Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 24-25, 2012 : Tealbook A

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

Content last modified 01/05/2018.

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Report to the FOMC
on Economic Conditions
and Monetary Policy

Book A
Economic and Financial Conditions:
Current Situation and Outlook
January 18, 2012

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

Authorized for Public Release

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Domestic Economic Developments and Outlook
A number of the indicators that we track in gauging the current and near-future
pace of economic activity have improved since the December Tealbook. Payroll
employment increased a little more in December than in the average of the preceding
several months and the unemployment rate continued to decline, manufacturing
production rebounded from a dip in November, and even residential construction has
shown a bit more vigor recently. In addition, measures of consumer and business
sentiment have moved up. However, these developments have not materially exceeded
our expectations; rather, for the most part, they have only been sufficient to validate our
forecast in previous Tealbooks of a gradually improving pace of real activity. Moreover,
despite the bounceback in consumer sentiment from recent lows, consumer spending
appears to be on a somewhat shallower trajectory than we had previously expected, and
federal outlays for defense have been significantly lower than anticipated. All told, we
now estimate that real GDP increased at an annual rate of 3 percent in the fourth quarter
of 2011 and will rise 1½ percent in the current quarter, ¼ percentage point and
½ percentage point less, respectively, than in the December Tealbook.
We also made a small downward adjustment to our medium-term projection. The
foreign exchange value of the dollar has moved up a little, on balance, since the
December Tealbook and is anticipated to subtract a bit from the demand for U.S.
products. Real GDP growth is further tempered by a somewhat higher path for crude oil
prices, while the changes in our other conditioning factors are neutral, on balance, for the
pace of activity: The effects of higher stock prices and lower interest rates are mostly
offset in our projection by a downward revision to house prices. With respect to our
fiscal assumptions, we have marked down the projected trajectory of defense spending
over the medium term. As a result, real GDP is projected to increase 2 percent in 2012,
about ¼ percentage point less than in the December Tealbook, and 2½ percent in 2013,
about unchanged from the previous projection. This average pace of growth only slightly
exceeds our estimate of potential. Accordingly, little progress is made in closing the
estimated gap in either the utilization of the workforce or the productive capacity of the
overall economy over the next two years.
The outlook for inflation is about the same as in the December Tealbook. Core
PCE inflation appears to be slowing about as we thought it would based on our

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Key Background Factors underlying the Baseline Staff Projection

Federal Funds Rate

Long-Term Interest Rates
Percent

Quarterly average

10
Current
Previous Tealbook
Market, expected rate
Market, modal rate

Percent

11
Quarterly average

BBB corporate yield

6
3

3
5

2007

2008

2009

2010

2011

2012

2013

6
Conforming
mortgage rate

4
3

4
10-year
Treasury yield

2007

2008

2009

2010

Ratio scale, 2007:Q1 = 100
130

130
Quarter-end

110

120

Dow Jones
U.S. Total Stock Market
Index

100

110

2008

2009

100

2010

2011

Quarterly

2012

2013

Dollars per barrel

140

120

100

West Texas
Intermediate

80
Imported oil

2008

2009

100
95

90
CoreLogic
index

2007

2008

2009

2010

2011

2012

2013

2007:Q1 = 100

110

Quarterly average

2007

105

Broad Real Dollar

140

Crude Oil Prices

2013

Ratio scale, 2007:Q1 = 100

105

2007

2012

100

2011

House Prices

Equity Prices

120

2010

2011

2012

2013

105

100

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2007

2008

2009

2010

2011

2012

2013

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assessment that last year’s upswing mostly represented the pass-through of a surge in
import and commodity prices. With labor and product market slack projected to remain
considerable and inflation expectations anticipated to hold steady, we continue to project
that core PCE inflation will be 1½ percent in both 2012 and 2013. Given our forecast for
relatively slight changes in food and energy prices over the next two years, headline
inflation is expected to run just a touch below core over the medium term.

KEY BACKGROUND FACTORS
Monetary Policy
In line with the prescription of the outcome-based policy rule, we continue to
assume that the FOMC will hold the target federal funds rate in the current range of 0 to
¼ percent until the fourth quarter of 2014, the same span of time as in the December
Tealbook. We also assume that the Committee will maintain the Federal Reserve’s
current portfolio-related policies.1

Interest Rates
The yield on 10-year Treasury securities has decreased about 25 basis points, on
net, since the December Tealbook, reflecting in part a downward revision to the market’s
expected policy path, and we have lowered our projection for the Treasury yield this
round. We still expect that sluggish progress toward resolving the European debt crisis
will continue to result in safe-haven demands for Treasury securities in coming quarters.
Even so, as in previous projections, we expect the 10-year Treasury yield to rise
substantially from the middle of this year through 2013, ending that year at 3½ percent—
about 1½ percentage points above its current level. This projected increase reflects the
movement of the valuation window through the period of near-zero short-term interest
rates, a gradual waning of the effects of nonconventional monetary policy, and an

The path of the federal funds rate in the extended baseline projection, and in particular the date
when conventional monetary policy begins to firm, depends importantly on our use of the estimated
outcome-based rule to set policy. If we had instead assumed that the federal funds rate would follow the
prescriptions of the Taylor (1999) rule, liftoff would not begin until late 2015; an inertial version of this
rule would delay the onset of conventional tightening until mid-2016. In contrast, conventional monetary
policy would begin tightening early this year under the Taylor (1993) rule and in mid-2013 under the firstdifference rule. These various prescriptions make no adjustment for the stimulus provided by the Federal
Reserve’s nonconventional policy actions; if they did, the prescribed dates for tightening would be pulled
forward. However, in most cases, the advance in timing would be modest because the staff projects the
downward pressure on term premiums from the SOMA portfolio to diminish appreciably over the next few
years.

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unwinding of safe-haven demands as apprehensions related to the European debt crisis
eventually abate and the U.S. economic recovery gains a firmer footing.
Spreads on BBB-rated corporate bonds and conforming fixed-rate mortgages have
widened a touch, on net, since the December Tealbook. These spreads are currently well
above their typical levels, and, as in previous forecasts, we expect them to narrow
gradually over the medium term. However, given the outlook for limited progress in
resolving the European situation in the near term, both spreads are expected to be roughly
flat through the first half of this year before narrowing further out. Coupled with our
forecast for Treasury rates, these assumptions imply a moderate increase in yields on
these private instruments over the next two years.

Equity Prices and Home Prices
Broad U.S. stock price indexes have increased about 3 percent, on net, since the
December Tealbook. We project that stock prices will be about flat over the first half of
this year and then move up rapidly in the second half of 2012 and in 2013, as investors
gain confidence that European authorities will make progress toward resolving their
fiscal and financial crisis. On the current projection, the equity premium will descend
somewhat from its current extraordinarily high level.
According to the latest data, home prices in November declined more than we
expected. We reacted by reducing the level of home prices by about 1 percent throughout
the projection period. Our forecast calls for the CoreLogic Home Price Index to decrease
a bit more than 1 percent in 2012 and to be about unchanged in 2013.

Fiscal Policy
We have scaled back our projection for defense spending over the medium term.
The spend-out of defense appropriations over the past year has persistently fallen short of
our expectations. Even more important, recent information indicates that appropriations
for overseas military operations will be smaller than we had previously expected. Our
other fiscal policy assumptions are unchanged. In particular, we assume that the
2 percentage point payroll tax reduction for employees and the Emergency
Unemployment Compensation (EUC) program—both of which were recently extended
through the end of February—will soon be extended through the end of this year. We
also continue to assume that discretionary spending will be restrained by the caps set in
the Budget Control Act. In addition, although we assume that the Congress will not

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allow the spending sequester triggered by the failure of the supercommittee last autumn
to take full effect in 2013, we expect that other, more gradual budget-saving measures
will be enacted to achieve the same $1.2 trillion in deficit reduction over the fiscal 2013–
21 period.
Given our revised assumptions, we now expect federal fiscal policy to impose
restraint of 0.4 percentage point on the growth of real GDP in 2012 (excluding multiplier
effects), 0.1 percentage point more than in the previous Tealbook. In 2013, federal fiscal
policy is still anticipated to impose a drag of about 1 percentage point.2
We project the budget deficit to narrow from $1.3 trillion (8½ percent of GDP) in
fiscal year 2011 to $1.1 trillion (7 percent of GDP) and $850 billion (5¼ percent of GDP)
in fiscal 2012 and 2013, respectively. As in the December Tealbook, the narrowing of
the deficit primarily reflects the assumed tightening of fiscal policy.

Foreign Activity and the Dollar
Incoming data indicate that foreign economic activity decelerated substantially in
the fourth quarter, and by a little more than we had expected. In particular, we now
estimate that aggregate real GDP growth in the foreign economies stepped down from an
annual rate of 3½ percent in the third quarter to 2 percent last quarter, the latter figure
being about ¼ percentage point lower than we projected in the December Tealbook. Our
overall foreign outlook is little changed from the December Tealbook; real GDP is
projected to rise 2½ percent this year and 3 percent in 2013. We continue to believe that
with a quick resolution to the euro-area crisis unlikely to materialize, financial tensions
will persist for some time and lead to an appreciable contraction of GDP in the euro area
this year, restraining the pace of global economic activity.
Since the time of the December Tealbook, the dollar has appreciated against the
euro and has changed little, on net, against most other currencies, leaving the broad real
dollar about 1 percent higher than we had assumed in December. From this higher
starting point we project the broad real dollar to depreciate 1¾ percent in 2012 and
3 percent in 2013, with these declines concentrated against the emerging market

If the payroll tax reduction and EUC benefits are not extended beyond February, then the
restraint from federal fiscal policy on real GDP growth this year would be 0.5 percentage point greater.
With the earlier expiration of these policies, the drag from fiscal policy on real GDP growth in 2013 would
be 0.35 percentage point less.

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Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
2011:Q4

2012:Q1

2012:Q2

Measure

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Business Fixed Investment
Government Purchases
Contributions to change in real GDP
Inventory investment1
Net exports1
Unemployment Rate2
PCE Chain Price Index
Ex. food and energy

3.2
2.6
2.4
3.1
3.7
-1.9

2.9
2.4
2.2
9.7
2.6
-4.5

2.1
1.9
2.3
3.6
-1.2
1.1

1.6
1.9
2.0
8.5
-.1
.0

1.9
2.3
2.2
6.3
1.8
-.5

1.8
2.4
2.4
4.0
2.1
-.8

1.2
.2
8.8
.7
1.1

1.6
.2
8.7
.5
.9

.1
.1
8.8
1.4
1.6

-.1
.1
8.7
1.4
1.5

-.1
.2
8.8
1.5
1.5

-.1
.1
8.7
1.7
1.5

1. Percentage points.
2. Percent.
Recent Nonfinancial Developments (1)
Real GDP and GDI
6

Change in Private Payroll Employment
4-quarter percent change

8
Gross domestic product
Gross domestic income

600

400

Thousands of employees

Dec.

200

Q3
Q3

-200

-400

-600

0
-2

-4

-800

-6

-1000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-2

-6

Unemployment Rate
Percent

-800

3-month moving average
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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

400
200

0
2

600

-1000

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

Manufacturing IP ex. Motor Vehicles and Parts
3-month percent change, annual rate

-1

-6

-11

-16

-21

-26

10
9

Dec.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

14
9
Dec.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

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currencies. On average over the forecast period, the level of the broad real dollar is about
1 percent higher than we projected in the December Tealbook.

Oil and Other Commodity Prices
Global oil markets have been buffeted by a number of conflicting developments
in recent weeks. Spot prices for most grades of oil are little changed, as greater concern
over global growth prospects has largely balanced increased fears of potential supply
disruptions, particularly heightened tensions over Iran’s nuclear development program.
The spot price of West Texas Intermediate (WTI) crude oil closed at $100 per barrel on
January 17, about the same as at the time of the December Tealbook. In contrast to spot
prices, WTI futures prices have risen slightly since the previous Tealbook; as a result, the
futures curve slopes down a bit less steeply. In all, we expect the price of imported oil to
fall modestly from $104 per barrel in the current quarter to $101 per barrel by the end of
2013, about $6 per barrel higher than projected in the December Tealbook. The upward
revision to the forecast importantly reflects higher futures prices for both WTI and
Brent.3 In light of the escalating tensions with Iran, the Risks and Uncertainty section
considers the effects of a significant disruption in global oil supply.
The broad index of nonfuel commodity prices that we follow is, on net, little
changed since the time of the December Tealbook. The prices of field crops, including
corn, soybeans, and wheat, have moved up modestly in recent weeks because of concerns
about growing conditions in Latin America; however, these prices remain well below the
peaks reached in the first half of 2011. Meanwhile, metals prices are little changed, on
net, from the time of the December Tealbook. Overall, we expect nonfuel commodity
prices to increase only slightly through 2013, in line with prices from futures markets
adjusted for staff assumptions regarding the path of the dollar and the global growth
outlook.

RECENT DEVELOPMENTS AND THE NEAR-TERM OUTLOOK
As noted earlier, we now estimate that real GDP rose at an annual rate of
3 percent in the fourth quarter of 2011, ¼ percentage point less than in our previous
projection, and that it will rise just 1½ percent in the current quarter, ½ percentage point
3

Additionally, because private economists’ forecasts of global economic activity have moved
down closer to ours, we now expect less downward pressure on oil prices going forward, and we have
raised the adjustment factor we apply to the futures curves.

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less than before. These downward revisions mostly reflect sharply weaker incoming
information on defense spending and a somewhat more moderate pace of increase in
consumer spending than we had forecast previously. Residential construction, which has
shown a few surprising signs of life, provided a small offset to these downward revisions.
Turning to the contour of our projection, the expected deceleration in real GDP growth
this quarter is shaped most importantly by the pattern of inventory investment, which is
estimated to have contributed more than 1½ percentage points to real GDP growth last
quarter but is expected to be about neutral in the current quarter.

The Labor Market
Labor market conditions have firmed somewhat recently. Total nonfarm payroll
employment increased 200,000 and private nonfarm payroll employment gained 212,000
in December—both somewhat faster than in recent months—and the unemployment rate
edged down 0.2 percentage point in December to 8.5 percent.4 Other labor market
indicators have also shown some improvement: Initial claims for unemployment
insurance have, on net, continued to move down, households upgraded their expectations
of future labor market conditions after having tamped them down during the summer, and
firms report that they expect to step up their rate of hiring in the first quarter.
Nonetheless, these indicators have improved less than generally would be consistent with
the decline in the unemployment rate over the past four months.
In light of this information and the weaker output growth that we have in this
projection, we have marked up our near-term labor market forecast only slightly. In
particular, we now expect that private payroll gains will average 150,000 per month in
the first quarter; this figure is about 10,000 per month stronger than in the December
Tealbook after adjusting for the anticipated payback in January from the overstated
December gain. With state and local governments expected to make further cuts to
payrolls in response to budget pressures, total payroll employment is expected to increase
about 125,000 per month through March. We expect the unemployment rate to edge
back up to 8.7 percent in the first quarter, a touch below our projection in the December
Tealbook.

As we saw last year, the rise in payroll employment in December seems to have been
exaggerated to some degree by a temporary increase in hiring by package delivery firms due to online
retailing, which—as a relatively recent phenomenon—is probably not yet fully captured in the BLS’s
seasonal adjustment procedure. We expect the payroll gain in January to be held down somewhat in
seasonally adjusted terms as those workers are laid off.

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The Industrial Sector
Manufacturing production posted a solid gain in the fourth quarter. While a
portion of this strength reflected the continued recovery in the motor vehicle supply chain
from last year’s earthquake in Japan and the more recent flooding in Thailand, recent
production gains outside the motor vehicle sector also have been relatively firm. After
jumping nearly 1 percent in December, manufacturing output appears poised to
decelerate in coming months, in part as the temporary boost to factory output resulting
from the recovery of the motor vehicle supply chain wanes. Indeed, although the
available indicators of near-term production changes—such as the new-orders diffusion
indexes from the national and regional manufacturing surveys—have improved in recent
months, they continue to suggest near-term gains in factory output that are a bit less rapid
than those we have seen since the summer. Nevertheless, after factoring in the strong
increase in IP for December, manufacturing output is now expected to rise at an annual
rate of 4 percent this quarter, 1¼ percentage points stronger than in the previous
Tealbook.

Household Spending
Real PCE appears to have increased at a moderate pace in the fourth quarter.
Sales of light motor vehicles rose to an annual rate of 13½ million units last quarter,
1 million units higher than in the third quarter when supply constraints related to the
earthquake in Japan were still limiting sales to some degree. However, the increase in
spending on goods other than motor vehicles was more moderate, and the available data
suggest that spending on services has been somewhat restrained.
If, as in our baseline projection, energy prices are stable in coming months and the
payroll tax cut is extended through the end of this year, then the job gains that we
anticipate should show through to a moderate increase in real disposable income over the
near term. Nevertheless, households’ expectations regarding their future incomes remain
bleak, and consumer sentiment remains at relatively low levels despite having improved
noticeably over the past several months. All told, we now estimate that real PCE rose
2¼ percent in the fourth quarter and look for a 2 percent increase in the current quarter.
This trajectory is a bit weaker than in our previous projection, reflecting a disappointing
retail sales report for December.
Recent indicators of single-family housing activity—such as starts, permit
issuance, and home sales—hint at incremental increases in demand over the past few

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Recent Nonfinancial Developments (2)

Production of Light Motor Vehicles

Sales of Light Motor Vehicles

Millions of units, annual rate

12
10

Dec.

12
Dec.

4
2

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Ward’s Auto Infobank.

Real PCE Goods ex. Motor Vehicles

Single-Family Housing Starts

Billions of chained (2005) dollars

3100
3000

Dec.

Thousands of units, annual rate

3100

2100

3000

1800

1500

1200

900

2900

2800

2700

2600

2500

2400

300

2300

2300
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: Figures for October, November, and December are staff.
estimates based on available source data.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

600

1500

New
(right scale)
1200

6000
5500

2100

600
300

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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

Nondefense Capital Goods ex. Aircraft

Thousands of units, annual rate

6500

Nov.

Starts
Adjusted permits

Single-Family Home Sales
7000

Existing
(left scale)

Billions of dollars

75
70

65
60

4500
Nov.

3500

Nov.

300

Nov.
Shipments

600

4000

Orders

900

5000

3000
2500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: For existing, National Association of Realtors;
for new, U.S. Census Bureau.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: U.S. Census Bureau.

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months. However, activity remains at deeply depressed levels, as mortgage credit
remains restrictive, the stock of vacant homes is still abundant, and credit availability for
builders continues to be tight. Accordingly, while we have taken on board the modestly
better news in this sector and have raised our projection for homebuilding a bit, we still
expect single-family starts to edge up in the first quarter only to an average annual rate
approaching 450,000 units. In response to increased demand for apartments and falling
vacancy rates, multifamily starts have slowly risen from very low levels over the past
year or so, and we expect further moderate gains in coming months.

Business Investment
Real business spending on equipment and software (E&S) appears to have risen at
an annual rate of only 3 percent in the fourth quarter after posting a sizable gain of
16 percent in the third quarter. Although spending on high-tech equipment has held up
reasonably well in recent months, spending on a broad range of other equipment appears
to have pulled back in the fourth quarter after a third-quarter surge. Forward-looking
indicators are mixed: Some indicators of business sentiment and of capital spending
plans have improved lately, but corporate bond spreads remain elevated and analysts’
earnings expectations for producers of capital goods remain subdued. As a result, we
expect E&S spending to rise at only a 2 percent pace in the current quarter, similar to the
previous quarter’s pace.
After two quarters of surprisingly large increases, real investment in
nonresidential structures appears to have decelerated sharply in the fourth quarter and is
expected to decline in the current quarter.5 The architectural billings index—which is
reasonably well correlated with changes in outlays two to three quarters hence—has
moved up recently but remains consistent with near-term decreases in spending outside
the drilling and mining sector. In contrast, we continue to expect activity in the drilling
and mining sector to rise at robust rates over the next few quarters, supported by the high
price of crude oil and by the ongoing diffusion of technologies that have increased the
expected profitability of drilling.
Real inventory investment in the nonfarm business sector looks to have picked up
noticeably in the fourth quarter—contributing more than 1½ percentage points to the rise in
5

Outside of drilling and mining, activity likely would have fallen quite noticeably at the end of
last year if not for an expiring tax provision for alternative energy projects that probably pulled some
spending from early this year into the fourth quarter.

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Recent Nonfinancial Developments (3)

Nonresidential Construction Put in Place

Inventory Ratios ex. Motor Vehicles

Billions of chained (2005) dollars

450

400

450

Months

1.8
1.7

1.7

1.6

400

350

1.5

1.5
Staff flow-of-goods system

300

300
Nov.

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1.4

1.3

Census book-value data

200

1.1

Nov.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unified (monthly)
NIPA (quarterly)

600

700

200

650

180

600
Dec.

550

500

450

Billions of dollars
200
Nov.
180

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

400

Non-oil imports

160

140

120

100

80
60

60
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis;
U.S. Census Bureau.

PCE Prices ex. Food and Energy
Percent

Nov.

-2

-4

-8
-10

Percent

12-month change
3-month change

-6

12-month change
3-month change

Exports

Total PCE Prices
10

160

140

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

-6

1.1

Exports and Non-Oil Imports
Billions of chained (2005) dollars

400

1.2

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

Defense Spending

650

1.3

250

Source: U.S. Census Bureau.

700

Dec.

1.4

1.2
200

1.8

Nov.

-8

-10
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: 3-month changes are at an annual rate.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Note: 3-month changes are at an annual rate.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

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real GDP—after slowing abruptly in the third quarter. On the whole, inventory stocks
generally appear well aligned with sales. One exception is in motor vehicles, where
dealers’ stocks remain lean and we anticipate further stockbuilding—albeit at a
diminishing pace—in coming quarters. All told, we expect the contribution to real GDP
growth from inventory investment to be about neutral in the current quarter.

Government
Incoming data suggest that total real federal purchases fell at an annual rate of
nearly 10 percent in the fourth quarter, pulled down by defense spending that proved
much weaker than we had expected. Given our revised assumptions for defense
spending, we now anticipate that real federal purchases will only edge up this quarter;
previously, we expected a 4 percent rate of increase. Meanwhile, data for the state and
local sector continue to suggest that the rate of decline in real purchases is moderating.
Over the second half of 2011, state and local employment declined 11,000 jobs per
month, on average, compared with decreases of roughly 30,000 per month over the first
half of the year. Moreover, real construction expenditures appear to have leveled out in
the second half of 2011 following sharp decreases in the first half of the year. As in our
previous projection, we continue to expect that real purchases by state and local
governments will decline at an annual rate of about 1 percent in the fourth and first
quarters.

Foreign Trade
After incorporating the trade data for October and November, we estimate that
real exports of goods and services rose at an annual rate of 5 percent in the fourth quarter.
In the current quarter we expect exports to increase at a similar pace, supported by
continued growth in the emerging market economies and by the lagged effect of the
declines in the dollar that occurred in the first half of 2011. Real imports of goods and
services are estimated to have increased 3 percent in the fourth quarter and are projected
to rise at a 4 percent pace in the current quarter as imports of oil pick up following a flat
fourth quarter. Given the relative strength of exports, we expect the contribution of net
exports to U.S. GDP growth to be about ¼ percentage point in the fourth quarter and to
be slightly positive in the current quarter, a forecast largely unchanged from the
December Tealbook.

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

2011
Measure

2010

2012

2013

2.4
2.6

2.1
2.3

2.4
2.5

.8
.8

2.2
2.7

2.0
2.1

2.2
2.2

3.0
3.0

1.4
1.4

2.0
2.2

2.4
2.4

2.4
2.3

Residential investment
Previous Tealbook

-6.3
-6.3

.8
.8

5.4
2.4

6.6
5.8

7.3
7.9

Nonresidential structures
Previous Tealbook

-1.8
-1.8

2.5
2.5

7.8
10.2

-2.1
-1.1

1.1
.9

Equipment and software
Previous Tealbook

16.6
16.6

7.5
7.5

9.4
9.4

3.8
3.2

6.4
6.4

2.9
2.9

-3.9
-3.9

-3.9
-.8

-1.0
.4

-4.1
-3.9

-1.7
-1.7

-3.1
-3.1

-1.2
-1.2

-.5
-.4

.7
.8

Exports
Previous Tealbook

8.8
8.8

5.7
5.7

4.9
5.4

4.8
5.1

5.2
5.5

Imports
Previous Tealbook

10.7
10.7

4.8
4.8

2.1
2.3

3.9
3.8

4.1
4.2

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

Federal purchases
Previous Tealbook
State and local purchases
Previous Tealbook

3.1
3.1

.8
.8

2.4
2.4

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

.7
.7

.0
.0

.1
-.2

.1
.3

.2
.3

Net exports
Previous Tealbook

-.6
-.6

-.1
-.1

.3
.3

.0
.0

Real GDP
4-quarter percent change

10
Current
Previous Tealbook

10
8

-2

-4

-6

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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

Page 14 of 104

2010

2012

-6

Authorized for Public Release

January 18, 2012

Prices and Wages
Recent data on consumer prices have been mostly in line with our December
forecast. With regard to core inflation, the latest readings continue to suggest that the
upswing in the spring and summer was mainly due to transitory factors, including the
first-half surge in commodity and import prices as well as the increase in motor vehicle
prices that stemmed from supply shortages related to the earthquake in Japan. Indeed,
prices for motor vehicles declined again in November. In addition, core prices in the
fourth quarter were held down by two temporary factors—a decline in nonmarket prices
from which we take little signal, and a weak reading on prices for medical services that
appears unlikely to persist. All told, we continue to expect core PCE prices to rise at an
annual rate of about 1 percent in the fourth quarter and to increase 1½ percent this
quarter.
Consumer food prices look to have decelerated a bit more than we anticipated in
the fourth quarter, and we expect food price increases to slow further over the first half of
this year, as the declines in crop prices since last spring continue to pass through to retail
prices. Meanwhile, our forecast for consumer energy prices—a sharp decline in the
fourth quarter and little change in the current quarter—is largely unrevised relative to the
previous projection. All told, total PCE price inflation appears on track to slow from an
annual rate of 2¼ percent in the third quarter to ½ percent in the fourth, a bit below our
previous projection, and then to step back up to 1½ percent in the first quarter.
We have received little new information on labor compensation since the
December Tealbook. Employee compensation in November was lower than anticipated,
but average hourly earnings in December were stronger than expected. As a result, we
continue to estimate that compensation per hour advanced at an annual rate of 2¼ percent
in the fourth quarter, and we expect it to increase at the same rate in the current quarter.

THE MEDIUM-TERM OUTLOOK
Our medium-term forecast for the growth of real GDP is a little weaker than at the
time of the December Tealbook. This change primarily reflects a higher projected
foreign exchange value for the dollar, a little higher path for oil prices, and a weaker
trajectory for defense spending. The other factors shaping the broad contour of our
projection are largely the same as in the previous projection. In particular, as before,
developments in Europe are expected to cast a pall over the U.S. economy during the first
half of this year; thereafter, Europe-related concerns are assumed to abate gradually.
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Components of Final Demand

Personal Consumption Expenditures
4-quarter percent change

Residential Investment
4-quarter percent change

5
Current
Previous Tealbook

-5

-10

-15

-1

-2

-20

-3

-25

-4

-30

2007

2008

2009

2010

2011

2012

2013

Equipment and Software
20

-5

-10

-15

-20

-25

2007

2008

2009

2010

2011

2012

2013

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

-25

Government Consumption & Investment
4

2008

2009

2010

2011

2012

2013

-30

Nonresidential Structures

4-quarter percent change

2007

4-quarter percent change

2007

2008

2009

2010

2011

2012

2013

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

Exports and Imports
4

4-quarter percent change

20
15
10

Exports

-1

-5

-2

-10

-3

-15

-4

-4
2007
2008
2009
2010
2011
2012
2013
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

-20

Page 16 of 104

5
0

Imports

2007

2008

-5

2009

2010

2011

2012

2013

-20

Authorized for Public Release

January 18, 2012

Similarly, the adverse effects of impaired credit availability are anticipated to ebb slowly
during the next two years, leading to further increases in consumer and business
confidence and causing households and businesses eventually to become more responsive
to the low level of interest rates. In contrast, federal fiscal policy is expected to become
substantially more restrictive over time, curtailing the growth rate of real GDP by a full
percentage point in 2013. Moreover, as discussed earlier, we project a substantial rise in
long-term interest rates through the end of next year. In all, real GDP is expected to
increase 2 percent in 2012 and 2½ percent in 2013, the same pace as the assumed rate of
growth in potential output this year and a little faster than potential growth next year.
As noted earlier, the path for the dollar is a little higher in this projection.
Accordingly, we trimmed our outlook for export growth. Nevertheless, we think that
continued increases in demand from the emerging market economies will support gains in
U.S. exports overall. As a result, real exports of goods and services are expected to rise
about 5 percent in both 2012 and 2013, about ¼ percentage point slower in each year than
in the previous projection. Meanwhile, real imports are forecast to increase at a modest
4 percent annual rate, on average, this year and next, consistent with the relatively
lackluster pace of U.S. GDP growth. On net, because imports still exceed exports, trade
is expected to make an essentially zero arithmetic contribution to real GDP growth over
the next two years, a slightly weaker forecast than in the December Tealbook.
We also have increased the projected drag from government spending over the
medium term relative to that in our previous forecast. As before, we expect federal
discretionary spending to be restrained by the Budget Control Act. But, as discussed
earlier in “Key Background Factors,” we now think that appropriations for overseas
military operations will be smaller than we had previously expected, and we have
tempered the anticipated rebound in defense spending this year from the surprisingly low
level of spending relative to appropriations in 2011. As a result, we now expect real
federal purchases to fall 1 percent in 2012 and 4 percent in 2013, a bit more than in the
December Tealbook. In the state and local sector, we continue to see an anemic recovery
in real purchases. Although state tax revenues are rising at a solid pace, federal stimulus
grants are being phased out and tax collections (especially property taxes) at the local
level have been weak. In this tight fiscal environment, we expect state and local
purchases to change little, on net, over the projection period.

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Aspects of the Medium-Term Projection

Personal Saving Rate

Wealth-to-Income Ratio
Percent

8
Current
Previous Tealbook

8
7

1995

2000

2005

2010

Ratio

6.8

6.4

6.0

5.6

5.2

4.8

4.4

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

4.4
1995
2000
2005
2010
Note: Household net worth as a ratio to disposable personal
income.
Source: For net worth, Federal Reserve Board, flow of funds
data; for income, Dept. of Commerce, Bureau of Economic Analysis.

Single-Family Housing Starts

Equipment and Software Spending
Millions of units

2.00

6.8

Share of nominal GDP

2.00

10.0

1.75

9.5

1.50

9.0

1.25

8.5

1.00

8.0

0.75

7.5

0.50

7.0

0.25

6.5

0.00

6.0

0.00

1995

2000

2005

2010

1995

2000

2005

2010

10.0

6.0

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

Source: U.S. Census Bureau.

Current Account Surplus/Deficit

Federal Surplus/Deficit
Share of nominal GDP

Share of nominal GDP

-1

-2

-2
-3

-3

-4

-6

-4

-8

-5

-10

-6

-12

-7

4-quarter moving average

-12

1995

2000

2005

2010

1995

Source: Monthly Treasury Statement .

2000

2005

2010

-7

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

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

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The other factors influencing our medium-term projection are mostly unrevised.
As we noted in the previous Tealbook, the news during the past several months about real
disposable personal income (DPI) has been very weak. Although we have taken down
the trajectory of consumer spending in response to that news, we have not done so to the
full extent called for by a mechanical reading of our models. The box “The Role of
Surprisingly Weak Income Data in the PCE Projection” provides our rationale for
tempering our response to the income data. All told, we continue to expect spending to
accelerate in 2012 as the growth in real DPI steps back up and as consumers become
more confident about the economic outlook.
As before, we expect a very slow recovery in the housing sector over the medium
term. The recent data on starts, permits, and new home sales have been slightly
encouraging. However, access to mortgage credit is still exceedingly tight, and
households remain pessimistic and uncertain about their future incomes and about the
direction of house prices; these factors are likely to weigh on the demand for housing for
some time. Moreover, the stock of vacant houses remains sizable, and the flow of homes
from foreclosure into the resale market is expected to remain substantial. Accordingly,
our projection calls for single-family housing starts to rise only gradually to an annual
rate of 560,000 units by the end of 2013, a pace we judge to be far below the longer-run
demand for housing.
In the business sector, we have not materially changed our view of the way E&S
investment is progressing. In particular, we continue to view many firms as being
hesitant to invest despite having the cash to do so. As firms grow more confident about
the economic outlook and as financing conditions for smaller businesses improve further,
we expect business spending to accelerate somewhat. As a result, growth in real E&S
outlays is projected to step up from about 4 percent in 2012 to about 6½ percent in 2013;
these moderate rates of increase are consistent with only a slow expansion of the capital
stock.
Our outlook for business investment in nonresidential structures remains sluggish.
Outside of drilling and mining, investment is expected to be essentially flat, on net, over
the next two years, reflecting the weak fundamentals for this sector: Vacancy rates are
still elevated, valuations for commercial real estate remain depressed, and financing
conditions continue to be difficult. In contrast, outlays for drilling and mining structures
are anticipated to persist at high levels over the projection period, although spending

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The Role of Surprisingly Weak Income Data in the PCE Projection
Real disposable personal income (DPI) has been considerably weaker than we had
expected in the fall. Indeed, real DPI now looks to have edged up just $40 billion (or
½ percent) over 2011; at the time of the October Tealbook, we anticipated an increase of
close to $160 billion (or 1½ percent), as shown in the table below.1 The meager gains in
personal income—which are also reflected in the very subdued increases in gross
domestic income (GDI) over the second and third quarters—have weighed on our
projection of consumer spending for this year and next.
Despite the slow growth in real disposable income, consumption expenditures in the
second half of last year seem to have held up reasonably well, and, as a result, the
personal saving rate fell from 5 percent in the first half of the year to around 4 percent in
the second half—a decline that seems out of line with the weaker consumer sentiment
and lower household wealth over the same period.
The Board staff’s preferred consumption models react to the relatively high level of
consumption (given the level of income and other determinants)—and hence the
relatively low saving rate—by projecting that future consumption growth will slow
enough to bring the level of consumption back in line with income and other observable
explanatory variables. In other words, the models imply that surprises in the saving rate
are unwound subsequently. The implications of one such model are shown by the blue
bars in the figure on the facing page: According to this model, the downward revisions to
income over the past two Tealbooks imply, all else being equal, reductions in the growth
rate of PCE of close to ½ percentage point in 2012 and about ¼ percentage point in 2013.
In the baseline forecast, we have discounted somewhat the implications of this and
similar models for the PCE outlook for the following reasons. For one thing, real‐time
readings on spending and income are subject to considerable measurement error. One
interpretation of the relative strength of consumption recently is that the currently
published data may understate the actual level of disposable income. (Indeed, the
deceleration in published compensation in the middle of the year seems out of step with

Projections of the 2011 Q4/Q4 Change in Real DPI
(Billions of real dollars)
Revision
Oct 2011 TB Jan 2012 TB
157
-120
DPI
38
Selected components
Compensation
95
69
-27
Transfers
-9
-53
-44
Dividends and interest
50
9
-41

Most of the revision to income ($85 billion out of $120 billion) occurred between the October and
December Tealbooks.

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the stability in both employment growth and the unemployment rate observed over the
same period.) Moreover, during the past decade, there has been some tendency for
large income revisions in a quarter—such as the recent downward revision to second‐
quarter compensation—to be partially unwound subsequently. To the extent that the
currently published estimates of income are too low, the outlook for consumption should
be brighter than a mechanical reading of the model results would indicate. Similarly,
current estimates of consumption may be too high, in which case the level of actual
consumption would be better aligned with income than is now apparent; accordingly,
there would be less reason to project a slower growth rate of consumption going
forward.2
Even if income and consumer spending were measured without error, a standard PCE
model might still overstate the implications of the current estimated imbalance between
consumption and income for future consumption growth because these apparent
imbalances may instead reflect factors or behavior that the model does not capture. For
example, changes in credit conditions, income uncertainty, or the proportion of current
income that is perceived to be transitory could all have important influences on the
saving rate. However, because we cannot accurately observe or estimate these
variables, the ability of our models to condition on them is very limited.
After weighing the various interpretations of the recent income data, we revised down
our projection of consumption growth from the October Tealbook to the January
Tealbook (the red bars in the figure below) by a little less than our preferred model
would have suggested (the blue bars).

Effect of Revision to the Level of 2011:Q4 Income from
the October to January Tealbook on Projected
Consumption Growth
(Percentage points)

-0.25

2013 Q4/Q4

2012 Q4/Q4
-0.5

Staff PCE Model

Staff PCE Projection

Although understated income and overstated consumption have similar implications for
consumption growth over the projection, they have opposite implications for the level of consumption
over the projection.

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

19962000

20012009

2010

2011

2012

2013

Potential Real GDP
Previous Tealbook

3.0
3.0

3.5
3.5

2.4
2.4

1.6
1.6

1.7
1.7

2.0
2.0

2.1
2.1

Selected contributions1
Structural labor productivity
Previous Tealbook

1.5
1.5

2.7
2.7

2.4
2.4

1.4
1.4

1.5
1.5

1.6
1.6

1.7
1.7

Capital deepening
Previous Tealbook

.7
.7

1.5
1.5

.8
.8

.4
.4

.5
.5

.7
.7

Multifactor productivity
Previous Tealbook

.5
.5

.9
.9

1.4
1.4

.9
.9

.8
.8

.9
.9

1.5
1.5

1.0
1.0

.6
.6

.5
.5

.6
.6

.7
.7

.6
.6

.4
.4

.0
.0

-.3
-.3

-.4
-.4

-.3
-.3

-.2
-.2

-.3
-.3

Measure

Structural hours
Previous Tealbook
Labor force participation
Previous Tealbook

Note: Components may not sum to totals because of rounding. For multiyear periods, the percent change is the
annual average from Q4 of the year preceding the first year shown to Q4 of the last year shown.
1. Percentage points.
Structural and Actual Labor Productivity
(Nonfarm business sector)
Chained (2005) dollars per hour

54
Structural

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Structural and Actual Labor Force Participation Rate
Percent

67
Structural

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: U.S. Department of Labor, Bureau of Labor Statistics; Bureau of Economic Analysis; and staff assumptions.

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2013

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January 18, 2012

growth in this sector should moderate in response to lower projected prices for natural
gas.
Finally, inventory investment is projected to have only a small influence on real
GDP growth this year and next. As noted earlier, stocks currently appear well aligned
with sales in most sectors, and thus we expect the pace of inventory accumulation to
about match the rise in final sales during the projection period.

AGGREGATE SUPPLY, THE LABOR MARKET, AND INFLATION
Potential GDP and the NAIRU
We have made no changes in this projection to our estimates of aggregate supply.
We continue to assume that potential GDP will increase roughly 2 percent in both 2012
and 2013, and we have retained our assumption that the NAIRU will remain at 6 percent
through 2013.6

Productivity and the Labor Market
With output growth coming in a little weaker than we had expected even as the
labor market has improved by more than we had anticipated, we have marked down our
estimates of the increase in productivity in the near term. These revisions have brought
the level of productivity down to our estimate of its trend level more quickly than we had
anticipated in the December Tealbook. Over the remainder of the medium-term
projection period, we expect firms to increase their labor input about in step with the
modest gains anticipated in output; thus, we look for productivity to rise at a pace similar
to its trend rate.
With little acceleration in economic activity projected over the medium term, we
expect the pace of private employment growth to hold fairly steady, with monthly job
gains averaging 160,000 in 2012 and 170,000 in 2013. Meanwhile, we expect state and
local employment to continue to decline this year, though by less than in recent years,
and to rise modestly next year, as budget pressures diminish somewhat. With these tepid
employment gains, the unemployment rate edges down to 8¼ percent by the end of 2013,

Our estimate of the short-run “effective” NAIRU (which includes the influence of extended and
emergency unemployment benefits) is also unrevised in this projection. It remains at 6.4 percent through
the end of 2012 and then declines toward the long-run NAIRU, nearly closing the gap between the two
measures by the end of 2013 when the extended unemployment benefits are almost fully wound down.

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The Outlook for the Labor Market and Resource Utilization
(Percent change from final quarter of preceding period)
2011
2010
Measure

2012

2013

Output per hour, nonfarm business
Previous Tealbook

2.5
2.5

-.4
-.4

1.4
2.1

1.4
1.3

1.4
1.2

Nonfarm private employment1
Previous Tealbook

98
98

165
165

155
145

163
168

171
173

Labor force participation rate2
Previous Tealbook

64.4
64.5

64.1
64.1

64.0
64.1

63.9
64.0

Civilian unemployment rate2
Previous Tealbook

9.6
9.6

9.1
9.1

8.7
8.8

8.6
8.6

8.2
8.2

-5.4
-5.4

-5.8
-5.8

-5.5
-5.5

-5.4
-5.2

-5.2
-4.8

Memo:
GDP gap3
Previous Tealbook

1. Thousands, average monthly changes.
2. Percent, average for the final quarter in the period.
3. Percent difference between actual and potential GDP in the final quarter of the period indicated. A negative number indicates that the economy
is operating below potential.
Source: U.S. Department of Labor, BLS; staff assumptions.

Nonfarm Private Employment

Unemployment Rate

(Average monthly changes)
Thousands

600
Current
Previous Tealbook

400
200
0

600

Percent

11
NAIRU
NAIRU with EEB adjustment

400

200

10
9

-200

-400

-600

-800

-1000

1995

2000

2005

2010

Source: U.S. Dept. of Labor, BLS.

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

GDP Gap
6

Manufacturing Capacity Utilization Rate
Percent

-2

-4

-6

-8

-10

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

-10

Percent

90
85

Average rate from
1972 to 2010

1995

2000

2005

2010

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

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

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the same as in the December Tealbook; most of this decline reflects downward pressure
on labor force participation from the expected phase-out of EUC benefits.

Resource Utilization
By our estimates, economic slack remains considerable, and we expect no
material progress to be made in whittling it down over the projection period. For
example, the unemployment rate in the fourth quarter of 2011 was 2¼ percentage points
above our estimate of the effective NAIRU, and we expect this gap to persist through
2013. Similarly, the output gap is projected to remain wide throughout the medium-term
projection. The extended period of labor market slack is likely to be associated with a
continuation of other adverse labor market conditions, including below-trend labor force
participation and an unusually large concentration of workers experiencing long-term
unemployment spells.
Unlike the staff’s measure of potential GDP, which directly reflects trends in the
labor force, our concept of capacity for the industrial sector focuses on the capability of
plants to produce with the equipment that is in place and ready to operate, and not on the
potential workforce. As a result, with manufacturing output rising moderately over the
projection period and with manufacturing capacity expanding only modestly (after having
contracted outright during the recession), excess capacity in this sector is taken up
relatively quickly. Indeed, the factory operating rate rises 2¾ percentage points over the
course of the next two years, to 78¼ percent, just a bit below its long-run average.

Prices and Compensation
We expect that the wide margin of labor market slack, along with low rates of
price inflation, will continue to restrain labor costs over the forecast period. Both the
Productivity and Cost measure of nonfarm hourly compensation and the employment cost
index are projected to rise about 2¼ percent per year in 2012 and 2013, unchanged from
the December Tealbook. Combined with the moderate gains in productivity that we
project, these increases in compensation imply only a small rise in unit labor costs this
year and next.
After falling at an estimated annual rate of ¾ percent in the final quarter of 2011,
prices for core imported goods are expected to decline at a 1¼ percent rate in the current
quarter; this decrease is slightly larger than projected in the December Tealbook because
of the recent appreciation of the dollar. These price declines stand in sharp contrast to the

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January 18, 2012

Inflation Projections
(Percent change at annual rate from final quarter of preceding period)
2011
2010

2012

2013

1.4
1.4

1.3
1.2

6.4
6.4

3.7
3.7

1.1
1.2

1.2
1.2

6.2
6.2

27.2
27.2

-1.9
-1.9

1.4
-.3

-.8
-1.6

Excluding food and energy
Previous Tealbook

1.0
1.0

1.9
1.9

1.5
1.5

1.4
1.4

Prices of core goods imports1
Previous Tealbook

2.6
2.6

7.7
7.7

.8
.8

.2
.2

1.5
1.5

Measure

1.3
1.3

3.6
3.6

Food and beverages
Previous Tealbook

1.3
1.3

Energy
Previous Tealbook

PCE chain-weighted price index
Previous Tealbook

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

Total PCE Prices

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

6
Current
Previous Tealbook

4-quarter percent change

5
4

1
-1

1995

2000

2005

2010

-1

1995

2000

2005

2010

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

Compensation per Hour

Long-Term Inflation Expectations

4-quarter percent change

Market-based

Percent

Productivity and Costs
8

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

6
3

4
SPF,
next 10 yrs.

2
Employment cost index

0
-2

Jan.

1995

2000

2005

2010

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

-2

1
0

1995

2000

2005

2010

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

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

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sizable increases observed in the first half of 2011; both the earlier increase and the
recent declines were driven largely by fluctuations in commodity prices. Core import
prices are expected to accelerate gradually to about a 1½ percent rate of increase in 2013,
as commodity prices flatten out and the dollar begins to depreciate.
Inflation expectations have been little changed since the time of the December
Tealbook. Median expectations from the Michigan survey ticked up 0.1 percentage point
in January at both the 1-year and 5-to-10-year horizons but are still down somewhat from
the middle of last year; the 5-to-10-year expectations stand near the lower edge of the
narrow range they have moved in for most of the past 10 years. Inflation compensation
5 to 10 years ahead derived from TIPS spreads has changed little, on net, in recent weeks.
As in previous Tealbooks, we anticipate that subdued labor costs and low levels
of resource utilization will continue to restrain core PCE inflation over the projection
period but that stable inflation expectations will head off any actual disinflation. We
continue to project that core PCE inflation will be about 1½ percent in both 2012 and
2013, the same as in the December Tealbook. Given our forecast of relatively small
changes in food and energy prices, headline inflation is expected to run just a bit below
core in both 2012 and 2013.

THE LONG-TERM OUTLOOK
We have extended the staff forecast to 2016 using the FRB/US model and staff
assumptions regarding long-run supply-side conditions, fiscal policy, and other factors.
The contour of the long-run outlook depends on the following key assumptions:


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



The Federal Reserve’s holdings of securities follow the baseline portfolio
projections reported in Book B. The projected longer-run decline in the
System’s holdings is forecast to contribute about 30 basis points to the rise in
the 10-year Treasury yield from 2013 to 2016.



Risk premiums on corporate equities and bonds decline gradually to normal
levels, and banks ease their lending standards somewhat further.

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January 18, 2012

The Long-Term Outlook
(Percent change, Q4 to Q4, except as noted)
Item

2011

2012

2013

2014

2015

2016

1.6
8.7
2.5
1.7
.1
2.1

2.1
8.6
1.4
1.5
.1
2.7

2.4
8.2
1.3
1.4
.1
3.5

3.6
7.8
1.5
1.4
.3
3.7

4.2
7.2
1.5
1.4
1.5
3.9

3.7
6.5
1.6
1.5
2.5
4.1

Real GDP
Civilian unemployment rate1
PCE prices, total
Core PCE prices
Federal funds rate1
10-year Treasury yield1
1. Percent, average for the final quarter of the period.

Real GDP

Unemployment Rate
4-quarter percent change

Percent
10

5
4

3
2
Potential GDP

1
0
−1

NAIRU with EEB
adjustment

−2

−3
Real GDP

NAIRU

−4

−5
−6
2002 2004 2006 2008 2010 2012 2014 2016

4
2002 2004 2006 2008 2010 2012 2014 2016

PCE Prices

Interest Rates
4-quarter percent change

Percent
5

Total PCE prices

9
4

8
BBB corporate

7
6

2
PCE prices
excluding
food and energy

5
10-year Treasury

4
3
2

Federal
funds rate

−1
2002 2004 2006 2008 2010 2012 2014 2016

0
2002 2004 2006 2008 2010 2012 2014 2016

Note: In each panel, shading represents the projection period.
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

The federal government budget deficit (NIPA basis) narrows from 5¼ percent
of GDP in 2013 to 4 percent of GDP in 2016. This narrowing reflects both
the effects of the economic recovery on tax receipts and budgetary restraint
consistent with the Budget Control Act.



The foreign exchange value of the dollar is assumed to depreciate 2¼ percent
per year in real terms from 2014 to 2016. The price of crude oil is roughly flat
beyond 2013. Foreign real GDP expands, on average, 3½ percent per year
from 2014 through 2016, slightly above its trend rate.



The NAIRU declines from 6 percent in late 2013 to 5½ percent in late 2016
as the functioning of the labor market gradually improves, and settles in at
5¼ percent in the long run. Potential GDP expands 2½ percent per year on
average from 2014 to 2016.

The economy enters 2014 with output still considerably below its potential, the
unemployment rate well above the projected NAIRU, and inflation below the assumed
objective. In the long-run forecast, improving confidence, diminishing uncertainty, and
supportive financial conditions enable real GDP to rise at an average annual rate of
3¾ percent from 2014 to 2016. With actual output expanding significantly faster than
potential, labor market conditions improve markedly. Nevertheless, the unemployment
rate is 6½ percent at the end of 2016, still 1 percentage point above the assumed NAIRU.
With slack-related downward pressures gradually abating, inflation edges up slightly but
is still around 1½ percent in 2016.
Relative to the November projection—the last time that Committee participants
submitted economic projections as part of the SEP process—the staff forecast for
unemployment at the end of 2014, at 7.8 percent, is revised up ½ percentage point. Half
of this revision reflects a change in our assumption about the pace at which labor market
functioning will improve over the next several years. (We still have the long-term
NAIRU heading ultimately to 5¼ percent, but getting there more slowly; as a result, the
NAIRU in 2014 is ¼ percentage point higher now than it was in the November
projection. This revision was introduced between the November and December
Tealbooks.) The other half of the upward revision to the unemployment rate in the fourth
quarter of 2014 reflects our expectation that the economic recovery will proceed at a
slower pace than we anticipated in November. The inflation projection for both core and
topline PCE inflation in 2014 is largely unrevised relative to the November Tealbook.

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

2011

2012

2013

1/20

3/10

4/21

6/16

8/4

9/15

10/27 12/8

1/19

3/9

4/20

2010

6/15

8/3

9/14

10/26 12/7

1/18

3/7

4/18

2011

6/13

7/25

9/5

10/17

12/5

2012

Tealbook publication date

Unemployment Rate
Percent, fourth quarter
10.5

10.5

10.0

9.5

9.0

8.5

8.0

8.0
2011

7.5

2013

2012

7.5

7.0

6.5

6.0

1/20

3/10

4/21

6/16

8/4

9/15

10/27 12/8

1/19

3/9

4/20

2010

6/15

8/3

9/14

10/26 12/7

1/18

3/7

4/18

2011

6/13

7/25

9/5

10/17

12/5

6.0

2012

Tealbook publication date

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

2.5

2.0

1.5

1.5
2013

1.0
2011

1.0

2012

0.5

0.0

0.5

1/20

3/10

4/21

6/16

2010

8/4

9/15

10/27 12/8

1/19

3/9

4/20

6/15

8/3

9/14

10/26 12/7

2011

Tealbook publication date

Page 30 of 104

1/18

3/7

4/18

6/13

2012

7/25

9/5

10/17

12/5

0.0

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January 18, 2012

International Economic Developments and Outlook
Incoming data point to a substantial deceleration of foreign economic activity
during the last quarter. We now estimate that economic growth abroad stepped down
from an annual pace of 3½ percent in the third quarter to 2 percent in the fourth, a bit
lower than projected in the December Tealbook. This slowdown reflects a number of
factors. First, economic growth in several of our key trading partners—Canada, China,
slowing was anticipated. Second, financial stresses and fiscal consolidation appear to be
pushing the euro area into recession. Third, the weakness in the euro area has spilled
over to the United Kingdom and contributed to lower external demand in a number of
other economies. Finally, the floods in Thailand led to an even deeper plunge in activity
in that country than we anticipated and also restrained activity in some other Asian
economies through supply chain linkages.
Our outlook for foreign activity over the next two years is little changed, with
aggregate growth abroad projected to be only 2½ percent this year—a pace well below
trend—and then 3 percent in 2013. The contour of our outlook represents a combination
of rather different trajectories across different regions of the world. In emerging Asia,
Chinese growth remains at about 8 percent and growth in the rest of the region returns to
a near-trend pace as the adverse effects of the floods in Thailand abate. Economic
growth in Latin America should also stay reasonably solid this year and next.
Conversely, in the euro area, we continue to believe that substantial obstacles remain to a
quick resolution of the crisis, and we see output contracting through the end of the year,
with only a meager recovery in train next year.
To be sure, the tone of European financial conditions appears to have improved
somewhat since the time of the December Tealbook, with short-term funding pressures
having eased and sovereign bond spreads for peripheral economies having declined, at
least for shorter maturities. Even S&P’s sovereign debt downgrades for several euro-area
economies, announced a few days ago, had little adverse effect, suggesting that these
downgrades had largely been priced in. Nevertheless, European financial markets remain
stressed, and the cumulative effect of the crisis on credit extension and confidence will
undoubtedly continue to weigh on economic activity in the region. Moreover, although
the provision of ample liquidity by the ECB has helped stabilize the situation, little other

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Int’l Econ Devel & Outlook

Japan, and Mexico—had been running unusually fast in the third quarter and some

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Recent Foreign Indicators
Nominal Exports

Industrial Production
Jan. 2007 = 100

Jan. 2007 = 100

180

Foreign
AFE
EME*

Foreign
AFE*
EME**

160

130

120

140
110
120
100

Int’l Econ Devel & Outlook

100
90

2007

2008

2009

2010

2011

60
2012

* Excludes Venezuela.

2007

2008

2009

2010

2011

80
2012

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

Retail Sales

Employment
12-month percent change

4-quarter percent change

Foreign
AFE*
EME**

Foreign
AFE
EME*

5
4

3
2

5
1
0

-1

2007

2008

2009

2010

2011

-5
2012

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

Headline
Core*

2008

2009

2010

2011

-2
2012

* Excludes Argentina and Mexico.

Consumer Prices: Advanced Foreign Economies
12-month percent change

2007

Consumer Prices: Emerging Market Economies
12-month percent change
10
Headline
Ex. food--East Asia*
Ex. food--Latin America
8

5
4

4
2
2
1

2007

2008

2009

2010

2011

-1
2012

-2

2007

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

Page 32 of 104

2008

2009

2010

2011

-4
2012

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The Foreign Outlook
(Percent change, annual rate)

2012

2013

3.0
3.2

3.6
3.6

2.0
2.3

2.5
2.5

2.3
2.4

2.6
2.7

3.0
3.0

Advanced foreign economies
Previous Tealbook

.9
1.2

2.7
2.7

.6
1.0

.6
.7

.5
.6

1.1
1.1

1.5
1.6

Emerging market economies
Previous Tealbook

5.3
5.3

4.6
4.7

3.5
3.7

4.6
4.4

4.3
4.3

4.3
4.4

4.5
4.6

3.7
3.7

3.1
3.1

3.1
3.5

2.3
2.6

2.4
2.3

2.3
2.2

2.3
2.3

Advanced foreign economies
Previous Tealbook

2.7
2.7

1.0
1.1

2.8
2.9

1.6
1.4

1.2
1.1

1.3
1.1

1.1
1.1

Emerging market economies
Previous Tealbook

4.6
4.6

3.3
3.9

3.0
3.6

3.3
3.2

3.1
3.1

3.2
3.2

Real GDP
Total foreign
Previous Tealbook

Consumer Prices
Total foreign
Previous Tealbook

Int’l Econ Devel & Outlook

2011
H1

Note: Annualized percent change from final quarter of preceding period to final quarter of period indicated.

Real GDP
Percent change, annual rate
Current
Previous Tealbook

Percent change, annual rate

15
10

Emerging market economies

15
10

0
Advanced foreign economies

Total foreign

-5

-10
2008

2009

2010

2011

2012

2013

-10
2008

2009

2010

2011

2012

2013

Consumer Prices
Percent change, annual rate

Total foreign

Percent change, annual rate
Emerging market economies

-2

Advanced foreign economies

-4
2008

2009

2010

2011

2012

2013

Page 33 of 104

-4
2008

2009

2010

2011

2012

2013

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progress has been made to strengthen the firewalls needed to protect embattled European
governments from a renewed run on their debt. Thus, a further deterioration of financial
conditions in the region remains likely, not least because talks on Greek debt
restructuring have so far failed to reach agreement, and we still do not see investor
confidence starting to return until later this year after policymakers are forced to take
stronger actions. Moreover, there remains some chance that financial conditions could
deteriorate much more severely than we anticipate in our baseline projection. (See the

Int’l Econ Devel & Outlook

“European Crisis with Severe Spillovers” scenario in the Risks and Uncertainty section.)
Inflation abroad held steady at an annual rate of a little more than 3 percent in the
fourth quarter. This estimate is a bit lower than projected in the December Tealbook,
largely reflecting a faster abatement of food price pressures in emerging market
economies (EMEs), particularly in China. We expect foreign inflation to moderate
further this year and next, to about 2¼ percent, as resource slack persists and as price
pressures from previous increases in commodity prices continue to diminish. Since the
time of the December Tealbook, most central banks left policy rates unchanged while the
ECB and the Central Bank of Chile loosened monetary policy. In several foreign
economies, further policy easing is expected.

ADVANCED FOREIGN ECONOMIES
We now estimate that real GDP in the advanced foreign economies (AFEs) rose at
an annual pace of only about ½ percent in the fourth quarter, nearly ½ percentage point
less than projected in the December Tealbook. In Japan and the United Kingdom,
activity surprised on the downside; Japanese exports continued to fall and U.K. consumer
and business confidence dipped to levels not seen since 2009. In the euro area, incoming
data support our view that the region has entered a moderate recession. But the Canadian
economy seems to be holding up better. Going forward, we continue to expect AFE
growth to remain a lackluster ½ percent in the first half of 2012, held down by the euroarea recession, before picking up to a 1¾ percent pace by the end of 2013.
Headline inflation in the AFEs is estimated to have risen to an annual rate of
2¾ percent in the fourth quarter from a rate of 1 percent in the third. The acceleration in
prices, which we had anticipated in the December forecast, largely reflected a series of
temporary factors, which started unwinding toward the end of last year. Accordingly, we
project that inflation will slow to 1½ percent in the first quarter and, reflecting persistent
and substantial output gaps, average about 1¼ percent over the remainder of the forecast

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period. This forecast is a touch higher than projected in the previous Tealbook, reflecting
a somewhat more elevated path for energy prices. Amid weak growth prospects and
moderating inflation, we expect that the major foreign central banks will take additional
measures to ease monetary policy conditions.

Euro Area
Recent indicators lead us to estimate that euro-area real GDP contracted at an
annual rate of 1¼ percent in the fourth quarter, a bit more than expected in the December
pace. More broadly, euro-area retail trade and industrial production fell further in
November, and the unemployment rate, at 10.3 percent, remains at its highest level since
June 1998. In December, economic sentiment edged down and the composite PMI
stayed in contractionary territory, although the latter improved relative to previous
months. However, we slightly reduced the magnitude of the projected contraction in
2012, as the recent depreciation of the euro is expected to boost euro-area exports. We
now expect GDP to fall 1¼ percent in 2012, about ¼ percentage point less than
previously anticipated, before increasing at a still-weak ½ percent pace in 2013.
Euro-area headline inflation spiked to an annual rate of about 4 percent in the
fourth quarter from just 1¼ percent in the third, with the largest increases in categories
most affected by a recent change in seasonal adjustment procedures. However, inflation
in other categories remained subdued. Amid sizable resource slack, we expect inflation
to come in just over 1½ percent this year and fall a bit further, to 1¼ percent, in 2013. At
its December 8 meeting, the ECB cut its benchmark policy rate to 1 percent, lowered the
required reserve ratio from 2 percent to 1 percent, eased collateral requirements for
refinancing operations, and announced three-year longer-term refinancing operations for
December 21 and February 29. At its January 12 meeting, the ECB left policy rates
unchanged. We continue to expect that the ECB will keep its benchmark policy rate at
1 percent over the forecast period and provide significant liquidity support to banks,
resulting in very low short-term market interest rates.
The ECB’s actions in December contributed to the relative calm seen in European
financial markets over the past month (see further details in the Financial Developments
section). However, beyond the ECB’s actions, EU leaders so far have done little to flesh
out the policy measures announced in early December, which included strengthening
fiscal rules and coordination, augmenting IMF resources, and introducing the permanent

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Int’l Econ Devel & Outlook

Tealbook. Preliminary indications are that German GDP contracted at nearly a 1 percent

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backstop facility, the European Stability Mechanism (ESM), in mid-2012, about a year
earlier than originally planned. 1 Euro-area finance ministers have committed
€150 billion in new bilateral loans to augment IMF resources, but it is unclear what other
countries will contribute and how the IMF will handle the new resources. The ESM
appears on track for introduction by midyear, but that will do little to expand EU
financial backstops given the €500 billion combined ceiling on the European Financial
Stability Facility (EFSF) and the ESM; so far, German officials have resisted raising that
ceiling. In response to concerns about policy weaknesses, in mid-January S&P
Int’l Econ Devel & Outlook

downgraded the sovereign debt ratings of Austria, France, several other European
countries, and the EFSF, further weakening the firewall intended to contain financial
contagion.
We assume that, in the absence of an effective firewall, any number of adverse
shocks will cause financial conditions in the euro area to start deteriorating again. One
near-term source of risk is the contentious negotiations between the Greek government
and its creditors over the “voluntary” write-down of Greek debt; should these talks fail to
result in an agreement, additional EU–IMF funding could be jeopardized, raising the
likelihood of a disorderly default. We anticipate that a further steep deterioration in
market conditions would force policymakers to eventually overcome domestic political
constraints and take more aggressive actions to stabilize the situation, but that investor
confidence would be restored only gradually thereafter.

Japan
Real GDP growth in Japan is estimated to have declined sharply from an annual
rate of 5½ percent in the third quarter to just ½ percent in the fourth. Much of this
slowdown was anticipated in the December Tealbook, reflecting the waning of the
rebound from the March earthquake and tsunami, the effects on parts supplies of the
floods in Thailand, and the appreciation of the yen. However, incoming data on
household spending and exports point to a sharper slowdown than we had anticipated, in
part because of a bigger effect from the floods than we had previously built in. As a
result, we lowered our fourth-quarter growth estimate by 1½ percentage points. We
project that real GDP growth will rebound to 2¾ percent in the current quarter, somewhat
1

The ESM, which was originally intended to replace the European Financial Stability Facility on
its expiration in 2013, is designed to channel liquidity to euro-area governments whose access to market
financing is impaired.

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January 18, 2012

higher than in the December Tealbook. Beyond the first quarter, growth should average
roughly 1½ percent through the end of 2013.
As expected, prices resumed their decline in November, supporting our estimate
that inflation was negative ½ percent in the fourth quarter. We project deflation to persist
amid sizable output gaps. Given the weak outlook for both output and inflation, we
anticipate that the Bank of Japan will further expand the size of its asset purchase
program. With the budget deficit projected to rise to nearly 9 percent of GDP this year,
restoring fiscal sustainability, although we do not assume such a hike over the forecast
period.

United Kingdom
In the United Kingdom, recent data on activity have been markedly weak,
prompting us to lower our estimate for fourth-quarter real GDP growth by ¾ percentage
point to negative ¼ percent. In November, industrial production continued to decline and
retail sales edged down. In addition, indicators of consumer and business confidence fell
further. However, both the manufacturing and services PMIs moved up in December,
suggesting that conditions improved toward year-end, and as a result, we carried forward
only part of the fourth-quarter weakness. Even so, we now project that U.K. real GDP
will rise only ½ percent in 2012, ¼ percentage point less than projected in the December
Tealbook. In 2013, economic growth is projected to strengthen to a 1¾ percent pace, as
financial conditions in Europe improve.
Higher utility prices pushed fourth-quarter inflation up to an annual rate of
4½ percent, a bit more than previously anticipated. However, with energy price inflation
projected to moderate and core inflation already trending down, inflation should step
down to 2 percent in the current quarter. Ample resource slack, along with our
assumption of no further increases in the VAT, should keep inflation at an average of
about 2 percent over the remainder of the forecast period. We continue to expect that the
Bank of England, faced with a bleak outlook and adverse financial spillovers from the
euro area, will increase the target for its asset purchase program from £275 billion to
£400 billion during the first half of 2012.

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Int’l Econ Devel & Outlook

the Noda administration is pushing for a hike in the value-added tax (VAT) to begin

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Canada
We estimate that real GDP growth in Canada stepped down to an annual rate of
2 percent in the fourth quarter after a temporary surge in exports helped boost thirdquarter GDP growth to 3½ percent. Monthly real GDP for October was unchanged from
the previous month, but the manufacturing PMI edged up in December and points to
positive, albeit moderate, growth. We expect GDP growth to hover around 2 percent
over the forecast period, a bit lower than in the previous Tealbook, reflecting the

Int’l Econ Devel & Outlook

downward revision to the path of U.S. activity.
We estimate that headline inflation moved up temporarily to an annual rate of
3½ percent in the fourth quarter from only 1 percent in the previous quarter, largely
reflecting the removal of car price discounts announced last summer. Inflation should
average 2 percent in 2012 and 1¾ percent in 2013, a touch more than in the December
Tealbook given the higher path for oil prices. In view of sizable output gaps and
moderating inflation, we continue to expect that the Bank of Canada will keep its main
policy rate at 1 percent through the end of 2013.

EMERGING MARKET ECONOMIES
We estimate that real GDP growth in the EMEs stepped down to an annual rate of
3½ percent in the fourth quarter from a 4½ percent pace in the third. This deceleration
reflected a slowdown in both China and Mexico to a more sustainable pace, a weakening
of export demand in Asia, and flooding and related supply chain disruptions in Thailand
and its trading partners. We continue to project an acceleration of EME activity in the
current quarter, to a pace of 4½ percent, partly reflecting recovery from the effect of the
floods in Thailand. Growth is then projected to remain near that rate over the remainder
of the forecast period, with some strengthening in 2013 as the recovery in the advanced
economies gains traction.
Incoming data suggest that headline inflation moderated to an annual rate of
3¼ percent in the fourth quarter; this decline was somewhat more than anticipated at the
time of the December Tealbook and was concentrated in China, where food prices
retreated faster than expected. We continue to project that EME inflation will move
down a bit more as the effects of earlier increases in food prices dissipate further. With
concerns about slowing global growth balanced by worries about currency depreciation,
many EME central banks have kept monetary policy on hold since the December
Tealbook; a notable exception was the Central Bank of Chile, which, despite 12-month
Page 38 of 104

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January 18, 2012

inflation moving above its target range in December, loosened policy in response to
concerns about domestic economic growth.

China
Chinese real GDP growth declined from 9½ percent in the third quarter to
8¼ percent in the fourth, in line with our forecast in the December Tealbook. Domestic
demand remained robust, with retail sales and fixed-asset investment continuing to grow
at close to their third-quarter pace, but the trade surplus fell sharply as imports rose more
$182 billion in 2010. Consumption and gross capital formation each contributed about
half of China’s economic growth of 9 percent in 2011, with net exports exerting a slight
drag. Looking forward, we project that Chinese real GDP will continue to grow at about
an 8 percent pace this year and next—somewhat below our estimate of potential—with
domestic demand remaining solid but external demand relatively weak. This outlook is
little changed from the December projection; we continue to believe that Chinese
authorities have sufficient scope for policy action to avoid a hard landing should demand
slow by more than we currently anticipate.
Chinese headline consumer price inflation stepped down to 1¾ percent at an
annual rate in the fourth quarter from 6¼ percent in the third, reflecting a decline in food
prices following large increases earlier in the year. As food prices bottom out, inflation is
expected to hover around 3 percent over the next two years. With inflation beginning to
moderate, Chinese authorities loosened monetary policy in late November by cutting
bank reserve requirements, and bank lending accelerated in December.

Other Emerging Asia
Elsewhere in emerging Asia, we estimate that growth slowed to an annual rate of
only 1¼ percent in the fourth quarter, about 1 percentage point lower than we had
projected in the December Tealbook. The slowdown in growth can be primarily
attributed to temporary disruptions to regional supply chains resulting from the October
floods in Thailand, which caused domestic output to plunge even more than we had
projected. In addition, output in Singapore contracted surprisingly sharply because of a
decline in the production of high-tech goods, and external demand was weaker
throughout the region. As output in the region recovers from the floods, growth this year
should pick up to about 4 percent, a bit lower than previously projected owing to weaker
exports, and increase to 4½ percent next year as demand from Europe starts to recover.

Page 39 of 104

Int’l Econ Devel & Outlook

than exports. For the year as a whole, the trade surplus was $155 billion, down from

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Authorized for Public Release

January 18, 2012

Inflation in the region remained at about 3½ percent in the fourth quarter, and we
expect it to edge down to about 3¼ percent for the remainder of the forecast period.
Since the December Tealbook, mounting concerns over the growth outlook have
prompted the Reserve Bank of India to refrain from further tightening of monetary policy
despite persistently high 12-month inflation of about 9 percent.

Latin America
We estimate that Mexican real GDP grew at a 3½ percent annual rate in the fourth
Int’l Econ Devel & Outlook

quarter, a large step-down from the previous quarter but ½ percentage point higher than
projected in the December Tealbook. Our upward revision reflects better-than-expected
U.S. industrial production data. Looking forward, the revised contour of U.S. industrial
production has led us to increase growth in Mexico in the near term and mark it down
further out, but these revisions have left average Mexican growth for this year and next
about unchanged from the December Tealbook at about 3 percent.
On balance, growth in South America is estimated to have remained steady at an
annual rate of 2¾ percent in the fourth quarter. Incoming data suggest that Brazil’s
economy, which stalled in the third quarter, perked up a bit in the fourth, in line with our
expectations. However, this improvement has been offset by a deceleration of activity
elsewhere in South America. Our outlook for the region is little changed from the
December Tealbook, with growth rising to about 3½ percent by next year, as monetary
policy easing supports Brazil’s recovery and the global economy strengthens.
Recent data suggest that headline inflation in Latin America increased to an
annual rate of 5½ percent in the fourth quarter from 3½ percent in the third, in part
because of a weather-related rise in food prices and the removal of an electricity subsidy
in Mexico. We expect these effects to dissipate going forward, which should bring
inflation for the region back down to about 3¾ percent by midyear. Of note, Brazilian
inflation has fallen to the upper bound of 6½ percent of the central bank’s target range,
giving authorities some scope to loosen monetary policy further.

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January 18, 2012

Evolution of Staff’s International Forecast

Total Foreign GDP
Percent change, Q4/Q4

6
5

2012

4
2013
3
2
1

1/20 3/10 4/21

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

3/9 4/20

6/15 8/3 9/14 10/26 12/7 1/18
2011

3/7 4/18

6/13 7/25 9/5 10/17 12/5
2012

Tealbook publication date

Total Foreign CPI
Percent change, Q4/Q4

4.0
3.5
3.0
2.5

2012

2013

2011

2.0
1.5
1.0
0.5

1/20 3/10 4/21

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

3/9 4/20

6/15 8/3 9/14 10/26 12/7 1/18
2011

3/7 4/18

6/13 7/25 9/5 10/17 12/5
2012

0.0

Tealbook publication date

U.S. Current Account Balance
Percent of GDP

0
-1
-2

2012

2013
-3

2011

-4
-5

1/20 3/10 4/21

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

3/9 4/20

6/15 8/3 9/14 10/26 12/7 1/18
2011

Tealbook publication date

Page 41 of 104

3/7 4/18

6/13 7/25 9/5 10/17 12/5
2012

-6

Int’l Econ Devel & Outlook

2011

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January 18, 2012

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Authorized for Public Release

January 18, 2012

Financial Developments
Conditions in financial markets improved somewhat over the intermeeting period,
with stock prices higher, risk spreads in several markets narrower, and measures of actual
and implied volatility generally down. Nonetheless, with doubts persisting about the
prospects for a durable solution to the European fiscal and banking problems, the
European situation continued to be a central concern for investors. Term Libor–OIS
spreads remained elevated, with dollar funding pressures especially notable for European
banks.
On balance over the period, policy expectations edged down, longer-dated
Treasury yields declined, and inflation compensation was relatively little changed.
Meanwhile, financing conditions for large nonfinancial businesses generally remained
favorable, as net debt financing was strong and C&I lending continued to expand in
December. Credit conditions for households were mixed. Consumer credit increased
robustly in November, but mortgage refinancing activity remained subdued amid tight
lending conditions despite mortgage rates that hovered near record-low levels.
Portfolio-weighted responses to the January Senior Loan Officer Opinion Survey on
strengthened slightly and lending standards eased a bit further in the fourth quarter (see
appendix).

POLICY EXPECTATIONS AND TREASURY YIELDS
FOMC communications during the period were largely in line with market
expectations and had limited effects on financial markets. That said, investors were
somewhat surprised by the announcement that the Summary of Economic Projections to
be published with the minutes of the January FOMC meeting will include FOMC
participants’ projections of the path of the federal funds rate as well as their qualitative
expectations for the Federal Reserve’s balance sheet.
Over the intermeeting period, the date at which the expected federal funds rate
implied by OIS rates first rises above its current 0 to ¼ percent target range moved out
one quarter to the first quarter of 2014, and the mean path of the policy rate for 2014 and

Page 43 of 104

Financial Developments

Bank Lending Practices (SLOOS) indicated that, in the aggregate, loan demand

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 18, 2012

Policy Expectations and Treasury Yields
Selected Interest Rates
Percent

Percent

2.3
2.2

1.0

December Philadelphia
FOMC
Fed

ECB 3-year longerterm refinancing
operation auction

PPI CPI

2.1

Consumer
confidence

Nonfarm
payrolls

0.9
0.8

GDP

0.7

10-year Treasury
yield (left scale)

2.0

0.6
0.5

1.9

0.4

2-year Treasury
yield (right scale)

1.8

0.3

1.7

0.2

1.6

0.1
Dec. 12

Dec. 15

Dec. 20

Dec. 23

Dec. 28

Jan. 2

Jan. 5

Jan. 10

Jan. 13

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

Long-Term Interest Rate Implied Volatility

Implied Federal Funds Rate
Percent

Daily

Dec.
FOMC

Percent
10

2.5

Mean: January 17, 2012
Mean: December 12, 2011
Mode: January 17, 2012
Mode: December 12, 2011

9
8

2.0
1.5

7
1.0

Financial Developments

Jan.
17

0.5

4
0.0

Jan.

May Aug.
Dec.
Apr.
Aug.
Dec.
2010
2011
Note: Derived from options on 10-year Treasury note futures.
Source: Bloomberg.

2012

2014

2015

Note: Mean is estimated using overnight index swap quotes.
Mode is estimated from the distribution of federal funds rate implied
by interest rate caps. Both include a term premium of zero basis
points per month.
Source: Bloomberg and CME Group.

Distribution of Modal Timing of First Rate Increase
from the Desk’s Dealer Survey
Percent
Recent: 20 respondents
Dec. FOMC: 21 respondents

2013

Inflation Compensation
Percent

Dec.
FOMC

Daily

5 to 10 years ahead

3
20
2

Jan.
17

Next 5 years*
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2013
2014
2015
2016
Source: Desk’s Dealer Survey from January 17, 2011.

2010

2011

2012

Note: Estimates based on smoothed nominal and inflationindexed Treasury yield curves.
*Adjusted for the indexation-lag (carry) effect.
Source: Barclays PLC and staff estimates.

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January 18, 2012

beyond decreased 6 to 26 basis points. 1 The modal path of expected policy rates derived
from quotes on interest rate caps remained within the current target range through the end
of 2015.
Results from the Open Market Desk’s latest survey of primary dealers also
suggested that the respondents had pushed back slightly the expected timing of
tightening. Respondents viewed the third quarter of 2014 as the most likely time for
liftoff of the federal funds rate, one quarter later than indicated in the December survey.
In response to questions about possible options for easing, dealers assigned a 70 percent
probability to the Committee making changes to its forward guidance regarding the
federal funds rate at the January meeting and a 40 percent probability to the Committee
providing guidance on the size of the SOMA portfolio. Many dealers indicated that they
expected the “mid-2013” reference in the FOMC’s statement to be updated or removed
given the publication of FOMC meeting participants’ federal funds rate projections in the
Summary of Economic Projections. Dealers modestly revised down, from 60 percent to
55 percent, the likelihood assigned to an expansion of the SOMA portfolio through
securities purchases within one year.
The decline in the expected path for the federal funds rate was reflected in
longer maturities. Staff term-structure models suggest that a narrowing in term premiums
also contributed to the move in Treasury yields, consistent with the reduction in longterm interest rate implied volatilities over the period. TIPS- and swaps-based measures
of inflation compensation were relatively little changed, on net, despite an appreciable
rise in energy prices.
The Desk’s outright purchases and sales of Treasury securities under the maturity
extension program continued to be generally well received and did not appear to have any
adverse effect on Treasury market functioning. 2 Trading volumes were thin in
December, as is typical at that time of the year, but other measures of Treasury market
liquidity remained stable.

The effective federal funds rate averaged 7 basis points over the intermeeting period, with the
intraday standard deviation averaging 5¼ basis points.
2
As of January 17, 2012, the Desk had sold $162 billion of short-term Treasury securities and
purchased $149 billion of long-term securities under the maturity extension program.

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Financial Developments

Treasury yields, which fell over the intermeeting period, particularly at intermediate and

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Authorized for Public Release

January 18, 2012

Short-Term Funding Markets and Financial Institutions
Selected Interest Rate Spreads
Daily

3-month Libor over OIS
1-week Libor over OIS

Dollar Funding Spreads
Basis points
60
Dec.
FOMC
50

Daily

USD 3x6 FRA-OIS*
3-month euro-dollar implied
basis swap

40
Jan.
17

Basis points
180
Dec.
FOMC
160
140
120
100

80
20

60
40

Jan.
17

0
Jan.

May
Sept.
2010
Source: Bloomberg.

Jan.

May
Sept.
2011

Jan.
2012

Daily

0
Apr.

July
Oct. Jan.
Apr.
July
Oct. Jan.
2010
2011
2012
*Spread is calculated from a Libor forward rate agreement (FRA)
3 to 6 months in the future and the implied forward overnight
index swap (OIS) rate for the same period.
Source: Bloomberg; staff estimates.

Spreads on Unsecured Financial Commercial
Paper Issued in the U.S. Market

Unsecured Dollar Financial Commercial Paper
Billions of dollars
Outstanding
400

Basis points
40
Dec.
FOMC
35

350

450

Dec.
FOMC

Daily

France and Germany
Ireland, Italy, and Spain
Other Europe
United States

300
250

Financial Developments

European issuers
U.S. issuers

200
Jan.
17

25
20
Jan.
17

150

Mar.

May

July
Sept.
Nov.
2011
Source: Depository Trust & Clearing Corporation.

0
-5
Jan.

May
Sept.
Jan.
May
Sept.
Jan.
2010
2011
2012
Note: 5-day moving average. Spreads computed over the
AA nonfinancial unsecured rate.
Source: Depository Trust & Clearing Corporation.

S&P 500 Diversified Financials Stock Price Index

CDS Spreads of Large Bank Holding Companies

Nov. 1, 2011 = 100, log scale
Daily

180
Daily
160
140

Jan.
17

Citigroup
JPMorgan Chase
Wells Fargo
Goldman Sachs
Bank of America
Morgan Stanley

Basis points
700
Dec.
FOMC
600
500
400

120
300
200

100
Jan.
17
80
Jan.

May
Sept.
2010
Source: Bloomberg.

Jan.

May
Sept.
2011

10
5

Jan.
2012

Dec.
FOMC

100

0
Jan.

Jan.
2012

Jan.

May
Sept.
2010
Source: Markit.

Page 46 of 104

Jan.

May
Sept.
2011

Jan.
2012

100
0

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

SHORT-TERM DOLLAR FUNDING MARKETS AND FINANCIAL INSTITUTIONS
U.S. financial institutions reportedly maintained ready access to short-term
funding markets, and there were few signs of dislocations in funding markets over
year-end. European banks continued to face dollar funding pressures, and spreads
between Libor and OIS rates remained elevated; on net over the period, the three-month
Libor–OIS spread widened a touch further while spreads at shorter maturities were little
changed. The spread between the forward rate agreement three to six months ahead and
the corresponding forward OIS rate remained at a relatively high level but narrowed
somewhat, a change that perhaps reflected an expectation for some moderation of these
pressures.
U.S. financial institutions generally continued to issue commercial paper (CP) and
negotiable certificates of deposit on terms typical of noncrisis periods. Outstanding
unsecured CP issued in the United States by entities with European parents declined
somewhat further, but the fraction of issuance by European entities occurring beyond
very short-term maturities moved up a bit. Overnight spreads for unsecured CP issued by
entities with French parents declined substantially following the reduction in the cost of
dollar liquidity provided through central bank swap lines with the Federal Reserve, the
the passage of year-end. Meanwhile, spreads for issuers with parents from elsewhere in
Europe or the United States remained comparatively low.
The general collateral repo market has continued to function normally, with no
reports of unusual year-end pressures, and haircuts across collateral types appeared to be
largely unchanged. Volume in the triparty repo market declined somewhat around
year-end but revived in the first two weeks of 2012, buoyed by a pickup in the financing
of Treasury securities. Spreads on overnight asset-backed commercial paper (ABCP)
issued by entities with French parents stabilized at a high level, while spreads on
overnight ABCP issued by firms with parents from elsewhere in Europe or the United
States were stable at a low level.
Other indicators provided mixed evidence of strains in the financial system.
Equity prices of most large domestic financial institutions outperformed the broader
market, on net, over the intermeeting period. The initial wave of fourth-quarter earnings
reports for large bank holding companies were mixed relative to market expectations,
with poor capital market revenues weighing on the profits of institutions with significant

Page 47 of 104

Financial Developments

implementation of the ECB’s three-year longer-term refinancing operation (LTRO), and

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January 18, 2012

Foreign Developments
European Central Bank Operations

Euro-Area Two-Year Government Bond Spreads

Billions of euros
Percent
1200
2.0
Weekly
1.8
Amount outstanding from refinancing
operations (left scale)
1000
1.6
EONIA (right scale)
1.4
800
1.2
600

Percentage points
Daily

Portugal
Spain
Ireland
Italy

Dec.
FOMC

1.0
Jan.
17

400

0.8

Jan.
17

0.6
0.4

200

0.2
0

0.0
Jan Apr

Jul
2010

Oct Jan Apr

Source: Bloomberg.

Jul
2011

Oct Jan
2012

2011

2012

Note: Spread over German bunds.
Source: Bloomberg.

Dollar Exchange Rates

Stock Price Indexes

Euros per dollar
Jan. 3, 2011 = 100
0.9
110
Daily
Broad (right scale)
Dec.
Euro (left scale)
FOMC
105

Jan. 3, 2011 = 100
Daily

Jan.
17

0.8

100

DJ Euro
Topix
FTSE
MSCI Emerging
Markets

Dec.
FOMC

Financial Developments

0.6

120
110

95
0.7

Jan.
17

Source: Federal Reserve Board; Bloomberg.

80
70

2012

Source: Bloomberg.

Emerging Market Economies Fund Flows
Percent of GDP, annual rate
Monthly

2011

2012

Foreign Net Purchases of U.S. Treasury Securities
Billions of dollars, annual rate

5
Official
Private

4
EME bonds
EME equities

800
600
Q3

400

1
H1

200

-1

-2

-200

-3

Oct.

-400

-4
-5
Apr

Jul
2011

-600
2009

Oct

1000

Nov.

3
2

Jan
2010

100

80
2011

130

2010

2011

Source: Treasury International Capital data adjusted for staff estimates.

2012

Source: EPFR Global.

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January 18, 2012

trading operations. The CDS spreads of most domestic large bank holding companies
moved notably lower, although they remained at an elevated level. (See the box “Recent
Developments in Counterparty Risk Management.”) Hedge fund valuations declined
again during the intermeeting period. Overall for 2011, the HFRX Global Hedge Fund
Index underperformed the S&P 500 stock index by about 8½ percent, though, on average,
there were no signs of significant outflows from hedge funds.

FOREIGN DEVELOPMENTS
During the intermeeting period, international financial markets were calmer than
in previous months, as the financial pressures faced by most European sovereigns and
financial institutions declined somewhat in the wake of ECB policy actions and in the
absence of negative policy news coming out of Europe. However, doubts remained about
the prospects for a durable solution to the European situation. Indeed, late in the period,
difficulties resurfaced in the negotiations over Greek restructuring, and S&P downgraded
the sovereign credit ratings of several euro-area nations.
The ECB’s three-year LTRO, announced a few days before the December FOMC
meeting and implemented in mid-December, contributed to an easing of euro funding
to about 40 basis points following the LTRO. Euro-area institutions drew almost
€500 billion in three-year funds while reducing their demand for ECB funding at shorter
maturities. On net, the total provision of liquidity by the ECB increased about
€200 billion. On January 4, the ECB allocated $26 billion in its second offering of
three-month dollar funding since the reduction in the cost of dollar liquidity from central
bank swap lines announced in late November. As of January 17, the ECB was providing
dollar liquidity amounting to a bit more than $80 billion, up from almost $55 billion at
the time of the December FOMC meeting. One gauge of dollar funding pressures in the
euro area, the three-month euro–dollar implied basis spread, dropped about 50 basis
points over the period; it is now 75 basis points lower than its level prior to the late
November swap line announcement, but it remains elevated.
Spreads of yields on 10-year Italian government debt over those on German bunds
were little changed over the intermeeting period, and spreads on Spanish debt declined
40 basis points. Spreads on 2-year Italian and Spanish debt declined roughly 150 basis
points, and both Italy and Spain held successful debt auctions. Although the reasons for

Page 49 of 104

Financial Developments

pressures, and overnight interbank euro interest rates declined from about 70 basis points

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Authorized for Public Release

January 18, 2012

Recent Developments in Counterparty Risk Management

Financial Developments

During the past several months, market participants have become more
concerned about the counterparty credit risks posed by financial institutions. For
instance, in the two most recent Senior Credit Officer Opinion Surveys on Dealer
Financing Terms (SCOOS), dealers indicated that they had increased the
resources and attention devoted to management of concentrated exposures to
dealers and other financial intermediaries over the previous three months (see
lower‐left figure below). Additionally, in the December SCOOS, most credit
officers reported that their institutions had decreased counterparty credit limits
for specific institutions; they generally pointed to a deterioration in the current or
expected financial strength of other institutions and to increased strains in global
financial markets as the most important reasons for having done so.
Conversations with market participants have provided additional information on
the specific practices used to monitor exposures to financial institutions.
Participants report monitoring indicators of counterparty risk across a range of
distinct business areas—such as OTC derivatives markets, secured funding
markets, and prime brokerage activities—but the procedures employed to
evaluate the overall counterparty risk of other firms vary considerably. Most
market participants report paying close attention to CDS spreads of their
counterparties. Some institutions indicated that spreads of 500 to 600 basis
points are triggers for more active management of exposures, for example
through heightened scrutiny of new trades and more frequent valuation of
positions. Market participants also report gauging the counterparty credit risk
posed by a financial institution based on equity prices or measures of implied
volatility in the equity options market. Industry contacts also suggest that
perceptions of counterparty credit risk are quite sensitive to reports that other
firms are not willing to accept novation of OTC trades from the institution in
question or that others are seeking to novate trades away from that institution.

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January 18, 2012

When implementing monetary policy, the Federal Reserve trades Treasury and
agency securities with designated primary dealers, a group of broker–dealers
that includes but is not limited to affiliates of major banks and securities firms
and involves institutions with a range of credit ratings (see lower‐right figure on
the facing page). In recent months, the Federal Reserve has instituted new
procedures to limit counterparty credit risk in its trading with primary dealers. In
particular, the Federal Reserve established margin agreements with primary
dealers on agency MBS forward transactions. These transactions typically settle
one or more months forward, and thus fluctuations over that period in the
market value of the securities purchased could impose costs on the Federal
Reserve if a transaction needed to be replaced following the failure of a
counterparty. In an effort to protect against these price fluctuations, the Federal
Reserve now requires dealers to post an initial margin of 2.5 percent on agency
MBS forward transactions; additional margins are required to be posted or
margin is returned based on daily changes in market values. The margin
requirements are one‐sided—that is, the Federal Reserve is not required to
provide collateral in the event that market prices move in the dealers’ favor by
more than the initial margin. Margins were set to cover potential price
movements over a three‐day expected replacement period with a very high
degree of confidence. Margin requirements were initially imposed on MF Global
as that firm’s financial health worsened but were subsequently extended to all
primary dealers.1

Market values had moved so that the cost to the Federal Reserve to replace the
transactions outstanding with MF Global when it defaulted was higher than the original price
of the transactions. However, the margin posted by MF Global was sufficient to cover this cost
difference.

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Financial Developments

In addition to carefully tracking the counterparty credit exposures they
themselves face, major financial intermediaries—keenly aware of the speed with
which confidence can diminish—have also reportedly stepped up their
monitoring of requests from their own counterparties to close out positions,
transfer margin collateral to third parties, and other indicators that would
suggest heightened concerns regarding their own financial condition.

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

the declines in spreads are not entirely clear, some market participants attributed them to
the possible use of LTRO funds by banks to purchase shorter-term peripheral debt.
On January 13, S&P lowered the long-term ratings of nine euro-area countries.
France and Austria were downgraded one notch to AA+, and Italy and Spain each
received a two-notch downgrade. Following the sovereign actions, S&P downgraded the
European Financial Stability Facility rating one notch to AA+. Overall market reaction
to the ratings announcements was muted. Similarly, markets shrugged off news that
negotiations over the terms of a voluntary private-sector debt exchange for Greece were
temporarily suspended.
The broad index of the foreign exchange value of the dollar changed little, on net,
over the intermeeting period. However, while the dollar depreciated some against most
other currencies, it appreciated 3½ percent against the euro, likely owing in part to the
deteriorating macroeconomic environment in the euro area and consequent market
expectations for further easing of monetary policy by the ECB.
Foreign stock markets generally ended the period higher. European headline
equity indexes rose 6½ percent, on net, and euro-area banking-sector share prices were
Financial Developments

little changed overall. However, shares of Italian bank UniCredit were down by about
40 percent over the period. This somewhat surprising decline followed the release of the
terms of a previously announced rights offering and prompted concerns that other
euro-area banks may be discouraged from seeking to raise further capital in the equity
market.
Emerging market equity and bond funds continued to experience outflows,
although the pace of such flows slowed in January. Rating agencies cut Hungary’s
sovereign debt rating to junk status, and Hungarian asset prices came under pressure.
Foreign private-investor demand for U.S. Treasury securities picked up notably in
November, consistent with the general decrease in risk appetite at that time. Official
inflows were also sizable, as foreign exchange intervention activity boosted official
purchases of Treasury securities. Partial and confidential data on custody accounts at the
Federal Reserve Bank of New York show a sharp decline in official holdings in
December. Although some of this decline seems to reflect actual sales, it also appears
that some official investors are shifting Treasury holdings to foreign custodians, and
those holdings are not captured in either the TIC or the FRBNY data.

Page 52 of 104

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January 18, 2012

DOMESTIC ASSET MARKET DEVELOPMENTS
Broad equity price indexes increased more than 4½ percent, on net, over the
intermeeting period, reflecting in part somewhat better-than-expected U.S. economic data
releases and some easing in concerns about Europe. Option-implied volatility on the
S&P 500 index declined to its lowest levels since July but remained well above its range
in the first half of 2011. The staff’s estimate of the spread between the expected real
equity return for the S&P 500 index and the real 10-year Treasury yield—a gauge of the
equity premium—remained extraordinarily wide.
Operating earnings per share for S&P 500 firms increased 8 percent in the third
quarter, reflecting in part transitory gains for financial firms. Over the intermeeting
period, bottom-up Wall Street forecasts for earnings in the fourth quarter fell a bit and
now point to a small decline from third-quarter levels. An index of revisions to analysts’
forecasts of year-ahead earnings for S&P 500 firms, which registered notable negative
values starting last August, eased some for the four-week period ending in
mid-December.
Yields on investment-grade corporate bonds declined a bit more than those on
and their spreads to yields on Treasury securities decreased noticeably. Conditions in the
secondary leveraged loan market were stable, with median bid prices about unchanged.
On net, spreads of yields on A2/P2-rated unsecured CP issued by nonfinancial firms over
yields on A1/P1-rated issues were about flat.

BUSINESS FINANCE
Net debt financing by nonfinancial corporations was solid overall in December.
Bond issuance by investment-grade nonfinancial corporations was strong, though below
its outsized November pace, while that by lower-rated firms slowed, likely owing in part
to seasonal factors. Nonfinancial CP outstanding contracted somewhat amid moderate
year-end pressures, and C&I loans posted solid growth. Issuance of leveraged loans was
relatively modest in the fourth quarter compared with its robust pace earlier in the year.
Gross public equity issuance by nonfinancial firms continued to rebound in
December from a slow third-quarter pace, boosted by previously withdrawn IPOs that
were brought to market. Share repurchases and cash-financed mergers by nonfinancial

Page 53 of 104

Financial Developments

comparable-maturity Treasury securities. Yields on speculative-grade corporate bonds

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

Domestic Asset Market Developments
S&P 500 Stock Price Index

Implied Volatility on S&P 500 (VIX)

Nov. 1, 2011 = 100, log scale

Percent, log scale
120

Dec.
FOMC

Daily

Jan.
17

Dec.
FOMC

Daily

100
80

110

100

20
Jan.
17

Jan.

May
Sept.
2010
Source: Bloomberg.

Jan.

May
Sept.
2011

Jan.
2012

2007
2008
2009
2010
Source: Chicago Board Options Exchange.

S&P 500 Earnings per Share

Equity Risk Premium
Percent

Dollars per share
14

Dec.
FOMC

Monthly

2011 2012

Quarterly

12
Expected 10-year real equity return

24
Q4
(p)

16
14

Financial Developments

Expected real yield on 10-year Treasury*

10
8

20
18

6
Jan.
17

6
4
2001
2003
2005
2007
2009
Note: Data are seasonally adjusted by staff.
p Preliminary.
Source: Thomson Financial.

1992
1996
2000
2004
2008
2012
* 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.
Source: Thomson Financial.

Spread on 30-Day A2/P2 Commercial Paper

Corporate Bond Spreads
Basis points

Basis points

950

Dec.
FOMC

Daily

Basis points
1750

5-day moving average

Dec.
FOMC

1500

800

100

1250

650
500

2011

10-year high-yield
(right scale)

1000

Jan.
17

750

Jan.
17

350
200
10-year BBB (left scale)
50

500

250

0
2007
2008
2009
2010
2011
2012
Note: Measured relative to a smoothed nominal off-the-run
Treasury yield curve.
Source: Merrill Lynch and staff estimates.

Sept.
Mar. Aug. Jan. June Nov. Apr.
2009
2010
2011
2012
Note: The A2/P2 spread is the A2/P2 nonfinancial rate minus the
AA nonfinancial rate.
+ Denotes the latest available single-day observation.
Source: Depository Trust & Clearing Corporation.

Page 54 of 104

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 18, 2012

Business Finance
Selected Components of Net Debt Financing,
Nonfinancial Firms
Billions of dollars

Gross Issuance of Institutional Leveraged Loans
Billions of dollars
80

Monthly rate
H1

Monthly rate

Q3 Q4

0
20

-20

Bonds
C&I loans*
Commercial paper*

Q3 Q4

-40

-60

Total

-80
2008

2009

2010

2011

2007

Debt over
total assets
(left scale)

0.33

-25
-50

Public issuance
Private issuance
Repurchases
Cash mergers

-100

Total

-125

-75

2010

0.13

Liquid assets over
total assets
(right scale)

Q3 p

0.07
0.27

Q3 p

0.05
0.24
1991

2011

1995

1999

2003

2007

2011

0.03

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

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

Bond Ratings Changes of Nonfinancial Firms

CMBS Issuance

Percent of outstandings

Billions of dollars

Annual rate

0.11
0.09

0.30

-150
2009

Ratio

0.36

25
0

2008

2011

Ratio
50

Monthly rate

2007

2010

Financial Ratios for Nonfinancial Corporations

Selected Components of Net Equity Issuance,
Nonfinancial Firms
Billions of dollars
Q3

2009

Source: Reuters Loan Pricing Corporation.

* Period-end basis, seasonally adjusted.
Source: Depository Trust & Clearing Corporation; Thomson
Financial; Federal Reserve Board.

2008

280
Annual rate

Upgrades

240

200

160

120

Downgrades

H1 Q3 Q4*

60
1990 1993 1996 1999 2002 2005 2008

2011

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

2007

2008

2009

2010

* Hollow bar indicates issuance in the pipeline.
Source: Commercial Mortgage Alert.

Page 55 of 104

2011

Financial Developments

2007

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

Household Finance
Purchase and Refinance Activity

Mortgage Rate and MBS Yield
Percent
7.5
Dec.
FOMC
6.5
30-year conforming
fixed mortgage rate

March 16, 1990 = 100
600

Weekly

March 16, 1990 = 100
12000
Dec.
FOMC
Purchase Index (left scale)

500

10000

400

8000

300

6000

5.5

MBS yield

4.5

Refi Index (right scale)

200
Jan.
17

2007

2008

2009

2010

2011

3.5

2.5
2012

Note: For mortgage-backed securities (MBS) yield, the data
are daily and consist of the Fannie Mae 30-year current-coupon
rate; for mortgage rate, the data are weekly before 2010 and
daily thereafter.
Source: For MBS yield, Barclays; for mortgage rate, Freddie
Mac (before 2010) and Loansifter (after 2010).

Jan.
13

100

2000

0
2002

2004

2006

2008

2010

2012

Note: Seasonally adjusted by FRB staff.
Source: Mortgage Bankers Association.

Delinquencies on Prime Mortgages,
Percent of loans
Transition Rate

Prices of Existing Homes
Index peak normalized to 100

3-month moving average
Monthly rate

110

Monthly

4000

1.8
1.6

100
1.4
90
1.2

Financial Developments

Nov.

1.0
0.8

Nov.

60
2005

2006

2007

2008

2009

2010

2011

0.6
2003

2005

2007

2009

Note: Percent of previously current mortgages that transition
to being at least 30 days delinquent each month.
Source: LPS Applied Analytics.

Source: CoreLogic.

Consumer Credit

Gross Consumer ABS Issuance

Percent change, annual rate
16

3-month moving average

Nov.

Billions of dollars
28

Monthly rate
Student loan
Credit card
Auto

Nonrevolving

2011

16
0
12

-4
H1

-8

Q3 Q4

Revolving
H2

-12

-16
2005

2007

Source: Federal Reserve Board.

2009

2011

0
2007

2008

2009

2010

2011

Source: Inside MBS & ABS; Merrill Lynch; Bloomberg;
Federal Reserve Board.

Page 56 of 104

Class II FOMC - Restricted (FR)

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January 18, 2012

firms maintained their recent strength in the third quarter, leaving net equity issuance
deeply negative. Preliminary data on merger activity and announcements of new share
repurchase programs suggest that net equity issuance likely remained quite negative in
the fourth quarter.
Indicators of the credit quality of nonfinancial corporations continued to be solid.
The aggregate ratio of debt to assets remained low in the third quarter, and the liquid
asset ratio was near its highest level in more than 20 years. The volume of corporate
bonds of nonfinancial companies upgraded by Moody’s Investor Service in the
fourth quarter continued to substantially outpace the volume of those downgraded.
American Airlines filed for bankruptcy in November, which pushed up a bit the
six-month trailing bond default rate for nonfinancial firms; nonetheless, the rate remained
fairly low overall. The expected year-ahead default rate for nonfinancial firms from the
Moody’s KMV model ticked down in December, reflecting lower stock price volatility
and higher asset valuations.
Financing conditions for commercial real estate remained tight. Issuance of
commercial mortgage-backed securities (CMBS) remained subdued in the fourth quarter,
a pace expected to persist in 2012. CMBS spreads over swaps declined over the
securities. Responses to the January SLOOS indicate that bank CRE lending standards
remain extraordinarily tight, but compared with one year ago, some banks reported
having reduced the spreads of loan rates over their cost of funds for the first time since
2007. Delinquency rates on commercial mortgages stayed elevated, and commercial real
estate price indexes continued to fluctuate around levels substantially lower than their
2007 peaks.

HOUSEHOLD FINANCE
Conditions in mortgage markets remained extremely tight. Although mortgage
interest rates and yields on current-coupon agency MBS edged down further to near their
historical lows, mortgage refinancing activity stayed subdued, as tight underwriting and
low levels of home equity continued to limit the access of many households to the
mortgage market. Moreover, mortgage delinquency rates, while improving gradually,
remained elevated relative to pre-crisis norms.

Page 57 of 104

Financial Developments

intermeeting period, in line with the decreases seen for other higher-risk fixed-income

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

House prices continued to move lower. The November reading of the CoreLogic
repeat-sales house price index was more than 4 percent below its year-ago level.
Although the decreases in home prices have been larger in recent months than during the
summer, some of the declines likely reflect a seasonal increase in the share of distressed
sales.
The price of subprime residential mortgage-backed securities (RMBS), as
measured by the ABX index, rose over the intermeeting period, in line with the changes
for other higher-risk fixed-income securities. The market remains somewhat illiquid, as
demonstrated by a temporary drop in the ABX index after rumors surfaced about the
possible sale of the subprime RMBS in the Maiden Lane II portfolio. The new-issue
market for subprime RMBS remains closed, and non-agency issuance is limited to the
occasional securitization of small portfolios of high-quality jumbo mortgages.
On the whole, conditions in consumer credit markets showed signs of
improvement. Consumer credit increased robustly in November, while delinquency rates
on credit card loans in securitized pools held steady in November at the lowest levels
seen in the 20-year history of the series. Lending standards on consumer loans continued
to ease modestly, as evidenced both from Mintel data on credit card offers and from
Financial Developments

responses to the January SLOOS. Issuance of consumer ABS in the fourth quarter held
steady at the moderate levels observed throughout 2011.

GOVERNMENT FINANCE
During the intermeeting period, the Treasury Department auctioned about
$199 billion of nominal coupon securities across the maturity spectrum and $12 billion of
five-year TIPS. The auctions were generally well received. On January 4, 2012, the
Treasury began using its currently available accounting tools to avoid breaching the
$15.194 trillion debt subject to limit. The staff estimates that these tools will allow the
Treasury to remain under the debt ceiling while the President and the Congress complete
the procedural steps required to raise the borrowing limit. 3
Financing conditions for state and local governments were again mixed. Gross
long-term issuance of municipal bonds remained robust in December, with continued
3

The President formally requested an increase of $1.2 trillion in the statutory debt limit in
mid-January, and the request is expected to be approved based on the budget agreements reached last
August.

Page 58 of 104

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

strength in new capital issuances. CDS spreads for states inched down further over the
intermeeting period. Yields on long-term general obligation municipal bonds fell
notably, leaving the yield ratio at about 1.3. However, downgrades of municipal bonds
continued to substantially outpace upgrades in the third quarter, and higher-frequency
data on ratings changes suggest that this pattern may have been even more pronounced in
the fourth quarter.

COMMERCIAL BANKING AND MONEY
In the fourth quarter, bank credit continued to increase, as banks accumulated
agency MBS and the growth of total loans picked up. Core loans—the sum of C&I loans,
real estate loans, and consumer loans—expanded modestly. Growth of C&I loans at
domestic banks was robust but was partly offset by weakness at European institutions.
Despite their steady growth in 2011, C&I loans have so far offset only about 30 percent
of the steep declines posted between late 2008 and mid-2010. Home equity loans fell
further in the fourth quarter, and commercial real estate loans contracted for the 12th
consecutive quarter, though the pace of contraction appeared to slow somewhat in
November and December. Noncore loans—a category that includes lending to nonbank
financial institutions—rose sharply, on net, in the fourth quarter, reflecting in part a surge

Portfolio-weighted responses to the January SLOOS indicated that, in the
aggregate, loan demand strengthened slightly and lending standards eased a bit further in
the fourth quarter. In particular, notable fractions of domestic banks reported stronger
demand for C&I loans from firms of all sizes, and the net fraction of banks reporting
increased demand from small firms rose to its highest level since 2005. Domestic banks
reported unchanged standards on C&I loans over the fourth quarter, but significant net
fractions continued to report reduced pricing on these loans on net. Branches and
agencies of foreign banks reported having tightened both standards and terms on
C&I loans. Moderate fractions of both domestic and foreign banks again reported having
tightened standards on loans to nonfinancial firms with significant exposure to Europe.
(See the box “Dollar Funding Strains and Credit Provision of U.S. Branches and
Agencies of European Banks.”) Many domestic banks also reported an increase in
business as a result of a decrease in competition from European banks. Moreover,
SLOOS responses indicated that large fractions of domestic banks expected that over the
next 12 months, credit quality in most major loan categories would improve.

Page 59 of 104

Financial Developments

in such loans at U.S. branches and agencies of European banks.

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

Dollar Funding Strains and Credit Provision of
U.S. Branches and Agencies of European Banks
The U.S. branches and agencies of European banks (hereafter, European branches) currently
account for about 10 percent of total commercial bank assets in the United States.1 Thus, pressures
on such firms caused by the ongoing fiscal and banking problems in Europe could have noticeable
effects on lending in the United States. Indeed, the composition of the balance sheets of European
branches has changed markedly since the strains in short‐term unsecured dollar funding markets
intensified in mid‐2011.

Financial Developments

Since mid‐2011, European branches have changed the structure of their funding—their holdings of
large‐denomination time deposits have dropped steadily, and they have shifted from being a net
supplier of dollars to their related offices to being net receivers of such funds (see lower‐left
figure). Other funding sources have also become less available to European branches; for example,
respondents to the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS)
reported widespread tightening of standards on loans to European banks or their affiliates and
subsidiaries over the second half of the year (see appendix). Moreover, some European branches
have run down their cash assets significantly. These recent patterns have primarily reflected
developments at the U.S. branches of French banks, which reportedly have faced substantial
funding pressures since mid‐2011.2
The funding strains also appear to have resulted in some reduction in the provision of credit to U.S.
firms by most European branches.3 C&I loans held by these branches have declined noticeably
since the middle of last year even as the overall demand for such loans, as reported in the SLOOS,
has reportedly increased (see lower‐right figure).

The nearly 40 European branches on the Federal Reserve’s weekly reporting panel account for more than
90 percent of such branches’ assets.
2
The U.S. branches of Spanish and Italian banks generally have been shrinking since early 2010, but these
institutions are quite small relative to the French and the non‐French European branches.
3
U.S. branches and agencies of foreign banks generally do not provide credit to U.S. households.

Page 60 of 104

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Authorized for Public Release

January 18, 2012

In addition, a significant fraction of European branches reportedly tightened standards and terms
on C&I loans during the second half of last year, whereas domestic banks generally eased some of
their lending policies on such loans on net. Moreover, because a tightening of standards and terms
tends to be reflected with a lag in the stock of loans outstanding, the SLOOS results suggest that a
further contraction in the C&I loans of European branches may be likely.
In contrast, lending by European branches to nonbank financial institutions has surged over the
second half of the year. However, the increase is due entirely to reverse repurchase agreements by
a couple of French branches that have reportedly provided substantial funding to their affiliated
U.S. broker–dealers. Indeed, such loans at the non‐French European branches have declined over
the same period.

Going forward, however, the European parent institutions have strong incentives to shrink their
balance sheets and other credit exposures. In addition to ongoing funding strains, they face
enhanced capital and liquidity requirements and pressure from domestic supervisors to pull back
from foreign markets.4 According to press reports and the edit explanations received with our
weekly bank balance sheet data, some European banks have sold securities and other U.S. assets,
including loans, but the quantities do not appear to have been substantial, at least thus far. In
addition, available data on off‐balance‐sheet exposures indicate that European branches had about
$110 billion of outstanding standby letters of credit to U.S. addressees and about $360 billion of
unused commitments to fund loans at the end of the third quarter, quantities that already stand
well below their pre‐crisis levels. Furthermore, some European financial institutions have large
securities and trading operations in the United States; as marketmakers and providers of liquidity,
these institutions are instrumental to intermediation activities, and their withdrawal from these
activities could have important consequences for various forms of credit extension and financial
market liquidity.

European parent institutions reportedly face pressure regarding early implementation of
Basel III requirements, and the European Banking Authority (EBA) announced that 71 large European banks must
meet a temporary 9 percent core Tier 1 capital ratio requirement by the end of June 2012. By itself, the EBA’s
estimated capital shortfall for core European banks―about €31 billion―is deemed to be manageable.

Page 61 of 104

Financial Developments

On the whole, it appears that the changes in credit flows to the U.S. economy from European
branches have not yet begun to restrain the provision of credit to U.S. firms; to the contrary, the
available data indicate that other institutions have stepped in to provide credit directly to U.S.
businesses. After expanding at an 8 percent average annual rate over the first half of last year,
total C&I loans grew 11 percent over the second half of the year, as a pickup in C&I lending by
domestic institutions and non‐European branches more than offset the declines at the European
branches. Indeed, many domestic respondents to the latest SLOOS reported an “increase in
business” over the past six months as a result of reduced competition from European banks.

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 18, 2012

Commercial Banking and Money
Changes in Bank Credit

Changes in Standards and Demand for Bank Loans
Percent

3-month change, a.r.

Index
30

1.0

Oct.
survey

Quarterly

0.8
0.6
0.4

20
10

Dec.

0.2
0.0

Jan.

-0.2
-0.4

-10

Standards
Demand

-20

Total bank credit
C&I loans
2006

2008

2010

2012

1992

1997

2002

2007

2012

Note: A composite index that represents the net percentage of
loans on respondents’ balance sheets that were in categories for
which banks reported tighter lending standards or stronger loan
demand over the past 3 months.
Source: Federal Reserve Board, Senior Loan Officer Opinion
Survey on Bank Lending Practices.

Changes in Spreads on C&I Loans

Changes in Standards on C&I
Loans at Foreign Respondents

Net percent
Tightening

-0.8
-1.0

-30

Source: Federal Reserve Board.

Quarterly

-0.6

100

Large/Middle-market firms
Small firms

Net percent

Jan.

Easing

Financial Developments

100

Oct.
survey

Quarterly

Jan.

-20

-40

-60

European respondents
Non-European foreign respondents

-80

-60
-80

-100
1992

1996

2000

2004

2008

2012

-100
2000

2002

2004

2006

2008

2010

2012

Note: Net percent of respondents that increased spreads of
loan rates over cost of funds over the past 3 months.
Source: Federal Reserve Board, Senior Loan Officer Opinion
Survey on Bank Lending Practices.

Note: Net percent of respondents that tightened lending standards
over the past 3 months.
Source: Federal Reserve Board, Senior Loan Officer Opinion
Survey on Bank Lending Practices.

Growth of M2 and Its Components

Level of Liquid Deposits
Trillions of dollars

Percent, s.a.a.r.
M2 Liquid Small time Retail Curr.
deposits deposits MMMFs

2010

3.1

10.9

-21.4

-15.7

5.9

2011:H1

6.7

11.9

-19.3

-6.8

9.3

2011:H2 11.9

18.0

-20.6

0.5

7.8

8.0

Weekly

Dec.
FOMC

7.5
7.0

Jan.
23

6.5
6.0

Oct.

5.9

9.3

-21.5

4.9

5.5

Nov.

5.8

10.2

-21.5

-11.6

8.5

5.0

Dec.

5.3

8.4

-17.2

-5.1

8.1

4.5
2008

Note: Retail MMMFs are retail money market mutual funds.
Source: Federal Reserve Board.

2009

2010

Note: Seasonally adjusted.
Source: Federal Reserve Board.

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

Page 62 of 104

2011

4.0
2012

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

M2 increased at an annual rate of 5¼ percent in December. 4 The level of M2
remained elevated relative to the staff’s assessment of fundamentals, likely reflecting
investors’ desire to hold safe and liquid assets in the face of the European crisis. In
addition, demand deposits surged around year-end, reportedly as lenders in repo and
other short-term funding markets chose to leave substantial balances with banks over the
turn of the year. The monetary base—reserve balances and currency—increased in
December along with currency. Reserve balances were roughly unchanged over the
period; a decline in reserve balances resulting from an increase in balances in the
Treasury’s general account offset the boost to reserve levels associated with the increased
drawings of foreign central banks on the dollar liquidity swap lines. (See the box

Financial Developments

“Balance Sheet Developments over the Intermeeting Period.”)

The staff recently revised measures of the money stock and its components to incorporate
updated seasonal factors and a new quarterly benchmark. The revisions increased the growth rate of M2 by
about 1 percentage point in the first half of 2011 and lowered the growth rate by 1¾ percentage point in the
second half.

Page 63 of 104

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January 18, 2012

Balance Sheet Developments over the Intermeeting Period
Over the intermeeting period, total assets of the Federal Reserve increased
$19 billion to $2,924 billion (see the table on the facing page).
Since the December FOMC meeting, the Open Market Desk conducted
19 operations as part of the maturity extension program: the Desk purchased
$40 billion in Treasury securities with remaining maturities of 6 to 30 years and
sold $62 billion in Treasury securities with maturities of 3 years or less.1 In
addition, the Desk purchased $33 billion in agency MBS securities as part of the
policy of reinvesting principal payments from agency debt and agency MBS.
Because of agency MBS market conventions, settlements of these transactions
can occur well after trade execution.

Financial Developments

Foreign central bank liquidity swaps increased $49 billion to $103 billion, primarily
reflecting large 84‐day draws by the European Central Bank and the Bank of
Japan. The net portfolio holdings of Maiden Lane LLC declined $3 billion largely
reflecting ongoing asset sales, while holdings of the Maiden Lane II and Maiden
Lane III LLCs were nearly unchanged. Loans outstanding under the Term Asset‐
Backed Securities Loan Facility declined about $1 billion to $9 billion.
On the liability side of the Federal Reserve’s balance sheet, the Treasury’s
General Account increased $33 billion, and Federal Reserve notes in circulation
increased $4 billion. Reserve balances of depository institutions increased
$8 billion over the period while other deposits decreased $17 billion, reflecting a
decline of relatively high GSE balances that had been accumulated prior to the
payment of principal and interest on agency MBS last month. Term deposits held
by depository institutions declined by $2 billion as a $5 billion small‐value
operation of the Term Deposit Facility matured on December 15, 2011, and a
smaller $3 billion operation was conducted on January 9, 2012. The auction size
for these small‐value operations was reduced in light of relatively low bid‐to‐
cover ratios in the prior few auctions. Reverse repurchase transactions with
foreign official and international accounts decreased $1 billion.

Purchases of $5 billion conducted on January 13, 2012, and $3 billion conducted on
January 17, 2012, are not reflected in the table, as settlement occurred after January 13, 2012. A
purchase of $1 billion conducted before the December FOMC meeting settled on December 13,
2011, and is reflected in the table but not in the text above.

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Authorized for Public Release

January 18, 2012

Financial Developments

Class II FOMC - Restricted (FR)

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Authorized for Public Release

Financial Developments

(This page is intentionally blank.)

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January 18, 2012

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices

Regarding business loans, domestic banks reported, on balance, little change in standards
on commercial and industrial (C&I) loans but a continued easing of pricing terms on those loans
during the fourth quarter. Consistent with strong growth in C&I loans in recent months, domestic
banks reportedly experienced stronger demand for C&I loans from firms of all sizes on net. The
net fraction of banks reporting increased demand from small firms rose to its highest level since
2005. 3 Many domestic banks also reported an increase in business as a result of reduced
competition from European banks (or their branches and subsidiaries). Indeed, foreign
respondents reported having tightened both standards and terms on C&I loans, on net, and they
noted that loan demand had been about unchanged over the past three months. Domestic banks
continued to report little change in their standards for commercial real estate (CRE) loans, but
modest net fractions had eased some loan terms over the past year. As has been the case recently,
moderate net fractions of domestic banks reported that demand for CRE loans had strengthened.
In response to a set of special questions that were also asked in the October 2011 survey,
large fractions of both domestic and foreign respondents again reportedly tightened standards on
loans to European banks or their branches and subsidiaries during the fourth quarter. In addition,
moderate fractions of banks indicated that they tightened standards and terms on loans to
nonfinancial firms with significant exposure to Europe.

The January 2012 survey addressed changes in the supply of, and demand for, loans to
businesses and households over the past three months. This appendix is based on responses from
56 domestic banks and 23 U.S. branches and agencies of foreign banks. Respondent banks received the
survey on or after December 21, 2011, and responses were due by January 10, 2012.
2
For questions that ask about lending standards or terms, reported net fractions equal the fraction
of banks that reported having tightened standards minus the fraction of banks that reported having eased
standards. For questions that ask about demand, reported net fractions equal the fractions of banks that
reported stronger demand minus the fraction of banks that reported weaker demand.
3
Large and middle-market firms are generally defined as firms with annual sales of $50 million or
more and small firms as those with annual sales of less than $50 million.

Page 67 of 104

Financial Developments

Overall, in the January Senior Loan Officer Opinion Survey on Bank Lending Practices,
modest net fractions of domestic banks reportedly eased their lending standards and experienced
stronger demand over the past three months. 1 However, econometric analysis shows that the
amount of easing reported in the January survey was more than would have been expected once a
number of bank-specific factors and the evolution of several key macroeconomic variables over
the survey period are taken into account. Meanwhile, foreign respondents, which mainly lend to
businesses, reported a net tightening of their lending standards. 2

Class II FOMC - Restricted (FR)

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Measures of Supply and Demand for Commercial and Industrial Loans,
by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for Commercial and Industrial Loans
Percent

Oct.
survey

100
80

Loans to large and middle-market firms
Loans to small firms

60
40
20
0
-20
-40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks’ Cost of Funds
Percent
100
80
60

Financial Developments

40
20
0
-20
-40
-60
-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial and Industrial Loans
Percent
60
40
20
0
-20
-40
-60
-80
1990

1992

1994

1996

1998

2000

2002

Page 68 of 104

2004

2006

2008

2010

2012

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On the household side, lending standards and demand for loans to purchase residential
real estate were reportedly little changed over the fourth quarter on net. Standards on home
equity lines of credit (HELOCs) were about unchanged, while demand for such loans continued
to weaken on net. On a loan-weighted basis, however, standards on both purchase loans and
HELOCs have eased modestly in each of the past several surveys. 4 Moderate net fractions of
banks reported that they had eased standards on all types of consumer loans over the past three
months, and some banks also eased terms on auto loans. Demand for credit card and auto loans
reportedly increased somewhat, while demand for other types of consumer loans was about
unchanged.
In response to a set of special questions regarding respondents’ outlook for asset quality
in 2012, moderate net fractions of domestic banks reportedly expect that ongoing improvements
in credit quality will continue this year in most major loan categories.

LENDING TO BUSINESSES
Questions on Commercial and Industrial Lending

A large net fraction of domestic banks eased many terms on C&I loans to firms of all
sizes. Spreads and costs of credit lines for large firms were trimmed by a somewhat larger
fraction of banks than in the previous survey. A moderate net fraction of banks also indicated a
reduction in their use of interest rate floors. In addition, several large banks eased loan covenants
to large and middle-market firms, a change that is consistent with reports of more-accommodative
lending conditions in the syndicated loan market in recent months.
Domestic banks that reported having eased terms on C&I loans unanimously cited
increased competition from other banks and nonbank lenders as a reason for having done so, with
only about a quarter of those banks attributing the change to an improved or less uncertain
economic outlook. The handful of banks that reported having tightened at least one C&I loan
term primarily cited a less favorable or more uncertain economic outlook and increased concerns
about legislative, supervisory, or accounting policies.
Meanwhile, foreign survey respondents continued to tighten terms on C&I loans, on net,
primarily reflecting actions taken by those with European parents. Almost half of the European
respondents and only a quarter of the non-European foreign respondents reduced the maximum
size of credit lines. European respondents were also more likely than other branches and agencies
4

Responses are weighted by survey respondents’ holdings of the relevant loan type, as reported in
the September 30, 2011, Call Report.

Page 69 of 104

Financial Developments

Domestic banks reported that their credit standards on C&I loans to firms of all sizes
were little changed over the fourth quarter on net. However, U.S. branches and agencies of
foreign banks reportedly tightened their standards on C&I loans for the second consecutive
quarter, on balance. The tightening by foreign survey respondents was again primarily limited to
U.S. branches and agencies of European banks.

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Measures of Supply and Demand for Commercial Real Estate Loans

Net Percentage of Domestic Respondents Tightening Standards for Commercial Real Estate Loans
Percent

Oct.
survey

100

-20

-40

Financial Developments

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

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

-20

-40

-60

-80

1990

1992

1994

1996

1998

2000

2002

Page 70 of 104

2004

2006

2008

2010

2012

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January 18, 2012

in the survey to have reduced the maximum maturity of C&I loans and to have increased the cost
of such credit lines. Foreign respondents that reported having tightened their standards or terms
on C&I loans unanimously cited a less favorable or more uncertain economic outlook. Notably,
about one-third of the European respondents that had tightened at least one term over the past
three months cited concerns about their capital position while none of the non-European foreign
respondents that had tightened cited this reason. Liquidity concerns were cited as a reason for
tightening standards or terms on C&I loans by about one-third of both the European and
non-European foreign respondents.
Reports from domestic banks of stronger demand for C&I loans outnumbered reports of
weaker demand, in contrast to the net weakening of demand reported in the previous survey.
Moreover, about 15 percent of domestic banks, on net, reported increased demand from small
firms, the largest net percentage that has been reported since 2005. Similarly, domestic banks
reported a net increase in the number of inquiries from potential business borrowers regarding
new or increased credit lines. Domestic banks that saw weaker demand and those that saw
stronger demand both cited changes in customers’ funding needs related to inventories, accounts
receivable, and mergers and acquisitions as important factors underlying the change in demand.
Of domestic banks reporting weaker demand, about 85 percent cited reduced funding needs for
capital investment. Foreign respondents experienced little change, on net, in demand for C&I
loans.

A set of special questions in the January survey asked respondents about lending to banks
headquartered in Europe and their affiliates and subsidiaries (regardless of the location of the
affiliates and subsidiaries) as well as to nonfinancial firms that have operations in the United
States and significant exposures to European economies (regardless of the location of the firms).
These questions were also asked in the previous survey, conducted in October 2011.
Large fractions of domestic and foreign respondents again reported having tightened
standards on loans to European banks, and one respondent volunteered that they had also
tightened standards on loans to nonbank financial firms headquartered in Europe. There was also
more widespread tightening of standards than in the previous survey on loans to nonfinancial
firms that have operations in the United States and significant exposure to European economies.
No domestic or foreign respondent reported that it had eased standards to either type of firm.
Demand for credit was reportedly little changed, on net, from European banks (or their affiliates
and subsidiaries) and from nonfinancial firms with significant European exposure.
A new special question asked if domestic respondents had experienced an increase in
business over the past six months as a result of decreased competition from European banks
(or their affiliates and subsidiaries). About half of the respondents who reported competing with
European banks for business noted such an increase in business. One large domestic bank
specifically reported that business increased slightly in the syndicated loan market because some
European banks have withdrawn from such lending activity to conserve capital.

Page 71 of 104

Financial Developments

Special Questions on Lending to Firms with European Exposures

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January 18, 2012

Measures of Supply and Demand for Residential Mortgage Loans

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

Percent

100

All residential
20

0
Prime
Nontraditional
Subprime

-20
1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

2009

-20

2011

Financial Developments

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

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

Percent

80
Prime
Nontraditional
Subprime

All residential

-20

-40

-60

-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

2009

2011

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

Page 72 of 104

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Questions on Commercial Real Estate Lending
Domestic banks continued to report little change in their standards on CRE loans, which
were widely described in a special question in the July survey (two quarters ago) as being at or
near their tightest levels since 2005. A moderate net fraction of foreign survey respondents
reportedly tightened their standards on such loans.
As has been the case recently, moderate fractions of domestic banks reported that demand
for CRE loans had strengthened, on net, over the past three months. In contrast, the foreign
respondents reported that demand for CRE loans had remained little changed over that period.
Overall, this net strengthening in demand is roughly consistent with an apparent slowing in the
pace of runoff of CRE loans at banks during November and December, although most other
indicators of activity in markets to finance CRE remain depressed.

Annual Question on Commercial Real Estate Loan Terms

Foreign respondents reported having tightened some terms and eased others on CRE
loans. On net, about 15 percent of foreign respondents reported that they had tightened debt
service coverage ratios, but about 15 percent reported that they had increased maximum loan
sizes. Other terms for CRE loans were reportedly little changed on balance.

LENDING TO HOUSEHOLDS
Questions on Residential Real Estate Lending
Most banks reported that lending standards for, and demand from, prime borrowers for
residential real estate loans to purchase homes were little changed over the past three months.
However, when the responses are weighted by outstanding closed-end mortgages held on banks’
books, demand for such loans had weakened, on net, and modest net fractions of banks had eased
standards. Weighted responses, which may better account for overall activity in mortgage
lending given that it is highly concentrated among the largest banks, have shown weaker demand
and an easing of standards in recent quarters. Nonetheless, standards likely remain tighter than
their average level since 2005, as reported in a special question in the July survey.
Most banks continued to report little change in their lending standards for HELOCs,
a pattern seen since the beginning of 2011. When responses are weighted by the amount of
outstanding home equity loans, however, about 20 percent of banks, on net, reported having eased

Page 73 of 104

Financial Developments

The January survey also included a question regarding changes in terms on CRE loans
over the past year (repeated annually since 2001). During the past 12 months, on net, some
domestic banks reportedly eased maximum CRE loan sizes and many domestic banks eased loan
spreads. Furthermore, a few large domestic banks, on balance, reported that they had lengthened
maximum loan maturities. Other terms for CRE loans were reportedly little changed. Overall,
the results for this special question show the first time since January 2007 that domestic banks
had eased any of the CRE loan terms covered in the survey.

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 18, 2012

Measures of Supply and Demand for Consumer Loans

Net Percentage of Domestic Respondents Tightening Standards for Consumer Loans
Percent

Percent

100

Credit card loans
Other consumer loans

Credit card loans
Auto loans
Other consumer loans

80
60

-20

-40

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Q2
2011

2011

Q3
2011

Q4
2011

Q1
2012

Note: For data starting in 2011:Q2, changes in standards for auto loans and consumer loans excluding credit card and auto loans are
reported separately. In 2011:Q2 only, new and used auto loans are reported separately and equally weighted to calculate the auto loans series.

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

Financial Developments

-20

-40
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

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

Percent

100

All consumer loans

Credit card loans
Auto loans
Other consumer loans

80
60

-20

-40

-60

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Q2
2011

Q3
2011

Q4
2011

Q1
2012

Note: For data starting in 2011:Q2, changes in demand for credit card loans, auto loans, and consumer loans excluding credit card and
auto loans are reported separately.

Page 74 of 104

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January 18, 2012

standards on HELOCs in each of the past five surveys. Meanwhile, the demand for such loans
continued to weaken, on net, regardless of whether the responses are weighted.

Questions on Consumer Lending
As in the previous three surveys, small fractions of domestic banks reported having eased
standards on credit card, auto, and other consumer loans. In addition, modest net fractions of
banks continued to report having narrowed spreads and lengthened maximum maturities on auto
loans. However, other terms across the categories of consumer loans were little changed on net.
A few banks, on balance, reported stronger demand for auto loans, with such reports
coming primarily from large banks. 5 A few small banks reported stronger demand for credit card
loans. Demand for other consumer loans was reportedly about unchanged.

ANNUAL QUESTIONS ON ASSET QUALITY EXPECTATIONS

Banks were least likely to forecast improvement in the quality of consumer loans in 2012.
Only about 20 percent of banks, on net, expected improvement in credit card loans, and a similar
fraction projected improvement in other consumer loans. However, the current credit quality of
these types of loans appears to be high. According to Call Report data available through the third
quarter of 2011, the aggregate rate of credit card delinquency is at its lowest level since 2006, and
delinquency rates on other consumer loans are near lows not seen since early 2008. Charge-off
rates for these types of loans are also low relative to the past four years.
Significantly more survey respondents reportedly expect the asset quality of
nontraditional residential real estate loans to improve in 2012 than did last year. Indeed, about
55 percent of banks, on net, anticipate that delinquency and charge-off rates on such
nontraditional loans will decline this year compared with about 20 percent of the respondents to
last year’s survey. Expectations for improvements this year in the asset quality of prime
residential real estate loans and for HELOCs stayed roughly the same as last year, with a bit more
than one-third of the respondents anticipating an improvement in the quality of such loans.

Large banks are defined as banks with assets greater than or equal to $20 billion as of
September 30, 2011, and other banks as those with assets of less than $20 billion.

Page 75 of 104

Financial Developments

The survey contained a set of special questions on respondents’ expectations for loan
quality in 2012. Overall, between 15 and 60 percent of domestic banks, on net, expected
improvements in delinquency and charge-off rates during 2012 in the major loan categories
included in the survey, assuming that economic activity progresses in line with consensus
forecasts. These questions have been asked once each year for the past five years. Expectations
for improvement in 2012 were reportedly less widespread than when asked a year ago, but last
year’s expectations were the broadest in the history of the question. Furthermore, loan quality did
improve noticeably over the past year.

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 18, 2012

Special Questions
Net
percent

Changes in Standards and Terms for Lending to Firms with Significant Exposure to European Economies

100

For banks headquartered in Europe*

For nonfinancial companies
80

Tightening

68
58

40
32
23

Easing

0
2011: Q4
2012: Q1
-20

Domestic
respondents

Foreign
respondents

Domestic
respondents

Foreign
respondents

Financial Developments

* Includes affiliates and subsidiaries.

Outlook for Asset Quality in 2012

Net percent expecting improvement

Business lending

Household lending
100
90
80

C&I* (large
firms)
C&I* (small
firms)

Commercial
real
estate
Prime
residential
real
estate

Nontrad.
residential
real
estate

60
50
40

HELOC**

Credit
card

Other
consumer

30
20
10
0

* Commercial and industrial.
** Home equity lines of credit.

Page 76 of 104

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Financial Developments

Regarding the outlook for the quality of business loans, about 50 percent of domestic
banks, on net, reportedly expect delinquency and charge-off rates to decline in 2012 on their
C&I loans both to large and middle-market firms and to small firms. Smaller domestic
respondents were more likely to expect improvements in C&I loan quality this year than their
larger counterparts. About 60 percent of domestic banks indicated that they expect improvement
in the quality of CRE loans this year. In contrast, foreign respondents, on net, reportedly
anticipate no improvement in the quality of C&I loans this year, and only about 25 percent of
these respondents forecast improvement in the quality of CRE loans.

Page 77 of 104

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Financial Developments

(This page is intentionally blank.)

Page 78 of 104

January 18, 2012

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January 18, 2012

Risks and Uncertainty
ASSESSMENT OF FORECAST UNCERTAINTY
We continue to see the risks around our projection for economic activity as
elevated relative to the average experience of the past 20 years (the benchmark used by
the FOMC). 1 The considerable risks surrounding the European sovereign debt crisis
contribute importantly to this assessment. In addition, we still see the aftereffects of the
financial crisis and subsequent recession as implying unusual uncertainty regarding the
level of economic slack and the likely pace of the recovery going forward. Moreover,
uncertainty about the capacity of either fiscal or monetary policy to counteract any
further weakening in economic activity is high, and in the case of fiscal policy, is
magnified by the unsustainability of current policies over the longer run. These factors,
most especially risks from Europe, also lead us to continue to see the risks to real activity
as skewed to the downside.
With regard to inflation, we see the risks surrounding our baseline forecast as
balanced. On the one hand, low levels of resource utilization, small increases in unit
labor costs, and the disproportionate possibility that economic conditions could be less
favorable than in baseline could cause inflation to drift down over time. On the other
hand, concerns related to the size of the Federal Reserve’s balance sheet and the ability to
execute a timely exit from the current stance of policy could cause inflation to move up,
as might renewed increases in commodity prices or a sharper depreciation of the
exchange value of the dollar. With regard to the overall degree of uncertainty, we take
some reassurance from the relative stability of inflation expectations. In addition, the
behavior of inflation over the past several years has accorded reasonably well with our
assessment of how stable inflation expectations, shifts in the prices of imports and
energy, and economic slack influence the evolution of consumer prices. As a result,
risks as unusually high.
1

This assessment of heightened uncertainty holds despite marked increases over the past few
years in the benchmark estimates of uncertainty about real activity. In particular, as the fixed
20-year window used to assess the typical size of forecast errors has rolled forward to include the
pronounced volatility of the past few years, the estimated standard error for out-year projections of the
unemployment rate has almost doubled. Thus, the benchmark estimates of uncertainty about real activity
are no longer dominated by the experience of the Great Moderation period. (In contrast, benchmark
estimates of uncertainty about inflation are essentially unchanged.)

Page 79 of 104

Risks & Uncertainty

while we see considerable risks around our inflation projection, we do not view these

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January 18, 2012

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

2011
Measure and scenario

Risks & Uncertainty

2012 2013 2014 201516

Real GDP
Extended Tealbook baseline
Faster snapback
Lost decade
Greater supply-side damage
Disinflation
European crisis with severe spillovers
Higher oil prices

2.4
2.4
2.4
2.4
2.4
2.4
2.4

2.1
2.9
1.9
1.7
2.0
-2.9
1.2

2.4
3.4
1.9
1.7
2.0
-1.6
1.9

3.6
3.7
2.0
2.5
2.9
3.5
3.5

3.9
3.0
2.4
2.9
3.9
5.1
4.2

Unemployment rate1
Extended Tealbook baseline
Faster snapback
Lost decade
Greater supply-side damage
Disinflation
European crisis with severe spillovers
Higher oil prices

8.7
8.7
8.7
8.7
8.7
8.7
8.7

8.6
8.3
8.7
8.5
8.6
10.2
8.9

8.2
7.3
8.7
8.1
8.4
11.6
8.8

7.8
6.7
8.7
8.0
8.3
11.4
8.4

6.5
6.2
8.5
7.7
7.1
8.9
6.9

Total PCE prices
Extended Tealbook baseline
Faster snapback
Lost decade
Greater supply-side damage
Disinflation
European crisis with severe spillovers
Higher oil prices

1.4
1.4
1.4
1.4
1.4
1.4
1.4

1.4
1.4
1.4
1.6
.7
-.7
3.4

1.3
1.4
1.3
1.9
.3
-.3
1.2

1.5
1.8
1.4
2.3
.3
1.2
1.5

1.5
2.0
1.2
2.3
.0
2.2
1.8

Core PCE prices
Extended Tealbook baseline
Faster snapback
Lost decade
Greater supply-side damage
Disinflation
European crisis with severe spillovers
Higher oil prices

1.5
1.5
1.5
1.5
1.5
1.5
1.5

1.5
1.5
1.5
1.7
.8
.4
1.7

1.4
1.5
1.4
2.0
.4
.2
1.8

1.4
1.7
1.3
2.2
.2
.9
1.7

1.5
2.0
1.2
2.3
.0
1.9
1.7

Federal funds rate1
Extended Tealbook baseline
Faster snapback
Lost decade
Greater supply-side damage
Disinflation
European crisis with severe spillovers
Higher oil prices

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

.1
.4
.1
.6
.1
.1
.1

.3
1.6
.1
1.9
.1
.1
.3

2.5
2.8
.1
3.4
.1
.4
2.0

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

Page 80 of 104

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ALTERNATIVE SCENARIOS
To illustrate some of the risks to the outlook, we constructed several alternatives
to the baseline projection using simulations of staff models. In the first scenario, we
assume that we have underestimated the extent of the balance sheet repair and
improvement in credit availability that has occurred to date, implying a faster recovery of
aggregate spending and production than in the baseline. In contrast, the second scenario
examines a downside risk to activity—namely, that household and financial institution
deleveraging and weak confidence will restrain the pace of economic recovery markedly
for many years, resulting in a “lost decade.” The next two scenarios turn to opposing
risks to the outlook for inflation. The first inflation scenario assumes that the margin of
slack is currently narrower than assumed in the baseline and than policymakers estimate,
resulting in more upward pressure on both actual and expected inflation. Conversely, the
second inflation scenario considers the possibility that inflation will decline by more than
we anticipate because the persistently elevated level of slack in labor and product markets
leads to self-reinforcing downward pressure on inflation expectations, along the lines of
the predictions of accelerationist Phillips curves. Finally, we examine two risks to the
outlook coming from abroad—a severe financial crisis in Europe that spills over to the
United States and the rest of the world, and a sharp rise in oil prices driven by supply
disruptions.
We generated the first four scenarios using the FRB/US model and an estimated
policy rule for the federal funds rate that responds to core PCE inflation and a measure of
economic slack based on the staff’s estimate of potential output. In contrast, the last two
scenarios were generated using the multicountry SIGMA model and a different policy
rule that employs an alternative concept of resource utilization. 2 In all of the scenarios,
the size and composition of the SOMA portfolio are assumed to follow their baseline
paths.

The economy may be further along in the financial recovery process than we have
assumed: Household debt service burdens have declined appreciably, while corporate
2

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

Page 81 of 104

Risks & Uncertainty

Faster Snapback

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January 18, 2012

Forecast Confidence Intervals and Alternative Scenarios
Confidence Intervals Based on FRB/US Stochastic Simulations
Extended Tealbook baseline
Faster snapback
Lost decade

Greater supply−side damage
Disinflation

Real GDP

European crisis with severe spillovers
Higher oil prices

Unemployment Rate
4-quarter percent change

70 percent
interval

Percent
8

12.0

11.5

11.0

10.5
10.0

9.5

9.0

8.5
1
8.0
0

7.5

−1

90 percent
interval

7.0

−2

6.5

−3

6.0

−4

5.5

−5

5.0

−6
2008

2010

2012

2014

4.5

2016

2008

PCE Prices excluding Food and Energy

2010

2012

2014

2016

Federal Funds Rate

4-quarter percent change

Percent
3.5

3.0
5
2.5
4

2.0
1.5

Risks & Uncertainty

1.0
2
0.5
1

0.0
−0.5

0
−1.0
2008

2010

2012

2014

2016

2008

Page 82 of 104

2010

2012

2014

2016

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January 18, 2012

bond issuance and C&I lending have been solid. Moreover, the apparent improvement in
recent labor market and production indicators may signal that a sustained economic
recovery is getting under way, and a greater release of pent-up demand for durable goods
represents an upside risk to our outlook; for example, the average age of motor vehicles
on the road is still rising and the level of the E&S capital stock is well below its trend. In
this scenario, easier credit conditions, more-rapidly falling risk premiums, and pent-up
demand lead to a stronger pace of consumption and investment outlays. Real GDP rises a
bit more than 3 percent, on average, in 2012 and 2013, bringing the unemployment rate
down to 7¼ percent by the end of 2013, almost 1 percentage point below baseline.
Initially, the stronger pace of recovery has little effect on inflation, in part because greater
capital investment increases labor productivity, thereby holding down unit labor costs;
anchored long-run inflation expectations also contribute to the muted response of
inflation. Over time, however, tighter labor and product markets cause inflation to move
above baseline. Largely in response to the stronger pace of real activity, the federal funds
rate begins to rise at the end of next year.

Lost Decade
Our baseline forecast depends importantly on steady improvements in credit
availability, consumer and business confidence, the balance sheet positions of households
and financial institutions, and the willingness of firms to hire. In this scenario, these
improvements are slower to materialize than in the baseline and cause the pace of the
recovery to remain sluggish. Moreover, the persistently slow growth in spending and
output has a corrosive effect on the supply side of the economy because, with
unemployment remaining very high for many years, the skills and labor force attachment
of unemployed workers erode more than in the baseline. In particular, the downward
trend in labor force participation steepens relative to baseline while the NAIRU edges up
to 6¼ percent by 2014 and thereafter declines only slowly, leaving it, on average,
¼ percentage point above its baseline path over the simulation period. In all, potential
conditions, real GDP expands at only a 2 percent annual rate, on average, through the
middle of the decade. With the expansion in aggregate demand only matching that of
potential output, the unemployment rate remains near recent levels through 2016. As a
consequence, inflation eventually falls below 1¼ percent despite the damage inflicted on
the functioning of the labor market. With real activity so weak and inflation so low, the
federal funds rate remains at its effective lower bound beyond 2016.

Page 83 of 104

Risks & Uncertainty

GDP expands about ½ percentage point less per year through 2016. Under these

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

Greater Supply-Side Damage
Although the staff estimates that potential GDP growth has been relatively weak
since the financial crisis, the supply side of the economy may already have suffered more
damage than we judge. In this scenario, the current output gap is assumed to be only
about half as large as in the baseline, reflecting smaller structural productivity gains over
the past few years, a larger decline in trend labor force participation, and a higher
NAIRU. Less slack and lower productivity in turn imply higher unit labor costs and
greater upward pressure on prices than in the baseline. Moreover, these inflationary
forces are amplified by the assumption that policymakers only gradually recognize the
less-favorable supply-side conditions, which leads the public to expect somewhat higher
inflation over the long run. Under these assumptions, real GDP expands about
¾ percentage point less rapidly per year, on average, through 2016 than in the baseline,
partly because households and businesses recognize the weaker trajectory for trend
income and earnings. Meanwhile, core PCE inflation gradually moves up to around
2½ percent. In response to higher inflation, the federal funds rate begins to rise about a
year earlier than in the baseline.

Disinflation
The stability of various measures of expected inflation to date may be misleading
us about the potential for further disinflation, particularly in the context of a baseline
outlook in which the economy is persistently weak. In this scenario, both expected and
actual inflation drift down steadily over time, with inflation reaching zero by 2015; such
a decline in inflation would be in line with the predictions of some accelerationist Phillips
curves. As disinflationary pressures mount, investors become increasingly concerned
about the economy becoming mired in persistent deflation; as a result, bond premiums
rise, thereby modestly damping spending and boosting unemployment relative to
baseline. In response to lower inflation and greater economic slack, the federal funds rate

Risks & Uncertainty

remains at its effective lower bound through 2016.

European Crisis with Severe Spillovers
In this scenario, Europe’s fiscal and financial difficulties intensify in coming
months to a markedly greater degree than assumed in our baseline. This outcome could
result from a disorderly sovereign default, a failure of a large European financial
institution, or because the public loses confidence in the ability of European governments

Page 84 of 104

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

to resolve the crisis. Specifically, European sovereign and private borrowing costs soar,
as corporate bond spreads rise 400 basis points above baseline, and household and
business confidence plummets. European real GDP declines almost 10 percent relative to
baseline by the end of 2013, notwithstanding a 20 percent real effective depreciation of
the euro. Given substantial cross-border financial and macroeconomic linkages, as well
as the still-fragile state of the U.S. economy, Europe’s difficulties are assumed to have
important spillovers to the United States and throughout the world. U.S. domestic
demand contracts sharply in response to higher borrowing costs (corporate bond spreads
widen by more than 300 basis points relative to the baseline), a much weaker stock
market, reduced access to credit, and decreases in household and business confidence.
In addition, weaker foreign activity and the stronger dollar depress U.S. net exports.
All told, U.S. real GDP contracts 3 percent this year and the unemployment rate rises to
over 11½ percent by late 2013, nearly 3½ percentage points above baseline. With
substantially greater resource slack and lower import prices, overall consumer prices in
the United States decline in 2012 and 2013.3 Under these conditions, the federal funds
rate remains near zero until late 2016.

Higher Oil Prices
Although we project that oil prices will change little over the forecast period,
there is a high degree of uncertainty around this projection. The recent tensions with Iran
over its nuclear program, with Iranian authorities threatening to block the Strait of
Hormuz and disrupt global oil supplies, is just one example of the risks threatening the
outlook for oil prices. This scenario assumes that geopolitical disturbances drive oil
prices $50 per barrel above baseline in the first half of this year before these prices
gradually recede. Although a supply-driven increase in oil prices might normally be
expected to cause the dollar to depreciate, we assume here instead that the heightened
geopolitical tensions increase the demand for dollar-denominated assets and cause the
dollar to appreciate slightly. U.S. domestic demand falls relative to baseline because

The rebound in consumer price inflation after 2013 in the simulation reflects the forward-looking
nature of inflation determination in SIGMA. Thus, long-run inflation expectations remain firmly anchored
at 2 percent, producer marginal costs are expected to rise as the economy recovers, and productivity is
weaker (reflecting reduced capital spending). In addition, import price inflation runs significantly higher
than in the baseline as the dollar’s initial appreciation is gradually reversed. Under alternative
specifications of SIGMA that, for instance, would allow for more structural persistence in the inflation
process or a less firm anchoring of inflation expectations, inflation would remain low for a longer period.

Page 85 of 104

Risks & Uncertainty

higher oil prices reduce permanent income and lower the return on investment, and real

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

Selected Tealbook Projections and 70 Percent Confidence Intervals Derived
from Historical Tealbook Forecast Errors and FRB/US Simulations
Measure
Real GDP
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
Civilian unemployment rate
(percent, Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
PCE prices, total
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
PCE prices excluding
food and energy
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations

Risks & Uncertainty

Federal funds rate
(percent, Q4)
Projection
Confidence interval
FRB/US stochastic simulations

2011

2012

2013

2014

2015

2016

1.6

2.1

2.4

3.6

4.2

3.7

1.4–1.8
1.4–1.8

.5–3.7
.7–3.8

.6–4.1
.6–4.3

...
1.4–5.4

...
1.7–6.1

...
1.5–5.9

8.7

8.6

8.2

7.8

7.2

6.5

8.7–8.7
8.6–8.8

8.0–9.2
7.9–9.2

7.2–9.2
7.1–9.2

...
6.5–9.1

...
6.0–8.6

...
5.5–7.9

2.5

1.4

1.3

1.5

1.6

2.4–2.6
2.4–2.6

.5–2.4
.5–2.6

.1–2.4
.0–2.5

...
.1–2.7

...
.1–2.8

...
.2–2.9

1.7

1.5

1.4

1.5

1.6–1.8
1.6–1.8

.9–2.0
.8–2.2

.6–2.2
.6–2.3

...
.4–2.4

...
.5–2.5

1.5

2.5

.1–.1

.1–.8

.1–1.5

.1–2.6

.1–3.8

.5–4.6

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

Page 86 of 104

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

exports also decline relative to baseline due to weaker foreign activity. All told, U.S. real
GDP rises only 1½ percent, on average, this year and next, and the unemployment rate
hovers just below 9 percent in 2013. Reflecting the jump in energy costs, overall PCE
inflation jumps to nearly 3½ percent this year but then moderates substantially as oil
prices begin their slow decline. Core PCE inflation increases to about 1¾ percent in
2012 and 2013 as firms pass on higher production costs to households. Although the
liftoff of the federal funds rate is unchanged from baseline, the removal of monetary
accommodation thereafter proceeds a bit more gradually.

OUTSIDE FORECASTS
In the January 10 release (based on responses gathered on January 4 and 5, before
the release of the most recent labor market report), the Blue Chip consensus projection
showed real GDP rising 2.3 percent over the four quarters of 2012, ¼ percentage point
above the staff forecast; for 2013, the Blue Chip outlook of 2.8 percent is almost
½ percentage point above that of the staff. The Blue Chip forecast for the unemployment
rate at the end of 2013 was 8.0 percent, somewhat below the staff projection of
8.2 percent. Regarding inflation, the Blue Chip panelists anticipated that the overall CPI
will increase 2 percent in 2012 and 2.2 percent in 2013, ½ percentage point higher than

Risks & Uncertainty

the staff projection next year and 1 percentage point higher in 2013.

Page 87 of 104

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 18, 2012

Tealbook Forecast Compared with Blue Chip
(Blue Chip survey released January 10, 2012)
Real GDP

Real PCE
Percent change, annual rate

8
6

Percent change, annual rate

-2

-1

-2

-3

-4

-4
-5

Blue Chip consensus
Staff forecast

-4
-6

-8

-5

-10

-6

2008
2009
2010
2011
2012
2013
Note: The shaded area represents the area between the
Blue Chip top 10 and bottom 10 averages.

2008

Unemployment Rate

2009

2010

2011

2012

2013

-6

Consumer Price Index
Percent

11
10

Percent change, annual rate

-2

-4

-6

-8

2008

2009

2010

2011

2012

2013

-10

2008

Treasury Bill Rate
Percent

-1

2008

2009

2010

2009

2010

2011

2012

2013

-10

10-Year Treasury Yield

Risks & Uncertainty

2011

2012

2013

-1

Percent

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

2008
2009
2010
2011
2012
2013
Note: The yield is for on-the-run Treasury securities. Over
the forecast period, the staff’s projected yield is assumed
to be 15 basis points below the off-the-run yield.

Page 88 of 104

1.5

3.1
4.0
4.5
4.3
3.8
3.5
4.1
4.4
3.7
3.7
3.9
4.4
3.5
4.4
3.6
4.2
3.7
4.2
4.7
4.0
3.9
3.9
4.2
3.9
4.0
3.9

Quarterly
2011:Q1
Q2
Q3
Q4
2012:Q1
Q2
Q3
Q4
2013:Q1
Q2
Q3
Q4

Two-quarter2
2011:Q2
Q4
2012:Q2
Q4
2013:Q2
Q4

Four-quarter3
2010:Q4
2011:Q4
2012:Q4
2013:Q4

Page 89 of 104

Annual
2010
2011
2012
2013
4.2
3.9
3.7
3.8

4.7
3.8
3.7
3.8

3.5
4.1
3.4
4.0
3.6
4.0

3.1
4.0
4.4
3.8
3.3
3.6
3.8
4.1
3.5
3.6
3.8
4.2

01/18/12

3.0
1.8
2.3
2.4

3.1
1.7
2.3
2.5

.8
2.6
2.0
2.7
2.2
2.7

.4
1.3
1.9
3.2
2.1
1.9
2.5
2.9
2.2
2.3
2.5
2.9

12/07/11

3.0
1.7
2.0
2.3

3.1
1.6
2.1
2.4

.8
2.4
1.7
2.5
2.1
2.6

.4
1.3
1.8
2.9
1.6
1.8
2.3
2.7
2.1
2.2
2.4
2.8

01/18/12

Real GDP

1.8
2.4
1.5
1.3

1.3
2.5
1.4
1.2

3.6
1.5
1.4
1.3
1.2
1.2

3.9
3.3
2.3
.7
1.4
1.5
1.3
1.3
1.3
1.2
1.2
1.2

12/07/11

1.8
2.4
1.5
1.3

1.3
2.5
1.4
1.3

3.6
1.4
1.5
1.3
1.3
1.3

3.9
3.3
2.3
.5
1.4
1.7
1.4
1.3
1.3
1.3
1.3
1.3

01/18/12

PCE price index

1.4
1.4
1.5
1.4

1.0
1.7
1.5
1.4

1.9
1.6
1.5
1.4
1.4
1.4

1.6
2.3
2.0
1.1
1.6
1.5
1.5
1.4
1.4
1.4
1.4
1.4

12/07/11

Greensheets

1.4
1.4
1.5
1.4

1.0
1.7
1.5
1.4

1.9
1.5
1.5
1.4
1.4
1.4

1.6
2.3
2.1
.9
1.5
1.5
1.5
1.4
1.4
1.4
1.4
1.4

01/18/12

9.6
9.0
8.7
8.3

-.4
-.8
-.2
-.4

-.5
-.3
.0
-.2
-.2
-.2

8.9
9.1
9.1
8.8
8.8
8.8
8.7
8.6
8.5
8.4
8.3
8.2

12/07/11

9.6
8.9
8.6
8.4

-.3
-.9
-.1
-.4

-.5
-.4
.0
-.1
-.2
-.2

9.0
9.1
9.1
8.7
8.7
8.7
8.6
8.6
8.5
8.4
8.3
8.2

01/18/12

Core PCE price index Unemployment rate1

Authorized for Public Release

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

12/07/11

Interval

Nominal GDP

Changes in GDP, Prices, and Unemployment
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
January 18, 2012

Page 90 of 104

-5.9
-5.9
-9.4
-12.6
-2.7
-3.4
49
49
60
-8

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

Change in bus. inventories2
Previous Tealbook2
Nonfarm2
Farm2

39
39
51
-9

-.9
-.9
1.9
7.0
-7.6
-2.8

-416
-416
3.6
1.4

10.3
10.3
6.2
6.2
22.6
22.6

4.2
4.2

.7
.7
-5.3
.2
1.9

1.6
1.6
1.9
1.9

1.3
1.3

-2
-5
6
-6

-.1
-.2
2.1
5.0
-3.8
-1.6

-403
-401
4.7
1.2

15.7
15.8
16.2
16.2
14.4
14.7

1.3
1.7

1.7
2.1
5.7
-.5
1.9

3.2
3.5
3.3
3.6

1.8
1.9

2011

51
32
54
-3

-4.5
-1.9
-9.6
-15.4
3.5
-.8

-396
-394
5.1
3.0

2.6
3.7
3.0
3.0
1.7
5.8

9.7
3.1

2.2
2.4
15.1
.6
.7

1.3
1.9
2.4
2.6

2.9
3.2

48
37
49
-1

.0
1.1
1.4
2.7
-1.1
-.9

-394
-391
5.5
4.0

-.1
-1.2
2.2
.6
-6.0
-5.6

8.5
3.6

2.0
2.3
3.9
1.9
1.7

1.7
1.9
1.9
1.9

1.6
2.1

43
34
43
0

-.8
-.5
-1.2
-.7
-2.2
-.6

-389
-384
4.5
2.8

2.1
1.8
3.4
2.5
-1.5
.0

4.0
6.3

2.4
2.2
7.2
2.1
1.7

2.0
2.0
2.4
2.3

1.8
1.9

56
53
55
1

-.9
-.4
-1.9
-1.6
-2.5
-.3

-395
-388
4.5
4.8

3.2
3.3
4.8
4.5
-1.0
.0

6.9
6.5

2.6
2.4
6.4
2.1
2.2

1.9
1.9
2.8
2.6

2.3
2.5

2012

69
66
68
1

-.9
-.4
-2.1
-2.0
-2.5
-.1

-395
-386
4.7
3.8

3.6
4.1
5.0
5.2
.1
1.2

7.0
6.9

2.8
2.8
7.2
2.3
2.2

2.3
2.5
3.0
3.0

2.7
2.9

76
68
75
1

-1.2
.0
-3.4
-3.8
-2.5
.3

-396
-386
5.1
4.5

3.8
4.4
4.9
5.9
.7
.6

7.0
7.2

2.2
2.1
6.2
1.7
1.8

1.8
2.1
2.6
2.5

2.1
2.2

77
73
76
1

-1.1
-.8
-3.6
-4.1
-2.6
.6

-395
-383
5.1
4.0

4.8
4.8
6.1
6.1
1.5
1.4

7.1
7.6

2.4
2.1
6.1
2.0
1.9

2.1
2.1
2.8
2.6

2.2
2.3

75
82
74
1

-1.4
-1.3
-4.6
-5.6
-2.6
.8

-392
-378
5.1
3.6

6.1
5.4
7.9
7.1
1.1
1.0

7.5
8.1

2.6
2.3
7.2
2.2
2.0

2.5
2.2
3.1
2.8

2.4
2.5

2013

91
106
90
1

-1.4
-2.5
-4.8
-5.9
-2.6
.9

-391
-377
5.3
4.3

5.0
5.1
6.6
6.7
1.0
.8

7.5
8.5

2.6
2.7
5.3
2.4
2.2

2.3
2.2
3.0
3.2

2.8
2.9

34
29
42
-6

-2.9
-2.2
-3.9
-4.5
-2.7
-2.1

-410
-409
5.3
3.4

7.5
7.8
8.4
8.4
5.1
6.2

3.1
1.6

1.7
1.8
6.5
.5
1.3

1.5
1.8
2.4
2.5

1.6
1.7

20111

54
47
54
0

-.7
-.1
-1.0
-.4
-2.1
-.5

-393
-387
4.8
3.9

2.2
2.0
3.8
3.2
-2.1
-1.1

6.6
5.8

2.4
2.4
6.2
2.1
1.9

2.0
2.1
2.5
2.5

2.1
2.3

20121

80
82
79
1

-1.3
-1.2
-4.1
-4.8
-2.6
.7

-394
-381
5.2
4.1

4.9
4.9
6.4
6.4
1.1
.9

7.3
7.9

2.4
2.3
6.2
2.1
2.0

2.2
2.2
2.9
2.8

2.4
2.5

20131

Authorized for Public Release

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

-424
-424
7.9
8.3

Net exports2
Previous Tealbook2
Exports
Imports

-2.4
-2.4

Residential investment
Previous Tealbook
2.1
2.1
8.7
8.7
-14.3
-14.3

2.1
2.1
11.7
1.6
.8

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

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

.0
.0
2.0
2.0

.4
.4

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

Real GDP
Previous Tealbook

Item

Greensheets
Changes in Real Gross Domestic Product and Related Items
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
January 18, 2012

Page 91 of 104

.7
.7
1.2
.4
2.6
.4
50
50
50
0

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

Change in bus. inventories1
Previous Tealbook1
Nonfarm1
Farm1

59
59
63
-4

1.5
1.5
2.2
4.4
-2.3
1.2

-729
-729
10.2
4.1

7.8
7.8
6.0
6.0
13.0
13.0

-15.7
-15.7

3.2
3.2
7.0
2.9
2.6

-36
-36
-38
1

2.7
2.7
8.8
9.8
6.8
-.9

-495
-495
-2.5
-5.9

-9.4
-9.4
-13.6
-13.6
-1.2
-1.2

-24.4
-24.4

-2.5
-2.5
-13.0
-3.1
-.5

-2.6
-2.6
-4.5
-4.5

-3.3
-3.3

2008

Greensheets

28
28
29
-1

1.9
1.9
3.1
2.6
4.2
1.2

-649
-649
10.1
.8

7.9
7.9
3.9
3.9
17.3
17.3

-20.7
-20.7

1.7
1.7
4.6
.8
1.4

2.4
2.4
1.2
1.2

2.2
2.2

2007

-145
-145
-144
-1

1.1
1.1
4.6
3.5
6.9
-1.1

-359
-359
-.1
-6.5

-14.4
-14.4
-5.8
-5.8
-29.3
-29.3

-12.9
-12.9

-.2
-.2
3.0
.6
-.9

-.8
-.8
-2.5
-2.5

-.5
-.5

2009

59
59
61
-1

.1
.1
2.9
1.5
5.7
-1.7

-422
-422
8.8
10.7

11.1
11.1
16.6
16.6
-1.8
-1.8

-6.3
-6.3

3.0
3.0
10.9
3.5
1.6

2.4
2.4
3.6
3.6

3.1
3.1

2010

34
29
42
-6

-2.9
-2.2
-3.9
-4.5
-2.7
-2.1

-410
-409
5.3
3.4

7.5
7.8
8.4
8.4
5.1
6.2

3.1
1.6

1.7
1.8
6.5
.5
1.3

1.5
1.8
2.4
2.5

1.6
1.7

2011

54
47
54
0

-.7
-.1
-1.0
-.4
-2.1
-.5

-393
-387
4.8
3.9

2.2
2.0
3.8
3.2
-2.1
-1.1

6.6
5.8

2.4
2.4
6.2
2.1
1.9

2.0
2.1
2.5
2.5

2.1
2.3

2012

80
82
79
1

-1.3
-1.2
-4.1
-4.8
-2.6
.7

-394
-381
5.2
4.1

4.9
4.9
6.4
6.4
1.1
.9

7.3
7.9

2.4
2.3
6.2
2.1
2.0

2.2
2.2
2.9
2.8

2.4
2.5

2013

Authorized for Public Release

1. Billions of chained (2005) dollars.

-723
-723
6.7
5.2

5.3
5.3

Residential investment
Previous Tealbook

Net exports1
Previous Tealbook1
Exports
Imports

2.8
2.8
2.8
3.1
2.7

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

4.5
4.5
6.2
6.2
-.1
-.1

2.7
2.7
3.2
3.2

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

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

2.4
2.4

2.8
2.8

Real GDP
Previous Tealbook
2.8
2.8
2.4
2.4

2006

2005

Item

Changes in Real Gross Domestic Product and Related Items
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
January 18, 2012

Page 92 of 104

-.1
-.1
.2
.2
.6
.6
-.4
-.4
-.3
-.3
1.0
-1.4
-1.2
-1.2
-.8
-.7
-.1
-.4

Residential investment
Previous Tealbook

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

Net exports
Previous Tealbook
Exports
Imports

Gov’t. cons. & invest.
Previous Tealbook
Federal
Defense
Nondefense
State & local
-.3
-.3
-.3
.0

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

.2
.2
.5
-.2

1.0
1.0
.4
.4
.5
.5

.1
.1

.5
.5
-.4
.0
.9

-1.4
-1.5
-1.5
.1

.0
.0
.2
.3
-.1
-.2

.4
.5
.6
-.2

1.5
1.5
1.1
1.1
.4
.4

.0
.0

1.2
1.5
.4
-.1
.9

3.2
3.5
2.8
3.0

1.8
1.9

1.6
1.2
1.6
.1

-.9
-.4
-.8
-.9
.1
-.1

.2
.2
.7
-.5

.3
.4
.2
.2
.0
.2

.2
.1

1.5
1.7
1.1
.1
.3

1.3
2.0
2.0
2.2

2.9
3.2

-.1
.1
-.2
.1

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

.1
.1
.8
-.7

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

.2
.1

1.4
1.6
.3
.3
.8

1.7
1.9
1.6
1.6

1.6
2.1

-.1
-.1
-.2
.0

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

.1
.2
.6
-.5

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

.1
.1

1.7
1.6
.5
.3
.8

2.0
2.0
2.0
1.9

1.8
1.9

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

.3
.3
.4
-.1

1.5
1.5
.9
.3
.4

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

1.6
1.6
1.6
1.6

1.3
1.3

.4
.6
.4
.0

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

-.2
-.1
.6
-.8

.3
.3
.4
.3
.0
.0

.2
.1

1.8
1.7
.5
.3
1.0

1.9
1.9
2.3
2.2

2.3
2.5

2012

.4
.4
.4
.0

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

.0
.1
.7
-.7

.4
.4
.4
.4
.0
.0

.2
.2

2.0
2.0
.6
.4
1.0

2.3
2.5
2.5
2.5

2.7
2.9

.2
.1
.2
.0

-.2
.0
-.3
-.2
-.1
.0

-.1
.0
.7
-.8

.4
.4
.4
.4
.0
.0

.2
.2

1.6
1.5
.5
.3
.8

1.8
2.1
2.1
2.1

2.1
2.2

.0
.2
.0
.0

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

.0
.1
.7
-.7

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

.2
.2

1.7
1.5
.5
.3
.9

2.1
2.1
2.3
2.2

2.2
2.3

.0
.3
-.1
.0

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

.1
.1
.7
-.6

.6
.6
.6
.5
.0
.0

.2
.2

1.8
1.6
.6
.4
.9

2.5
2.2
2.6
2.3

2.4
2.5

2013

.5
.7
.5
.0

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

.0
.0
.7
-.8

.5
.5
.5
.5
.0
.0

.2
.2

1.8
1.9
.4
.4
1.0

2.3
2.2
2.6
2.7

2.8
2.9

.1
-.1
.1
.0

-.6
-.5
-.3
-.3
-.1
-.3

.1
.1
.7
-.6

.7
.8
.6
.6
.1
.2

.1
.0

1.2
1.3
.5
.1
.6

1.5
1.8
2.0
2.1

1.6
1.7

20111

.1
.3
.1
.0

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

.0
.0
.7
-.7

.2
.2
.3
.2
-.1
.0

.1
.1

1.7
1.7
.5
.3
.9

2.0
2.1
2.1
2.1

2.1
2.3

20121

.2
.3
.2
.0

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

.0
.0
.7
-.7

.5
.5
.5
.5
.0
.0

.2
.2

1.7
1.6
.5
.3
.9

2.2
2.1
2.4
2.3

2.4
2.5

20131

Authorized for Public Release

Change in bus. inventories
Previous Tealbook
Nonfarm
Farm

.0
.0
1.6
1.6

.4
.4

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

Real GDP
Previous Tealbook

Item

2011

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

Greensheets

Class II FOMC - Restricted (FR)
January 18, 2012

2.1
2.1
-.6
-.6
5.6
5.6
6.2
6.2
8.3
8.3

ECI, hourly compensation2
Previous Tealbook2

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

Page 93 of 104

Core goods imports chain-wt. price index3
Previous Tealbook3

7.2
7.2

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

3.2
3.2

4.1
4.1
2.5
2.5

3.3
3.3
15.0
15.0
6.4
6.4
2.3
2.3
2.4
2.4

2.5
2.5

2.4
2.3

1.9
2.2
-.2
-.2
-2.1
-2.4

1.4
1.4

3.1
3.1
2.7
2.7

2.3
2.3
3.3
3.3
4.7
4.7
2.1
2.0
2.3
2.3

2.6
2.5

-.8
-.7

.8
2.1
2.3
2.2
1.5
.1

2.0
1.9

.9
.9
1.7
1.7

.5
.7
-6.8
-8.2
2.6
3.5
.9
1.1
1.1
1.0

.9
1.0

-1.2
-.9

.3
.7
2.3
2.3
2.0
1.5

2.5
2.3

1.6
1.5
1.7
1.8

1.4
1.4
.7
-.9
.9
1.3
1.5
1.6
1.5
1.4

1.7
1.7

Greensheets

.0
.4

1.3
.9
2.4
2.3
1.1
1.3

2.5
2.4

1.9
1.5
1.5
1.6

1.7
1.5
4.9
1.3
1.1
1.1
1.5
1.5
1.4
1.4

1.7
1.6

.7
.7

1.7
1.5
2.3
2.3
.6
.8

2.4
2.4

1.5
1.4
1.5
1.5

1.4
1.3
.7
-.4
1.2
1.2
1.5
1.5
1.3
1.3

1.5
1.6

2012

1.4
1.2

2.2
1.9
2.3
2.2
.1
.3

2.4
2.4

1.3
1.2
1.5
1.5

1.3
1.3
-.5
-1.2
1.2
1.2
1.4
1.4
1.3
1.3

1.4
1.4

1.5
1.4

1.1
1.0
2.2
2.2
1.1
1.2

2.3
2.3

1.3
1.2
1.5
1.5

1.3
1.3
-.6
-1.2
1.2
1.2
1.4
1.4
1.3
1.3

1.5
1.5

1.6
1.4

1.3
1.1
2.2
2.2
.9
1.1

2.3
2.3

1.2
1.2
1.5
1.5

1.3
1.2
-.9
-1.7
1.2
1.2
1.4
1.4
1.3
1.3

1.4
1.4

1.6
1.4

1.5
1.2
2.1
2.2
.6
1.0

2.3
2.3

1.2
1.2
1.5
1.5

1.3
1.2
-1.0
-1.7
1.2
1.2
1.4
1.4
1.3
1.3

1.4
1.4

2013

1.5
1.4

1.8
1.6
2.1
2.1
.3
.5

2.3
2.3

1.2
1.2
1.5
1.5

1.3
1.2
-.8
-1.6
1.2
1.2
1.4
1.4
1.3
1.3

1.4
1.4

4.2
4.2

.5
.9
1.8
1.8
1.3
.9

2.2
2.2

3.3
3.3
2.2
2.2

2.5
2.5
11.7
11.3
5.0
5.2
1.7
1.7
1.8
1.7

2.1
2.1

20111

.2
.4

1.4
1.3
2.3
2.3
1.0
1.0

2.4
2.4

1.6
1.4
1.6
1.6

1.4
1.4
1.4
-.3
1.1
1.2
1.5
1.5
1.4
1.4

1.6
1.6

20121

1.5
1.4

1.4
1.2
2.2
2.2
.7
.9

2.3
2.3

1.3
1.2
1.5
1.5

1.3
1.2
-.8
-1.6
1.2
1.2
1.4
1.4
1.3
1.3

1.4
1.4

20131

Authorized for Public Release

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

5.2
5.2
1.7
1.7

3.9
3.9
40.7
40.7
6.5
6.5
1.6
1.6
1.3
1.3

2.5
2.5

Previous Tealbook
Ex. food & energy
Previous Tealbook

CPI

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

GDP chain-wt. price index
Previous Tealbook

Item

2011

Changes in Prices and Costs
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
January 18, 2012

Item

2.9
2.9
1.6
1.6
3.5
3.5
1.9
1.9
2.2
2.2

ECI, hourly compensation1
Previous Tealbook1

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

Page 94 of 104

Core goods imports chain-wt. price index2
Previous Tealbook2

2.5
2.5

.8
.8
4.5
4.5
3.6
3.6

3.2
3.2

2.0
2.0
2.7
2.7

2.9
2.9

2.5
2.5
3.6
3.6
1.1
1.1

3.0
3.0

4.0
4.0
2.3
2.3

3.5
3.5
19.3
19.3
4.7
4.7
2.4
2.4
2.1
2.1

2.6
2.6

2007

3.7
3.7

-1.1
-1.1
2.5
2.5
3.7
3.7

2.4
2.4

1.6
1.6
2.0
2.0

1.7
1.7
-8.8
-8.8
7.0
7.0
2.0
2.0
2.2
2.2

2.1
2.1

2008

-1.7
-1.7

5.3
5.3
1.8
1.8
-3.3
-3.3

1.2
1.2

1.5
1.5
1.7
1.7

1.5
1.5
2.6
2.6
-1.7
-1.7
1.7
1.7
1.7
1.7

.7
.7

2009

2.6
2.6

2.5
2.5
1.6
1.6
-.9
-.9

2.1
2.1

1.2
1.2
.6
.6

1.3
1.3
6.2
6.2
1.3
1.3
1.0
1.0
.7
.7

1.6
1.6

2010

4.2
4.2

.5
.9
1.8
1.8
1.3
.9

2.2
2.2

3.3
3.3
2.2
2.2

2.5
2.5
11.7
11.3
5.0
5.2
1.7
1.7
1.8
1.7

2.1
2.1

2011

.2
.4

1.4
1.3
2.3
2.3
1.0
1.0

2.4
2.4

1.6
1.4
1.6
1.6

1.4
1.4
1.4
-.3
1.1
1.2
1.5
1.5
1.4
1.4

1.6
1.6

2012

1.5
1.4

1.4
1.2
2.2
2.2
.7
.9

2.3
2.3

1.3
1.2
1.5
1.5

1.3
1.2
-.8
-1.6
1.2
1.2
1.4
1.4
1.3
1.3

1.4
1.4

2013

Authorized for Public Release

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

3.7
3.7
2.1
2.1

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

2.9
2.9

3.5
3.5
3.2
3.2
21.5
21.5
1.5
1.5
2.3
2.3
2.0
2.0

2006

2005

Previous Tealbook
Ex. food & energy
Previous Tealbook

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

GDP chain-wt. price index
Previous Tealbook

CPI

Greensheets
Changes in Prices and Costs
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
January 18, 2012

Page 95 of 104

12.6
-.1

Gross national saving rate3
Net national saving rate3

12.4
-.4

-1,275
-40

13.7
12.7

4.0
-.5
-.5
4.8
4.8

.6
12.1

.7
.6
.1
.0
74.4
74.4

.5
9.1
9.1
6.0
6.0
-5.8
-5.8

12.3
-.5

-1,172
-83

6.9
12.8

4.4
-1.9
-2.1
3.9
3.8

.6
12.4

6.3
5.2
5.0
4.3
75.1
74.9

.3
9.1
9.1
6.0
6.0
-5.8
-5.8

12.6
.0

-1,127
-70

-3.1
12.5

3.8
2.7
4.3
4.1
4.3

.7
13.4

3.1
2.6
3.9
2.7
75.6
75.3

.4
8.7
8.8
6.0
6.0
-5.5
-5.5

12.8
.3

-1,078
-60

-.2
12.4

3.3
3.4
2.9
4.4
4.4

.7
13.4

3.2
2.4
4.1
2.7
76.2
75.6

.4
8.7
8.8
6.0
6.0
-5.6
-5.4

12.7
.2

-1,069
-45

-6.1
12.1

3.6
3.0
3.0
4.5
4.6

.7
13.4

2.9
2.3
2.5
1.6
76.4
75.7

.4
8.7
8.8
6.0
6.0
-5.7
-5.5

-.8
12.0

3.8
3.3
3.3
4.7
4.8

.8
13.5

2.2
2.3
2.1
2.0
76.6
75.8

.4
8.6
8.7
6.0
6.0
-5.6
-5.4

12.8
.2

-1,051
-41

2012

12.7
.2

-1,043
-35

-4.1
11.8

4.1
3.5
3.6
4.9
5.0

.8
13.6

2.4
2.2
2.7
2.5
76.9
76.1

.5
8.6
8.6
6.0
6.0
-5.4
-5.2

12.9
.3

-864
-33

.6
11.7

3.5
-1.3
-1.3
4.0
4.1

.9
13.9

2.7
3.2
2.5
3.3
77.1
76.4

.5
8.5
8.5
6.0
6.0
-5.4
-5.1

13.0
.5

-842
-20

.5
11.6

3.6
2.3
2.4
4.0
4.2

.9
14.1

3.2
3.2
3.3
3.3
77.5
76.8

.5
8.4
8.4
6.0
6.0
-5.4
-5.1

2013

13.1
.5

-819
-20

1.9
11.6

3.8
2.6
2.7
4.0
4.3

1.0
14.6

3.7
3.3
4.1
3.5
77.9
77.1

.6
8.3
8.3
6.0
6.0
-5.3
-5.0

Greensheets

13.1
.6

-805
-19

.7
11.5

4.2
3.1
3.2
4.1
4.4

1.0
14.7

2.9
3.3
2.9
3.5
78.2
77.5

.6
8.2
8.2
6.0
6.0
-5.2
-4.8

12.6
.0

-1,194
-63

5.2
12.5

3.8
.4
.7
4.1
4.3

.6
12.7

3.7
3.3
4.0
3.5
75.6
75.3

1.6
8.7
8.8
6.0
6.0
-5.5
-5.5

20111

12.7
.2

-1,060
-45

-2.9
11.8

3.7
3.3
3.2
4.9
5.0

.7
13.5

2.7
2.3
2.8
2.2
76.9
76.1

1.7
8.6
8.6
6.0
6.0
-5.4
-5.2

20121

13.1
.6

-832
-23

.9
11.5

3.8
1.7
1.7
4.1
4.4

.9
14.3

3.1
3.2
3.2
3.4
78.2
77.5

2.1
8.2
8.2
6.0
6.0
-5.2
-4.8

20131

Authorized for Public Release

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

-1,201
-57

Net federal saving8
Net state & local saving8

4.2
12.4

.6
13.0

Housing starts6
Light motor vehicle sales6

Corporate profits7
Profit share of GNP3

4.8
4.8
7.2
7.2
74.5
74.5

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

3.1
1.2
1.2
5.0
5.0

.4
9.0
8.9
6.0
6.0
-5.7
-5.8

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

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

Item

2011

Other Macroeconomic Indicators

Class II FOMC - Restricted (FR)
January 18, 2012

Greensheets

Page 96 of 104

-283
26
15.6
3.6

Net federal saving7
Net state & local saving7

Gross national saving rate2
Net national saving rate2

16.5
4.4

-204
51

3.7
11.6

5.3
4.6
4.6
2.8
2.8

1.8
16.5

2.3
2.3
2.0
2.0
78.4
78.4

2.1
4.5
4.5
5.0
5.0
.0
.0

2006

13.9
1.7

-245
12

-8.1
10.1

4.9
1.6
1.6
2.5
2.5

1.4
16.1

2.5
2.5
2.8
2.8
79.0
79.0

1.2
4.8
4.8
5.0
5.0
-.2
-.2

2007

12.6
-.6

-613
-72

-33.5
6.8

-1.2
1.0
1.0
6.2
6.2

.9
13.1

-9.1
-9.1
-11.8
-11.8
70.1
70.1

-2.8
6.9
6.9
5.3
5.3
-5.4
-5.4

2008

11.3
-1.9

-1218
-78

61.8
11.0

.0
-2.4
-2.4
4.3
4.3

.6
10.3

-5.5
-5.5
-6.1
-6.1
67.7
67.7

-5.6
9.9
10.0
6.0
6.0
-6.9
-6.9

2009

12.3
-.4

-1274
-25

18.2
12.4

4.7
3.5
3.5
5.2
5.2

.6
11.5

6.2
6.2
6.1
6.1
73.3
73.3

.7
9.6
9.6
6.0
6.0
-5.4
-5.4

2010

12.6
.0

-1194
-63

5.2
12.5

3.8
.4
.7
4.1
4.3

.6
12.7

3.7
3.3
4.0
3.5
75.6
75.3

1.6
8.7
8.8
6.0
6.0
-5.5
-5.5

2011

12.7
.2

-1060
-45

-2.9
11.8

3.7
3.3
3.2
4.9
5.0

.7
13.5

2.7
2.3
2.8
2.2
76.9
76.1

1.7
8.6
8.6
6.0
6.0
-5.4
-5.2

2012

13.1
.6

-832
-23

.9
11.5

3.8
1.7
1.7
4.1
4.4

.9
14.3

3.1
3.2
3.2
3.4
78.2
77.5

2.1
8.2
8.2
6.0
6.0
-5.2
-4.8

2013

Authorized for Public Release

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

19.6
11.8

2.1
16.9

Housing starts5
Light motor vehicle sales5

Corporate profits6
Profit share of GNP2

2.3
2.3
3.4
3.4
78.5
78.5

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

6.4
.6
.6
1.6
1.6

2.4
5.0
5.0
5.0
5.0
.0
.0

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

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

2005

Item

Other Macroeconomic Indicators
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
January 18, 2012

Page 97 of 104
-929
-.3
-0.4
-0.3

1.1
0.5
0.5

-1263

-1305

-943

2531
3765
1070
715
355
2695
-1234
165

2379
3648
1042
697
346
2606
-1269
165

1110
252
-65

2302
3599
-1297
-1296
-1364
67

-0.4
-0.3

-1.3

-745

-1093

2688
3769
1076
718
358
2693
-1081
156

1102
8
-3

2469
3576
-1107
-1149
-1079
-29

2012

Fiscal year
2011a

-1.1
-1.1

-1.4

-537

-890

2934
3826
1074
719
355
2752
-892
153

933
0
-80

2710
3563
-853
-904
-855
2

2013

-0.6
-0.6

-.7

-906

-1227

2528
3729
1059
701
358
2670
-1201
161

118

260
225
-24

488
949
-460
-460
-451
-10

Q1a

0.4
0.4

-961

-1298

2554
3829
1078
723
354
2752
-1275
160

137

93
-19
67

714
855
-141
-141
-202
61

389
79
-142

568
895
-326
-325
-311
-15

Q3a

-0.1
-0.1

-.8

-844

-1197

2572
3744
1085
733
352
2659
-1172
164

2011
Q2a

-1.2
-0.7

-.3

-794

-1141

2599
3726
1067
709
357
2660
-1127
155

326
-28
23

555
877
-322
-348
-346
24

2012
Q3

144
-20
6

763
893
-130
-135
-159
30

203
30
-20

626
839
-213
-228
-166
-47

337
0
-20

607
924
-317
-328
-325
8

Not seasonally adjusted

-0.2
-0.0

-.3

-745

-1091

-0.5
-0.5

-.1

-730

-1079

-0.5
-0.4

-.2

-710

-1059

-0.4
-0.3

-.1

-702

-1048

Seasonally adjusted annual rates
2687
2716
2749
2778
3766
3785
3800
3821
1079
1080
1079
1078
720
722
722
722
359
358
357
356
2687
2705
2721
2743
-1078
-1069
-1051
-1043
157
157
156
156

429
26
-12

524
967
-443
-437
-407
-35

-1.8
-1.6

-1.2

-507

-864

2955
3818
1078
722
356
2741
-864
154

370
0
-20

567
917
-350
-364
-329
-21

-0.9
-0.8

-.2

-482

-838

2985
3827
1073
718
355
2754
-842
152

63
0
-20

836
878
-43
-53
-88
45

163
0
-20

700
843
-143
-159
-113
-30

-1.0
-1.0

-.2

-459

-810

3018
3837
1066
712
353
2772
-819
149

2013
Q2

-0.7
-0.9

-.1

-445

-791

3050
3855
1058
706
352
2797
-805
146

300
0
-20

648
927
-280
-288
-302
23

Greensheets

Authorized for Public Release

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

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

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

310

1474
-35
-146

Means of financing
Borrowing
Cash decrease
Other2

Cash operating balance,
end of period

2163
3456
-1293
-1293
-1370
77

2010a

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

Item

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

Class II FOMC - Restricted (FR)
January 18, 2012

-2.1
-.9
.6
1.6

4.1
3.6
4.2
4.0

3.5
3.9
3.7
4.9
2.3
3.1
4.3
4.6
4.9
3.9
3.0
5.0
4.6
3.5
3.0
4.8

2010
2011
2012
2013

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

-4.8
-2.5
-2.5
-1.8
-2.6
-2.4
-1.9
-1.6
-1.3
-1.0
-.8
-.5
-.2
.0
.1
.1

-2.9
-2.1
-.9
-.0

11.1
6.9
-.5
-1.4

-3.9
-3.3
-2.2
2.3
2.2
3.5
1.4
4.6
3.3
4.8
5.1
5.7
6.0
6.2
6.4
6.3

-1.8
2.9
4.8
6.4

4.1
5.8
1.5
-4.4

Consumer
credit

-.1
-1.3
1.8
2.4
4.1
4.5
3.4
3.9
3.4
3.2
3.2
3.4
3.7
3.8
3.9
3.9

.7
4.0
3.4
3.9

11.1
13.6
6.2
-2.4

Business

2.4
-.5
2.1
4.8
-3.3
-3.5
.0
-.8
1.7
1.5
1.3
1.2
1.2
1.2
1.2
1.2

2.2
-1.9
1.4
1.2

3.7
5.4
.7
3.9

State and local
governments

20.6
22.5
16.0
16.4
7.9
8.6
14.1
13.1
13.5
9.5
5.8
12.2
10.2
6.0
4.0
10.0

20.2
11.4
10.6
7.7

3.9
4.9
24.2
22.7

Federal
government

5.5
5.4
3.9
4.2
3.1
4.0
4.4
3.8
3.3
3.6
3.8
4.1
3.5
3.6
3.8
4.2

4.7
3.8
3.7
3.8

5.3
4.9
-1.2
.0

Memo:
Nominal
GDP

Authorized for Public Release

Page 98 of 104

Note: Quarterly data are at seasonally adjusted annual rates.
1. Data after 2011:Q3 are staff projections. Changes are measured from end of the preceding period to end of period indicated except for annual nominal
GDP growth, which is calculated from Q4 to Q4.

-3.1
-2.2
-2.2
-.7
-1.8
-.6
-1.2
-.0
-.0
.5
.7
1.1
1.4
1.6
1.7
1.7

9.9
6.7
.1
-1.7

Total

8.7
8.5
6.0
3.0

Total

Year
2006
2007
2008
2009

Period1

Home
mortgages

Households

Change in Debt of the Domestic Nonfinancial Sectors
(Percent)

Greensheets

Class II FOMC - Restricted (FR)
January 18, 2012

Page 99 of 104

-278.4
-298.2
-44.2
120.3
-197.1
-278.0
77.0
66.2
257.0

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

Business
Financing gap4
Net equity issuance
Credit market borrowing

State and local governments
Net borrowing
Current surplus5

-181.1

154.9

1067.9
1067.9
1251.4

-57.3
214.6

-201.9
-484.9
449.3

-122.7
-211.8
71.3
114.7

249.1
8.9

852.3
-484.9
1337.1

2011

339.6

1112.9
1112.9
1102.6

43.0
203.1

-93.9
-410.0
391.6

73.7
-88.2
120.0
110.3

249.6
10.4

1211.1
-410.0
1621.1

2012

371.6

895.2
895.2
815.2

38.0
233.2

66.7
-340.0
462.5

213.5
-0.0
167.0
108.0

250.5
9.9

1269.2
-340.0
1609.2

2013

489.9

1382.6
389.1
328.1

1.0
212.1

-257.3
-606.6
392.2

-158.8
-185.6
33.6
114.3

248.0
10.7

1010.4
-606.6
1617.0

432.1

1321.2
326.0
321.7

-23.9
173.8

-196.0
-494.8
443.6

-4.8
-158.0
113.4
113.2

248.4
11.3

1241.2
-494.8
1736.0

375.5

1415.7
428.8
442.7

50.0
185.6

-158.9
-400.0
399.9

-5.3
-127.8
82.2
111.9

249.3
12.0

1460.3
-400.0
1860.3

306.0

1030.1
143.6
129.5

46.0
202.0

-121.0
-400.0
378.1

63.9
-98.0
120.7
110.7

249.9
9.7

1118.0
-400.0
1518.0

Greensheets

327.2

639.6
203.3
213.2

38.0
208.8

-76.7
-420.0
382.7

94.1
-78.2
129.9
109.6

249.7
7.3

734.4
-420.0
1154.4

2012

349.7

1366.0
337.2
317.2

38.0
215.9

-18.8
-420.0
405.7

141.9
-48.8
147.1
108.5

249.6
12.3

1531.6
-420.0
1951.6

357.3

1179.2
369.6
349.6

38.0
220.3

35.3
-320.0
438.1

182.7
-19.5
157.2
108.9

250.4
11.5

1517.9
-320.0
1837.9

356.7

706.4
62.7
42.7

38.0
234.9

51.9
-320.0
456.4

211.1
0.0
164.9
108.3

250.7
8.7

1091.9
-320.0
1411.9

382.1

479.1
163.2
143.2

38.0
237.6

68.9
-360.0
473.5

229.7
9.7
172.9
107.7

250.4
7.5

860.2
-360.0
1220.2

2013

390.5

1216.2
299.7
279.7

38.0
239.8

110.8
-360.0
482.0

230.5
9.7
172.9
107.0

250.2
11.9

1606.6
-360.0
1966.6

Authorized for Public Release

Note: Data after 2011:Q3 are staff projections.
1. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP.
2. Includes change in liabilities not shown in home mortgages and consumer credit.
3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income.
4. For corporations, excess of capital expenditures over U.S. internal funds.
5. NIPA state and local government saving plus consumption of fixed capital and net capital transfers.
n.s.a. Not seasonally adjusted.

Depository institutions
Funds supplied

1580.2
1580.2
1275.1

249.1
9.9

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

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

1167.1
-278.0
1445.1

2010

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

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 24-25, 2012 : Tealbook A

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