II-36

food prices edged up 0.1 percent in October, while spot prices for grain and livestock
have risen briskly in recent weeks.
PCE prices excluding food and energy moved up 0.2 percent in October as prices in the
volatile nonmarket category jumped 0.8 percent. Market-based core prices remained
subdued in October, edging up 0.1 percent for the sixth consecutive month. Over the past
12 months, the deceleration in core PCE prices has been relatively widespread. Apart
from the tax-induced increases in tobacco prices and a rebound in motor vehicles prices,
prices for core goods decelerated considerably over the year ending in October. Core
services prices also decelerated significantly over the past 12 months, reflecting notably
smaller increases in housing services and several other services categories.
Measures of inflation expectations have been mixed recently. In the Reuters/University
of Michigan survey for November, median year-ahead inflation expectations moved
down 0.2 percentage point from their October reading to 2.7 percent. Median inflation
expectations over the next 5 to 10 years edged up 0.1 percentage point from their October
reading to 3.0 percent but remain in the narrow range that has prevailed over the past few
years. In contrast, median long-run inflation expectations as measured by the SPF moved
down in the fourth quarter from earlier readings, with expectations for the CPI moving
down 0.2 percentage point to 2.3 percent, and expectations for the PCE index edging
down 0.1 percentage point to 2.1 percent.
At earlier stages of processing, the producer price index (PPI) for core intermediate
materials declined 0.2 percent in October, breaking a string of four consecutive months of
increases. Despite the recent four-month increase, the PPI for core intermediates remains
well below its elevated level a year ago. In contrast, commodity prices stand a good bit
above their year-earlier levels. Since the October Greenbook, both the Commodity
Research Bureau (CRB) spot index of industrial materials and the Journal of Commerce
(JOC) index of industrial materials have continued to move up, rising 7.5 percent and
8.4 percent, respectively.
Labor Costs
After a sharp decline in the first quarter, revised data indicate that P&C compensation per
hour rebounded in the second quarter and continued to rise solidly in the third quarter. 9
9

In the supplement to the October Greenbook, P&C compensation per hour was reported to have
decreased at an annual rate of 2¼ percent in the first half of the year and was estimated to have increased at
an annual rate of nearly 2 percent in the third quarter. After folding in the upwardly revised data on

II-37

Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2007:Q3 2008:Q3
to
to
2008:Q3 2009:Q3e

Category

2009
Q1

Q3 e

Compensation per hour
Nonfarm business

3.1

2.5

-4.7

6.9

5.4

Output per hour
Nonfarm business

1.2

3.8

6.9

7.3

Unit labor costs
Nonfarm business

1.9

-1.2

-5.0

-1.8

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

Percent

4
7

Productivity and costs*

0
3
ECI

0
Q3

-1

-2

-1

1996 1998 2000 2002 2004 2006 2008 2010
1997 1999 2001 2003 2005 2007 2009
*Value for 2009:Q3 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-1

-2

-3

-4

-5

1996 1998 2000 2002 2004 2006 2008 2010
1997 1999 2001 2003 2005 2007 2009

-5

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

Markup, Nonfarm Business

Average Hourly Earnings
(Percent change from year-earlier period)
4.5

Percent

4.5

4.0

1.72

3.5

3.0

2.5

Ratio

1.76

2.5

1.76
1.72

1.68

1.64
2.0

Nov.

1.60

1.5

1.5
1.0

2.0

1.64

1996 1998 2000 2002 2004 2006 2008 2010
1997 1999 2001 2003 2005 2007 2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

1.56

1.0

1.52

Average,
1968-present
1996 1998 2000 2002 2004 2006 2008 2010
1997 1999 2001 2003 2005 2007 2009
Note: The markup is the ratio of output price to unit
labor costs. Value for 2009:Q4 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.

1.56
1.52

II-38

Change in Employment Cost Index of Hourly Compensation
for Private-Industry Workers
2008
Measure

2009

Sept.

Dec.

2.6
2.6
2.3

1.9
1.8
1.5

Total hourly compensation
Wages and salaries
Benefits

Mar.
June
Quarterly change
(compound annual rate) 1
.7
.7
.7

Sept.

.7
.7
.7

1.8
1.8
1.1

1.5
1.6
1.3

1.2
1.4
1.1

12-month change
Total hourly compensation
Wages and salaries
Benefits

2.8
2.9
2.4

2.4
2.6
2.0

1.9
2.0
1.6

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

Change in ECI Benefits (unpublished)*
Health Insurance

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

Percent

Sept.

0
Sept.

-5

-10

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-5

-15

Retirement and Savings
30

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-15

Workers’ Compensation Insurance
Percent

Percent

5
0

5
Sept.

-5
-10

0
Sept.

0
-5

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-10

-5
-10

-5

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

*The data on the costs of individual benefits should be interpreted with care because, with the exception of health insurance, they
do not meet BLS’s standard publication criteria.

-10

II-39

Nonetheless, after smoothing through the quarterly swings, measures of labor costs have
decelerated modestly over the past year. P&C compensation per hour is reported to have
risen 2.5 percent over the four quarters ending in the third quarter of this year, down from
a 3.1 percent increase over the four quarters ending a year earlier. Labor compensation
as measured by the ECI decelerated more sharply over the past year, moving up only
1.2 percent over the 12 months ending in September after increasing 2.8 percent in the
year-earlier period.
Turning to the current quarter, average hourly earnings of production and nonsupervisory
workers increased 0.3 percent in October and 0.1 percent in November. Average hourly
earnings have also decelerated over the past year. Over the 12 months ending in
November, this wage measure increased 2.2 percent, 1.7 percentage points less than over
the preceding year.

Last page of Domestic Nonfinancial Developments

second-quarter labor income from the BEA described earlier, the BLS now estimates that P&C
compensation per hour increased at annual rates of 1 percent in the first half of the year and 5½ percent in
the third quarter.

Domestic Financial
Developments

Domestic Financial Developments
Overview
Market expectations for the path of the federal funds rate shifted down over the
intermeeting period, and yields on nominal Treasury coupon securities decreased as well.
Stock prices moved higher, while yield spreads on corporate bonds edged down. In
short-term funding markets, year-end pressures have been muted thus far, although strong
demand for Treasury bills that mature early next year has helped push their yields close
to zero. Net debt financing by nonfinancial businesses remained light in recent weeks, as
C&I loans outstanding contracted further but net bond issuance remained fairly strong.
The first newly issued CMBS since June 2008 came to market over the intermeeting
period, but conditions in the commercial mortgage market continued to be tight overall.
In the household sector, the latest data showed a further slight contraction of mortgage
debt and consumer credit and delinquency rates that have remained very high.
Policy Expectations and Treasury Yields
Implied rates on federal funds and Eurodollar futures decreased, on net, over the
intermeeting period. Although the FOMC’s decision to keep the target range for the
federal funds rate unchanged at the November meeting and the retention of the “extended
period” language in the accompanying statement were largely anticipated, market
participants took note of the Committee’s explicit enumeration of some of the factors that
are expected to continue to warrant this policy, and Eurodollar futures rates decreased
slightly on the release. Investors’ perceptions that the federal funds rate will likely
remain near its current level for some time appeared to be reinforced by subsequent
Federal Reserve communications, most notably Chairman Bernanke’s speech on
November 16. Incoming economic data were, on balance, somewhat better than
expected, but their net impact on interest rate expectations appeared to be small. Based
on the staff’s usual assumption of a term premium of 1 basis point per month, futures
quotes currently indicate that the federal funds rate is expected to rise above 25 basis
points for the first time during the third quarter of 2010 and to reach about 1¾ percent by
the end of 2011. In the December survey of primary dealers, around two-thirds of
respondents reported expecting the first policy rate increase to occur by the end of 2010,
a slightly larger fraction than in the October survey.
Consistent with the decline in the expected path of the federal funds rate over the
intermeeting period yields on nominal Treasury securities declined 22 basis points and
12 basis points at the 2- and 10-year maturities, respectively. TIPS yields fell slightly
more than nominal yields, implying a small net increase in inflation compensation.

III-1

III-2
Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2008

Change to Dec. 8 from
selected dates (percentage points)

2009

Instrument
Sept. 12

Sept. 22

Nov. 3

Dec. 8

2008
Sept. 12

2009
Sept. 22

2009
Nov. 3

2.00

.13

-1.87

.00

1.46
1.80

.11
.20

.06
.17

.03
.15

-1.43
-1.65

-.08
-.05

-.03
-.02

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

2.39
2.75

.18
.21

.16
.18

.13
.20

-2.26
-2.55

-.05
-.01

-.03
.02

Large negotiable CDs1
3-month
6-month

2.79
3.09

.25
.35

.22
.32

.22
.30

-2.57
-2.79

-.03
-.05

.00
-.02

Eurodollar deposits3
1-month
3-month

2.60
3.00

.40
.55

.30
.45

.32
.45

-2.28
-2.55

-.08
-.10

.02
.00

Bank prime rate

5.00

3.25

-1.75

.00

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

2.24
2.97
3.93

.99
2.44
3.74

.93
2.37
3.73

.71
2.12
3.61

-1.53
-.85
-.32

-.28
-.32
-.13

-.22
-.25
-.12

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

1.33
1.77

1.11
1.69

.70
1.48

.41
1.33

-.92
-.44

-.70
-.36

-.29
-.15

Municipal general obligations (Bond Buyer)6

4.54

4.20

4.39

4.24

-.30

.04

-.15

4.26
4.36
6.62
7.22
10.66

3.67
4.12
5.11
6.36
9.90

3.62
4.06
5.12
6.25
9.48

3.52
3.85
4.96
6.00
9.42

-.74
-.51
-1.66
-1.22
-1.24

-.15
-.27
-.15
-.36
-.48

-.10
-.21
-.16
-.25
-.06

5.78
5.03

5.04
4.52

4.98
4.47

4.71
4.25

-1.07
-.78

-.33
-.27

-.27
-.22

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

Private instruments
10-year swap
10-year FNMA7
10-year AA8
10-year BBB8
10-year high yield8
Home mortgages (FHLMC survey rate)
30-year fixed
1-year adjustable

Record high

Change to Dec. 8
from selected dates (percent)

2009

Stock exchange index
Level
Dow Jones Industrial
S&P 500 Composite
Nasdaq
Russell 2000
D.J. Total Stock Index

Date

Sept. 22

Nov. 3

Dec. 8

Record
high

2009
Sept. 22

2009
Nov. 3

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

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

9,830
1,072
2,146
621
11,083

9,772
1,045
2,057
571
10,729

10,286
1,092
2,173
598
11,207

-27.38
-30.23
-56.96
-30.16
-29.10

4.64
1.89
1.24
-3.70
1.12

5.26
4.45
5.62
4.75
4.46

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.
_______________________________________________________________________
NOTES:
September 12, 2008, is the last business day before Lehman Brothers Holdings filed for bankruptcy.
September 22, 2009, is the day before the September 2009 FOMC monetary policy announcement.
November 3, 2009, is the day before the most recent FOMC monetary policy announcement.
_______________________________________________________________________

III-3

Policy Expectations and Treasury Yields
Interest Rates
4.0
3.8

Percent
FOMC
statement

Percent
Employment
report

Chairman’s
speech

1.50

Employment
report

1.25
10-year Treasury yield
(left scale)

3.6

1.00

3.4

0.75

3.2
3.0

0.50
June 2010 Eurodollar
(right scale)

2.8

0.25

2.6
2.4

0.00
Nov. 3

Nov. 6

Nov. 11

Nov. 16

Nov. 19

Nov. 24

Nov. 27

Dec. 2

Dec. 7

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

Implied Federal Funds Rate

Treasury Yield Curve
Percent

Percent

3.5

5.0
November 3, 2009

4.5

3.0

4.0

2.5

December 8, 2009

3.5
3.0

2.0

2.5

1.5

May
Sept.
2010

Jan.

May
Sept.
2011

1.5
1.0

December 8, 2009

Jan.

2.0

1.0

November 3, 2009

0.5
Jan.

0.5

0.0

0.0
1

Years ahead

Note: Estimated from federal funds and Eurodollar futures,
with an allowance for term premiums and other adjustments.
Source: CME Group.

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 Board.

10-Year Treasury Implied Volatility

Inflation Compensation
Percent

Daily

Nov.
FOMC

Percent
16

Nov.
FOMC

Daily

14
12

5 to 10 years ahead
Dec.
8

10
8

3
2

Next 5 years*

Dec.
8

-1

0
Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan.
2007
2008
2009
Note: 10-year Treasury note implied volatility derived from
options on futures contracts.
Source: Bloomberg.

-2
Jan. May Sept. Jan. May Sept. Jan. May Sept.
2007
2008
2009
Note: Estimates based on smoothed nominal and inflation-indexed
Treasury yields.
*Adjusted for lagged indexation of Treasury inflation-protected
securities.
Source: Federal Reserve Board.

III-4

Financial Institutions, Short-Term Funding Markets, and Liquidity Facilities
Bank Exchange-Traded Funds

Senior CDS Spreads for Banking Organizations
Jan. 2, 2009 = 100

Daily

Large banks
Regional and smaller banks

Nov.
FOMC

Basis points
260
240

Daily

Large bank holding companies
Other banks

220

Nov.
FOMC

450
400

200

350

180

300

160
Dec.
8

250

140

200

120
Dec.
8

100
80

100

60
40

Jan.

May
2008

Sept.

Jan.

May
2009

Sept.

150

Jan.

May
2008

Sept.

Jan.

May
2009

Sept.

Note: Large bank ETF consists of 24 banks; regional and smaller
bank ETF consists of 51 banks.
Source: Keefe, Bruyette & Woods (KBW) and Bloomberg.

Note: Median spreads for 6 large bank holding companies and 10
other banks.
Source: Markit.

Libor over OIS Spread

Spreads on 30-day Commercial Paper
Basis points
Nov.
FOMC

Daily

1-month
3-month
6-month

Basis points
400
350

Nov.
FOMC

Daily

ABCP
A2/P2

800
700

300
250

500

200

400

150
Dec.
9

600

300

100

200
Dec.
8

50
0

July Nov. Mar. July Nov. Mar. July Nov.
2007
2008
2009
Source: British Bankers’ Association and Prebon.

1600

0
July Nov. Mar. July Nov. Mar. July Nov.
2007
2008
2009
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.

Usage of TALF and Other Lending Facilities
Billions of dollars

Expected Year-End Premiums in Libor

Billions of dollars
Nov.
FOMC

Daily

1400

100

Basis points

300
250

1600
1-month
2-month

1400

1200

200

1000

800

150

600
Other facilities*
(left scale)

400
200
0

Dec.
7
TALF
(right scale)

800

100

600
400

200

0
0
Jan.

June Nov. Apr.
Oct. Mar. Aug.
2007
2008
2009
* Includes primary, secondary, and seasonal credit; TAF; PDCF;
dollar liquidity swaps; CPFF; and AMLF.
Source: Federal Reserve Board.

2006

2007

2008

2009

Note: Premiums measured from the change in Libor rates when
these contracts first rolled forward to settle past the year-end.
Source: Bloomberg and staff estimates.

III-5

Financial Institutions and Short-Term Funding Markets
Investor sentiment toward the financial sector has changed little, on balance, since the
November FOMC meeting. Equity prices at large and small banks increased a bit less
than broader market indexes, in part as investors continued to express concerns about the
future profitability of the banking industry; CDS spreads for banking institutions edged
down. Market commentary suggested that some large financial firms and hedge funds
may have pared their holdings of riskier assets ahead of year-end in order to lock in
capital market gains posted over the course of the year. Their increased demand for safe
assets reportedly contributed to the scarcity and near-zero yields of Treasury bills
maturing just after year-end.
Conditions in short-term funding markets changed little over the intermeeting period.
One- and three-month Libor-OIS spreads remained very low, while six-month spreads
continued to edge down. Spreads on A2/P2-rated commercial paper and AA-rated ABCP
also remained at the low end of each of their ranges since the fall of 2007. Thus far,
year-end pressures appear to be much lighter than in the past two years. The forward
premiums priced into one- and two-month Libor rates as they crossed year-end were only
20 basis points and 3 basis points, respectively—significantly less than those of last year
and the year before. Meanwhile, the term structure of commercial paper rates has stayed
relatively flat through the early part of 2010.
Federal Reserve Purchase Programs and Facilities
Total Federal Reserve holdings of agency debt and MBS under the large-scale asset
purchase programs reached $156 billion and about $1.1 trillion, respectively, during the
intermeeting period. Reports suggest that the tapering of Federal Reserve purchases of
agency MBS has, to date, placed only modest upward pressure on MBS yields. Some
market participants reportedly interpreted the relatively low shares of accepted bids in the
agency debt operations as indicating a wind-down in that program as well. The
announcement in the FOMC statement that the Federal Reserve would purchase only
about $175 billion of agency securities had not been generally anticipated by market
participants, and spreads on those securities increased a few basis points on the release.
Usage of the Federal Reserve’s credit facilities generally declined further over the
intermeeting period. TAF auctions—including those that provided funding over yearend—continued to be substantially undersubscribed. Commercial paper held by the
CPFF declined to around $9 billion, and TALF credit edged up slightly to around
$44 billion. On November 17, the TALF subscription for CMBS resulted in loans
totaling about $1.4 billion, including about $72 million in loans backed by the first newly
issued CMBS since June 2008. On December 3, the ABS TALF subscription supported

III-6

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

Expected Real Equity Return and
Long-Run Treasury Yield

Nov. 3, 2009 = 100
Daily

165

Nov.
FOMC

Percent
14

Monthly

140

S&P Financial
Dec.
8

Expected 10-year real equity return

115

8
6

Dec.
8

S&P 500

Expected real yield on 10-year Treasury*

40
Sept.
Dec.
2008

Mar.

June Sept.
2009

Dec.

-2
1991 1994

1997 2000

2003 2006 2009

* Off-the-run 10-year Treasury yield less Philadelphia Fed 10-year
expected inflation.
+ Denotes the latest observation using daily interest rates and
stock prices and latest earnings data from I/B/E/S.
Source: Thomson Financial.

Source: Standard & Poor’s.

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Weekly Friday*

Percent
95

Nov.
FOMC

Daily
Nov.
FOMC

21
19

10-year high-yield

35
Dec.
8

9
Dec.
8

25
15

2008

2009

2007

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

Basis points

Nov.
FOMC

1600

2009

Estimated Median Bid-Asked Spread
for Corporate Bonds

Basis points

Daily

2008

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

Corporate Bond Spreads
1800

7
5

10-year BBB

5
2007

1000
900

500

Daily

450

Nov.
FOMC

800

1400

Basis points

400

700

800
600

10-year high-yield
(left scale)

250

400
Dec.
8

400
10-year BBB
(right scale)

200

300

500

1000

350

600

1200

200

High-yield

300
200

150
Investment-grade

Dec.
8

100
0

2003

2005

2007

2009

Note: Corporate yields from smoothed yield curves based on
Merrill Lynch bond data and spreads measured relative to
comparable-maturity Treasury securities.

100
50
0

2005

2006

2007

2008

2009

Source: Staff estimate using data from the National Assn. of
Securities Dealers’ Trade Reporting and Compliance Engine.

III-7

six deals, with a total of about $3 billion in loan requests that will settle later this week.
Thus far, there are no indications in interbank, repurchase agreement (repo), or
commercial paper markets to suggest that market participants expect conditions to
deteriorate around February 1, 2010, when some facilities (the AMLF, CPFF, PDCF,
TSLF, and foreign currency swap lines) are scheduled to expire.
On November 17, the Board announced a reduction in the maximum maturity of primary
credit loans at the discount window for depository institutions to 28 days from 90 days,
effective January 14, 2010. In early December, the Federal Reserve Bank of New York
began conducting a series of small-scale, real-value reverse repo transactions with
primary dealers as a test of the systems needed to use such transactions as a reservedraining tool. Financial markets were unaffected by these developments.
Stock Prices and Corporate Interest Rates
Over the intermeeting period, broad stock price indexes rose about 5 percent, reflecting,
in part, stronger-than-expected earnings reports from a number of firms in the first half
of November. The staff’s estimate of the real return on equity expected over the next
10 years for S&P 500 firms continued to hover at about its average levels during the
recession of the early 1990s. As a result, the gap between the expected return and the
real 10-year Treasury yield—a gauge of the equity risk premium—remained at a level
that would appear broadly consistent with continued investor uncertainty about the pace
of economic recovery. However, option-implied volatility on the S&P 500 index fell,
and it now stands at roughly its lowest level since early September 2008.
Over the intermeeting period, yields on investment- and speculative-grade corporate
bonds decreased a little more than those on comparable-maturity Treasury securities,
leaving the risk spreads a touch narrower. Estimates of bid-asked spreads for investmentand speculative-grade corporate bonds—indicators of liquidity in the secondary corporate
bond market—remained steady at moderate levels. Conditions in the leveraged loan
market were also little changed, with both average bid prices and bid-asked spreads about
flat for the period.

III-8

Corporate Earnings and Credit Quality
S&P 500 Earnings Per Share

Revisions to Expected S&P 500 Earnings
Dollars per share

Percent
24

Quarterly

Monthly

MidNov.

20
Q3

-1

18
16

-3

-5

-7

-9

-11

4
2000

2003

2006

2009

2000

2003

2006

-13

2009

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.
* Revision in Feb. 2009 was -17.2%.
Source: Thomson Financial.

Note: Data are seasonally adjusted by Board staff.
e Estimate.
Source: Thomson Financial.

Financial Ratios for Nonfinancial Corporations
Ratio

Bond Ratings Changes of Nonfinancial Companies

Ratio

Percent of outstandings
0.14

0.36

40
Annual rate

Debt over
total assets
(left scale)

0.33

Liquid assets over
total assets
(right scale)

Upgrades

0.12

Q4
Q3
H1

0.10

0.30
p

0.27

0.08

0.06

40
Downgrades

0.24
0.04
1989

1993

1997

2001

2005

2009

1991

1994

1997

2000

2003

2006

2009

e Estimate.
Source: Calculated using data from Moody’s Investors Service.

Note: Data are annual through 1999 and quarterly thereafter.
p Preliminary.
Source: Compustat.

Selected Default and Delinquency Rates

Expected Nonfinancial Year-Ahead Defaults

Percent of outstandings

Percent of liabilities
8

Monthly

C&I loan delinquency rate

3
Oct.

2
Nov.

Bond default rate*

2
1

0
0
1991

1994

1997

2000

2003

2006

2009

* 6-month trailing defaults divided by beginning-of-period
outstandings, at an annual rate.
Source: For default rate, Moody’s Investors Service; for
delinquency rate, Call Report data.

1994

1997

2000

2003

2006

2009

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

III-9

Corporate Earnings and Credit Quality
With the latest quarterly earnings season now almost complete, earnings per share for
S&P 500 firms are estimated to have logged another solid gain in the third quarter. In
addition, during the month ending in mid-November, analysts significantly revised up
their expectations for year-ahead earnings for S&P 500 firms.
On balance, indicators of the credit quality of nonfinancial firms improved somewhat in
recent months. The aggregate ratio of debt to assets for nonfinancial corporations fell in
the third quarter, while liquid assets as a share of total assets climbed further. The pace
of nonfinancial corporate ratings downgrades by Moody’s remained moderate through
November, while the pace of upgrades was strong, in large part reflecting the upgrade of
Ford Motor Company last month. Although the delinquency rate on C&I loans continued
to increase in the third quarter, the six-month trailing bond default rate for all U.S. firms
inched down further in October and has retraced about three-quarters of the spike that
occurred in late 2008 and early this year. The year-ahead expected default frequency for
nonfinancial firms from Moody’s KMV remained close to 2 percent, less than half its
level in March.
Business Finance
Gross issuance of investment-grade bonds by nonfinancial corporations jumped in
November following a lull in October, and speculative-grade bond issuance maintained a
solid pace. By contrast, both nonfinancial commercial paper outstanding and C&I loans
contracted, on net, in November, although the decrease in commercial paper was not
widespread across issuers. Overall, net debt financing by nonfinancial businesses is
estimated to have been negligible this quarter after having been negative in the third
quarter.
Gross public equity issuance by nonfinancial firms remained solid in November,
including a spate of initial public offerings that were generally well received by the
market. In the third quarter, overall private and public equity issuance continued to
outpace retirements, as both estimated share repurchases and retirements from cashfinanced mergers remained muted. So far in the fourth quarter, announcements of share
repurchase programs have continued to be sparse, but the volume of announced mergers
and acquisitions has rebounded.
Public equity issuance by financial firms remained moderate in November. However, on
December 3, Bank of America completed a large secondary equity offering of just over
$19 billion in common-equivalent shares as part of the firm’s plan to repay TARP funds;
this offering was very well received. Gross bond issuance by financial firms slowed

III-10

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2009
Type of security

Oct.

Nov. p

5.4
.6
4.8

4.7
1.8
2.9

5.0
1.5
3.5

50.1
32.6
5.3
12.2

30.4
13.4
7.4
9.7

21.4
4.7
6.7
10.0

45.8
28.3
8.3
9.2

1.6

-12.4

-.9

4.2

-13.2

21.2

12.8

-17.7

-34.6

-22.2

-19.5

8.6
151.7

13.5
45.4

15.9
44.5

5.5
38.9

2.7
31.0

2.1
23.7

2005

5.5
1.6
3.8

3.7
.3
3.4

5.3
.2
5.1

29.3
13.1
6.2
10.1

35.1
17.5
7.5
10.0

27.7
19.5
1.8
6.4

2.4

-.4

10.2

11.1

5.0
170.4

Financial corporations
Stocks1
Bonds2

4.7
1.8
2.9

-.2

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

2008

18.7
8.7
5.2
4.8

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

2007

4.6
1.7
2.8

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

2006

5.3
180.6

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. For all nonfinancial firms; 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

Billions of dollars
80

Monthly rate, nonfinancial firms
Commercial paper*
C&I loans*
Bonds

80
Monthly rate, nonfinancial firms

60
H1

Total
Q3

Public issuance
Private issuance*
Repurchases
Cash mergers

60
40

Total

Q2
Q3

20
20
0
0
-20
-20
-40
-40

-60

-80
2005

2006

2007

2008

2009

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

-80
-100
2005

2006

2007

2008

2009

* Private issuance was revised back to 2005.
e Estimate.
Source: Thomson Financial, Investment Benchmark Report;
Money Tree Report by PricewaterhouseCoopers, National
Venture Capital Association, and Venture Economics.

III-11

Commercial Real Estate
Commercial Mortgage Debt

Commercial Real Estate Sales

Percent change, annual rate

Billions of dollars
24

Quarterly

21
18
15

Percent

140
Nov.

120
Share of properties sold
at nominal loss (right scale)

100

50
40

12
9
6

30
Value of sales (left scale)

60
20

3
0
Q3 e

-3

40
10

20
Nov.

-6
0
2001

2003

2005

2007

2009

0
2001

e Estimate
Source: Federal Reserve Board.

2003

2005

2007

2009

Note: 3-month moving averages.
Source: Real Capital Analytics.

Prices of Commercial Real Estate
Index, 2001:Q1=100
225

Delinquency Rates on Commercial Mortgages
Percent
on Existing Properties
Q3

Oct.

200
4
175
Moody’s index

150
Q3

NCREIF
TBI

Sept.

At commercial
banks*

125

3
CMBS
2

100
75
50

At life
insurance
companies

25
1996

1998

2000

2002

2004

2006

2008

2010

1996

Note: NCREIF TBI series re-weighted by staff to exclude multifamily.
Source: NCREIF; MIT Center for Real Estate; Moody’s.

Delinquency Rates on Construction Loans at Banks
Percent

2000

2002

2004

2006

2008

2010

Commercial Mortgage CDS Index Prices
CMBX

Quarterly

1998

Note: CMBS are commercial mortgage-backed securities.
*Excluding farmland.
Source: Citigroup; Call Report data; ACLI.

Percent

Daily, by rating
Senior AAA

Nov.
FOMC
Dec.
3

20
Q3
Residential
construction

Junior AAA

15
10

BBB5

Commercial
construction

0
Apr.

2007

2008

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

2009

Sept.
2007

Feb.

July
2008

Dec.

May
Oct.
2009

Note: Each index corresponds to pools of mortgages
securitized in 2006:H1.
Source: JPMorgan Chase & Co.

120
110
100
90
80
70
60
50
40
30
20
10
0

III-12

Residential Mortgages
Mortgage Rate and MBS Yield

Spread of Mortgage Rate to Treasury Yield
Percent

Basis points
8.0

Weekly

Nov.
FOMC

30-year conforming
fixed mortgage rate

Weekly

7.5

30-yr FRM to 10-yr Treasury
5/1 ARM to 2-yr Treasury

7.0

Nov.
FOMC

6.5
6.0
Dec.
2

5.5
Dec.
2
Dec.
8

MBS yield

Oct.
2006

Apr.

Oct.
2007

Apr.

Oct.
2008

Apr.

5.0

4.0

4.5
Dec.
2

3.5

Oct.
2009

Oct.
Apr.
2006

Oct.
2007

Apr.

Oct.
Apr.
2008

650
600
550
500
450
400
350
300
250
200
150
100
50

Oct.
2009

Note: For MBS yield, Fannie Mae 30-year current coupon rate.
Source: For mortgage rate, Freddie Mac; for MBS yield,
Bloomberg.

Note: Spreads are relative to corresponding off-the-run
Treasury yields.
Source: Bloomberg; Freddie Mac.

Net Agency MBS Issuance

Prices of Existing Homes
Billions of dollars

Percent change from a year earlier
100

Monthly

15
80

10
5

0
Oct.

Sept.
Oct.

40
FHFA price index
LP price index
20-city S&P/Case-Shiller price index

-5

Sept.

-10
-15

-20
-25

2003

2005

2007

2009

2003

Note: 3-month moving average
Source: FHLMC, FNMA, and GNMA.

2005

2007

2009

Source: For FHFA, Federal Housing Finance Agency; for LP,
LoanPerformance, a division of First American CoreLogic; for
S&P/Case-Shiller, Standard & Poor’s.

Delinquencies on Subprime and FHA-Backed
Mortgages

Delinquencies on Prime Mortgages
Percent of loans
Monthly
Oct.

Percent of loans
15

Percent of loans
40

Monthly

Oct.
Sept.

Variable-rate
Fixed-rate

6
Oct.

0
2001

2003

2005

2007

2009

Note: Percent of loans 90 or more days past due or in
foreclosure. Prime includes near-prime mortgages.
Source: McDash Analytics.

30
25

FHA (left scale)

Subprime (right scale)

10
5

0
2001

2003

2005

2007

2009

Note: Percent of loans 90 or more days past due or in foreclosure.
For subprime mortgages, rates are for securitized loans.
Source: For FHA-backed mortgages, McDash Analytics; for
subprime mortgages, LoanPerformance, a division of
First American CoreLogic.

III-13

somewhat further following the October 31 expiration of the FDIC’s Temporary
Liquidity Guarantee Program.
Commercial Real Estate Finance
Financing conditions for commercial real estate remained strained. Outstanding
commercial mortgage debt is estimated to have decreased at an annual rate of about
4 percent in the third quarter, and recent data suggest another decline this quarter. The
dollar value of commercial real estate sales stayed very low in November, and around
half of transacted properties were sold at a nominal loss. Commercial property prices
decreased about 3 percent in September, leaving the index about 40 percent below its
peak in mid-2007, at roughly its mid-2003 level. In October, delinquency rates on loans
in CMBS pools increased to 4¾ percent, about the same as the delinquency rate on CRE
loans for existing properties held by commercial banks in the third quarter. Delinquency
rates on banks’ construction and land development loans for residential and commercial
projects climbed above levels that were already exceptionally high. CDS index prices
covering a range of investment-grade CMBS increased, on net, as investors appear to
have been encouraged by the first issuance of CMBS since the spring of 2008; moreover,
reports suggest that two more CMBS deals will be offered in coming weeks.
Household Finance
Over the intermeeting period, the average interest rate on 30-year conforming fixed-rate
mortgages decreased to less than 5 percent, and the spread between this mortgage rate
and the 10-year Treasury yield was little changed. Despite the low level of the
conforming mortgage rate, refinancing activity does not seem to have picked up in recent
weeks. Agency MBS yields decreased, on net, in recent weeks, while issuance of these
securities moderated through October.
Following several monthly increases, the repeat-sales house-price index from
LoanPerformance (LP) inched down in September and October, leaving the index about
8 percent below its year-earlier level. Delinquency rates for fixed- and variable-rate
prime mortgages continued to climb in October, as did the delinquency rate for
FHA-backed loans.
Consumer credit contracted for the ninth consecutive month in October, as a sizable
decline in revolving credit more than offset a slight increase in nonrevolving credit.
Consumer ABS issuance increased in November, boosted by an increase in auto-loan
securitizations. Credit card ABS issuance, which was very low in the past two months, is
anticipated to pick up substantially in December as a result of interim guidance clarifying
how the FDIC would handle these securitizations for a sponsoring bank in receivership.

III-14

Consumer Credit and Mutual Funds
Consumer Credit

Gross Consumer ABS Issuance

Percent change, annual rate
16

3-month change

Monthly rate

Revolving

TALF eligible
Non-TALF

24
20

4
Oct.

Nonrevolving

Billions of dollars

Q3
N.

-4
Oct.

-8

2004

2005

2006

2007

2008

-16
2010

2009

-12
2005

2006

2007

4
0

2008

Note: Credit card, auto, and student loan ABS.
Source: Inside MBS & ABS; Merrill Lynch; Bloomberg;
Federal Reserve Board.

Source: Federal Reserve Board.

Consumer Interest Rates

Delinquencies on Consumer Loans
Percent

Percent
16

Oct.

Credit cards

Credit card loans
in securitized pools

Oct.

Nov.
29

Nonrevolving
consumer loans at
commercial banks

8
6

New auto loans

Nov.
29

3
2

Auto loans at captive
finance companies

0
2009

1
1997

Source: For credit cards, Mintel; for auto loans, Federal Reserve
Board.

1999

2001

2003

2005

2007

2009

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

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

2008
H2

2009
Q3

Oct.

Nov.e

Assets
Oct.

11.8
-3.6
-5.0
1.3
1.7
13.8
-0.2
11.1
2.9
56.1

-49.0
-35.1
-20.1
-15.1
-4.8
-9.1
0.1
-7.6
-1.6
59.6

0.5
-14.4
-7.8
-6.5
-2.9
17.8
2.7
11.2
3.9
0.1

46.1
14.2
9.7
4.4
2.3
29.7
2.9
21.1
5.7
-54.6

47.9
0.9
-3.7
4.6
5.2
41.8
1.4
31.8
8.7
-81.8

40.9
-7.1
-14.8
7.8
2.9
45.0
0.7
39.6
4.8
-71.8

33.4
-5.2
-10.0
4.8
2.5
36.1
0.8
30.3
5.1
-34.6

7,327
4,596
3,408
1,188
605
2,126
180
1,503
444
3,357

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

Sept.

4
2

2008

6
5

Used auto loans

2007

III-15

Treasury Finance
Foreign Participation in Treasury Auctions

Treasury Auction Amounts

Percent of total issue

Billions of dollars
140
Quarterly

Nov.
FOMC

6-month moving average
120

2-year
3-year
5-year
10-year

Nov.
30

Indirect bids

100

30
Oct.
15

60
40
20

2006

2007

2008

2009

Billions of dollars
250

Nov.
FOMC

2005

2007

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.

Daily Treasury Market Volume
Monthly average

0
2003

Note: No 3-year issuance between Q3 2007 and Q3 2008.
Source: U.S. Treasury.

20
10

Actual foreign allotment

0
2005

Average Absolute Nominal Yield Curve
Basis points
Fitting Error
Nov.
FOMC

Daily

30
25

200

20
Dec.

150
15
100
10
Dec.
8

0
2004

2005

2006

2007

2008

2009

2010

0
2001

Note: December observation is the month-to-date average.
Source: Bloomberg.

2003

2005

2007

2009

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.

Fails-to-Deliver of Treasury Securities

Treasury On-the-Run Premium
Basis points
Nov.
FOMC

Monthly average

Billions of dollars

Weekly

Nov.
FOMC

3000
2500

60
50

2000

1500

1000

10-year note
Dec.

Nov.
25

0
2001

2003

2005

2007

2009

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 Board.

500

Q3
Q1
Q3
Q1
Q3
2007
2008
2009
Source: Federal Reserve Board, FR 2004, Government Securities
Dealers Reports.

III-16

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

2009
Type of security

2005

2006

2007

2008

38.4
34.2
15.6
18.6
4.2

36.1
32.5
10.6
21.9
3.7

40.4
35.5
12.6
22.9
4.9

2.1

2.5

2.4

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

Oct.

Nov.

37.6
32.5
14.6
17.9
5.0

36.5
32.9
12.5
20.4
3.6

41.9
30.6
11.1
19.5
11.2

48.7
45.8
22.7
23.1
2.9

39.7
38.2
14.5
23.7
1.5

2.3

4.5

7.9

15.9

9.0

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

Ratings Changes
Number of ratings changes
1200
Annual rate

Upgrades

900
Q3
Q1 Q2

600
300
0
300
600

Downgrades

900
1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

1200

2009

Source: Moody’s Credit Trends.

Municipal Bond Yields

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
9

Weekly

Nov.
FOMC

Ratio
Nov.
FOMC

7
6

20-year general
obligation

5
Dec.
3

4
3

7-day SIFMA
swap index*

2
20-year

1
Nov.
25

Dec.
3

0
-1

2005

2006

2007

2008

2009

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

2003
Source: Bond Buyer.

2005

2007

2009

2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8

III-17

The latest readings on consumer interest rates have been mixed: Interest rates offered on
credit cards increased in October, while rates on new and used auto loans dropped in
November. Delinquency rates on consumer loans have remained high in recent months,
although they have not continued to climb.
Long-term mutual funds received sizable net inflows in November, though not quite as
large as had been seen during the summer. Net flows into bond funds last month again
more than offset net redemptions from equity funds. Money market mutual funds
continued to experience net outflows in November, as yields paid by these funds
remained extremely low.
Treasury Finance
To date, the Treasury has auctioned about $240 billion of nominal coupon securities
across the term structure during the intermeeting period. The auctions were very well
received, with bid-to-cover ratios mostly at the upper end of their recent ranges. Indirect
participation continued to trend upward, indicating resilient foreign demand. Treasury
trading volumes remained within their recent ranges, and indicators of liquidity in the
nominal coupon market—yield curve fitting errors, on-the-run premiums, and fails-todeliver in the repo market—were roughly stable. In the TIPS market, there were
indications that liquidity improved, on balance, in recent weeks.
In its quarterly refunding statement, the Treasury announced the discontinuation of the
20-year TIPS and the re-introduction of the 30-year TIPS, actions that were broadly in
line with market expectations. Separately, the Treasury Borrowing Advisory Committee
recommended that total TIPS issuance for 2010 increase to between $70 billion and
$80 billion, up from $58 billion in 2009. This amount, which would not be sufficient to
replace the stock of TIPS maturing next year, was significantly below traders’
expectations and may have put some downward pressure on TIPS yields over the period.
Absent legislative action, Treasury debt subject to limit is projected to breach the current
statutory ceiling in coming weeks. As in the past, the Treasury will likely use its
available accounting tools to continue normal funding operations until the Congress
raises the limit.
State and Local Government Finance
Gross issuance of long-term municipal bonds remained robust in November, mostly
driven by the strength of new capital issuance. The pace of short-term issuance was
again subdued in November, consistent with typical seasonal patterns. Newly acquired
ratings data from Moody’s show that credit quality in the municipal sector has steadily
deteriorated over the first three quarters of 2009. This trend had been obscured in the

III-18

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)1

Aggregate and components

(billions
of dollars),

2007

2008

5.9

8.3

7.7

3.9

4.6

8,392

Components2
Currency
Liquid deposits3
Small time deposits
Retail money market funds

2.0
4.3
4.3
20.2

5.8
6.9
11.7
13.1

11.6
16.9
-8.3
-15.8

3.4
12.7
-26.5
-33.0

.6
23.0
-43.0
-46.9

-5.0
19.8
-33.4
-34.2

859
5,600
1,102
826

Memo:
Institutional money market funds
Monetary base

40.2
2.0

24.7
70.4

18.4
46.7

-9.6
-2.2

-41.2
90.1

-38.2
49.4

2,266
2,016

2009
Q3
Oct.

Level

Nov.
(e)

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.
e Estimate.
Source: Federal Reserve Board.

Nov.
(e)

III-19

ratings data we obtained from Standard & Poor’s because of that firm’s gradual increase
in municipal debt ratings as they moved to align their ratings criteria for corporate and
municipal debt. Yields on long-term municipal bonds edged slightly lower over the
intermeeting period, leaving their ratios to comparable-maturity Treasury yields little
changed.
Money and Bank Credit
M2 increased at an annual rate of 4½ percent in November, in line with its rate of growth
in September and October. Liquid deposits continued to expand rapidly, while small
time deposits and retail money market mutual funds contracted further, albeit at a slightly
slower pace than in prior months. Currency ran off at an annual rate of 5 percent in
November, as demand from abroad continued to moderate. The monetary base expanded
at an annual rate of almost 50 percent, as purchases of long-term assets more than offset a
decrease in the usage of liquidity and credit facilities.
Commercial bank credit is estimated to have fallen further in November, although the
rate of decline slowed from that in previous months. Banks’ holdings of securities
decreased at about a 2 percent pace in November, and their total loans contracted about
5 percent at an annual rate. Core loans (the sum of C&I, real estate, and consumer loans)
decreased at an estimated annual rate of 7¼ percent in November, a pace that was about
half as rapid as in recent months. On the business side, C&I loans fell at a nearly
16 percent rate, as paydowns, maturing loans, and loan sales reportedly contributed to the
decline. Commercial real estate loans shrank at about a 10 percent pace, consistent with
weak fundamentals in that sector. On the household side, a slowdown in banks’ sales of
loans to the GSEs during the intermeeting period arrested the contraction in on-balancesheet holdings of closed-end residential mortgages registered in each of the previous
seven months; however, home equity loans continued to run off. Consumer loans
declined considerably as credit card loan originations dropped. Call Report data for the
third quarter show that unused commitments to fund loans contracted for the seventh
consecutive quarter, but that the rate of decline slowed, particularly for commitments to
lend to businesses.
Industry-wide measures of returns on assets and equity were bolstered by substantial
profits at a few large banks that resulted, in part, from reduced loan loss provisioning at
those institutions. However, delinquency and charge-off rates continued to rise for most
loan categories, and losses remained widespread among regional and smaller banks. In
the aggregate, regulatory capital ratios increased further in the third quarter, as
commercial banks received equity infusions from their parent holding companies and
reduced their asset holdings.

III-20

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

Level1
Nov. 2009e

2007

H2
2008

H1
2009

Q3
2009

Oct.
2009

Nov.
2009e

9.9

5.0

4.8

-5.5

-7.3

-12.0

-4.3

9,107

10.6
9.5

4.4
5.0

3.0
3.2

-7.4
-4.7

-12.9
-9.7

-15.5
-14.4

-5.0
-7.3

6,773
6,017

19.0
9.4

16.3
6.0

14.1
3.2

-14.1
-1.6

-20.0
-5.5

-28.7
-11.6

-15.7
-10.2

1,362
1,654

5.3
5.6
5.3
6.8
6.5
18.7

-3.3
13.0
-8.0
7.1
5.6
.8

-5.5
12.9
-11.2
7.6
4.5
1.7

-2.0
6.5
-5.1
.0
-1.7
-25.4

-8.2
-5.2
-9.3
-3.4
-4.3
-37.0

-11.8
-5.1
-14.4
-2.7
-3.8
-25.0

-.1
-6.7
2.6
-6.1
-12.4
13.0

2,159
604
1,556
843
1,228
756

7.6
-5.5
28.0

Total

2008

6.9
16.4
-4.1

11.1
31.4
-12.0

.7
.5
1.0

10.7
20.5
-3.0

-1.5
.8
-5.0

-2.1
5.1
-13.0

2,334
1,412
922

Loans2
Total
Core
To businesses
Commercial and industrial
Commercial real estate
To households
Residential real estate
Revolving home equity
Closed-end mortgages
Consumer
Memo: Originated3
Other
Securities
Total
Treasury and agency
Other4

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 (FAS 115) and the initial consolidation of certain variable
interest entities (FIN 46). Data also account for the effects of nonbank structure activity of $5 billion or more.
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 that retained recourse or servicing rights.
4. Includes private mortgage-backed securities; securities of corporations, state and local governments, and foreign governments;
and any trading account securities that are not Treasury or agency securities.
e Estimate.
Source: Federal Reserve Board.

Total Loans at Commercial Banks

Change in Unused Commitments

Trillions of dollars
Monthly

5.0

NBER
peak

Quarterly

Basis points
30

NBER
Peak

220

NBER
Peak

Quarterly

4.5

200
10

4.0

Large*

C&I Loan Rate Spreads*

Percent

180
0
3.5

160

-10
Nov.

3.0
-20

Small**

140

2.5
-30
2.0
June Dec.
2007

June Dec.
2008

June Dec.
2009

*Large are the top 25 domestic commercial
banks ranked by assets as of the last Call Report.
**Small are all other domestic commercial banks.
Source: Federal Reserve Board.

120
1993

1997

2001

2005

2009

Source: Call Report data, adjusted for the
effects of merger and failure activity involving
large thrift institutions.

1997

2000

2003

2006

2009

*The spread over market interest rate on an
instrument of comparable maturity, adjusted
for changes in nonprice loan characteristics.
Source: Survey of Terms of Business Lending.

III-21

Loan price data from the November Survey of Terms of Business Lending indicated that
C&I loan rate spreads over comparable-maturity market instruments rose noticeably for
the fifth consecutive survey. The increase was apparent across most types of loans,
including small loans and loans at small banks, which may indicate that credit conditions
for small and medium-sized firms tightened further.

Last page of Domestic Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to $36.5 billion in September, from
$30.8 billion in August, as a surge in imports outpaced an increase in exports.

The value of exports of goods and services moved up 2.9 percent in September after
remaining about flat in August. The September increase was relatively broadbased with
most major categories of exports moving higher. Capital goods recorded a particularly
robust gain, as aircraft recovered following a weak August and exports of machinery
climbed sharply, more than offsetting a slight decline in high-tech goods. Industrial
supplies also grew strongly, supported by higher exports of petroleum products and
chemicals. In contrast, exports of agricultural products fell, largely on account of lower
prices.
In the third quarter, nominal exports jumped a robust 24 percent at an annual rate, but
only retraced a small portion of the declines recorded late last year and through the first
half of this year. The third-quarter increase was most pronounced in industrial supplies,
helped by higher prices as well as an increase in volumes. Exports of automotive
products also recorded a large increase following especially steep declines in earlier

IV-1

IV-2

quarters. Most other major categories of exports also increased with the exception of
agricultural products, which recorded a small decline.

IV-3

IV-4

IV-5

The value of imports of goods and services jumped 5.8 percent in September, after
declining slightly in August. Imports of oil accounted for roughly one half of the
September increase, reflecting both greater volumes and higher prices. In addition to oil,
most other categories of imports also recorded gains in September, with imports of
automotive products exhibiting a particularly large increase.
For the third quarter as a whole, nominal imports surged nearly 37 percent at an annual
rate, but, as with exports, only managed to retrace a small amount of the steep decline
that occurred over the previous three quarters. The third-quarter increase was broadbased
across major categories of imports, with automotive products and oil showing particularly
large gains. The increase in oil imports was wholly reflected in higher prices as volumes
declined slightly.
Prices of Internationally Traded Goods
Non-oil imports. Prices for imported core goods rose 0.6 percent in October, slightly
less than in September, when they registered their largest increase since July 2008. The
increase reflected higher prices for both material-intensive goods, as in previous months,
and finished goods, whose prices previously had remained rather flat. Within finished
goods, prices for all major subcategories showed moderate growth.
Oil. The Bureau of Labor Statistics price index of imported oil has been roughly flat for
the past two months, falling 1 percent in September and then rising nearly 1 percent in
October. In contrast, the spot price of West Texas Intermediate (WTI) crude oil moved
higher during October, rising about 9 percent to an average of $76 per barrel for the
month as a whole, and then continued to move higher during November, rising to an
average of $78. In early-December, however, spot WTI retreated, closing most recently
on December 8 at $72.62 per barrel.
Exports. Core export prices rose 0.3 percent in October, in contrast to a 0.3 percent
decline the previous month. October prices were boosted by an increase in the prices of
materially-intensive exports, as higher prices for industrial supplies more than offset
lower prices of agricultural products. Prices for finished goods increased only slightly.

IV-6

IV-7

U.S. International Financial Transactions
Since the previous Greenbook, we have received additional Treasury data on
international financial transactions in the third quarter and partial data for October. On
balance, private foreigners have continued to sell U.S. Treasury securities and purchase
U.S. equities, while foreign official purchases of U.S. Treasuries have remained strong.
Foreign official inflows dipped in September but resumed quite strongly in October (see
line 1 of the table “Summary of U.S. International Transactions”; see also the figure
“Foreign Official Financial Inflows through October 2009”). Official purchases of U.S.
Treasury securities continued at a strong pace in both months,

.
Net official financial inflows in October also received a boost from a further $25 billion
decline in outstanding drawings by foreign central banks on the Federal Reserve swap
lines, reflecting continued normalization of funding markets. The swap lines are
recorded as a U.S. claim on foreigners and therefore generate inflows as they are repaid.
Banks located in the United States borrowed funds from affiliated foreign offices,
contributing to large net banking inflows in September (line 3). These flows could reflect
a recycling of funds that went abroad through other channels. In particular, we received
additional partial data for the third quarter that show U.S. institutional investors
purchased $130 billion in U.S. dollar-denominated negotiable CDs and short-term debt
abroad—most issued by foreign financial institutions. (These data, not shown, will be
included in line 10 upon the release of the third-quarter balance of payments accounts.)
Although dollar interest rates remain higher in Europe than in the United States, the
spreads have narrowed during 2009, suggesting that the large third-quarter outflows may
reflect improved sentiment toward foreign financial institutions.
Private foreigners intensified their net sales of Treasuries in October to $45 billion (line
4a), continuing the reversal of flight-to-safety flows. Net sales of Treasuries by
foreigners were concentrated in bills, likely in part reflecting the decline in the stock
outstanding. Private foreign investors continued to show interest in U.S. equities in both
September and October (line 4d), with September’s purchases ranking among the highest
since early 2008.

IV-8

However, private foreign interest in U.S. agency and corporate debt remains weak.
Private foreigners bought about $7 billion in agency bonds in September but sold $5
billion on net in October (line 4b). U.S. corporate bonds continue to be sold, on net, by
foreigners (line 4c).
U.S. investors continued their strong net purchases of foreign securities in September and
October, buying primarily foreign bonds (line 5a). International bond issuance has been
high in recent months, and the portion of such bonds denominated in U.S. dollars remains
elevated, which may be attracting U.S. investors.

IV-9

IV-10

IV-11

IV-12

Foreign Financial Markets
Since the October Greenbook, the dollar has depreciated, on net, against most major
currencies, falling about 1 percent on a trade-weighted basis against both the major
foreign currencies and the currencies of our other important trading partners. This
decline appears to have been driven in part by a continued normalization of risk attitudes.
Much of the dollar’s depreciation occurred early in the period, and the dollar fell broadly
after the meeting of the G-20 ministers over the weekend of November 7-8, with market
participants noting that the meeting’s communiqué failed to mention concern over the
dollar’s recent depreciation. Notably, the dollar depreciated 3 percent, on balance,
against the yen. Japanese officials have voiced concerns about the yen’s strength,
although in real effective terms, the yen has just returned to its level in 2005, a time when
the Japanese did not intervene in the foreign exchange market. The depreciation of the
dollar led several emerging economies, including Brazil and Korea, to intervene to stem
the appreciation of their currencies, while others are reportedly contemplating tightening
capital controls.
Consistent with a normalization in risk attitudes, global mutual fund flows show that
investors continue to pull money out of money-market funds in favor of equity and bond
funds. Foreign stock markets have generally risen, and foreign sovereign yields have
declined on net. Equity indexes in Europe and Japan rose 2¾ and 1 percent respectively,
while stock markets in Brazil and Mexico registered double-digit gains, amid rising
commodity prices and a better-than-expected Mexican GDP report. China’s stock market
rose nearly 9 percent, in part due to strong trade data. Yields on German and Japanese
sovereign benchmark bonds declined about 10 basis points. However, U.K. yields rose
by 9 basis points on net, in part because yields increased after the Bank of England
surprised markets by raising the size of its Asset Purchase Facility by only £25 billion to
£200 billion at the beginning of November.
News that the Dubai government had requested a standstill on debts owed by Dubai
World’s temporarily roiled financial markets. Global equity markets and sovereign bond
yields fell, while the dollar rose roughly 1 percent as investors pulled back from riskier
investments. These movements have largely been reversed as investors became
increasingly confident that this was an isolated event that was unlikely to spillover to
other markets. Sentiment was buttressed by the announcement that Dubai World was
seeking to restructure only $26 billion of its debt. U.K. banks appear to have the largest
exposure to Dubai World, with reports in the financial press suggesting that their overall
exposure is about $5 billion. The Dubai World event raised concerns that other sovereign

IV-13

nations with large outstanding debt levels, such as Greece, Hungary, and Ireland, may
have trouble refinancing, and CDS spreads rose accordingly. Although most spreads
have since fallen back, the Greek spread has risen further this week after Fitch lowered
Greece’s sovereign debt rating.

IV-14

IV-15

IV-16

IV-17

IV-18

IV-19

Developments in Advanced Foreign Economies
The advanced foreign economies are gradually emerging from their deep recessions.
Japan, the euro area, and Canada posted positive real GDP growth in the third quarter. In
the United Kingdom, GDP continued to decline, but domestic demand stabilized and the
pace of contraction moderated substantially. Indicators for the current quarter are
consistent with positive growth in all the major foreign economies. In particular,
improvements in PMIs and confidence indicators suggest continued positive momentum.
In addition, incoming data show that trade volumes improved further from their earlyyear lows, accompanied by increases in production.
Headline inflation has generally moved up since the October Greenbook, primarly
reflecting higher commodity prices. A notable exception is Japan, where 12-month rates
of both headline and core (excluding food and energy) inflation fell to record lows in
October. All major foreign central banks have kept their policy rates unchanged.
Recently, the BOJ announced a new lending facility offering three-month funds and the
BOE increased, though modestly, the size of its asset purchase program. The ECB, in
contrast, has announced some unwinding of liquidity support measures.

IV-20

IV-21

The Japanese economy grew 1.3 percent (s.a.a.r.) in the third quarter, substantially
below the 4.8 percent pace reported in the first release. Although private consumption
rose at a solid pace, likely supported by government stimulus, private investment
continued to fall sharply. Net exports remained a source of growth, but to a lesser extent
than in the previous quarter as imports began to rebound.

Indicators for the fourth quarter suggest continued moderate expansion. Industrial
production rose for the eighth consecutive month in October, but at a considerably slower
pace, as autos and electronics production fell back somewhat after surging earlier. In
addition, consumer confidence was nearly unchanged in October, and the Shoko-Chukin
business confidence survey posted only modest gains in the fourth quarter; previously,
both indexes had grown at a more robust pace. Although the appreciating yen is raising
concerns about the near-term outlook, in October, Japanese real exports rose 3.4 percent
on a monthly basis. The unemployment rate declined to 5.1 percent in October, down
from a peak of 5.7 percent in July. However, the more reliable job opening-toapplication ratio suggests a much more limited improvement in labor market conditions.

IV-22

IV-23

In October, the 12-month inflation rate reached a new all-time low of negative
2.5 percent. The decline in prices was not limited to commodities; core inflation
(excluding all food and energy) also reached a record low. Incoming data suggest that
deflationary pressures might have eased a bit in November; in the Tokyo area, headline
prices rose on a monthly basis for the first time since February 2009.
The BOJ left its policy rate unchanged and repeated its commitment to maintain the zerointerest-rate policy for an extended period. On December 1, at an emergency meeting,
the BOJ announced a new lending program, which in part replaces existing facilities, to
provide 10 trillion yen (about $110 billion) worth of funds for three months at a rate of
0.1 percent against a wide range of collateral. Previously, Japan’s central bank had
unveiled plans to withdraw some unconventional policy measures, beginning with
commercial paper and corporate debt purchase programs at the end of 2009. As for fiscal
policy, the new Hatoyama government recently announced that it intends to take “policy
action in view of the strengthening yen and problems surrounding stock prices” and plans
to spend 7.2 trillion yen (1½ percent of GDP) over 2010 and 2011. It appears, however,
that about one-third of the resources for the additional package, which calls for
government guarantees for new lending as well as grants to local governments, will come
from reshuffling existing budget priorities.
Euro-area real GDP increased 1.5 percent (s.a.a.r.) in the third quarter, marking a return
to positive growth after five quarters of contraction. The rise reflects positive
contributions from inventories and net exports; final domestic demand continued to
decline, although at a moderating pace. Private consumption fell almost 1 percent, as the
effects of government incentives for car purchases waned. Investment decreased
1.4 percent, the slowest pace of decline in six quarters. Changes in inventories provided
a contribution of 1.4 percentage points to growth. As world trade rebounded, both
exports and imports surged at double-digit rates, and net exports contributed
0.6 percentage point to third-quarter growth.
Recent indicators suggest further improvement in economic conditions in the current
quarter. In November, several measures of economic sentiment reached their highest
levels since August 2008, and PMIs rose further, consistently indicating expansion in
both manufacturing and services. There are also some signs that household spending
might be bottoming out; real retail sales were flat in October after falling in the third
quarter. In addition, the unemployment rate, after having risen 2½ percentage points
since early 2008, held at 9.8 percent in October.

IV-24

In November, 12-month inflation rose to 0.6 percent from negative 0.1 percent in
October, according to the flash estimate. Excluding all food and energy, October
inflation was 1.2 percent.
The ECB kept its benchmark policy rate unchanged at 1 percent at its December 3
meeting. The ECB also announced that the one-year refinancing operation scheduled for
December 16 will be the last liquidity operation with such a long maturity and that the
average refinancing rate will be indexed to the minimum bid rate over the life of the
operation. In addition, the ECB indicated that its last six-month refinancing operation
will be conducted on March 31, 2010, and that its main refinancing operations will be at a
fixed rate with full allotment at least through April 13. The ECB has continued to
implement plans to buy €60 billion worth of covered bonds, and by early December had
purchased about €26 billion in such bonds.

IV-25

IV-26

Euro-area credit conditions have shown signs of improvement in recent months.
Household credit growth turned positive in the second quarter and edged up further in the
third, although corporate credit growth has continued to fall. Bank lending surveys
showed less tightening in credit standards in the third quarter. The surveys also indicate
that while demand for credit from corporations is still contracting, that from households
has begun to increase. Tight lending has induced firms to issue new debt in financial
markets. In the first three quarters of 2009, nonfinancial corporations have issued
€80 billion worth of debt, making up for much of the contraction in bank loans.
Amid rising fiscal deficits, the EC recently announced deadlines for countries to return
within the 3 percent rule required by the Stability and Growth Pact. Most countries,
including France and Germany, are expected to reach the reference value in 2013.
However, in the case of Greece, the Commission has yet to change the original deadline
set to 2010, which appears quite unrealistic given the projected budget deficit is about
12 percent of GDP for 2009. On December 8, Fitch downgraded Greek debt to BBB+
with a negative outlook, citing concerns over the medium-term outlook for public
finances.
In the United Kingdom, GDP growth in the third quarter was revised up ½ percentage
point to negative 1.2 percent (s.a.a.r.). Final domestic demand stabilized, as small
declines in private consumption and investment were partly offset by higher government
spending. Net exports made their first negative contribution to GDP growth since 2007.
Imports rose 5.2 percent, while exports increased a more modest 2.0 percent.
Data received since last Greenbook are consistent with output expanding moderately in
the fourth quarter. The volume of retail sales rose 0.4 percent in October, and analysts
project further increases late in the quarter as households bring forward consumption
expenditures ahead of the expiration of the temporary value-added tax cut on
December 31. The manufacturing and services PMIs edged down in November but
continue to point to a moderate expansion of those sectors. According to the Labor Force
Survey, the total number of unemployed (measured as a three-month centered average)
declined modestly in July and August. However, the number of people claiming
unemployment benefits continued to rise through October.

IV-27

Price pressure has increased in recent months, although it remains subdued overall.
Headline inflation jumped to 1.5 percent in October on a 12-month basis, in part as
record declines in fuel prices in September 2008 dropped out of the calculation.
Excluding all food and energy, inflation edged up 0.2 percentage point to 1.8 percent.
Producer input and output prices rose further in October. Both series now stand close to
their pre-recession peaks. Reading through the monthly volatility, measures of earnings
growth were well below their recent trends in September.
At its November meeting, the BOE announced the acquisition of an extra £25 billion in
assets through the creation of reserves, bringing total purchases to £200 billion. The
additional purchases are to be completed by the end of January; the BOE is effectively
halving the pace of asset purchases. As of November 26, the BOE had acquired
£183.4 billion in assets through the creation of bank reserves, almost the entirety of
which were gilts.

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IV-29

On December 9, the Chancellor of the Exchequer delivered the 2009 Pre-Budget Report
which confirmed the sharp deterioration in U.K. public finances. The fiscal deficit is
projected to be about 12 percent of GDP in the current and next fiscal years (fiscal years
run from April to March). As a consequence, public sector debt is expected to jump,
from under 40 percent of GDP prior to the recession to peak of almost 80 percent in fiscal
year 2014-2015. The Treasury’s economic forecast calls for output to grow a meager
1¼ percent in 2010 on the back of a further small contraction in investment and stagnant
consumption. GDP is then forecast to rise 3½ percent in 2011 and 2012.
Canadian GDP rose 0.4 percent in the third quarter (s.a.a.r.), following a 3 percent
contraction in the previous quarter. Final domestic demand expanded rapidly, moving up
almost 5 percent, as private consumption increased at the fastest pace since the fourth
quarter of 2007. Much of the strength in consumption was in durable goods purchases,
particularly motor vehicles and furniture. Fixed investment increased, rising almost
9 percent, as outlays on motor vehicles and industrial machinery surged. Government
consumption and investment were strong as well in the third quarter, contributing nearly
2 percentage points to growth. Residential investment rose 8.1 percent.
The strength in domestic demand was almost fully offset by a large negative contribution
from net exports, as imports grew at about twice the pace of exports. Both imports and
exports were boosted by a surge in automotive trade. Exports outside of energy and autos
remained muted, while import gains were widespread.
As yet, we have little data beyond the end of September. The contour of growth heading
into the current quarter, however, points to further expansion. September monthly GDP
rose at an annual rate of 5.3 percent, suggesting momentum built up toward the end of the
third quarter. Likewise, retail sales and manufacturing orders ended the third quarter
with strong performance. In addition, the Canadian housing market continued to rebound
forcefully. After rising more than 15 percent in the third quarter, housing starts were up
5.4 percent in October, neither number at an annual rate.

IV-30

Canadian labor market conditions improved in November. Total employment rose
0.5 percent. A record-setting increase in public employment and a solid gain in private
employment drove November's gains. Excluding the public sector, private-sector
employment rose a solid 0.2 percent. Tempering the good news, aggregate hours worked
declined in November, as part-time employment rose and full-time hours dropped. The
unemployment rate fell 0.1 percentage point to 8.5 percent.
Consumer prices rose 0.2 percent in the year ending in October, the first 12-month
increase since May 2009. Excluding all food and energy, inflation was 1.2 percent in
October, up sharply from 0.7 percent in September. The 12-month change in average
hourly wages fell a full percentage point to 2.3 percent in November.
At its December 8 meeting, the BOC maintained its policy rate at 0.25 percent and
reiterated its intention, conditional on the outlook for inflation, to keep rates at this level
until at least the end of the second quarter of 2010.

IV-31

IV-32

Economic Situation in Other Countries
Economic activity in the emerging market economies continued to surprise on the upside
in the third quarter despite a moderation in the pace of recovery in emerging Asia.
Mexico’s economy grew at an unexpectedly brisk pace in the third quarter, reflecting in
part a large payback from an H1N1 virus-related contraction in the second quarter. In
India, GDP also came in well above expectations in the third quarter, reflecting a
surprisingly effective fiscal stimulus. Industrial production and trade data point to a
slight dip in October in several Asian economies, suggesting a relatively slow start to the
fourth quarter. In emerging Asia, headline inflation continued to rise (albeit generally
from low levels), in several cases led by rising food prices. Meanwhile, inflation
continued to fall in Latin American countries, likely owing in part to recent appreciation
of their currencies and still-weak domestic demand.
In China, economic activity continues to expand robustly, although a few indicators
dipped in October. Real retail sales growth, on a 12-month basis, remained around
17 percent in October, and fixed-asset investment growth stayed above 30 percent. In
November, the purchasing managers index was 55, the same level as in October, which
was the highest since April of last year. However, industrial production moved down in
October from its September level, as did trade, with the value of imports falling more
than exports.
Chinese authorities have continued to trim economic stimulus at the margin. In October,
the level of outstanding bank loans expanded at the slowest pace this year, and concerns
about overcapacity led authorities to instruct financial institutions to limit lending to six
industries, including steel and cement. Nonetheless, credit growth remains
accommodative, and outstanding loans are 34 percent higher than a year earlier. In
November, authorities raised the price of electricity for nonresidential use. This likely
will put upward pressure on the producer price index, which has fallen nearly 6 percent
over the past year. Consumer prices have moved higher recently, led by food and
housing, but the consumer price index remains slightly below its year-earlier level.

IV-33

In India, GDP surged 15 percent at an annual rate in the third quarter, underpinned by
robust manufacturing activity and an especially sharp rebound in social services,
reflecting very accommodative fiscal policy. The strong growth of domestic demand
during the third quarter caused the merchandise trade deficit to widen, as imports grew
faster than exports. Available data point to a slight retrenchment of economic activity in
the beginning of the fourth quarter: The purchasing managers index for manufacturing
crept down in October and November, reaching 53, its lowest level since March.
Consumer price inflation continued to hover above 10 percent on a 12-month basis
through October. Wholesale price inflation pushed further into positive territory after
several months of deflation during the summer, primarily reflecting rising food prices
following one of the driest rainy seasons in decades.

IV-34

IV-35

IV-36

In the newly industrialized economies (NIEs), 1 most indicators point to robust, though
moderating, growth in recent months. In line with Korea and Singapore, which released
strong third-quarter GDP reports prior to the last Greenbook, Taiwan’s real GDP
expanded at an 8.3 percent annual rate in the third quarter. Exports, consumption, and
investment all contributed to growth, pointing to a broad-based recovery. Meanwhile,
Hong Kong’s growth slowed sharply to 1.5 percent in the third quarter, as weak
consumption and exports offset a boost from inventory accumulation. Several monthly
indicators show a slight dip in the level of economic activity in the region going into the
fourth quarter, particularly in Korea, where industrial production, imports, and the
purchasing managers index retreated in October. Trade balances, which moved sharply
up at the onset of the crisis as imports fell even more sharply than exports, have since
started to give up these increases.
Inflation has risen from very low levels across the NIEs. In Korea and Hong Kong,
prices have risen a bit more than 2 percent during the past year, while in Singapore and
Taiwan prices remain below their year-earlier levels. With inflation still contained,
central banks have kept policy rates on hold.

The NIEs are Hong Kong, South Korea, Singapore, and Taiwan.

IV-37

IV-38

IV-39

Since the previous Greenbook, we have received third-quarter GDP for the Association
of Southeast Asian Nations (ASEAN-4). 2 Malaysia and Indonesia led the group,
growing at 10 and 8 percent, respectively, spurred by government spending and a pickup
in private domestic demand. Growth in Thailand came in a bit lower, as the recovery
stalled in the first two months of the quarter before picking up sharply in September. In
the Philippines, growth decelerated because of weak domestic demand and flat
remittances. With the exception of the Philippines, trade balances have deteriorated
relative to the second quarter as strengthening domestic demand caused import growth to
outpace that of exports.
Consumer prices continued to accelerate in the region with the exception of Indonesia,
where inflation remained roughly flat because of subdued food prices and the
strengthening rupiah. In Thailand, 12-month inflation turned positive in October for the
first time this year and increased further in November. Central banks left policy rates
unchanged.

The ASEAN-4 is Indonesia, Malaysia, the Philippines, and Thailand.

IV-40

IV-41

IV-42

In Mexico, real GDP rebounded sharply in the third quarter, with strength in both
manufacturing and services. The service sector rebound reflected a strong payback from
the H1N1 virus-related contraction in the second quarter. The manufacturing sector
benefited from higher auto production following the reopening of Chrysler and GM
plants. Both exports and imports rose in the third quarter, and exports rose further in
October. But consumer demand remained weak going into the fourth quarter despite a
modest improvement in the unemployment rate. Weak domestic demand and an
appreciating peso helped lower 12-month headline inflation to 4.5 percent in October.

In early November, the Mexican congress approved a watered-down version of the
government’s fiscal reform. Although the final package includes various tax hikes, a rise
in fuel prices, and some spending cuts, it left out a centerpiece of the original proposal: a
new general sales tax that would have paved the way for broadening the tax base. As
such, the reform is not generally viewed as a significant step toward addressing structural
weaknesses in Mexico’s fiscal framework, although it will help the government’s
finances in 2010. As expected, Fitch downgraded Mexican sovereign debt to BBB
following the bill’s passage. However, the fact that Fitch gave Mexico a stable outlook
was regarded as positive news that led to a rally in the peso and stock markets. President

IV-43

Calderón has nominated Agustín Carstens as the new Governor of the Bank of Mexico
and Ernesto Cordero as the new Minister of Finance.
In Brazil, monthly indicators suggest that robust economic growth in the third quarter has
extended into the fourth quarter. (Third-quarter GDP will not be released until December
10.) Industrial production continued to climb rapidly through October to a level that was
only 5 percent below its September 2008 peak. The purchasing managers index for
manufacturing shot up to 55 in November, its highest level in two years. The recovery
has been supported by rapid growth of government-directed credit and strong domestic
demand, particularly for autos and appliances, which have benefited particularly from
government tax breaks. Export growth has been comparatively tepid, causing the trade
surplus to narrow since the second quarter.
Despite the rapid pace of recovery, inflation has continued to creep down. Headline
inflation fell to 4.2 percent in October on a 12-month basis, just below the midpoint of
the central bank’s target range. The real’s strong appreciation this year has likely played
some part in the fall in inflation. However, given the weak export recovery, the
government moved again to limit upward pressure on the currency by closing a loophole
that allowed foreign investors to circumvent the 2 percent tax on portfolio capital inflows
imposed in late October. Brazilian companies’ issuance of American Depository
Receipts, which foreign investors had been using to gain exposure to the Brazilian stock
market without paying the tax, is now subject to a 1.5 percent tax.

IV-44

IV-45

IV-46

In Russia, real GDP expanded at a 10.5 percent annual rate in the third quarter following
three quarters of decline. The rebound reflected rapid growth of the manufacturing and
transport sectors on the production side, and strong investment growth and inventory
accumulation on the expenditure side. Retail sales were flat in the third quarter but
posted two consecutive months of growth in September and October, while the
unemployment rate crept below 8 percent in October. Consumer prices were flat in
October, bringing headline consumer price inflation down to 9.7 percent on a 12-month
basis, the lowest level in two years. The central bank of Russia lowered its refinancing
rate 50 basis points in late November to stem capital inflows and slow the appreciation of
the ruble, which has also been supported by higher oil prices.

Last page of International Developments

Abbreviations–Part 2

Abbreviations—Part 2
ABCP

asset-backed commercial paper

ABS

asset-backed securities

ACLI

American Council of Life Insurers

AMLF

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility

ARM

adjustable-rate mortgage

ASEAN-4

Association of Southeast Asian Nations (Indonesia, Malaysia,
the Philippines, and Thailand)

BEA

Bureau of Economic Analysis, Department of Commerce

BLS

Bureau of Labor Statistics, Department of Labor

BOC

Bank of Canada

BOE

Bank of England

BOJ

Bank of Japan

BOP

balance of payments

certificate of deposit

CDS

credit default swap

C&I

commercial and industrial

CMBS

commercial mortgage-backed securities

CPFF

Commercial Paper Funding Facility

CPI

consumer price index

CPIP

construction put in place

CRB

Commodity Research Bureau

CRE

commercial real estate

European Commission

ECB

European Central Bank

ECI

Employment Cost Index

E&S

equipment and software

ETF

exchange-traded fund

FDIC

Federal Deposit Insurance Corporation

V-1

V-2

FHA

Federal Housing Administration, Department of Housing and Urban
Development

FHFA

Federal Housing Finance Agency

FHLMC

Federal Home Loan Mortgage Corporation (Freddie Mac)

FNMA

Federal National Mortgage Association (Fannie Mae)

FOMC

Federal Open Market Committee; also, the Committee

FRB

Federal Reserve Board; also, the Board

FRBNY

Federal Reserve Bank of New York

FRM

fixed-rate mortgage

GDP

gross domestic product

General Motors

GNMA

Government National Mortgage Association (Ginnie Mae)

GSE

government-sponsored enterprise

IMF

International Monetary Fund

industrial production

ISM

Institute for Supply Management

JOC

Journal of Commerce

Libor

London interbank offered rate

LoanPerformance

MBS

mortgage-backed securities

MPU

microprocessor unit

NBER

National Bureau of Economic Research

NCREIF

National Council of Real Estate Investment Fiduciaries

NFIB

National Federation of Independent Business

NIEs

newly industrialized economies (Hong Kong, South Korea, Singapore,
and Taiwan)

NIPA

national income and product accounts

nsa

not seasonally adjusted

OIS

overnight index swap

V-3

OPEC

Organization of the Petroleum Exporting Countries

personal computer

P&C

Productivity and Costs

PCE

personal consumption expenditures

PDCF

Primary Dealer Credit Facility

PMI

purchasing managers index

PPI

producer price index

RADGO

real adjusted durable goods orders

repo

repurchase agreement

s.a.a.r.

seasonally adjusted annual rate

SPF

Survey of Professional Forecasters

TAF

Term Auction Facility

TALF

Term Asset-Backed Securities Loan Facility

TARP

Troubled Asset Relief Program

TIPS

Treasury inflation-protected securities

TSLF

Term Securities Lending Facility

WTI

West Texas Intermediate

Last page of Part 2

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 15-16, 2009 : Greenbook Part 2

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