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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 01/08/2021. Authorized for Public Release Class II FOMC – Restricted (FR) Report to the FOMC on Economic Conditions and Monetary Policy Book A Economic and Financial Conditions: Current Situation and Outlook July 22, 2015 Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Authorized for Public Release (This page is intentionally blank.) Class II FOMC - Restricted (FR) July 22, 2015 Domestic Economic Developments and Outlook The basic dimensions of the economic situation are little changed from the time of the June Tealbook: After having averaged just 1 percent in the first half of this year, real GDP growth still looks poised to step up to an annual rate of 2 percent in the second half.1 Second-half growth along those lines would be unimpressive but nonetheless sufficient to generate some further narrowing of the remaining gap between actual and potential output. Labor market conditions also continue to improve, with payroll employment running noticeably above the pace required to absorb new entrants into the workforce, and inflation continues to run well below the Committee’s 2 percent objective. We now project that real GDP will rise 2¼ percent in 2016 before edging down to 2 percent in 2017. This forecast is slightly weaker than in June, reflecting small changes to a number of conditioning assumptions—most notably, a higher exchange value of the dollar. All else being equal, the combination of the surprisingly low reading on the unemployment rate in June and the slight degradation in our forecast for aggregate demand would have led us to project no further decline in the unemployment rate over the forecast period, a projection that did not seem to balance the risks adequately in light of the significant and consistent declines seen over the past few years. Consequently, as we describe in greater detail later, we made sufficient adjustments to the supply side of the projection to bring the unemployment rate down to 5.1 percent in the fourth quarter of 2017. As for inflation, we continue to foresee core inflation gradually moving up from 1.3 percent this year to 1.7 percent in 2017, as import prices turn back up, resource utilization tightens, and the effects of the earlier sharp declines in energy prices wane. The recent fall in crude oil prices damps headline inflation over the next few quarters relative to core, but we expect total PCE inflation to run roughly in line with core inflation next year and in 2017. As always, numerous risks attend our outlook. We view the uncertainty around our projection for real GDP growth, the unemployment rate, and inflation as broadly in 1 The BEA is scheduled to publish its initial estimate of second-quarter GDP along with its annual revision to the national income and product accounts on July 30, the day after the FOMC meeting. Page 1 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Comparing the Staff Projection with Other Forecasts The staff’s projection for real GDP growth is somewhat lower than the most recent Blue Chip Consensus outlook (from early this month) and the median projection from the Survey of Professional Forecasters (from mid‐May). The staff’s forecast of the unemployment rate is a little higher than those of the outside forecasters; the staff’s inflation projection is a bit lower. Comparison of Tealbook and Outside Forecasts 2015 2016 GDP (Q4/Q4 percent change) July Tealbook Blue Chip (7/10/15) SPF median (5/15/15) 1.5 2.2 2.2 2.3 2.7 n.a. Unemployment rate (Q4 level) July Tealbook Blue Chip (7/10/15) SPF median (5/15/15) 5.2 5.1 5.2 5.2 4.8 n.a. Consumer price inflation (Q4/Q4 percent change) July Tealbook Blue Chip (7/10/15) SPF median (5/15/15) .4 .9 .7 2.1 2.3 2.1 PCE price inflation (Q4/Q4 percent change) July Tealbook SPF median (5/15/15) .3 .8 1.6 1.9 1.3 1.4 1.5 1.7 Core PCE price inflation (Q4/Q4 percent change) July Tealbook SPF median (5/15/15) Note: SPF is the Survey of Professional Forecasters. Blue Chip does not provide results for PCE price inflation. The Blue Chip Consensus contains about 50 panelists, and the SPF about 40. Roughly 20 panelists contribute to both surveys. n.a. Not available. Source: Blue Chip Economic Indicators; Federal Reserve Bank of Philadelphia. Page 2 of 94 Class II FOMC - Restricted (FR) July 22, 2015 Tealbook Forecast Compared with Blue Chip (Blue Chip survey released July 10, 2015) Real GDP Industrial Production Percent change, annual rate Blue Chip consensus Staff forecast 2008 2010 2012 2014 2016 Note: The shaded area represents the area between the Blue Chip top 10 and bottom 10 averages. Percent change, annual rate 8 12 6 8 4 4 2 0 0 -4 -2 -8 -4 -12 -6 -16 -8 -20 -10 2008 2010 2012 2014 2016 -24 Note: Historical revisions to the IP data were published after the latest Blue Chip survey. Unemployment Rate Consumer Price Index Percent Percent change, annual rate 11 8 6 10 4 9 2 8 0 7 -2 -4 6 -6 5 2008 2010 2012 2014 2016 -8 4 2008 Treasury Bill Rate 2010 2012 2014 2016 -10 10-Year Treasury Yield Percent Percent 4 5.5 5.0 3 4.5 4.0 2 3.5 3.0 1 2.5 2.0 0 1.5 2008 2010 2012 2014 2016 -1 2008 2010 2012 2014 2016 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 3 of 94 1.0 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Key Background Factors underlying the Baseline Staff Projection Long-Term Interest Rates Federal Funds Rate Percent Percent 6 Quarterly average Quarterly average 10 9 Current Tealbook Previous Tealbook 5 8 Triple-B corporate yield 4 7 6 3 5 Conforming mortgage rate 2 4 10-year Treasury yield 1 3 2 2007 2009 2011 2013 2015 2017 0 2007 2009 2011 2013 2015 2017 House Prices Equity Prices Ratio scale, 2007:Q1 = 100 Quarter-end Dow Jones U.S. Total Stock Market Index Ratio scale, 2007:Q1 = 100 200 185 170 155 140 100 95 90 125 110 CoreLogic index 85 80 80 75 65 70 50 2009 2011 2013 2015 105 Quarterly 95 2007 1 65 2017 2007 Crude Oil Prices 2009 2011 2013 2015 2017 Broad Real Dollar Dollars per barrel 2007:Q1 = 100 140 110 Quarterly average Quarterly average 105 120 Imported oil 100 100 West Texas Intermediate 95 80 90 85 60 80 40 2007 2009 2011 2013 2015 2017 75 20 2007 Page 4 of 94 2009 2011 2013 2015 2017 70 Class II FOMC - Restricted (FR) July 22, 2015 line with the average over the past 20 years, a period that includes considerable volatility. We have maintained our assessment that the risks to our GDP projection are tilted somewhat to the downside, largely reflecting our view that neither monetary nor fiscal policy appears well positioned to offset large adverse shocks to the economy. By contrast, we still see the risks around our outlook for the unemployment rate as roughly balanced, as the downside risks to real activity are offset by the possibility that the unemployment rate could continue to decline more rapidly than we expect. Our concerns with respect to the inflation outlook remain mostly on the downside, given the still-muted readings on TIPS-based measures of inflation compensation and hints from surveys of a small decline in longer-term inflation expectations. KEY BACKGROUND FACTORS Monetary Policy We continue to assume that the federal funds rate will lift off from its effective lower bound after the September meeting. As in previous projections, the trajectory of the federal funds rate following liftoff is determined by the prescriptions of an inertial version of the Taylor (1999) policy rule. The projected path of the federal funds rate is similar to that in the June Tealbook, rising an average of about 20 basis points per quarter after liftoff and reaching an average of 2.1 percent in the fourth quarter of 2017. Other Interest Rates The 10-year Treasury yield is little changed, on net, since the June Tealbook. As before, we expect this rate to increase significantly over the forecast period, reflecting both the movement of the 10-year valuation window through the period of extremely low short-term interest rates and an increase in the term premium toward its historically normal level. Similarly, we made only small adjustments to our projections for the 10-year triple-B corporate bond yield and 30-year mortgage rates. Equity Prices and Home Prices We project stock prices to rise at an average pace of 4.2 percent per year. As in our previous forecast, we expect the equity risk premium to decline notably Page 5 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 over the next few years, consistent with the benign economic outlook in the staff forecast and the associated rise in 10-year Treasury yields. With the incoming data on house prices close to our expectations, we continue to expect house prices to rise about 5¼ percent in 2015 and then to decelerate to an average growth rate of 3 percent per year in 2016 and 2017. Our assessment is that house prices are not far out of line with their historical relationship to rents; we expect valuations to remain within the range predicted by this relationship over the medium term. Fiscal Policy We have slightly downgraded our assessment of the fiscal position of state and local governments. The net hiring of these governments has stalled out this year, and proposed state government budgets for fiscal year 2016—which started on July 1 in most states—point toward somewhat less spending growth than expected. Moreover, the need to shore up pension funding appears likely to impose greater restraint on budgets in at least some states and localities than we had previously expected. Accordingly, we anticipate that the state and local sector will provide a bit less impetus to aggregate demand in this projection. Nonetheless, we continue to expect that fiscal policy actions at all levels of government will provide a small stimulus to GDP growth during the next few years. Foreign Economic Activity and the Dollar We estimate that foreign real GDP growth remained subdued in the second quarter, rising at an estimated annual rate of 1¾ percent, which is ½ percentage point weaker than in our previous forecast. Much of the revision reflects a greater-than-expected decline in Canadian GDP, as drilling and mining investment in Canada has fallen sharply in response to lower oil prices. We continue to expect foreign GDP growth to step up to an annual rate of 3 percent by early next year and to remain at that pace over the rest of the projection period, supported by accommodative monetary policy abroad, depreciated currencies, and still-low oil prices. The broad nominal dollar is somewhat higher than expected in the June Tealbook. We project that the dollar will appreciate 1¾ percent further Page 6 of 94 Class II FOMC - Restricted (FR) July 22, 2015 through the remainder of 2015 as investors continue to focus on the divergence between monetary policies in the United States and abroad. Thereafter, the dollar is projected to weaken as monetary policy in several foreign economies begins to normalize and as downside risks to the economic expansion abroad diminish. Our forecast leaves the level of the broad real dollar up 1¼ percent at the end of 2017 relative to the previous Tealbook. Oil Prices and Other Commodity Prices The spot price of Brent crude oil has fallen about $8 per barrel since the time of the June Tealbook, and prices for futures contracts with delivery at the end of 2017 are down about $6 per barrel. These declines reflect anxieties about global growth, continued strong oil production in the United States and OPEC, and improved prospects for Iranian oil exports related to the Iranian nuclear agreement. We expect the price of imported oil to move up from $53 per barrel in the second half of this year to about $57 per barrel by the end of 2017. Concerns about weak demand also weighed on metals prices, which moved down sharply in early July and remain depressed. In contrast, the forecast for agricultural prices is higher in response to weather-induced worries about supply, especially for corn and soybeans. THE OUTLOOK FOR REAL GDP Real GDP appears to have increased in the second quarter at an annual rate of about 2½ percent, supported in part by the reversal of some of the temporary factors that we think restrained activity in the first quarter.2 Even so, GDP growth over the first half of the year looks to have averaged only about 1 percent at an annual rate, somewhat less than our estimate of potential growth. As in previous Tealbooks, we attribute much of this subdued performance to the effects of both the stronger dollar on net exports and the sharply lower oil prices on drilling and mining investment. We continue to expect that the economy will expand at a moderate pace over the remainder of this year. The fundamentals underpinning household demand should 2 The table “Federal Reserve System Nowcasts of 2015:Q2 Real GDP Growth” provides forecasts of second-quarter output growth from other near-term forecasting approaches used within the System. Page 7 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Federal Reserve System Nowcasts of 2015:Q2 Real GDP Growth (Percent change at annual rate from previous quarter) Type of model Nowcast as of July 21, 2015 Factor-augmented autoregressions Factor-augmented autoregressions (financials only) New dynamic factor model 1.9 2.0 2.1 Bayesian regressions with stochastic volatility Tracking model 2.4 1.7 Federal Reserve entity Federal Reserve Bank New York Cleveland Atlanta Tracking model combined with Bayesian vector autoregressions (VARs), dynamic factor models, and factor-augmented autoregressions (known as GDPNow) 2.4 Chicago Dynamic factor models Bayesian VARs 2.1 3.1 Dynamic factor models News index model Let-the-data-decide regressions 2.6 3.8 2.6 Minneapolis Bayesian VARs 1.6 Kansas City Judgmental tracking model 2.0 Board staff’s forecast (judgmental tracking model)1 Dynamic factor models 2.4 2.0 St. Louis Board of Governors Memo: Median of Federal Reserve System nowcasts 2.1 1. The July Tealbook forecast, which incorporates data received after July 21, is also 2.4 percent. Page 8 of 94 Class II FOMC - Restricted (FR) July 22, 2015 Summary of the Near-Term Outlook (Percent change at annual rate except as noted) 2015:Q2 2015:Q3 2015:H2 Measure Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Real GDP Private domestic final purchases Personal consumption expenditures Residential investment Nonres. private fixed investment Government purchases Contributions to change in real GDP Inventory investment1 Net exports1 Unemployment rate2 PCE chain price index Ex. food and energy 2.5 2.8 2.8 11.3 1.0 1.3 2.4 3.0 2.8 8.4 2.5 1.1 1.9 3.3 3.4 6.8 2.0 .3 1.7 3.0 2.9 5.8 2.6 .2 2.1 3.5 3.4 6.5 2.8 .4 2.0 3.2 3.1 5.4 2.9 .4 .1 -.2 5.5 1.9 1.6 -.1 -.2 5.4 2.0 1.7 -.1 -.9 5.4 1.4 1.5 -.1 -.8 5.3 1.2 1.4 -.2 -.7 5.3 1.3 1.4 .0 -.7 5.2 .7 1.4 1. Percentage points. 2. Percent; 2015:Q4 values are used for 2015:H2. Recent Nonfinancial Developments (1) Manufacturing IP ex. Motor Vehicles and Parts Real GDP and GDI 4-quarter percent change Gross domestic product Gross domestic income 3-month percent change, annual rate 8 10 6 Q1 15 June 4 5 0 2 -5 0 -10 -15 -2 -20 -4 2003 2005 2007 2009 2011 2013 2015 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. -25 -6 2003 2005 2007 2009 2011 2013 2015 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." Sales and Production of Light Motor Vehicles -30 Real PCE Goods ex. Motor Vehicles Millions of units, annual rate Billions of chained (2009) dollars 22 June June 18 3600 3400 3200 Sales 14 3000 10 Production 2800 June 6 2003 2005 2007 2009 2011 2013 2015 Source: Ward’s Communications, Chrysler, General Motors; adjusted using FRB seasonals. 2600 2 2003 2005 2007 2009 2011 2013 2015 Note: Figures for April, May, and June 2015 are staff estimates based on available source data. Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Page 9 of 94 2400 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Recent Nonfinancial Developments (2) Single-Family Housing Starts and Permits Millions of units, annual rate Adjusted permits Starts Home Sales 2.1 1.8 7.5 Millions of units (annual rate) 1.2 1.5 Existing homes (left scale) 6.0 1.2 5.5 5.0 June 0.9 4.5 0.6 4.0 0.9 New single-family homes (right scale) May 3.5 0.3 2003 2005 2007 2009 2011 2013 2015 0.0 0.6 0.3 3.0 2.5 2003 2005 2007 2009 2011 2013 2015 0.0 Source: For existing, National Association of Realtors; for new, U.S. Census Bureau. Note: Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas. Source: U.S. Census Bureau. Nondefense Capital Goods ex. Aircraft Billions of dollars 1.8 7.0 6.5 1.5 Millions of units (annual rate) Nonresidential Construction Put in Place Billions of chained (2009) dollars 75 450 3-month moving average 70 May Orders 400 May 65 350 60 Shipments 300 55 250 50 200 45 2003 2005 2007 2009 Source: U.S. Census Bureau. 2011 2013 2015 40 2003 2005 2007 2009 2011 2013 2015 Note: Nominal CPIP deflated by BEA prices through 2015:Q1 and by the staff’s estimated deflator thereafter. Source: U.S. Census Bureau. 150 Exports and Non-oil Imports Inventory Ratios Months Billions of dollars 1.9 220 1.8 June 200 1.7 Non-oil imports 1.6 Staff flow-of-goods system 240 180 May 160 1.5 May 140 1.4 120 1.3 Census book-value data 100 Exports 1.2 1.1 2003 2005 2007 2009 2011 2013 2015 Note: Flow-of-goods system inventories include manufacturing and mining industries and are relative to consumption. Census data cover manufacturing and trade, and inventories are relative to sales. Source: U.S. Census Bureau; staff calculations. 80 2003 2005 2007 2009 2011 2013 2015 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; U.S. Census Bureau. Page 10 of 94 60 Class II FOMC - Restricted (FR) July 22, 2015 support continued solid growth in real PCE, and we anticipate that drilling and mining investment will bottom out relatively soon as the effects of the declines in oil prices recede. Thus, despite the likelihood that past dollar appreciation will continue to weigh on net exports in coming quarters, we expect real GDP growth to average 2 percent at an annual rate in the second half of this year. After having averaged 2½ percent in the first half of the year, real PCE growth is projected to step up to a 3 percent pace in the second half, supported by robust real DPI growth, a high wealth-to-income ratio, and upbeat consumer sentiment. That said, the June reading on retail sales was weaker than we expected, and we have lowered our projection by a few tenths relative to our previous forecast. The decline in oil prices over the past year has resulted in a sharp drop in drilling and mining investment that we now estimate reduced real GDP growth in the first half of the year by nearly ¾ percentage point, on average, a slightly bigger drag than in our June projection. We expect the declines in drilling and mining investment to slow markedly over the second half of the year, consistent with the recent bottoming out in the weekly data on rig counts. Outside of drilling and mining, investment in nonresidential structures has been moving up at robust clip over the past year. Construction spending growth in May is estimated to have been considerably stronger than we had expected, and spending in previous months was revised up. We took some signal from the strong incoming data and marked up our projection for nondrilling structures investment by a moderate amount throughout the medium term. We estimate that net exports subtracted 1 percentage point from real GDP growth, on average, in the first half of the year. Given the effects of the earlier appreciation of the dollar, we expect the drag on growth from net exports to be only a little smaller in the second half—roughly ¾ percentage point on average. This projection is little changed from the June Tealbook. Page 11 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Total industrial production declined 1 percent at an annual rate in the first half of the year.3 We continue to think that manufacturing output was restrained earlier this year by a combination of transitory factors (such as supply-chain disruptions arising from the labor disputes at West Coast ports) and longerlived influences (such as the sharp declines in drilling activity and the stronger exchange value of the dollar). We expect manufacturing production to rise in the second half of the year, though only at a subdued pace, consistent with the recent readings of the national and regional manufacturing surveys. In broad-brush terms, the medium-term GDP projection is much the same as it was in the June Tealbook: We continue to expect the pace of real GDP growth to average roughly 2¼ percent over the forecast period, ¾ percentage point faster than potential GDP growth. Accommodative monetary policy (even though progressively less so) plays the key role in our projection in helping to support above-trend growth. Our forecast for real GDP is more subdued than that of many outside analysts. The reason for this difference, in part, may be because we expect a larger and more prolonged drag on domestic activity from the appreciation of the dollar over the past 12 months. Turning up the magnification on the microscope, our current forecast for the level of real GDP at the end of 2017 is revised down ¼ percent in light of the slightly stronger path for the exchange value of the dollar, slightly weaker foreign output growth, and the somewhat downgraded assessment of the fiscal position of state and local governments. These effects are partly offset by the lower path of oil prices in this projection. THE OUTLOOK FOR THE LABOR MARKET AND AGGREGATE SUPPLY The incoming data indicate that labor market conditions have continued to improve, although a bit less quickly on the whole than we had anticipated in the June Tealbook. 3 The Board published its annual revision to the index of industrial production and related measures of capacity utilization on July 21. Taking on board newly available source data, total IP is now estimated to have returned to its pre-recession peak in May 2014, seven months later than was stated previously. In addition, capacity utilization rates for total industry and for manufacturing are now lower than reported earlier; the operating rate for manufacturing in June 2015 is now 75.8 percent, a rate 1.4 percentage points below its previous estimate and 2.7 percentage points below its long-run (1972–2014) average. Page 12 of 94 Class II FOMC - Restricted (FR) July 22, 2015 Payroll employment growth averaged 220,000 per month in the second quarter, about 20,000 less than we expected in the June Tealbook but still a solid pace. Most of the shortfall relative to our forecast was in employment at local governments. The unemployment rate declined 0.2 percentage point in June—one-tenth more than we had expected—putting it at 5.3 percent. However, the labor force participation rate also declined more than we had expected, to 62.6 percent, and as a result, the employment-to-population ratio edged down. Going forward, we have made only minor adjustments to our near-term forecast. We expect payroll employment gains to average 210,000 per month in the second half of the year. In addition, we expect the unemployment rate to edge down to 5.2 percent by the fourth quarter, one-tenth lower than in the June Tealbook. And we project the participation rate to average 62.7 percent in the fourth quarter, unrevised from June. Had we made no other adjustments, the June decline in the unemployment rate, combined with the slightly weaker prospects for the growth of real GDP, would have led us to project no further reduction in the unemployment rate between June and the end of 2017—an outcome that would not, in our judgment, have balanced the risks around the unemployment rate forecast.4 We therefore made two small changes to our supply-side assumptions (in advance of a more comprehensive reassessment following receipt of the annual revision to the national income and product accounts). We now assume that the natural rate of unemployment continued to edge down through the end of last year rather than flattening out around midyear, as in our previous projection. As a result, the natural rate is now projected to be 5.1 percent through the projection period, 0.1 percentage point lower than in the June Tealbook. We were encouraged to make a minor adjustment in this direction by some recent research suggesting that, despite an outward shift in 4 The June forecast showed the unemployment rate ending 2017 at 5.2 percent; the weaker GDP performance in this forecast, all else being equal, would have caused that figure to revise up to 5.3 percent, the same as the actual reading in June. Page 13 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 the Beveridge curve, the natural rate may nonetheless be unchanged from or lower than prior to the recession.5 We also trimmed our assumption for the growth of potential GDP by about 0.1 percentage point per year. This adjustment reflected two partly offsetting changes: o On the downside, we took a bit of forward signal from the recent disappointing U.S. productivity performance and cut our forecast of structural productivity growth ¼ percentage point per year to 1½ percent per year, roughly its average pace from 2005 to 2014. (For a more optimistic interpretation of productivity developments, see the box “The Recent Slowing in High-Tech Equipment Price Declines.”) o On the upside, we incorporated slightly stronger projections for population growth from 2015 to 2017. With downward revisions to both aggregate demand and aggregate supply, the GDP gap in this projection is unrevised from the June Tealbook and is closed by the end of 2017. Given all of these adjustments, the medium-term outlook for the labor market is little changed relative to our previous forecast. We expect monthly payroll gains to slow to 170,000 in 2016 and 140,000 in 2017, much as in the June Tealbook. The unemployment rate is projected to edge down from 5.3 percent in the current quarter to 5.1 percent by the end of 2017, one-tenth lower than in the June forecast despite the slightly weaker growth of actual real GDP. (For 5 See the June 8, 2015, FEDS Notes article titled “The Labor Share of Income and Equilibrium Unemployment,” by Andrew Figura and David Ratner, www.federalreserve.gov/econresdata/notes/fedsnotes/2015/labor-share-of-income-and-equilibrium-unemployment-20150608.html. Another important factor putting downward pressure on the unemployment rate is demographic changes to the labor force, which has been a feature of our estimate and projection of the natural rate for some time. For an analysis of the effect of demographics on the natural rate, see Daniel Aaronson, Luojia Hu, Arian Seifoddini, and Daniel G. Sullivan (2015), “Changing Labor Force Composition and the Natural Rate of Unemployment,” Federal Reserve Bank of Chicago, Chicago Fed Letter, no. 338, May 8, https://www.chicagofed.org/publications/chicago-fed-letter/2015/338. Page 14 of 94 Class II FOMC - Restricted (FR) July 22, 2015 Decomposition of Potential GDP (Percent change, Q4 to Q4, except as noted) Measure 19962000 1974-95 Potential real GDP Previous Tealbook Selected contributions1 Structural labor productivity2 Previous Tealbook Capital deepening Multifactor productivity Structural hours Previous Tealbook Labor force participation Previous Tealbook Memo: GDP gap3 Previous Tealbook 2001-07 2008-10 2011-13 2014 2015 2016 2017 3.1 3.1 3.4 3.4 2.6 2.6 1.7 1.7 1.6 1.6 .6 .5 1.5 1.6 1.6 1.7 1.6 1.7 1.6 1.6 .7 .7 1.5 1.5 .4 .4 2.9 2.9 1.5 1.1 1.0 1.0 .0 .0 2.8 2.8 .9 1.6 .7 .7 -.3 -.3 1.5 1.5 .5 .9 .2 .2 -.4 -.4 1.2 1.2 .4 .7 .7 .7 -.5 -.5 .5 .5 .6 -.2 .8 .7 -.5 -.5 1.3 1.5 .7 .5 .5 .3 -.5 -.5 1.4 1.6 .8 .5 .4 .3 -.5 -.5 1.4 1.6 .8 .5 .4 .3 -.5 -.5 -1.8 -1.8 2.5 2.5 .9 .9 -4.4 -4.4 -2.8 -2.8 -1.0 -1.0 -1.0 -1.0 -.4 -.4 .1 .1 Note: 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. 2. Total business sector. 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. Unemployment Rate GDP Gap Percent Current Tealbook Previous Tealbook Percent 8 Unemployment rate Previous Tealbook Natural rate of unemployment Previous Tealbook 6 4 2 14 12 10 8 0 -2 6 -4 4 -6 1997 2002 2007 2012 2017 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. Department of Commerce, Bureau of Economic Analysis; staff assumptions. -8 2 1997 2002 2007 2012 2017 Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Structural and Actual Labor Productivity Manufacturing Capacity Utilization Rate Percent (Business sector) 90 85 Average rate from 1972 to 2014 Chained (2009) dollars per hour Actual Structural 80 70 50 48 46 65 60 66 64 62 60 58 56 54 52 75 1997 2002 2007 2012 2017 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." 68 2002 2005 2008 2011 2014 2017 Source: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of Commerce, Bureau of Economic Analysis; staff assumptions. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 15 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 The Recent Slowing in High‐Tech Equipment Price Declines The marked step‐down in the staff’s estimate of structural labor productivity growth from 2 percent per year between 2005 and 2009 to 1 percent between 2010 and 2014 partly reflects a shrinking contribution from high‐tech capital deepening (figure 1).1 The slowing of measured real investment in high‐tech equipment is largely attributable to a slackening in the pace of computer price declines in the NIPAs (figure 2). However, recent research suggests that measured computer investment prices have increasingly suffered from biases that have attenuated the estimated pace of declines.2 These biases have not led to a material understatement of measured growth of real GDP or productivity in recent years, as these computers are now largely imported. However, they imply that high‐tech capital accumulation has been understated, which, depending on the implications for multifactor productivity (MFP), may signal a stronger outlook for structural productivity growth. Import substitution bias. The BEA deflates computer investment with an average of BLS price indexes for domestic producer prices (PPI) and import prices (IPI) (also shown in figure 2). This method may capture the broad trends in domestic and import prices, respectively, but it omits the discount associated with businesses shifting their purchases from domestic to imported equipment; that discount has been estimated to be 20 percent or more. The effect of this omission has been acute in recent years, as import penetration for computer investment jumped from 40 percent in 2009 to 90 percent by 2011, a development that coincides with the slowing of the declines in high‐tech prices. New goods bias. After a new category of equipment appears in the marketplace, prices often decline rapidly for items in that category as adoption rises quickly, so a delay in the inclusion of such products in price indexes can overstate price inflation. For example, tablet personal computers (PCs) appeared in 2010 but were not introduced in the IPI until Figure 1. Structural labor productivity and capital deepening Log growth rate Structural labor productivity Contribution of high-tech equipment capital deepening Contribution of other capital deepening 3.0 2.5 2.0 1.5 1.0 0.5 1 1975-94 2 1995-04 3 2005-09 4 2010-14 5 2015-17 0.0 Note: Crosshatched green bar represents additional direct contribution of high-tech equipment capital deepening to structural labor productivity growth under counterfactual considered in figure 3. Source: Staff estimates and forecast. 1 High‐tech equipment consists of computers and related equipment, communication equipment, electro‐medical equipment, instruments, photocopiers, and other office equipment in the NIPAs. 2 See David Byrne and Eugenio Pinto (2015), “The Recent Slowdown in High‐Tech Equipment Price Declines and Some Implications for Business Investment and Labor Productivity,” FEDS Notes, March 26. Page 16 of 94 Class II FOMC - Restricted (FR) July 22, 2015 late 2012, when they already accounted for one‐fourth of the PC market. Because tablet PCs are largely imported, this delay likely led to an understatement of import price declines. Quality‐adjustment bias. When a new model enters the PPI or IPI samples, the BLS adjusts the item’s price to account for the estimated value of any new or improved features. These adjustments are intended to provide an “apples to apples” comparison with similar models already in the index. However, in the case of imports, often too little detailed information is provided by survey respondents to allow for a proper adjustment. Consequently, the IPI tends to fall more slowly as new waves of imported goods are treated as more expensive than the imports they succeed rather than as more feature rich. The recent sharp shift toward imports has likely further slowed the pace of declines in the investment price index (as shown in figure 2). The magnitudes of these biases are unknown, but if the five‐year average inflation rate for high‐tech capital had held steady at the rate observed in 2009, as shown in figure 3, overall real nonresidential private fixed investment would have been 2½ percent higher. The greater high‐tech capital deepening would be equivalent to 0.3 percent on the level of structural productivity at the end of 2014 and would raise its growth rate 0.1 to 0.2 percentage point per year between 2015 and 2017 (see the crosshatching in figure 1). The outlook for MFP is more uncertain. Because the measurement difficulties are centered on imports, overall labor productivity has been largely unaffected by these biases, and greater capital accumulation in recent years would have been offset by an overstatement of measured MFP growth. Extrapolating forward, that may imply weaker future MFP growth as well. On the other hand, MFP growth has historically been positively correlated with earlier gains in capital deepening. (For example, Paul David famously noted that the transition from the steam engine to the electric dynamo spawned decades of process renovation, as shop floors were reengineered to take full advantage of the new technology.) This positive correlation suggests that structural productivity growth could be boosted by higher trend MFP growth as investments in business processes and other intangible capital are undertaken to complement investments in high‐tech capital. Figure 3. High-tech equipment prices Figure 2. Computer equipment price index Percent change Percent change, annual rate 10 NIPA investment index Domestic price index (Industry PPI series) Import price index (IPI series) Quarterly Five-year average Counterfactual five-year average 5 6 4 2 0 0 -2 -5 -4 -6 -10 -8 -15 -10 -12 -20 -14 2004 2006 2008 2010 2012 -25 Note: Computer equipment includes PCs and servers and excludes peripheral equipment. Source: Bureau of Labor Statistics; Bureau of Economic Analysis; staff calculations. 1990 1995 2000 2005 2010 2015 -16 Note: High-tech equipment refers to information processing equipment in the NIPAs. Gray-shaded regions indicate recessions; teal-shaded region indicates forecast period. Source: Bureau of Economic Analysis; staff forecast. Page 17 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 further discussion, see the box “Employment and Unemployment in the Staff Projection.”) In our accounting, the output gap represents the most comprehensive measure of resource utilization. At the moment, we see the unemployment rate gap as understating the amount of slack remaining in the economy. In particular, we estimate that, in the current quarter, output is 1¼ percent below potential, while the unemployment rate is only 0.2 percentage point above our estimate of its natural rate. In contrast, a dynamic simulation of Okun’s law would imply an unemployment rate gap of 0.5 percentage point. o In our analysis, the Okun’s law error reflects three additional sources of cyclically abnormal weakness. First, the labor force participation rate is below our estimate of its trend by more than one would expect based on its usual relationship with the GDP gap. Second, the level of involuntary part-time employment is unusually high. Third, productivity currently lies well below our estimate of its trend. o As the economy continues to improve, we expect the unemployment rate to decline further. But in addition, we anticipate more individuals to be drawn into the labor market and the rate of involuntary part-time employment to move down, in both cases by more than the cyclically normal amount. We also expect productivity to move up to its trend over the projection period. o Together, the behavior of the labor force participation rate, involuntary part-time employment, and productivity should attenuate the decline in the unemployment rate relative to the improvement in the output gap. By design, at the end of the medium term, the output and unemployment gaps are back in normal cyclical alignment. THE OUTLOOK FOR INFLATION Headline PCE prices are expected to increase at an annual rate of 1.2 percent in the third quarter and only 0.2 percent in the fourth. The dip in inflation late in the year occurs as the recent fall in crude oil prices passes through into retail energy prices and as currently elevated gasoline margins decline. Core PCE prices are estimated to have risen 1.7 percent in the second quarter but are projected to rise a bit more slowly in the second Page 18 of 94 Class II FOMC - Restricted (FR) July 22, 2015 half. This pattern is mainly due to residual seasonality that we think boosts core PCE inflation in the second quarter and holds it down some in the third quarter and a bit more in the fourth. Our forecast for total PCE inflation in the second half of 2015 is 0.6 percentage point lower than in our June projection, reflecting the downward surprise in crude oil prices. Consumer food prices declined modestly during the first half of the year but— consistent with available readings from futures markets—still are projected to accelerate by the end of this year to a pace that is roughly in line with core PCE inflation. The most recent readings on core inflation have come in about as expected, and our forecast for core PCE inflation for the remainder of the year is essentially unchanged from June. Core import prices appear to be stabilizing. After declining at an annual rate of 4.4 percent in the first quarter, core import prices are estimated to have declined 3 percent in the second quarter—1 percentage point less negative than in the June Tealbook. For the second half of 2015, we expect these prices to decline only 0.8 percent at an annual rate. With the dollar peaking early next year and foreign CPI inflation picking up, core import price inflation is expected to turn positive by the start of 2016 and to move up to 1.4 percent in 2017. Readings on longer-term inflation expectations have changed little over the intermeeting period. That said, some of these measures seem to have edged down during the past handful of years. Although none of these changes are large, collectively they suggest a downside risk to our maintained assumption that expectations will remain well anchored. o The median estimate of expected inflation over the next 5 to 10 years from the Michigan Surveys of Consumers has averaged 2.7 percent so far this year. This level is a touch lower than the average annual readings on this measure over the past several years, which have bounced between 2.8 percent and 2.9 percent. Going back to 2007 and Page 19 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Employment and Unemployment in the Staff Projection In the current staff projection, payroll employment gains are expected to average 165,000 per month through the end of 2017. During this same period, we project that the unemployment rate will edge down only 0.2 percentage point to 5.1 percent. These two projections may appear at odds, as the pace of payroll gains may seem to point to a considerably steeper decline in the unemployment rate. Here we highlight two aspects of the staff’s labor market outlook that help reconcile the healthy pace of payroll gains with the nearly flat unemployment rate projection. First, as shown in figure 1, we project payroll employment to rise faster over the forecast period than employment as measured in the current population survey (CPS), similar to the pattern observed in most previous periods of economic expansion. Second, we expect that, as the labor market tightens, the labor force participation rate will move back towards its (declining) trend over the projection period, which will attenuate the decline in the unemployment rate. As shown in figure 1, the ratio of payroll employment to CPS employment has been trending upward over time and tends to be pro-cyclical. Several factors help explain the movements in payroll employment relative to CPS employment. The payroll survey is limited to nonfarm wage and salary jobs, which have been rising as a share of total employment, while groups outside the scope of the payroll survey have seen their shares declining; these groups include self-employed individuals, private household workers, and farm workers. Other factors contributing to the rise in payroll employment relative to CPS employment during expansions include increases in short-duration jobs, which are less likely to be reported to the CPS, and decreases in “off the books” jobs, which are not captured by the payroll survey. Finally, the CPS counts employed individuals, while the payroll survey counts jobs; implicitly, our forecast assumes an increase in multiple job holding that could be associated with a reduction in CPS respondents reporting themselves as working part time for economic reasons. Page 20 of 94 Class II FOMC - Restricted (FR) July 22, 2015 The staff’s projection of a further increase in the ratio of payroll employment to CPS employment is consistent with recent historical experience. However, to isolate the influence of this aspect of our projection on the evolution of the unemployment rate, we show in figure 2 a counterfactual thought experiment in which CPS employment increases at the same rate as the number of payroll jobs but all other details of the staff’s projection (including monetary policy) are unchanged from the baseline. In particular, we assume— unrealistically—that the labor force is the same as in the baseline so that the faster gains in CPS employment in this experiment are matched by faster declines in the number of unemployed individuals. Under these assumptions, the unemployment rate falls 1¼ percentage points by the end of 2017 (dotted line) rather than the ¼ percentage point decline shown in the current baseline forecast (solid line). The second relevant aspect of the staff labor market projection is the behavior of labor force participation. From 2010 to 2013, the labor force participation rate fell more than would have been expected given our assessment of its trend and its usual behavior over the business cycle. One possible explanation for this unusual weakness in the participation rate is that the severity of the Great Recession and, especially, the sluggishness of the recovery resulted in an extended period of especially poor job prospects that induced some individuals to drop out of the labor force and others to not enter. More recently, however, the participation rate has been moving sideways, which, when viewed against its declining (demographically driven) trend, suggests that the ongoing tightening in labor market conditions has begun to draw individuals back into the labor force. Indeed, the flattening of the participation rate since early 2014 reflects a marked increase in the transition rate from out of the labor force to employment. Going forward, we expect more individuals to be drawn back into the labor force as job prospects continue to improve and wage gains pick up, which will slow the decline in participation relative to its trend. As a second illustrative counterfactual, we maintain the staff’s forecast for CPS employment but assume that the participation rate declines from its level in 2015:Q2 at its trend pace of 0.3 percentage point per year. Thus, in contrast to the staff’s projection, this counterfactual assumes no cyclical improvement in participation. In this case, as shown by the dashed line in figure 2, the unemployment rate would decline nearly ¾ percentage point more than in the baseline projection. Page 21 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 2008, the average reading was 3.0 percent, though that may have reflected some sensitivity to energy price increases. o The 10-year-ahead median expectation for PCE inflation among respondents to the Survey of Professional Forecasters was 2 percent in 2015:Q2—essentially the same as it has been for the past two years— while the median 5-year-forward measure from this survey has drifted down roughly 25 basis points since the beginning of this decade. o TIPS-based measures of longer-term inflation compensation are little changed, on balance, since the June Tealbook, but they remain below levels that prevailed until last summer. We project that core PCE price inflation will rise from 1.3 percent this year to 1.5 percent next year and 1.7 percent in 2017, as import prices turn back up, the effects on core inflation of the previous large declines in energy prices dissipate, and resource utilization tightens further in an environment of well-anchored inflation expectations. With consumer food and energy prices projected to rise roughly in line with core prices after this year, we expect total PCE inflation to run at about the same pace as core inflation throughout most of the medium term. The slight downward revision to our medium-term forecast for core PCE price inflation in this forecast reflects two influences: First, we have assumed, to a greater extent than before, that the slowdown in health-care services prices during the past few years will persist. Second, the downward revision to energy price inflation during the second half of this year passes through with a small coefficient into core inflation next year. Together, these influences shave one-tenth off our projection for core inflation in both 2016 and 2017. We received little information about labor compensation during the intermeeting period and continue to expect a modest pickup going forward. Average hourly earnings increased 2 percent over the 12 months ending in June, ¼ percentage point less than we projected in the previous Tealbook. As labor markets tighten further over the forecast period, we expect the increases in the productivity and cost measure of compensation to step up Page 22 of 94 Class II FOMC - Restricted (FR) July 22, 2015 from about 2½ percent last year to 2¾ percent this year and to 3¼ percent in 2016 and 2017. THE LONG-TERM OUTLOOK The federal funds rate continues to be set according to the prescriptions of an inertial version of the Taylor (1999) rule. This policy rule assumes a long-run equilibrium level of the nominal federal funds rate of 3½ percent. The federal funds rate rises further after 2017 and reaches its long-run value by 2020. As monetary policy tightens sufficiently to reverse a slight overshooting of output relative to its potential, real GDP growth slows to 1.7 percent in 2019 before gradually returning to its long-run growth rate of 1.9 percent. The unemployment rate remains close to its natural rate of 5.1 percent. PCE price inflation remains below the Committee’s long-run objective at the end of 2017. The slight overshooting of output relative to potential speeds the convergence of inflation to the 2 percent objective. Page 23 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Authorized for Public Release Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) July 22, 2015 Projections of Real GDP and Related Components (Percent change at annual rate from final quarter of preceding period except as noted) 2015 Measure 2014 2015 H1 Real GDP Previous Tealbook 2016 2017 H2 2.4 2.4 1.5 1.6 1.1 1.0 2.0 2.1 2.3 2.4 2.1 2.2 2.4 2.4 1.5 1.5 .9 .8 2.0 2.3 2.4 2.6 2.5 2.6 Personal consumption expenditures Previous Tealbook 2.9 2.9 2.8 2.9 2.5 2.3 3.1 3.4 3.3 3.3 2.7 2.7 Residential investment Previous Tealbook 2.5 2.5 6.4 7.6 7.4 8.8 5.4 6.5 11.6 12.0 6.9 8.0 Nonresidential structures Previous Tealbook 6.5 6.5 -5.5 -7.3 -11.8 -13.8 1.3 -.3 .8 .2 1.4 .3 Equipment and intangibles Previous Tealbook 6.1 6.1 3.6 3.4 4.0 3.0 3.3 3.7 4.2 4.6 3.3 3.6 .2 .2 -.8 -1.1 -.5 -.8 -1.0 -1.4 -1.1 -1.2 -1.0 -.8 State and local purchases Previous Tealbook 1.2 1.2 1.0 1.3 .7 1.0 1.3 1.5 1.6 2.0 1.9 2.2 Exports Previous Tealbook 2.4 2.4 -.3 -.1 -1.5 -1.5 .9 1.3 1.1 1.3 3.0 3.2 Imports Previous Tealbook 5.6 5.6 5.5 5.5 5.5 5.2 5.5 5.8 6.0 5.7 3.7 3.7 Final sales Previous Tealbook Federal purchases Previous Tealbook Contributions to change in real GDP (percentage points) Inventory change Previous Tealbook .0 .0 .1 .0 .2 .2 .0 -.2 -.1 -.1 -.3 -.3 Net exports Previous Tealbook -.6 -.6 -.9 -.9 -1.1 -1.0 -.7 -.7 -.8 -.8 -.2 -.2 Real GDP 4-quarter percent change Current Tealbook Previous Tealbook 10 8 6 4 2 0 -2 -4 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 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 24 of 94 2015 2017 -6 Class II FOMC - Restricted (FR) July 22, 2015 Components of Final Demand Personal Consumption Expenditures 4-quarter percent change Residential Investment 4-quarter percent change 5 Current Tealbook Previous Tealbook 20 15 4 10 3 5 2 0 1 2010 2011 2012 2013 2014 2015 2016 2017 -5 0 2010 Equipment and Intangibles 2011 2012 2013 2014 2015 2016 2017 Nonresidential Structures 4-quarter percent change 4-quarter percent change 14 12 10 8 6 4 2 2010 2011 2012 2013 2014 2015 -10 2016 2017 0 2010 Government Consumption & Investment 2011 2012 2013 2014 2015 2016 2017 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 Exports and Imports 4-quarter percent change 4-quarter percent change 2 20 1 15 0 10 -1 Exports -2 5 -3 0 -4 2010 2011 2012 2013 2014 2015 2016 2017 Imports -5 2010 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 25 of 94 2011 2012 2013 2014 2015 2016 2017 -5 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Aspects of the Medium-Term Projection Personal Saving Rate Wealth-to-Income Ratio Percent Current Tealbook Previous Tealbook Ratio 9 8 6.8 6.4 7 6.0 6 5 5.6 4 5.2 3 4.8 2 1997 2002 2007 2012 2017 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. 1 1997 2002 2007 2012 2017 Note: Ratio of household net worth to disposable personal income. Source: For net worth, Federal Reserve Board, Financial Accounts of the United States; for income, U.S. Dept. of Commerce, Bureau of Economic Analysis. Single-Family Housing Starts 4.4 Equipment and Intangibles Spending Millions of units Share of nominal GDP 2.00 12 1.75 11 1.50 1.25 10 1.00 9 0.75 0.50 8 0.25 1997 2002 2007 Source: U.S. Census Bureau. 2012 2017 0.00 1997 2002 2007 2012 2017 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Federal Surplus/Deficit 7 Current Account Surplus/Deficit Share of nominal GDP Share of nominal GDP 6 1 4-quarter moving average 4 0 2 -1 0 -2 -2 -3 -4 -4 -6 -5 -8 -6 -10 1997 2002 2007 Source: Monthly Treasury Statement. 2012 2017 -12 1997 2002 2007 2012 2017 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. Page 26 of 94 -7 Class II FOMC - Restricted (FR) July 22, 2015 The Outlook for the Labor Market 2015 Measure 2014 2015 H1 Output per hour, business1 Previous Tealbook 2016 2017 H2 -.4 -.4 1.0 1.1 -.1 -.3 2.1 2.6 1.7 1.9 1.7 1.9 Nonfarm private employment2 Previous Tealbook 254 254 205 206 207 210 203 202 160 160 125 122 Labor force participation rate3 Previous Tealbook 62.8 62.8 62.7 62.7 62.8 62.8 62.7 62.7 62.6 62.6 62.4 62.4 Civilian unemployment rate3 Previous Tealbook 5.7 5.7 5.2 5.3 5.4 5.5 5.2 5.3 5.2 5.2 5.1 5.2 1. Percent change from final quarter of preceding period at annual rate. 2. Thousands, average monthly changes. 3. Percent, average for the final quarter in the period. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Inflation Projections (Percent change at annual rate from final quarter of preceding period) 2015 Measure PCE chain-weighted price index Previous Tealbook 2014 2015 H1 H2 2016 2017 1.1 1.1 .3 .6 .0 -.1 .7 1.3 1.6 1.6 1.7 1.8 Food and beverages Previous Tealbook 2.8 2.8 .3 .3 -.6 -.6 1.2 1.1 1.8 1.6 2.0 1.9 Energy Previous Tealbook -6.1 -6.1 -16.4 -11.3 -19.9 -19.9 -12.7 -1.7 3.3 2.3 2.3 1.3 Excluding food and energy Previous Tealbook 1.4 1.4 1.3 1.3 1.2 1.2 1.4 1.4 1.5 1.6 1.7 1.8 Prices of core goods imports1 Previous Tealbook .6 .6 -2.3 -2.3 -3.7 -4.2 -.8 -.4 .9 1.0 1.4 1.5 1. Core goods imports exclude computers, semiconductors, oil, and natural gas. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 27 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Authorized for Public Release Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) July 22, 2015 Labor Market Developments and Outlook (1) Measures of Labor Underutilization Percent U-5* Unemployment rate Part time for economic reasons** Percent 13 Unemployment rate Previous Tealbook Natural UE rate with EEB adjustment Previous Tealbook 12 11 10 9 June 8 10 9 8 7 7 6 6 5 4 5 3 20022003200420052006200720082009201020112012201320142015 2 2012 2013 2014 2015 2016 2017 4 * U-5 measures total unemployed persons plus all marginally attached to the labor force, as a percent of the labor force plus persons marginally attached to the labor force. ** Percent of Current Population Survey employment. EEB Extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics. Level of Payroll Employment* 125 Millions Millions Total (right axis) Private (left axis) Millions 145 Total Previous Tealbook June 120 150 148 146 140 144 142 115 135 140 138 110 130 136 134 105 125 20022003200420052006200720082009201020112012201320142015 * 3-month moving averages. Source: U.S. Department of Labor, Bureau of Labor Statistics. 2012 2013 2014 2015 2016 2017 132 Change in Payroll Employment* Thousands Thousands 400 350 200 June 400 300 0 250 -200 200 -400 150 -600 Total Private 20022003200420052006200720082009201020112012201320142015 Total Previous Tealbook -800 -1000 50 2012 2013 2014 2015 2016 * 3-month moving averages. Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 28 of 94 100 2017 0 Class II FOMC - Restricted (FR) July 22, 2015 Labor Market Developments and Outlook (2) Labor Force Participation Rate* Percent Labor force participation rate Estimated trend** June 20022003200420052006200720082009201020112012201320142015 Percent 68.0 67.5 67.0 66.5 66.0 65.5 65.0 64.5 64.0 63.5 63.0 62.5 62.0 Labor force participation rate Previous Tealbook Estimated trend** 65.0 64.5 64.0 63.5 63.0 62.5 2012 2013 2014 2015 2016 2017 62.0 * Published data adjusted by staff to account for changes in population weights. ** Includes staff estimate of the effect of extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Initial Unemployment Insurance Claims* Private Hires, Quits, and Job Openings Thousands Percent 700 Hires* Openings** Quits* 650 600 550 450 4.0 3.0 May 400 2.5 350 2.0 300 1.5 250 200 20022003200420052006200720082009201020112012201320142015 * 4-week moving average. Source: U.S. Department of Labor, Employment and Training Administration. 4.5 3.5 500 July 11 5.0 20022003200420052006200720082009201020112012201320142015 1.0 * Percent of private nonfarm payroll employment, 3-month moving average. ** Percent of private nonfarm payroll employment plus unfilled jobs, 3-month moving average. Source: Job Openings and Labor Turnover Survey. Average Monthly Change in Labor Market Conditions Index Index points 15 10 Q2 5 0 -5 -10 -15 -20 -25 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Labor market conditions index estimated by staff. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 29 of 94 2014 2015 -30 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Inflation Developments and Outlook (1) (Percent change from year-earlier period) Headline Consumer Price Inflation Percent CPI PCE Percent 6 PCE - Current Tealbook PCE - Previous Tealbook 5 5 4 4 3 3 2 2 June (e) 1 1 0 June -1 0 -2 -3 -1 2002 200320042005 2006200720082009 201020112012 2013201420152016 2017 2012 2013 2014 2015 2016 2017 Note: PCE prices from April to June 2015 are staff estimates (e). Source: For CPI, U.S. Department of Labor, Bureau of Labor Statistics; for PCE, U.S. Department of Commerce, Bureau of Economic Analysis. Measures of Underlying PCE Price Inflation Percent Trimmed mean PCE Market-based PCE excluding food and energy PCE excluding food and energy Percent 4.0 Core PCE - Current Tealbook Core PCE - Previous Tealbook 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 May June (e) 1.5 1.5 1.0 1.0 June (e) 0.5 0.5 0.0 2002 2006200720082009 201020112012 2012 2013 2014 2015 2016 2017 200320042005 2013201420152016 2017 Note: Core PCE prices from April to June 2015 are staff estimates (e). Source: For trimmed mean PCE, Federal Reserve Bank of Dallas; otherwise, U.S. Department of Commerce, Bureau of Economic Analysis. 0.0 Labor Cost Growth Percent Percent 6 Compensation per hour - Current Tealbook Compensation per hour - Previous Tealbook 5 Mar. June Employment cost index Average hourly earnings Compensation per hour 6 5 4 4 3 3 2 2 1 1 0 0 Q1 2002 200320042005 2006200720082009 201020112012 2013201420152016 2017 -1 2012 2013 2014 2015 2016 2017 Note: Compensation per hour is for the business sector. Average hourly earnings are for the private nonfarm sector. The employment cost index is for the private sector. Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 30 of 94 -1 Class II FOMC - Restricted (FR) July 22, 2015 Inflation Developments and Outlook (2) (Percent change from year-earlier period, except as noted) Commodity and Oil Price Levels Dollars per barrel 1967 = 100 220 Brent crude oil history/futures (right axis) 1680 168 CRB spot commodity price index (left axis) 1420 142 1200 120 1000 100 800 80 2200 600 60 400 200 40 July 21 2000 1967 = 100 Dollars per barrel Brent crude oil history/futures (right axis) CRB spot commodity price index (left axis) 1600 1400 1200 200 160 140 120 1000 100 800 July 21 600 80 60 20 400 40 2002 2004 2006 2008 2010 2012 2014 2016 2013 2014 2015 2003 2005 2007 2009 2011 2013 2015 2017 Note: Futures prices (dotted lines) are the latest observations on monthly futures contracts. Source: For oil prices, U.S. Department of Energy, Energy Information Agency; for commodity prices, Commodity Research Bureau (CRB). Energy and Import Price Inflation 18 Percent Percent PCE energy prices (right axis) Core import prices (left axis) 15 60 10 Percent Percent PCE energy prices (right axis) Core import prices (left axis) 25 50 8 40 6 9 30 4 10 6 20 2 5 3 10 0 0 0 0 -2 -5 -10 -4 -20 -6 -9 -30 -8 -12 -40 -10 12 -3 June -6 June (e) 2003 2005 2007 2009 2011 2013 2015 2017 20 15 June June (e) 2013 2014 -10 -15 -20 -25 2015 Source: For core import prices, U.S. Dept. of Labor, Bureau of Labor Statistics; for PCE, U.S. Dept. of Commerce, Bureau of Economic Analysis. Long-Term Inflation Expectations Percent 5-to-10-year-ahead TIPS Michigan median next 5 to 10 years SPF PCE median next 10 years Percent 4.5 4.0 5-to-10-year-ahead TIPS Michigan median next 5 to 10 years SPF PCE median next 10 years 4.0 3.5 July (p) 3.0 3.5 July (p) 2.5 June Q2 4.5 3.0 2.5 June 2.0 Q2 2.0 1.5 1.5 2003 2005 2007 2009 2011 2013 2015 2017 2013 2014 2015 Note: Based on a comparison of an estimated TIPS (Treasury Inflation-Protected Securities) yield curve with an estimated nominal off-the-run Treasury yield curve, with an adjustment for the indexation-lag effect. p Preliminary. SPF Survey of Professional Forecasters. Source: For Michigan, University of Michigan Surveys of Consumers; for SPF, Federal Reserve Bank of Philadelphia; for TIPS, Federal Reserve Board staff calculations. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 31 of 94 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 The Long-Term Outlook (Percent change, Q4 to Q4, except as noted) Measure 2015 2016 2017 2018 2019 Longer run Real GDP Previous Tealbook 1.5 1.6 2.3 2.4 2.1 2.2 2.0 1.9 1.7 1.7 1.9 1.9 Civilian unemployment rate1 Previous Tealbook 5.2 5.3 5.2 5.2 5.1 5.2 5.0 5.1 5.0 5.1 5.1 5.2 PCE prices, total Previous Tealbook .3 .6 1.6 1.6 1.7 1.8 1.8 1.9 1.9 2.0 2.0 2.0 Core PCE prices Previous Tealbook 1.3 1.3 1.5 1.6 1.7 1.8 1.8 1.9 1.9 2.0 2.0 2.0 Federal funds rate1 Previous Tealbook .4 .4 1.2 1.3 2.1 2.1 2.7 2.8 3.1 3.2 3.5 3.5 2.5 2.6 3.1 3.1 3.6 3.6 3.9 3.9 4.1 4.1 4.3 4.3 10-year Treasury yield1 Previous Tealbook 1. Percent, average for the final quarter of the period. Real GDP Unemployment Rate 4-quarter percent change Potential GDP Real GDP 2004 2008 2012 2016 Percent 10 5 4 3 2 1 0 −1 −2 −3 −4 −5 Unemployment rate 8 Natural rate with EEB adjustment 7 6 5 Natural rate 4 2020 2004 PCE Prices 9 2008 2012 2016 2020 Interest Rates 4-quarter percent change Percent 4 Total PCE prices 10-year Treasury 3 Triple-B corporate 2 PCE prices excluding food and energy 1 0 Federal funds rate −1 2004 2008 2012 2016 2020 2004 2008 2012 2016 2020 Note: In each panel, shading represents the projection period, and dashed lines are the previous Tealbook. Page 32 of 94 10 9 8 7 6 5 4 3 2 1 0 Class II FOMC - Restricted (FR) July 22, 2015 Evolution of the Staff Forecast Change in Real GDP Percent, Q4/Q4 4 2015 2016 3 2014 2017 2 1 9/5 10/17 12/5 2012 1/23 3/13 4/24 6/12 7/24 9/11 2013 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 2014 3/11 4/22 6/10 7/22 0 2015 Tealbook publication date Unemployment Rate Percent, fourth quarter 8.0 2014 7.5 7.0 2015 6.5 6.0 5.5 2016 5.0 2017 9/5 10/17 12/5 2012 1/23 3/13 4/24 6/12 7/24 9/11 2013 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 2014 10/22 12/10 1/21 3/11 4/22 6/10 7/22 4.5 2015 Tealbook publication date Change in PCE Prices excluding Food and Energy Percent, Q4/Q4 2.5 2015 2.0 2017 2016 1.5 2014 1.0 0.5 9/5 2012 10/17 12/5 1/23 2013 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 6/11 2014 Tealbook publication date Page 33 of 94 7/23 9/10 10/22 12/10 1/21 2015 3/11 4/22 6/10 7/22 0.0 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 (This page is intentionally blank.) Page 34 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 International Economic Developments and Outlook Recent indicators suggest that foreign real GDP growth remained quite subdued in the second quarter, at an estimated 1¾ percent. This estimate is ½ percentage point lower than we anticipated at the time of the June Tealbook. The disappointment in growth was broad based, but it was particularly sizable for Canada, where the energy sector experienced disruptions and the drop in oil-related investment has been more Mexico’s recovery from a mediocre first quarter, and the economic contraction in Brazil appeared to be deeper than we had predicted. Finally, the weakness in global trade continued to weigh on activity in many countries. On the brighter side, Chinese real GDP growth was surprisingly strong in the second quarter, and activity in the euro area continued to show signs of being on the mend despite the crisis enveloping Greece. We expect real GDP growth to step up in the current quarter to about 2½ percent, driven importantly by a rebound in the Canadian economy. We have foreign growth improving further in the second half of the year before settling in at a 3 percent pace thereafter. Although the Greek crisis and stock market turmoil in China commanded considerable attention over the intermeeting period, these developments have left little imprint on our baseline forecast. We assume that Greece will continue to struggle to achieve sustainable adjustment, but that it will remain in the euro area. Furthermore, we assume that spillovers from the Greek turmoil to the rest of the euro area will continue to be contained, reflecting strong financial backstops and a firm commitment by European authorities to support the monetary union. (See the box “Recent Developments and Prospects in Greece.”) We also do not expect the turmoil in the Chinese stock market to weigh on overall activity. (See the box “Chinese Equity Markets: Recent Developments and Implications” in the Financial Developments section.) Overall, growth abroad should be underpinned by accommodative monetary policies, an improvement in global trade, depreciated currencies, and still-low oil prices. Nevertheless, the Greek crisis and the financial fragilities in China continue to present important risks. In the alternative scenario “Greek Exit with Sizable Spillovers” in the Risks and Uncertainty section, we explore the effects of a Greek exit from the euro area that leads to a severe recession in the region and generates large global spillovers. In another alternative scenario, “China-Driven EME Slump with Stronger Dollar,” financial Page 35 of 94 Int’l Econ Devel & Outlook protracted than we had expected. Weak U.S. manufacturing activity likely held down Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Recent Developments and Prospects in Greece Int’l Econ Devel & Outlook Since the previous Tealbook, Greece’s negotiations with its official-sector creditors have taken center stage. Although a Greek exit from the euro area was an imminent possibility at times, the period ended on a more positive note, with the groundwork laid for a new three-year aid program and with bridge financing in place to service debt for one month. However, Greece’s economic and financial situation has deteriorated dramatically, and questions about the resilience of the monetary union have arisen. Even so, broader euro-area financial markets have so far remained relatively insensitive to developments in Greece. After tense and unsuccessful attempts early in the intermeeting period to agree on program conditionality and debt restructuring, renewed negotiations over the Greek program in late June were derailed when Greek Prime Minister Tsipras unexpectedly called a referendum on the EUIMF proposals and urged Greek citizens to vote “No.” This call intensified tensions between Greece and its creditors and triggered an even more rapid flight of deposits from Greek banks (figure 1). With the outlook for Greek banks growing increasingly precarious, the ECB suspended its earlier practice of accommodating deposit flight through increases in emergency liquidity assistance (ELA) to Greek banks; instead, it announced a freeze on the ELA ceiling. As a result, an acute liquidity shortage loomed, forcing the Greek government to declare a bank holiday, limit deposit withdrawals to €60 per day, and restrict payments and transfers of funds abroad. Soon afterward, with its resources dwindling and its relationship with its creditors unravelling, Greece defaulted on a €1½ billion debt repayment to the IMF on June 30. Tensions escalated further in early July. After the Greek referendum decisively rejected the EUIMF proposals, the Greek government continued pressing for more favorable loan terms. In response, other European authorities hardened their position, threatening to withdraw financial support for Greece’s government and banks—which could trigger a Greek exit from the euro area—if an agreement was not reached by July 12. Greece and its creditors finally reached an agreement on July 13. European authorities agreed to consider a three-year financial assistance program from the European Stability Mechanism (ESM) as well as further extensions of the maturity of their loans (albeit without principal reductions and only after Greece completes a review of its program). In exchange, they demanded Greek commitments that were far stricter than previously proposed. As a precondition to begin formal program negotiations, Greece passed significant increases in value-added taxes, cuts in pension benefits, and institutional reforms; it is also expected to reform its legal system in order to facilitate bank restructuring and property foreclosures. Finally, Greece also agreed to ambitious fiscal objectives and to European oversight of its public administration and legislative processes. Based on Greece’s recent progress, European governments received domestic approval to begin formal negotiations on the new ESM program and arranged €7.2 billion in bridge financing, which will help cover the Greek government’s sizable debt service through mid-August and its arrears to the IMF (figure 2). In addition, the ECB raised the ceiling on ELA to Greek banks for the first time in more than three weeks. Many hurdles remain, however, and the political environment in Greece and the rest of the euro area makes compromise and implementation difficult. Page 36 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Greek economic activity has been severely disrupted in recent weeks. Although Greek banks have reopened, they remain liquidity constrained and undercapitalized, and capital controls and transaction limits remain in place. Households and businesses are largely operating on a cash basis, foreign trade and tourism have been severely curtailed, and even basic services have been hard to provide. Although forecasting in such a situation is quite difficult, we judge that Greek output likely will contract at a double-digit rate this quarter and will be slow to recover thereafter. Greek public debt may rise above 200 percent of GDP and is regarded by many (including the IMF) as unsustainable unless substantial debt relief, beyond the extension of maturities contemplated by European authorities, is provided. Our baseline scenario assumes that Greece remains in the euro area and that spillovers from Greek tensions to broader European financial markets remain contained, reflecting enhanced financial backstops and a firm commitment by European authorities to safeguard the monetary union. That said, we expect Greece to have considerable difficulty restarting growth and fulfilling its commitments, with pronounced tensions flaring periodically. Accordingly, a Greek exit that sparks broader financial market turmoil remains a significant risk. The Risks and Uncertainty section examines that alternative scenario in more detail. Page 37 of 94 Int’l Econ Devel & Outlook Notwithstanding these risks, financial markets have responded positively to the rapprochement between Greece and its creditors. As shown in figure 3, Greek 10-year sovereign bond spreads have plummeted since the Greek parliament endorsed a more conciliatory stance in mid-July. Spreads of other peripheral countries, which had risen only somewhat in response to earlier tensions, fell by much less. Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 and economic conditions and consumer confidence in China deteriorate sharply, generating adverse spillovers to EMEs and a flight to quality that leads to an appreciation of the dollar. Finally, the continued weakness in foreign growth in the second quarter reinforces our concern that the underlying momentum in global activity could be weaker than we thought. Quarterly foreign inflation turned positive in the second quarter as the effects of last year’s decline in oil prices waned. The more recent and much smaller decline in oil Int’l Econ Devel & Outlook prices should push inflation down again in the near term, but only temporarily. We continue to expect inflation to reach central bank objectives of 2 percent in Canada and the United Kingdom by 2017 and to pick up but remain below the 2 percent goal in the euro area and Japan. Inflation in the EMEs is expected to average about 3 percent over the forecast period. In response to the continued weakness of activity in their economies and still-low inflation rates, the central banks of Canada, Korea, and Sweden cut their policy rates over the intermeeting period. The Swedish Riksbank expanded its asset purchase program as well. China’s central bank also cut banks’ benchmark lending and deposit rates to support economic growth and the stock market. ADVANCED FOREIGN ECONOMIES Euro Area. Based on solid readings on retail sales, PMIs, economic sentiment, and manufacturing production, we estimate that GDP continued to expand 1½ percent in the second quarter. We expect output to expand at a similar pace in the third quarter, as a pickup in growth in most euro-area economies is offset by a sharp contraction in Greece. Thereafter, we expect euro-area growth to rise to about 2 percent in 2016 and 2¼ percent in 2017, supported by ongoing monetary stimulus and easing credit conditions as well as by currency depreciation and lower oil prices. This forecast is about ¼ percentage point lower in the third quarter of 2015 than in the June Tealbook, as the plunge in Greek activity will be even steeper than we previously thought, and about ¼ percentage point higher in 2016, reflecting support from lower energy prices and a depreciated euro. Our projection assumes that current and prospective spillovers to other countries from developments in Greece remain limited, but much more dire outcomes are possible. Page 38 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Inflation rebounded from negative 1½ percent in the first quarter to positive 2½ percent in the second quarter, reflecting the fading effects of last year’s fall in energy prices as well as a firming in core inflation. We expect inflation to average about 1¼ percent during the second half of the year, somewhat lower than our June Tealbook forecast, owing to the recent decline in oil prices. As the output gap narrows and oil prices stabilize, inflation is expected to rise to 1¾ percent by 2017. We continue to assume the ECB will purchase assets totaling about through the end of 2017. Canada. We estimate that real GDP contracted again in the second quarter, falling ¼ percent, a pace that is 1½ percentage points below the June Tealbook projection. Energy exports were disrupted by wildfires and maintenance shutdowns. Moreover, disappointing imports of machinery and equipment suggest that the adverse effects of lower oil prices on investment have been more protracted than we had thought. June manufacturing PMI edged up to expansionary territory for the first time since January, however, so as disruptions to the energy sector dissipate, we expect GDP growth to rebound to 2 percent this quarter. We see GDP growth reaching 2½ percent by 2016, supported by accommodative monetary policy, currency depreciation, and moderate U.S. growth, before edging down to a nearpotential pace of 2 percent by 2017 as the output gap closes. Inflation jumped to 2.5 percent in the second quarter, partly driven by the pass-through of currency depreciation to retail prices. We expect that lower oil prices will bring inflation down to 1½ percent in the third quarter. The waning influence of the decline in oil prices and narrowing output gap should bring inflation up to the Bank of Canada’s (BOC) 2 percent target by 2017. Given the recent economic weakness, the BOC cut its policy rate by 25 basis points to ½ percent in mid-July. With inflation remaining low, we expect the BOC to start raising its main policy rate in the third quarter of 2016, one quarter later than in our previous projection. Japan. We estimate that real GDP growth declined from 3.9 percent in the first quarter to only ½ percent in the second quarter, partly owing to a Page 39 of 94 Int’l Econ Devel & Outlook €1.2 trillion by September 2016 and keep its main policy rate near zero Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 normalization of inventory investment. This slowdown is more pronounced than projected in the previous Tealbook, as recent data on exports and industrial production were surprisingly weak. Nevertheless, business confidence rose to its highest level in more than a year and manufacturing firms plan to ramp up production, suggesting that the second-quarter softening was short-lived. Accordingly, we see GDP growth picking up to 1½ percent in the current quarter and remaining near that pace through 2016 before a second hike in the consumption tax stalls the expansion in 2017. Consumer Int’l Econ Devel & Outlook prices appear to have risen 1 percent in the second quarter, led by a rapid increase in food prices. However, with oil prices declining, inflation should fall to ¼ percent in the current quarter. Thereafter, as oil prices stabilize, we project that inflation (excluding the direct effect of the consumption tax hike) will edge up to ¾ percent in early 2016 and, as the output gap narrows and inflation expectations rise, will reach almost 1½ percent by the end of 2017. United Kingdom. Strong incoming data—such as on retail sales, industrial production, exports, and economic sentiment—suggest that real GDP growth accelerated to 2½ percent in the second quarter from a modest 1½ percent rate in the first quarter. We project that GDP growth will edge up to 2¾ percent in 2016, about ½ percentage point higher than previously projected, as the new fiscal budget calls for less consolidation in the coming years than the budget that was unveiled in March. Growth then moves back down to 2½ percent in 2017. Consumer prices rose 1.1 percent in the second quarter, as retail energy prices stabilized. We expect inflation to continue rising in coming quarters, albeit a touch more slowly than we wrote down in June on account of the recent fall in crude oil prices, and to reach the Bank of England’s (BOE) 2 percent target by 2017. In response to the higher path for economic growth and despite the slightly lower rise in inflation in the near-term, we expect the BOE to normalize monetary policy a bit more rapidly than previously assumed following liftoff in the first quarter of 2016. EMERGING MARKET ECONOMIES China. Real GDP growth was volatile in the first half of the year, surging to 7¾ percent in the second quarter, 1¾ percentage points above our June Tealbook estimate, after falling to an unusually low pace of 5 percent in the Page 40 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Although the sharp fall in Chinese stock prices since mid-June has garnered significant attention, we do not expect the declines to weigh on activity. Chinese stock market movements have traditionally had little effect on the economy because the vast majority of Chinese do not own stocks and because equity financing accounts for a small share of overall financing in China’s bank-dominated economy. (For further details, see the box “Chinese Equity Markets: Recent Developments and Implications” in the Financial Developments section.) Inflation picked up to a 2½ percent rate in the second quarter from negative ½ percent in the first quarter, as food and fuel prices rebounded and core inflation edged up, suggesting that the risk of deflation has likely subsided. We expect inflation to remain at about this level throughout the forecast period. Other Emerging Asia. We now estimate that the region’s GDP growth stepped down from an already subdued 3½ percent pace in the first quarter to about 3 percent in the second, 1 percentage point lower than in the June Tealbook. The revision is broad based across countries and reflects the weaker-than-expected tone of recent indicators, particularly exports. In Korea, the downward revision to second-quarter growth also reflects our assessment that the outbreak of Middle East Respiratory Syndrome (MERS) will have a larger effect on the economy than initially envisioned. To support activity, the Bank of Korea cut its policy rate by 25 basis points to 1.5 percent and the government ratcheted up fiscal stimulus. Exports from the region improved late in the quarter, supporting our view that growth will move up in the second half of the year in response to stronger activity in China and in the 1 Recall that China does not have a level real GDP series. We estimate seasonally adjusted quarter-on-quarter growth rates based on the official data releases that report four-quarter changes. Page 41 of 94 Int’l Econ Devel & Outlook first quarter.1 Exports and industrial production rebounded sharply in the second quarter, but fixed-asset investment growth continued to moderate, led by a further slowing of real estate investment. We expect growth to average 7 percent in the second half of the year, a little stronger than the 6½ percent average in the first half, as exports continue to recover and recent monetary policy stimulus kicks in. We expect GDP growth to edge down a bit further thereafter, to 6½ percent by 2017, in line with declining potential growth. Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 advanced economies. Growth should settle at about 4¼ percent thereafter. Inflation in the region rebounded from negative ¼ percent in the first quarter to 3 percent in the second, supported by the stabilization of energy prices after earlier declines. We expect inflation to edge up to 3¼ percent in 2016 and 2017. Int’l Econ Devel & Outlook Latin America. We estimate that Mexican real GDP growth stepped up from a meager 1½ percent in the first quarter to a still-subdued 2¼ percent in the second, ¼ percentage point below our previous forecast. Incoming data for the second quarter were mixed. Although fixed investment was weak and exports fell through May, manufacturing output was up and private consumption appears to have continued to improve, supported by solid credit and job growth. We expect the pace of growth to step up to 3 percent by the end of this year, thanks to a pickup in U.S. manufacturing output, and to remain at that pace through 2017. After dipping to only ¼ percent in the first quarter, headline inflation rebounded to 2¾ percent in the second, reflecting the waning effects of earlier declines in energy prices and administered prices of telecommunications. In Brazil, recent indicators—including industrial production, retail sales, and consumer and business confidence—continue to disappoint and suggest that the economy contracted sharply in the second quarter. As a result, we now see GDP having fallen 4¼ percent last quarter, 1 percentage point more than the June Tealbook estimate. Despite the weak economy, the depreciation of the real and increases in administered prices have kept inflation elevated at a 10¾ percent annual rate in the second quarter. To restrain inflation, the central bank has raised its policy rate 275 basis points since October 2014, and we expect more tightening in the near term. Tighter monetary policy and the fading influence of increases in administered prices should bring inflation down to 5¾ percent by the end of this year and to 5½ percent by 2017. We expect growth to pick up to a still-sluggish 1½ percent pace next year and to 2¼ percent in 2017 as the authorities ease monetary policy and as global growth firms. Page 42 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Recent Foreign Indicators Industrial Production Nominal Exports Jan. 2010 = 100 Foreign AFE EME* Jan. 2010 = 100 160 Foreign AFE* EME** 150 125 120 140 115 130 110 120 100 100 90 2010 2011 2012 2013 2014 95 2010 2015 2011 2012 2013 2014 2015 * Excludes Australia and Switzerland. ** Excludes Venezuela, Hong Kong, and Colombia. * Excludes Venezuela. Employment Retail Sales 12-month percent change Foreign AFE* EME** 4-quarter percent change 12 Foreign AFE EME* 10 5 4 8 3 6 2 4 1 2 0 0 -2 2010 2011 2012 2013 2014 * Excludes Australia. ** Includes Brazil, Chile, China, Indonesia, Korea, Mexico, and Taiwan. Headline Core* 2011 2012 2013 2014 2015 * Excludes Argentina and China. Consumer Prices: Advanced Foreign Economies 12-month percent change -1 2010 2015 Consumer Prices: Emerging Market Economies 3.0 12-month percent change 7 Headline Ex. food--Emerging Asia* Ex. food--Latin America* 6 2.5 5 2.0 4 1.5 3 1.0 2 0.5 1 3.5 0.0 2010 2011 2012 2013 2014 Note: Excludes Australia, Sweden, and Switzerland. * Excludes all food and energy; staff calculation. Source: Haver Analytics and CEIC. 2015 0 2010 2011 2012 2013 * Excludes all food; staff calculation. Page 43 of 94 2014 2015 Int’l Econ Devel & Outlook 105 110 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 The Foreign GDP Outlook Int’l Econ Devel & Outlook Real GDP* Percent change, annual rate 2014 H1 H2 1. Total Foreign Previous Tealbook 2.3 2.2 2. Advanced Foreign Economies Previous Tealbook Canada Euro Area Japan United Kingdom Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 3. 4. 5. 6. 7. 8. 9. 10. 11. Q1 2015 Q2 Q3 2016 2017 Q4 2.7 2.6 1.6 1.6 1.7 2.2 2.5 2.7 2.8 2.9 3.1 3.0 3.0 2.9 1.5 1.5 2.2 0.7 -1.4 3.6 1.9 1.8 2.7 1.1 -0.4 3.1 0.8 0.9 -0.6 1.5 3.9 1.5 0.7 1.6 -0.2 1.6 0.5 2.4 1.8 1.8 2.0 1.4 1.5 2.5 2.1 2.1 2.4 1.8 1.4 2.5 2.3 2.2 2.5 2.1 1.3 2.8 1.9 1.9 2.1 2.2 -0.3 2.4 3.0 2.9 7.0 3.3 2.8 -1.4 3.5 3.4 7.6 3.6 2.4 0.8 2.4 2.2 5.1 3.4 1.6 -0.6 2.7 2.8 7.8 2.9 2.3 -4.2 3.2 3.5 7.2 3.7 2.9 -1.1 3.5 3.6 6.8 4.1 3.0 0.4 3.9 3.8 6.6 4.4 3.1 1.6 3.9 3.9 6.5 4.2 3.1 2.3 * GDP aggregates weighted by shares of U.S. merchandise exports. Total Foreign GDP Foreign GDP Percent change, annual rate 8 Current Previous Tealbook Percent change, annual rate 10 Current Previous Tealbook 6 Emerging market economies 4 5 2 0 0 -2 Advanced foreign economies -4 -5 -6 -8 -10 2009 2010 2011 2012 2013 2014 2015 2016 2017 -10 2009 2010 2011 2012 2013 2014 2015 2016 2017 Page 44 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 The Foreign Inflation Outlook Consumer Prices* Percent change, annual rate Q1 2015 Q2 Q3 Q4 1. Total Foreign Previous Tealbook 2.5 2.5 1.6 1.5 -0.1 -0.1 2.6 2.1 2.2 2.2 2. Advanced Foreign Economies Previous Tealbook Canada Euro Area Japan United Kingdom 2.2 2.2 3.2 0.4 4.9 1.6 0.2 0.2 0.6 -0.1 0.3 0.3 -0.9 -0.8 -0.2 -1.5 -0.3 -1.7 1.9 1.4 2.5 2.5 1.0 1.1 Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 2.7 2.7 1.4 2.8 4.1 7.0 2.6 2.6 1.6 1.7 4.3 6.1 0.4 0.5 -0.4 -0.2 0.3 11.1 3.1 2.6 2.6 3.1 2.8 10.8 3. 4. 5. 6. 7. 8. 9. 10. 11. 2016 2017 2.2 2.4 2.4 2.4 2.6 2.6 1.0 1.3 1.4 1.1 0.2 1.5 1.3 1.4 1.8 1.3 0.5 1.6 1.5 1.6 1.8 1.5 1.0 1.8 2.0 2.0 2.0 1.7 2.6 2.0 3.1 3.0 2.5 3.0 3.1 7.9 2.9 3.1 2.2 3.1 3.3 5.7 3.1 3.1 2.5 3.2 3.3 5.6 3.1 3.1 2.5 3.3 3.3 5.4 Int’l Econ Devel & Outlook 2014 H1 H2 * CPI aggregates weighted by shares of U.S. non-oil imports. Foreign Monetary Policy AFE Policy Rates AFE Central Bank Balance Sheets Percent Japan Euro area Canada United Kingdom Percent of GDP 3.0 Japan Euro area Canada 2.5 EME Policy Rates Percent 70 60 2.0 50 1.5 40 14 Korea Brazil Mexico 12 10 8 6 1.0 30 4 0.5 20 0.0 2009 2011 2013 2015 2017 2 10 2009 2011 2013 Page 45 of 94 2015 0 2009 2011 2013 2015 2017 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Evolution of Staff’s International Forecast Total Foreign GDP Percent change, Q4/Q4 6 5 2015 2014 4 2016 2017 Int’l Econ Devel & Outlook 3 2 1 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 6/10 7/22 2012 2013 2014 2015 0 Tealbook publication date Total Foreign CPI Percent change, Q4/Q4 4.0 3.5 2015 2014 2017 2016 3.0 2.5 2.0 1.5 1.0 0.5 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 6/10 7/22 2012 2013 2014 2015 0.0 Tealbook publication date U.S. Current Account Balance Percent of GDP 0 -1 -2 2016 2015 -3 2014 -4 2017 -5 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 6/10 7/22 2012 2013 2014 2015 Tealbook publication date Page 46 of 94 -6 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Financial Developments U.S. financial market conditions were buffeted by developments abroad over the intermeeting period but were little changed outside of a somewhat stronger dollar on balance. The expected path of policy rates moved down a bit, reportedly reflecting in part the more-accommodative-than-expected path for the federal funds rate in the June SEP and some weaker-than-expected data on economic activity. Negotiations between the Greek government and its official creditors and, separately, a plunge in Chinese equity prices generated volatility in global financial markets at times. (See the box on Greece in the international section and the box on Chinese equity markets later in this section.) The federal funds rate at the end of 2016 implied by OIS quotes decreased about 10 basis points. September remained the most likely time of liftoff in the Desk’s surveys of primary dealers and market participants, with the expected pace of normalization after liftoff little changed. The nominal Treasury yield curve was nearly unchanged on net. The TIPS-based decline in oil prices. The S&P 500 index ended the period up about 1 percent, while the VIX settled back to the lower end of its range in recent years after rising in response to developments abroad. Amid some monetary easing abroad, the broad index of the dollar increased about 2 percent over the period. Financing conditions for households stayed generally accommodative, and businesses continued to raise substantial funds amid robust M&A activity. Moderate numbers of banks reportedly eased lending standards and experienced increased loan demand during the second quarter on balance.1 The broader municipal market was generally unaffected by the announcement that Puerto Rico might seek to restructure at least part of its debt (see the box later in this section). 1 See Emre Yoldas (2015), “The July 2015 Senior Loan Officer Opinion Survey on Bank Lending Practices,” memorandum to the FOMC, July 23. Page 47 of 94 Financial Developments measure of inflation compensation over the next five years moved lower amid a Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Policy Expectations and Treasury Yields Selected Interest Rates Percent 1.7 Percent June FOMC statement 10-year Treasury yield (right scale) 1.6 Greek referendum announced 1.5 June Greek debt employment proposal report Greek announced referendum June FOMC results minutes Retail sales 2.6 Monetary Policy Report 2.5 2.4 1.4 2.3 Dec. 2016 Eurodollar (left scale) 1.3 2.2 1.2 2.1 June 17 June 22 June 25 June 30 July 2 July 6 July 8 July 10 July 15 July 20 Note: 5-minute intervals. 8:00 a.m. to 4:00 p.m. Source: Bloomberg. Implied Federal Funds Rate Percent 3.0 Most recent: July 21, 2015 Last FOMC: June 16, 2015 2.5 Distribution of Expected Timing of First Rate Increase from the Desk’s Primary Dealer Survey Percent 60 Recent: 22 respondents June FOMC: 22 respondents 50 2.0 40 1.5 30 20 Financial Developments 1.0 10 0.5 0 2015 2016 2017 2018 June 2019 July Sept. Oct. Dec. 2016 Note: Path is estimated using overnight index swap quotes with a spline approach and a term premium of zero basis points. Source: Bloomberg; staff estimates. Note: Average across dealers of their individual probabilities attached to the first tightening occurring at a particular meeting. For 2016, expected timing is during or after that year. Source: Desk’s primary dealer survey from July 20, 2015. Treasury Yield Curve Inflation Compensation Percent Percent 3.5 Daily Most recent: July 21, 2015 Last FOMC: June 16, 2015 3.0 5 to 10 years ahead June FOMC 4 3 2.5 2.0 2 July 21 1.5 1.0 Next 5 years* 1 0.5 0.0 1 3 5 7 10 20 Years ahead Note: Smoothed yield curve estimated from off-the-run Treasury coupon securities. Yields shown are those on notional par Treasury securities with semiannual coupons. Source: Federal Reserve Board. Page 48 of 94 0 2011 2012 2013 2014 2015 Note: Estimates based on smoothed nominal and inflationindexed Treasury yield curves. * Adjusted for lagged indexation of Treasury InflationProtected Securities (carry effect). Source: Barclays PLC; Federal Reserve Bank of New York; staff estimates. Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 EFFECTS OF GREEK DEBT NEGOTIATIONS ON FINANCIAL MARKETS For most of the intermeeting period, market participants around the globe were focused on negotiations between the Greek government and its official creditors. (See the box “Recent Developments and Prospects in Greece” in the International Economic Developments and Outlook section.) In contrast with the sizable market reactions during negotiations between Greece and its creditors in previous years, asset price movements outside of Greece were quite modest in recent weeks. For example, although the Greek 10-year sovereign spread to German government bonds soared more than 600 basis points at one point during the current episode, contemporaneous moves in Spanish and Italian spreads were muted. In addition, although flight-to-quality flows were occasionally evident in the yields and currencies of the United States and safe-haven AFEs, these moves were not especially sharp or of long duration. Several factors may help explain this modest reaction, including substantially reduced private-sector exposure to Greece, confidence that European authorities have the tools and the willingness to stem the spread of financial market disruption, and investors’ belief that Greece would ultimately receive some form of additional financial assistance.2 Amid the temporary volatility stemming from the developments in Greece and China, Federal Reserve communications and incoming economic data put some downward pressure on the implied path of policy rates and nominal Treasury yields along the curve. In particular, investors reportedly focused on participants’ downward revisions in the June SEP to the appropriate target range for the federal funds rate at the end of 2015 as suggesting that policy firming could commence later than previously expected. In contrast, the release of the June FOMC meeting minutes and the Chair’s semiannual Monetary Policy Report in July were interpreted by investors as largely consistent with earlier FOMC communications and elicited little reaction in financial markets. Economic data releases over the intermeeting period were somewhat weaker than expected, on net, with the path of the federal funds rate implied by OIS quotes shifting down noticeably after the release of the employment situation report and retail 2 Three-fourths of Greek debt is currently held by official creditors. In particular, U.S. prime money funds do not hold any Greek debt, and U.S. banks have a negligible direct exposure to Greek debt. Page 49 of 94 Financial Developments POLICY EXPECTATIONS AND TREASURY YIELDS Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Corporate Asset Prices and Earnings S&P 500 Stock Price Index Implied Volatility on S&P 500 (VIX) Log scale; June 16, 2015 = 100 June FOMC Daily July 21 Log scale, percent 120 June FOMC Daily 60 110 50 100 40 90 30 80 20 70 July 21 60 10 50 2011 2012 2013 2014 2015 2011 Financial Developments Corporate Bond Spreads Basis points 400 2012 2013 2014 2015 Source: Chicago Board Options Exchange. Source: Bloomberg. Revisions to S&P 500 Year-Ahead Earnings per Share Percent Basis points June FOMC Daily 800 Monthly 350 June 650 300 10-year high-yield (right scale) 500 250 July 21 350 200 10-year triple-B (left scale) 150 200 2011 2012 2013 2014 2015 2003 2005 2007 2009 2011 2013 2015 Note: Weighted average of the percent change in the consensus forecasts of current-year and following-year earnings per share. Source: Thomson Reuters Financial. Note: Spreads over 10-year Treasury yield. Source: Staff estimates of smoothed corporate yield curves based on Merrill Lynch data and smoothed Treasury yield curve. Page 50 of 94 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10 -11 -12 -13 -14 -15 -16 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 sales data for June. All told, over the intermeeting period, the federal funds rate implied by OIS quotes at the end of 2016 and the end of 2017 declined about 10 basis points. According to the Desk’s surveys of dealers and market participants, a majority of respondents to both surveys continued to view the September 2015 meeting as the most likely date of liftoff, with little change to the expected pace of tightening following liftoff relative to the June surveys. Although the median respondents now expect some or all securities reinvestments to cease a bit later than the six- to seven-month post-liftoff horizon reported in the Desk’s June surveys, they continued to anticipate that reinvestments will most likely be phased out when the time comes. Swings in risk sentiment were evident in longer-term nominal Treasury yields. The 10-year yield drifted up notably early in the intermeeting period on optimism over the Greek debt negotiations, then subsequently declined, at one point sliding as much as 30 basis points over several days amid safe-haven flows before retracing much of this decline. On net, both shorter- and longer-term nominal Treasury yields were nearly unchanged. The 5-year measure of inflation compensation based on TIPS fell 15 basis points, likely reflecting a notable decline in oil prices, while 5-to-10-year inflation compensation was about unchanged. Liquidity conditions in fixed-income markets CORPORATE ASSET PRICES AND EARNINGS Swings in risk sentiment were also evident in U.S. corporate asset markets at times, and broad U.S. equity price indexes ended the period up about 1 percent on net. Option-implied volatility on the S&P 500 index at the one-month horizon—the VIX— increased for a time before falling back to the lower end of its range over recent years. Spreads of yields on 10-year triple-B-rated and speculative-grade corporate bonds over comparable-maturity Treasury securities were also volatile but ended the period slightly wider on net. Overall, spreads on triple-B-rated bonds remained slightly above their historical median levels, while those on speculative-grade bonds stayed somewhat below their historical median. 3 Since the June FOMC meeting, the Treasury Department has auctioned $148 billion of Treasury nominal fixed-coupon securities, $7 billion of TIPS, and $13 billion of two-year Floating Rate Notes. Page 51 of 94 Financial Developments remained stable over the intermeeting period.3 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Foreign Developments 10-Year Peripheral Spreads 36 Percentage points Percentage points June FOMC Daily 32 6.5 June FOMC Daily Spain (right scale) 28 AFE & U.S. 10-Year Nominal Percent Yields 5.5 United States 20 July 21 2.0 3.5 United Kingdom 16 Italy (right scale) Greece (left scale) 12 8 July 21 Germany 2.5 1.5 4 0.5 2011 2012 2013 2014 2014 Source: Bloomberg. Dollar Exchange Rate Indexes June FOMC Daily Sept. 1, 2014 = 100 130 June FOMC Daily DJ Euro Stoxx FTSE 100 S&P 500 EME AFE Swiss franc Euro 120 110 Financial Developments 2015 Source: Bloomberg. Sept. 1, 2014 = 100 July 21 130 125 120 July 21 115 110 105 100 100 95 90 90 80 Sept. Nov. 2014 Jan. Mar. May 2015 85 July Sept. Source: Bloomberg. Nov. 2014 Jan. Mar. May 2015 July Source: Federal Reserve Board; Bloomberg. 24-Month-Ahead Policy Expectations Chinese Equities Percent Daily United Kingdom Euro area Canada Jan. 1, 2014 = 100 3.0 June FOMC Daily June FOMC 2.5 280 260 240 2.0 220 200 1.5 Shanghai Composite 1.0 July 21 180 July 21 0.5 160 140 120 0.0 100 -0.5 Sept. Nov. 2014 Jan. Mar. May 2015 July Note: 1-month forward rates from OIS quotes, 3-day moving average. Source: Bloomberg. Page 80 Jan. Mar. May July Sept. Nov. Jan. Mar. May July 2014 2015 52 of 94 Source: Bloomberg. 1.0 0.0 2015 Stock Price Indexes 1.5 0.5 Japan 0 3.0 2.5 4.5 24 3.5 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Based on reports for about 20 percent of the firms in the S&P 500 index and equity analysts’ forecasts for the rest, earnings per share are projected to have declined somewhat last quarter. However, the index of year-ahead revisions to analysts’ earnings forecasts for all firms in the S&P 500 index—which was deeply negative earlier in the year—stayed close to zero in mid-June. OTHER FOREIGN DEVELOPMENTS The U.K. 10-year bond yield rose slightly, supported in part by stronger-thanexpected macroeconomic data and a shift up in the path of expected future policy rates. In contrast, comparable benchmark yields declined in most other AFEs, weighed down to varying degrees by weaker-than-expected macroeconomic data and monetary easing. The central banks of Canada, Norway, and Sweden all lowered policy rates, and Sweden’s Riksbank also increased the size of its QE program. In addition, the Swiss National Bank (SNB) appears to have intervened to counter upward pressure on the Swiss franc during the period, with Chairman Jordan of the SNB stating in a speech that the franc was significantly overvalued. In contrast, comments by the Bank of England’s Governor Carney led market participants to expect an earlier initiation of rate hikes in the Partly because of the generally more accommodative actions of foreign central banks, the broad index of the U.S. dollar ended the period about 2 percent higher, with the dollar appreciating 3½ percent, on average, against AFE currencies. The dollar strengthened about 5 percent against the Canadian dollar and Swedish krona, while it was only slightly stronger against the British pound, consistent with the relative movements in policy expectations. In addition, the dollar gained about 2½ percent against the euro, as market participants’ focus on differentials between U.S. and euro-area policy rate expectations appeared to reemerge after concerns about Greece had lessened. The dollar appreciated only ½ percent against the yen. AFE equity prices rose in all countries but Canada, supported to varying degrees by diminished concerns about Greece, stronger macroeconomic data in the United Kingdom and the euro area, and actual or expected monetary accommodation elsewhere. Headline stock indexes in the euro area increased more than 5 percent. Page 53 of 94 Financial Developments United Kingdom. Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Business and Municipal Finance Selected Components of Net Debt Financing, Nonfinancial Firms Billions of dollars Changes in Standards and Demand for Commercial and Industrial Loans 125 100 75 Q1 H1 50 H2 60 Q2 2012 0 -50 -75 2013 2014 -40 Standards Demand -60 -80 -100 1991 2015 1995 1999 2003 2007 2011 2015 * Period-end basis, seasonally adjusted. Source: Depository Trust & Clearing Corporation; Mergent Fixed Investment Securities Database; Federal Reserve Board. Note: Responses are weighted by survey respondents’ holdings of relevant loan types as reported on Call Reports. The shaded bars indicate periods of business recession as defined by the NBER. Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices. Institutional Leveraged Loan Issuance, by Purpose Changes in Standards and Demand for Commercial Real Estate Loans Billions of dollars Net percent 100 Monthly rate Q1 60 50 Q2 Q2 40 Q3 Quarterly 80 60 40 Q2 30 20 Q1 10 2014 -60 Standards Demand -80 -100 1994 2015 1997 2000 2003 2006 2009 2012 2015 Source: Thomson Reuters LPC LoanConnector. Note: Responses are weighted by survey respondents’ holdings of relevant loan types as reported on Call Reports. The shaded bars indicate periods of business recession as defined by the NBER. Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices. CMBS Issuance Municipal Bond Spread Billions of dollars Ratio 14 Monthly rate June FOMC Weekly 12 A. 10 H2 Q1 J. M. 8 H1 6 July 16 4 2 0 2011 2012 2013 2014 2011 2015 Note: CMBS is commercial mortgage-backed securities. Source: Commercial Mortgage Alert. 0 -40 0 2011 2012 2013 20 -20 Easing/weaker Q4 Financial Developments Tightening/stronger 70 New money Refinancings 20 0 -100 2011 40 -20 -25 Total 80 25 Apr. June Commercial paper* C&I loans* Bonds 100 Quarterly Easing/weaker May Tightening/stronger 150 Monthly rate Net percent 2012 2013 2014 2015 Note: Bond Buyer GO 20-year index over 20-year Treasury yields. Source: Bond Buyer; Merrill Lynch. Page 54 of 94 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 By contrast, stock prices in China declined steeply during the period. After having risen 150 percent between mid-2014 and its peak on June 12, the Shanghai Composite index tumbled more than 30 percent. The index subsequently retraced some of that decline and ended the period about 20 percent lower than its mid-June peak. (See the box “Chinese Equity Markets: Recent Developments and Implications.”) Developments in China also appeared to contribute to a net decline over the intermeeting period of almost 4 percent in Hong Kong equity prices, but spillovers to other markets were limited. Asset prices in other EMEs exhibited no clear signs of distress in response to the events in Greece, the plunge in Chinese equity markets, or the approaching policy firming in both the United States and the United Kingdom. EMBI spreads over Treasury securities edged lower, and the performance of stock indexes across EMEs was mixed. Notably, stocks in some of the countries seen as vulnerable during the taper tantrum, such as India, South Africa, and Turkey, ended the period up between 2 and 6 percent. Most emerging market currencies outperformed AFE currencies, with the dollar firming only about 1½ percent, on average, against the EME currencies. Meanwhile, financing conditions for U.S. nonfinancial businesses remained accommodative, particularly for the largest corporations. Corporate bond issuance was brisk in June for both investment- and speculative-grade firms, moderating somewhat from its torrid pace in May. Borrowers continued to report planning to use most of their proceeds to refinance existing debt and fund M&A activity rather than incremental capital investment. Early indications suggest that investment-grade bond issuance stayed strong in the first few weeks of July, while high-yield issuance slowed notably, reportedly reflecting in part the heightened market volatility. Strong growth of C&I loans on banks’ books persisted in June, and the SLOOS continued to indicate that demand from large firms for C&I loans strengthened, particularly reflecting the need to finance M&A activity. In addition, although banks’ lending standards for C&I loans have reportedly changed relatively little in recent quarters, they stand somewhat easier than the midpoint of their range over the past 10 years. Institutional leveraged loan issuance picked up noticeably in the second quarter relative to earlier in the year, as tighter loan spreads supported refinancing. Financing Page 55 of 94 Financial Developments BUSINESS AND MUNICIPAL FINANCE Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 7/22/2015 2:57 PM Chinese Equity Markets: Recent Developments and Implications After an 11‐month rally, during which the Shanghai composite index rose roughly 150 percent, Chinese equity prices have fallen more than 20 percent since mid‐June (figure 1). Spillovers to other markets from this plunge in Chinese stock prices have been limited: While Hong Kong’s Hang Seng index has fallen 9 percent since mid‐June and copper prices have declined 7 percent over the same period, most other markets seemed largely unaffected. Nonetheless, the sharp decline of Chinese equities has raised concerns about financial stability and potential disruptions to the real economy. Financial Developments What explains the recent run‐up and subsequent correction? On the upswing, retail investors, who account for the vast majority of the trading of Chinese equities, had reportedly been shifting their savings away from Chinese property markets and bank deposits amid falling house prices and growing expectations of further monetary easing in China. In addition, margin financing, which was officially authorized in 2010, increased rapidly as retail investors sought to magnify their equity gains by taking on leverage as the market kept rising (figure 2). These factors led to over‐stretched valuations for most Chinese stocks; in mid‐June, P/E ratios of companies listed in the Shanghai exchange averaged 26, whereas those of companies listed in the ChiNext—China’s equivalent of Nasdaq—reached 146. With bubble‐like conditions, the market was ripe for a correction. Several factors may have triggered or exacerbated the sell‐off, including attempts by the Chinese authorities to curb margin lending, the selling of stocks by investors to free up requisite funds to subscribe to a growing volume of IPOs this year, and the decision by MSCI—a provider of benchmark stock indexes—to delay the inclusion of China’s mainland shares in its emerging markets indexes. As levered trades unwound, falling stock prices triggered margin calls, which resulted in further selling of stocks. Chinese authorities have undertaken aggressive measures to try to stem the selloff. These actions include relaxing margin requirements, freezing IPOs temporarily, banning the sale of stocks by large shareholders, and creating a fund to be used to purchase shares of the largest companies. Moreover, recently the China Securities Regulatory Commission has allowed companies to voluntarily suspend trading of their stocks to prevent further price declines. In the first week of July, nearly half of the stocks listed on mainland exchanges had voluntarily suspended trading, but most have since resumed. Altogether, these measures appear to have helped stabilize stock markets. We expect the recent stock market correction to have only a limited effect on China’s economic growth and, in turn, negligible spillovers to the United States and the global economy. First, notwithstanding its recent losses, the Shanghai composite index is still up 97 percent since mid‐2014. Second, the correlation between economic activity and stock prices in China is generally weak. In 2006 and 2007, Chinese stock prices increased 425 percent, before reversing almost three‐quarters of those gains in 2008, but the economic impact of this decline is thought to have been limited. Chinese households hold only a small share of their wealth in stocks and the vast majority of households own no stocks at all; indeed, the run‐up in stock prices from mid‐2014 to mid‐2015 did not appear to boost household consumption. Similarly, China’s market capitalization as a Page 56 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 7/22/2015 2:57 PM share of GDP is also small relative to other countries (figure 3).1 We also do not expect the decline in equity markets to weaken investment, as most investment is financed by bank lending; in 2014, for example, equity financing constituted only about 2½ percent of total net financing. Third, stock markets compose a small part of China’s financial system. Although some Chinese securities firms and mutual funds have experienced losses on their equity holdings, their assets make up a small portion of total financial system assets. Moreover, there is little evidence that Chinese banks have meaningful exposure to stock markets. Finally, the official sector has the resources to provide liquidity assistance to financial institutions, if needed. We cannot rule out the possibility, however, that market volatility triggers serious economic deterioration in China. One concern is that, unlike the 2006–07 episode, the recent run‐up was largely fueled by leverage, reportedly including non‐traditional forms of leverage such as consumer loans and trusts, which are less regulated and less transparent than the traditional margin financing provided by securities trading firms. The use of leverage can magnify losses and destabilize markets when it is unwound in a disorderly fashion. Of greater concern is the possibility that the unwinding of leverage produces wider and unforeseen reverberations in the shadow banking system, resulting in a financial crisis and a sharp slowdown in growth. Such a crisis may be more likely against the background of the ongoing strains in property and credit markets, a factor that may have motivated the authorities’ recent aggressive response. And such a crisis— which is explored in more detail in the Risks and Uncertainty section of this Tealbook— could have adverse spillovers t0 the U.S. economy. 1. Chinese Equities January 2, 2014 = 100, ratioscale Shanghai Composite Index ChiNext Index 320 280 240 160 120 80 40 2006 2007 2008 Source: Bloomberg. 2009 2010 2. Margin Loans Outstanding, Shanghai Exchange Billions of dollars 2011 2012 2013 2014 2015 3. Stock Market Capitalization/GDP Percent 250 Daily 100 200 150 50 100 50 0 Jan May 2014 Source: CEIC. Sep Jan May 2015 China* Germany Korea USA Japan 0 * Estimated free-floating market capitalization. Source: Haver and Bloomberg. 1 The ratio of China’s market capitalization to GDP shown in figure 3 excludes government stakes in state‐owned enterprises, which account for roughly half of China’s total stock market capitalization. Page 57 of 94 Financial Developments 200 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Household Finance Level of Standards on Residential Real Estate Percent of respondents Loans in 2015 Tightest Midpoint Significantly tighter Somewhat tighter Mortgage Rate and MBS Yield Percent Easiest Significantly easier Somewhat easier 6.0 Daily June FOMC 30-year conforming fixed mortgage rate 5.5 5.0 100 4.5 75 4.0 50 July 21 25 GSE eligible Government insured Jumbo 2.5 2.0 1.5 Note: Banks were asked to describe their current level of standards in relation to the midpoint of the range of standards at their bank between 2005 and the present. Responses are weighted by survey respondents’ holdings of relevant loan types, as reported on the Q1 Call Reports from 2015 where relevant. Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices. 2010 2012 2013 2014 2015 Net Percentage of Banks Reporting Stronger Net percent Demand for Consumer Loans Percent change from a year earlier Quarterly 18 12 75 60 Stronger 24 Student loans 2011 Note: The MBS yield is the Fannie Mae 30-year current-coupon rate. Source: For MBS yield, Barclays; for mortgage rate, Loansifter. Consumer Credit Monthly 3.0 MBS yield 0 Subprime 3.5 45 30 6 May 15 Auto loans -6 -12 Credit cards 0 Weaker Financial Developments 0 Credit card loans Auto loans -15 -30 2007 2009 2011 2013 2015 Q2 Q4 2011 Note: The data are not seasonally adjusted. Source: Federal Reserve Board. Q2 Q4 2012 Q2 Q4 2013 Q2 Q4 Q2 2014 2015 Note: Responses are weighted by survey respondents’ holdings of relevant loan types as reported on Call Reports. Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices. Consumer Delinquency Rates Gross Consumer ABS Issuance Percent 7 Credit card loans in securitized pools Billions of dollars Subprime auto Prime auto Credit card Student loan Monthly rate 6 5 Q1 8 Q1 4 1 2003 2007 2011 12 3 May 1999 20 Q2 2 1995 24 16 4 Auto loans 28 2015 Note: Based on dollar value. Auto loans are 30 days or more past due. For auto loans, 4-quarter moving average. For credit card loans, the data are monthly; for auto loans, the data are quarterly. Source: For credit card loans, Moody’s Investors Service; for auto loans, Federal Reserve Bank of New York Consumer Credit Panel/Equifax. 2007 2009 2011 2013 2015 Source: Inside MBS & ABS; Merrill Lynch; Federal Reserve Board. Page 58 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 conditions for small businesses improved further, with loan originations maintaining their gradual upward trend. Financing for commercial real estate (CRE) remained broadly available, including for large- and small-sized loans and for the full range of property types. CRE property prices rose at a fast pace through April, supported in part by rising rents, declining vacancy rates, and accommodative financing conditions. CRE loans on banks’ books expanded through June; according to the SLOOS, moderate numbers of banks again reported stronger demand for CRE loans in the second quarter, while few reported any further easing in lending standards. CMBS issuance stayed robust, and the spread between investment-grade CMBS and the swap rate was little changed, on net, an indication that strong issuance was met with investor demand. Credit conditions in municipal bond markets were stable despite the announcement that Puerto Rico might seek to restructure at least part of its debt. (See the box “Assessing the Risks of a Puerto Rico Default for the Broader Municipal Market.”) The pace of issuance of long-term municipal bonds remained robust in June, as issuers reportedly continued to take advantage of low yields to refinance existing debt. In addition, spreads of yields on 20-year general obligation municipal bonds over HOUSEHOLD FINANCE Residential mortgage credit remained accessible for many consumers, although individuals with less desirable underwriting characteristics, such as low credit scores, undocumented income, or high debt-to-income ratios, still faced difficulties in obtaining loans. Although banks reported in the SLOOS that their lending standards for GSE-eligible and government-insured mortgages were little changed in the second quarter, they also reported that these standards are less tight than they were a few years ago. Standards for other types of residential real estate loans reportedly stayed quite tight. Meanwhile, interest rates on 30-year fixed-rate mortgages to highly qualified borrowers were little changed at around 4 percent, on net, in line with MBS yields and other longer-term interest rates. Page 59 of 94 Financial Developments comparable-maturity Treasury securities changed little. Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Assessing the Risks of a Puerto Rico Default for the Broader Municipal Market Financial Developments The risk that Puerto Rico (PR) will be unable to repay its lenders has grown notably in recent weeks, as its government stated in an interview with the New York Times published on June 29, that its debt (estimated at $76 billion) is “not payable” and significant concessions from its creditors would be necessary.1 Subsequently, yields and credit default swap (CDS) spreads on PR general obligation bonds both spiked. However, CDS spreads for the broad municipal bond market (as indicated by the MCDX index) were little changed, suggesting that the events in PR have left, thus far, no material imprint on the overall market (figure 1). Even so, the risk remains that a PR default could increase borrowing costs and reduce funding for other municipal bond issuers, possibly through its adverse effects on investors or muni bond insurers. Here we assess the risk of these possible spillovers using available data on taxexempt mutual funds, money market funds (MMFs), and monoline insurers. Tax-exempt mutual funds are some of the main investors in PR debt. However, the likelihood that the tax-exempt mutual fund industry could experience significant and widespread strains due to PR default appears low, since PR bonds represent a small percentage of total holdings for the majority of exposed funds. The fund family with the largest PR exposure holds about $5 billion at market value or 20 percent of their muni investments in PR (figure 2). While this fund family is vulnerable to extreme investor outflows and may have to sell securities issued by other states to satisfy sudden redemptions, the potential price impact exerted by forced sales is likely limited and temporary, as this fund family holds less than 1 percent of the total bonds outstanding of other more highly indebted U.S. states (such as California, New York, and New Jersey).2 SEC filings indicate that MMFs hold a very small amount of PR’s debt—$21 million—as of the end of June, down from $1.1 billion in December 2013. This exposure is particularly small when compared with the $3 trillion in MMFs’ assets under management. In addition, all MMF holdings of PR obligations are pre-refunded (that is, backed by Treasury securities). Hence, the direct risk for MMFs of a PR default is negligible. Although detailed data on direct exposure of other investors to PR debt are not available, market contacts estimate that the majority of the outstanding debt is held by hedge funds, mutual funds, and retail investors, with a large share of retail investors accounted for by Puerto Rican residents and banks. The significant exposure of local investors to PR debt is likely to exert additional strains on the local economy in the event of a default. As nearly 25 percent of PR debt is insured, a PR default could in principle imperil the ability of monoline bond insurers to conduct new business. However, several indicators suggest that 1 See Michael Corkery and Mary Williams Walsh (2015), “In Puerto Rico, Debt Is Called ‘Not Payable,’ ” New York Times, June 29 (also available online at www.nytimes.com/2015/06/29/business/dealbook/puertoricos-governor-says-islands-debts-are-not-payable.html?_r=0). 2 Preliminary data suggest that, while this fund family has experienced significant outflows in recent weeks, aggregate redemptions in the overall tax-exempt muni fund industry have been small. Page 60 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 these risks are limited. While a few bond insurers have significant exposure to PR debt as a percentage of their qualified statutory capital, upon default, financial guarantors are obligated to make principal and interest payments only as they come due, which would be over a period of many years. Staff estimates suggest that if PR defaults, the financial guarantors with the largest near-term exposure are expected to pay at most 25 percent of their statutory capital within the next year (figure 3). Furthermore, the majority of monolines with exposure to PR appear to have stopped writing new financial guarantees on municipal bonds in recent years, which further limits potential knock-on effects on the broader municipal bond market.3 Financial Developments Although no state or local issuer is as embattled as Puerto Rico, a default may adversely affect the broad municipal bond market for other reasons. In particular, a default by PR may remind investors that repayment by the more fiscally troubled municipalities poses risks. This realization could prompt a temporary outflow from muni funds and briefly reduce the ability of states and municipalities to issue new debt. In addition, a PR default may lead investors to reassess the recovery rate of bondholders’ claims against defaulting states, which could increase future borrowing costs for local governments. 3 While data on individual entities writing CDS contracts on PR debt are not available, aggregate estimates suggest that no more than $600 million gross notional of CDS is linked to a PR default. Page 61 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Other Banking Developments and Money Growth of Core Loans Growth of Treasury Securities Percent Percent 20 3-month moving average June 3-month moving average 15 60 10 40 20 5 June 0 0 -5 -20 -10 -40 -15 -60 -20 2005 2007 2009 2011 2013 2015 2005 Source: Federal Reserve Board, FR 2644, Weekly Report of Selected Assets and Liabilities of Domestically Chartered Commercial Banks and U.S. Branches and Agencies of Foreign Banks. 2007 2009 2011 2013 2015 Note: Includes Treasury and agency non-MBS debt. Source: Federal Reserve Board, FR 2644, Weekly Report of Selected Assets and Liabilities of Domestically Chartered Commercial Banks and U.S. Branches and Agencies of Foreign Banks. Changes in Standards and Demand across Core Loan Categories Net percent Apr. survey Tightening Standards Quarterly 80 60 40 100 Apr. survey Demand Stronger Quarterly Net percent 100 80 60 40 20 Q2 20 Q2 0 -60 -40 -60 -80 -80 -100 1991 1995 1999 2003 2007 2011 2015 0 -20 Weaker -40 Easing Financial Developments -20 -100 1991 1995 1999 2003 2007 2011 2015 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, with results weighted by survey respondents’ holdings of loans in each category. Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices. Growth of M2 and Its Components S&P 500 Stock Price Indexes Ratio scale; June 16, 2015 = 100 June FOMC Daily Percent, s.a.a.r. 110 S&P 500 July 21 Source: Bloomberg. Small time deposits Retail MMFs Curr. 100 2014 5.7 7.0 -8.0 -2.8 7.5 90 2014:H2 5.2 6.5 -8.7 -2.8 6.2 2015:Q1 7.6 9.1 -10.0 -4.0 9.8 2015:Q2 5.0 6.7 -18.2 -3.4 5.1 June 4.6 5.6 -16.3 5.5 4.7 70 2014 Liquid deposits 80 S&P 500 Bank Index 2013 M2 2015 60 Note: Retail MMFs are retail money market funds. 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 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Outstanding balances of auto and student loans kept expanding at a robust pace through May, and consumers appeared to rely on credit to finance vehicle purchases more than they did a year ago. The gradual recovery in revolving credit that started in early 2014 appeared to stay broadly on track. Banks indicated in the SLOOS that the level of their lending standards for credit card loans has eased somewhat relative to a few years ago. Nevertheless, a range of indicators suggest that standards and terms of credit card loans likely remain tight, particularly for subprime borrowers. Amid robust issuance in the second quarter, spreads in the consumer ABS market widened a bit toward the upper edge of their narrow range seen after the financial crisis. Demand for ABS appeared to remain solid, with deals reportedly oversubscribed. OTHER BANKING DEVELOPMENTS AND MONEY Bank-intermediated credit continued to expand during the second quarter. The rapid rise in banks’ Treasury holdings largely ceased, as most large banks are now compliant with the liquidity coverage ratio. During the first half of the intermeeting period, bank stock prices declined as risk sentiment deteriorated, but they subsequently recovered with the broader market. Banks’ stock prices were further supported by the second quarter, primarily as a result of somewhat higher net interest margins that resulted from loan growth and expense containment.4 M2 expanded at a moderate pace in June amid a continuation of recent trends in the growth of its major individual components, and liquid deposits as a share of M2 stayed at an all-time high. FEDERAL RESERVE OPERATIONS AND SHORT-TERM FUNDING MARKETS Short-term funding markets remained stable, and the Federal Reserve’s RRP testing operations continued to provide a soft floor on money market rates.5 The Desk 4 The Federal Reserve Board’s approval of the final rule on risk-based capital surcharges applicable to U.S. global systemically important banks on July 20 induced no apparent reaction in banks’ equity prices. 5 The effective federal funds rate averaged 13 basis points over the intermeeting period, with the intraday standard deviation averaging 4 basis points. The announcement that the calculation of the effective federal funds rate would change next year to a volume-weighted median in conjunction with the transition to the FR 2420 (Report of Selected Money Market Rates) data source—as noted in both the June FOMC minutes and a Federal Reserve Bank of New York statement—did not elicit any price reaction. Page 63 of 94 Financial Developments generally positive earnings reports; bank profitability was reported to have improved in Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Federal Reserve Operations and Short-Term Funding Markets Sources of Term RRP Awards at Quarter-End Money Market Rates Basis points Quarter-end (June 30, 2015) Daily ON RRP Federal funds Eurodollar GCF Treasury repo Triparty Treasury repo 3-month Treasury bill Billions of dollars 70 Daily 60 Change in govt. MMF ON RRP* Change in prime MMF ON RRP* Change in non-MMF ON RRP* Other sources 50 200 Govt. MMF term RRP Prime MMF term RRP Non-MMF term RRP 160 120 40 July 21 240 80 30 40 20 0 10 -40 -80 0 -120 Apr. 1 Apr. 23 May 14 2015 June 5 June 26 July 20 Dec. 8 Dec. 15 Dec. 22 Dec. 29 Mar. 19 2014 Note: GCF is General Collateral Finance; repo is repurchase agreement. Source: Depository Trust & Clearing Corporation; Federal Reserve Bank of New York; Federal Reserve Board. Mar. 30 June 25 June 29 2015 Note: MMF is money market fund. * 1-day change in ON RRP allotment from the previous day. Source: Federal Reserve Bank of New York. Outstanding Term Treasury Repo ON RRP and Term RRP Take-Up Billions of dollars Billions of dollars 350 Daily Daily 450 ON RRP Term RRP 300 Private triparty Fed term RRPs 500 400 250 350 300 200 250 Financial Developments July 20 150 200 July 21 100 150 100 50 50 0 Sept. 2014 Nov. Jan. Mar. 2015 May 0 July Oct. 2014 Source: Federal Reserve Bank of New York. Feb. Apr. June 2015 Source: Federal Reserve Bank of New York. Distribution of the Change in Total RRP Take-Up from Previous Quarter-End ON RRP and Term RRP Take-Up, by Type Billions of dollars Daily Dec. Percent of counterparties 700 ON RRP Term RRP 600 Govt. MMF Prime MMF Other Govt. MMF Prime MMF Other 500 From 2014:Q4 to 2015:Q1 From 2015:Q1 to 2015:Q2 60 50 40 400 30 300 20 200 10 100 0 June 18 June 24 June 30 July 7 July 13 2015 Note: MMF is money market fund. Source: Federal Reserve Bank of New York. July 17 -10 -8 -6 -4 -2 0 2 4 6 Billions of dollars 8 10 12 14 Source: Federal Reserve Bank of New York. Note: Overnight reverse repurchase agreements (ON RRPs) specify operations in which the trade matures on the next business day. Term reverse repurchase agreements (term RRPs) specify operations in which the trade matures more than 1 business day after the settlement date. Page 64 of 94 0 16 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 auctioned two term RRPs covering June quarter-end, each with an offered amount of $100 billion and a maximum bid rate of 8 basis points. Both operations were slightly oversubscribed, with awards allocated at 7 basis points. Similar to previous quarter-ends, counterparties generally substituted from ON RRP into term RRP, with limited apparent substitution out of private term reverse repo positions into term RRP. Moreover, at $393 billion, total take-up of term and ON RRPs on June 30, as well as the pattern of take-up at the counterparty level, was consistent with recent quarter-ends.6 Over the intermeeting period, the Desk purchased $36 billion of agency MBS Financial Developments under the reinvestment program and rolled $0.1 billion in expected settlements. 6 The monetary base contracted in June because of temporary factors, including the greater take-up at the Federal Reserve’s RRP operations over quarter-end and an increase in the Treasury’s General Account. Page 65 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Financial Developments (This page is intentionally blank.) Page 66 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Risks and Uncertainty ALTERNATIVE SCENARIOS To illustrate some of the risks to the outlook, we construct a number of alternatives to the baseline projection using simulations of staff models. The first two scenarios illustrate risks associated with the possibility that labor productivity could turn out weaker than in the staff projection. In both of these scenarios, the economy suffers an adverse shock to aggregate supply. In the first, aggregate demand moves down in line with aggregate supply, while in the second, aggregate demand continues along its baseline trajectory, resulting in a stronger labor market and tighter resource utilization. In the third scenario, economic activity is significantly stronger than in the baseline and inflation turns out to be more sensitive to cyclical pressures. In the fourth scenario, we explore the risk that losses within the financial sector could weaken economic activity more materially if their effects were amplified by high leverage in the financial system. In the fifth scenario, a disorderly exit of Greece from the euro-area monetary union causes Europe to plunge into recession with substantial adverse effects on the global economy. In the final scenario, a deterioration of financial conditions and confidence in China triggers spillovers to other emerging markets and a flight to quality that appreciates the dollar. We generate the first and second scenarios using the FRB/US model, while the third uses the EDO model. The fourth scenario uses a model similar in spirit to EDO but explicitly models the behavior of leveraged financial intermediaries. The final two scenarios are generated using the multicountry SIGMA model. Once the federal funds rate has risen above its current target range, its movements are governed—as in the baseline forecast—by an inertial version of the Taylor (1999) rule. The date of liftoff in each scenario is set using a mechanical procedure intended to be broadly consistent with that the size and composition of the SOMA portfolio follow their baseline paths. 1 For the scenarios run in SIGMA, we assume a policy rule broadly similar to the FRB/US and EDO simulations. One key difference relative to the FRB/US and EDO simulations is that the policy rule in SIGMA 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 slow adjustment of wages and prices. Page 67 of 94 Risks & Uncertainty the guidance provided in the Committee’s recent statements.1 In all cases, we assume Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Alternative Scenarios (Percent change, annual rate, from end of preceding period except as noted) 2015 Measure and scenario Risks & Uncertainty H1 H2 2016 2017 201819 Real GDP Extended Tealbook baseline Weaker labor prod., slower output growth Weaker labor prod., stronger labor market Faster growth with higher inflation Adverse credit shock with high leverage Greek exit with sizable spillovers China-driven EME slump with stronger dollar 1.1 1.1 1.1 1.1 1.1 1.1 1.1 2.0 1.3 2.0 3.2 2.0 1.8 1.6 2.3 1.9 2.2 3.8 -.2 1.5 1.3 2.1 1.7 1.9 2.2 3.8 1.8 2.1 1.8 1.5 1.4 1.5 2.4 2.0 2.2 Unemployment rate1 Extended Tealbook baseline Weaker labor prod., slower output growth Weaker labor prod., stronger labor market Faster growth with higher inflation Adverse credit shock with high leverage Greek exit with sizable spillovers China-driven EME slump with stronger dollar 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.2 5.2 5.0 5.0 5.2 5.2 5.3 5.2 5.2 4.7 4.4 6.1 5.5 5.6 5.1 5.1 4.5 4.4 5.4 5.6 5.7 5.0 5.0 4.4 4.6 4.8 5.4 5.4 Total PCE prices Extended Tealbook baseline Weaker labor prod., slower output growth Weaker labor prod., stronger labor market Faster growth with higher inflation Adverse credit shock with high leverage Greek exit with sizable spillovers China-driven EME slump with stronger dollar .0 .0 .0 .0 .0 .0 .0 .7 .7 .8 1.5 .7 .5 -.1 1.6 1.8 1.8 1.9 1.6 .9 .6 1.7 1.9 1.9 2.2 1.7 1.2 1.5 1.9 1.9 2.1 2.3 1.9 1.6 1.9 Core PCE prices Extended Tealbook baseline Weaker labor prod., slower output growth Weaker labor prod., stronger labor market Faster growth with higher inflation Adverse credit shock with high leverage Greek exit with sizable spillovers China-driven EME slump with stronger dollar 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.4 1.4 1.4 1.5 1.4 1.2 1.1 1.5 1.7 1.7 1.9 1.6 1.0 .9 1.7 1.8 1.9 2.2 1.7 1.2 1.4 1.9 2.0 2.1 2.3 1.9 1.6 1.8 Federal funds rate1 Extended Tealbook baseline Weaker labor prod., slower output growth Weaker labor prod., stronger labor market Faster growth with higher inflation Adverse credit shock with high leverage Greek exit with sizable spillovers China-driven EME slump with stronger dollar .1 .1 .1 .1 .1 .1 .1 .4 .4 .4 .5 .4 .4 .4 1.2 1.3 1.7 2.3 .4 .8 .7 2.1 2.2 2.9 3.8 1.0 .9 1.0 3.1 3.2 4.3 4.9 3.1 2.2 2.5 1. Percent, average for the final quarter of the period. Page 68 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Weaker Labor Productivity, Slower Output Growth Labor productivity growth has been quite weak over the past few years. In the baseline, we assume that productivity growth rebounds to a pace in line with its average over the past 10 years. Here we present two alternative scenarios in which productivity growth is weaker than in the baseline (though still somewhat stronger than the meager ½ percent growth over the past four years). Specifically, in both we assume that labor productivity growth is 50 basis points below baseline in 2016 and 2017. However, the weakness occurs in two different environments, with differing policy implications. In the first scenario, we assume a slowdown in structural productivity growth that, through permanent income effects, also reduces spending and, hence, actual output growth, leaving the output gap and unemployment rate broadly unchanged relative to the baseline. The weakness in structural productivity raises core inflation around 15 basis points relative to baseline in 2016 and 2017; this increase is because weaker productivity growth implies a faster rise in unit labor costs, which has a direct role in determining inflation in the FRB/US model.2 The prescription for policy is therefore largely unchanged from the baseline—and, in fact, is marginally tighter in response to the higher inflation. Weaker Labor Productivity, Stronger Labor Market In the second scenario illustrating risks to the labor productivity forecast, the slower growth in output per hour again reflects weakness on the supply side of the economy, but this time we assume that household and business spending continues along its baseline trajectory. In effect, the adverse aggregate supply shock is counterbalanced by a favorable aggregate demand shock. As a result, actual output growth is broadly unchanged compared with the baseline, but employment grows more rapidly and the unemployment rate falls more steeply. With a more rapid take-up of slack than in the first scenario, inflation is higher still. about 1 percentage point above the baseline. With resource utilization noticeably tighter The staff’s judgmental apparatus does not have a direct role for unit labor costs in determining inflation. As such, under the staff’s judgmental apparatus the lower productivity would have little effect on price inflation but would instead lower wage inflation. The resulting prescription for monetary policy in this scenario using the judgmental apparatus would be even closer to the baseline. 2 Page 69 of 94 Risks & Uncertainty In this scenario, the output gap closes in 2016 and moves up to 1 percent in 2017, Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Forecast Confidence Intervals and Alternative Scenarios Confidence Intervals Based on FRB/US Stochastic Simulations Extended Tealbook baseline Weaker labor prod., slower output growth Weaker labor prod., stronger labor market Faster growth with higher inflation Adverse credit shock with high leverage Real GDP Greek exit with sizable spillovers China−driven EME slump with stronger dollar Unemployment Rate 4-quarter percent change 70 percent interval Percent 6 9.0 8.5 5 8.0 7.5 4 7.0 6.5 3 6.0 2 5.5 5.0 1 4.5 4.0 0 3.5 90 percent interval 3.0 −1 2.5 −2 2012 2014 2016 2.0 2018 2012 PCE Prices excluding Food and Energy 2014 2016 2018 Federal Funds Rate 4-quarter percent change Percent 4.0 7 3.5 6 3.0 5 2.5 4 2.0 Risks & Uncertainty 3 1.5 2 1.0 1 0.5 0 0.0 2012 2014 2016 2018 2012 Page 70 of 94 2014 2016 2018 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 and inflation higher, the policy prescription is for a markedly steeper funds rate path, and the policy rate reaches 4¼ percent by the end of 2019. Faster Growth with Higher Inflation Labor market indicators continue to be relatively strong: Overall payrolls rose an average of 210,000 per month over the first half of the year, for example, and the unemployment rate declined 0.3 percentage point despite measured GDP growth averaging only 1 percent at an annual rate. One plausible interpretation is that the underlying state of the economy is, in fact, considerably more robust than assumed in the baseline. In this scenario, households’ and businesses’ confidence about the underlying strength of the economy leads them to be more willing to spend and hire than in the baseline, supporting a much faster economic expansion. We also assume that inflation is more sensitive to reductions in resource slack than in the standard version of the EDO model, consistent with the estimates of some other DSGE models.3 As a result, real GDP growth averages about 3¼ percent in the second half of 2015 and 3¾ percent in 2016, compared with 2 percent and 2¼ percent, respectively, in the baseline. The unemployment rate falls to nearly 4¼ percent early in 2017 before rising back slowly toward the natural rate. With resource utilization tighter and the Phillips curve steeper, inflation rises faster than in the baseline, reaching 2¼ percent by the end of 2017.4 The federal funds rate rises more quickly than in the baseline, reaching 5 percent by the end of 2019. Given enough time, tighter monetary policy would eventually return output to a sustainable trajectory and bring inflation back to 2 percent. Adverse Credit Shock with High Leverage The most recent QS Assessment of Financial Stability notes that lenders’ risk appetite for nonfinancial business sector credit remains elevated, presumably spurred, in part, by “reach for yield” in the context of the prolonged period of low interest rates. 3 We make inflation more sensitive to slack by reducing the adjustment cost parameters for prices and wages in EDO. In particular, we use values that are two standard deviations below the EDO point estimates of these two parameters. 4 The larger rise in inflation depends importantly on the smaller adjustment costs for wages and prices in this scenario. Had we used our standard coefficients in these equations, inflation would have peaked at 2 percent. Page 71 of 94 Risks & Uncertainty Although the staff’s baseline outlook does not envisage a marked deterioration in credit Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 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 2015 2016 2017 2018 2019 1.5 2.3 2.1 2.0 1.7 .5–3.1 .8–2.3 .5–4.0 1.0–4.0 -.1–4.0 .7–4.0 ... .4–3.8 ... -.1–3.6 5.2 5.2 5.1 5.0 5.0 4.8–5.6 4.8–5.6 4.2–6.2 4.2–5.9 3.6–6.6 3.7–6.1 ... 3.3–6.2 ... 3.2–6.2 .3 1.6 1.7 1.8 1.9 -.4–.7 -.1–.9 .8–3.3 .7–2.6 .7–3.4 .7–2.8 ... .8–3.0 ... .8–3.0 1.3 1.5 1.7 1.8 1.9 1.0–1.5 .9–1.7 .9–2.3 .7–2.4 ... .8–2.6 ... .9–2.9 ... .9–3.0 .4 1.2 2.1 2.7 3.1 .1–.5 .3–2.0 .6–3.5 .9–4.8 1.2–5.6 Note: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969–2014 set of model equation residuals. Intervals derived from Tealbook forecast errors are based on projections made from 1980 to 2014 for real GDP and unemployment and from 1998 to 2014 for PCE prices. The intervals for real GDP, unemployment, and total PCE prices are extended into 2017 using information from the Blue Chip survey and forecasts from the CBO and CEA. . . . Not applicable. Page 72 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Prediction Intervals Derived from Historical Tealbook Forecast Errors Historical Distributions Forecast Error Percentiles Q4 Level, Percent Unemployment Rate Historical revisions Tealbook forecasts Augmented Tealbook 1 median 15% to 85% 5% to 95% data/forecast range 2012 2013 2014 2015 2016 2017 12 4 10 3 8 2 6 1 4 0 2 2012 1980 to 2014 Q4/Q4, Percent Real GDP Growth Q4/Q4, Percent PCE Inflation 2013 2014 2015 2016 2017 -1 1998 to 2014 Q4/Q4, Percent Core PCE Inflation 8 4 6 3 4 2 2 1 0 0 -2 2012 2013 2014 2015 2016 2017 -4 2012 1980 to 2014 2013 2014 2015 2016 2017 -1 1998 to 2014 Historical Distributions PCE Inflation Real GDP Growth Annual, Percent 25 median 15% to 85% 5% to 95% 20 2.5% to 97.5% range Annual, Percent Annual, Percent 20 16 12 12 12 8 8 4 4 0 0 -4 -4 -8 -8 -8 -12 -12 -12 0 -4 5 0 1980 to 2014 Annual, Percent 4 10 1930 to 1947 to 2014 2014 16 16 8 15 Core PCE Inflation -16 1930 to 1947 to 1980 to 2014 2014 2014 -16 1930 to 1947 to 1998 to 2014 2014 2014 -16 1930 to 1947 to 1998 to 2014 2014 2014 Note: See the technical note in the appendix for more information on this exhibit. 1. Augmented Tealbook prediction intervals use 1- and 2-year-ahead forecast errors from Blue Chip, CBO, and CEA to extend the Tealbook prediction intervals through 2017. Page 73 of 94 Risks & Uncertainty Unemployment Rate Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 performance, this alternative scenario assumes that a large fraction of that risky credit sours in the near term. The model used to generate this scenario includes a leveraged financial sector with sizable credit risk exposure that serves as an important amplification mechanism. In particular, higher leverage leaves the system more vulnerable to adverse shocks that reduce the net worth of financial firms. In the aftermath of an adverse shock to financial firms’ net worth, the financial sector sharply curtails lending and thus imposes a material drag on economic activity.5 We suppose that effective leverage in the financial system moves by early next year to a level as high as that observed pre-crisis. Losses at financial institutions are then assumed to spike significantly. As a result, real GDP contracts in 2016 and the unemployment rate climbs back to almost 6¼ percent.6 The tightening of policy called for in the baseline by the inertial Taylor rule in late 2015 is halted, and the federal funds rate hovers around ½ percent in 2016 and early 2017 until economic conditions improve. Inflation in the scenario moves little from the baseline in part because the model assumes a flat Phillips curve, but also because the deterioration of banks’ balance sheets leads to a reduction in investment, which reduces the marginal productivity of labor and so limits the decline in marginal cost. Greek Exit with Sizable Spillovers Despite recent actions by the Greek government and its official-sector creditors laying the groundwork for a new three-year aid program, Greece’s continued membership in the euro area is far from assured. In particular, given substantial political uncertainty within Greece, dire economic conditions, and the unpopularity of the austerity measures, there is some risk that negotiations with creditors over the new bailout may break down completely; alternatively, even if a new bailout is agreed upon, there is risk that the Risks & Uncertainty Greek government may fail to adhere to its terms, leading the European authorities to 5 This scenario is conditioned on the financial system being fairly highly leveraged: Given the currently strong capital position of the banking sector, the scenario might best be thought of as reflecting risks emanating from the nonbank financial sector, where leverage is challenging to comprehensively measure in real time. 6 In contrast, the same adverse shock without the additional leverage would cause unemployment in the model to reach only 5¾ percent. The notion that lower leverage implies less amplification of the macroeconomic effects of losses within the financial system was also discussed in simulations of a related DSGE model in the box “CCAR/DFAST Trends” in the April QS Assessment of Financial Stability, pages 26–28. Page 74 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 withdraw financial support. While we think that the firewalls erected during the past few years would keep spillovers from a possible Greek exit from the euro area largely contained, this scenario considers a more adverse outcome in which a Greek exit causes both a severe recession in the euro area and broader financial market turmoil. Specifically, our scenario assumes that euro-area real GDP falls about 4 percent relative to the baseline by early 2017 as peripheral sovereign bond spreads rise sharply above baseline and euro-area confidence tumbles. These developments have substantial adverse spillovers to the United States. U.S. corporate bond spreads are assumed to rise about 50 basis points, while flight-to-safety flows help push the trade-weighted dollar up nearly 7 percent.7 Weaker foreign activity and the stronger dollar cause U.S. real net exports to fall relative to the baseline. U.S. domestic demand also declines relative to the baseline as a result of tighter credit conditions, and U.S. real GDP expands only 1½ percent in 2016. Lower U.S. output and lower import price inflation slow U.S. core inflation to 1 percent in 2016, about ½ percentage point below baseline. The inertial Taylor rule prescribes a considerably shallower path for the federal funds rate than in the baseline. China-Driven EME Slump with Stronger Dollar China’s economy faces important financial-sector vulnerabilities, as suggested by its weakened property market, high credit-to-GDP ratio, and, most recently, the plunge in its stock market following its earlier run-up. Our baseline projection assumes that the stock market correction has little effect on the Chinese economy and financial system. But in this scenario, we assume that a further plunge in equity prices interacts with other weaknesses in the financial system to trigger a more generalized crisis and recession. Specifically, China’s GDP falls about 7 percent below baseline by the end of next year, and there are marked spillovers to other EMEs that reduce their GDP about 3½ percent. In addition, considerable flight-to-quality flows into dollar-denominated assets contribute 7 The adverse spillovers from a Greek exit in this scenario are smaller than those featured in the June 2015 Tealbook scenario “Greek Exit with Severe Spillovers.” The surprising resilience displayed by financial markets in recent weeks—even as tensions between Greece and its creditors mounted —has given us a bit more confidence that a Greek exit would not generate a 2008-style global financial crisis. That said, the possibility that more severe spillovers could ensue following Greek exit—along the lines considered in the June Tealbook, or even worse —should not be entirely discounted. Page 75 of 94 Risks & Uncertainty to an appreciation of the broad real dollar of 8 percent. Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 The weaker foreign economic activity and the appreciation of the dollar cause U.S. real net exports to fall relative to baseline. As a result, U.S. real GDP growth slows to only 1¼ percent at an annual rate in 2016, and the unemployment rate increases to 5½ percent, about ½ percentage point higher than in the baseline. Core PCE inflation declines to slightly less than 1 percent in 2016 as a result of both the dollar’s appreciation and lower resource utilization. As a result, the federal funds rate rises more gradually Risks & Uncertainty going forward. Page 76 of 94 Authorized for Public Release July 22, 2015 Class II FOMC - Restricted (FR) Assessment of Key Macroeconomic Risks (1) Probability of Inflation Events (4 quarters ahead—2016:Q2) Probability that the 4-quarter change in total PCE prices will be ... Staff FRB/US EDO BVAR Greater than 3 percent Current Tealbook Previous Tealbook .03 .04 .04 .07 .13 .14 .08 .08 Less than 1 percent Current Tealbook Previous Tealbook .42 .29 .28 .19 .24 .22 .15 .16 Probability of Unemployment Events (4 quarters ahead—2016:Q2) Probability that the unemployment rate will... Staff FRB/US EDO BVAR Increase by 1 percentage point Current Tealbook Previous Tealbook .04 .05 .04 .04 .27 .25 .01 .01 Decrease by 1 percentage point Current Tealbook Previous Tealbook .11 .10 .04 .04 .03 .04 .37 .35 Probability that real GDP declines in each of 2015:Q3 and 2015:Q4 Current Tealbook Previous Tealbook Staff FRB/US EDO BVAR Factor Model .05 .04 .02 .03 .03 .03 .03 .03 .17 .41 Note: “Staff” represents Tealbook forecast errors applied to the Tealbook baseline; baselines for FRB/US, BVAR, EDO, and the factor model are generated by those models themselves, up to the current-quarter estimate. Data for the current quarter are taken from the staff estimate for the second Tealbook in each quarter; if the second Tealbook for the current quarter has not yet been published, the preceding quarter is taken as the latest historical observation. Page 77 of 94 Risks & Uncertainty Probability of Near-Term Recession Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Assessment of Key Macroeconomic Risks (2) Probability that Total PCE Inflation Is above 3 Percent Probability that Total PCE Inflation Is below 1 Percent (4 quarters ahead) (4 quarters ahead) Probability Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 FRB/US BVAR 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 0 1998 Probability that the Unemployment Rate Increases 1 ppt 2000 2002 2004 2006 2008 2010 2012 2014 Probability that the Unemployment Rate Decreases 1 ppt (4 quarters ahead) (4 quarters ahead) Probability Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Probability that Real GDP Declines in Each of the Next Two Quarters Probability 1 .8 Risks & Uncertainty .6 .4 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Note: See notes on facing page. Recession and inflation probabilities for FRB/US and the BVAR are real-time estimates. See Robert J. Tetlow and Brian Ironside (2007), "Real−Time Model Uncertainty in the United States: The Fed, 1996−2003," Journal of Money, Credit and Banking , vol. 39 (October), pp. 1533−61. Page 78 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Appendix Technical Note on “Prediction Intervals Derived from Historical Tealbook Forecast Errors” This technical note provides additional details about the exhibit “Prediction Intervals Derived from Historical Tealbook Forecast Errors.” In the four large fan charts, the black dotted lines show staff projections and current estimates of recent values of four key economic variables: average unemployment rate in the fourth quarter of each year and the Q4/Q4 percent change for real GDP, total PCE prices, and core PCE prices. (The GDP series is adjusted to use GNP for those years when the staff forecast GNP and to strip out software and intellectual property products from the currently published data for years preceding their introduction. Similarly, the core PCE inflation series is adjusted to strip out the “food away from home” component for years before it was included in core.) The prediction intervals around the current and one-year-ahead forecasts are derived from historical staff forecast errors, comparing staff forecasts with the latest published data. For the unemployment rate and real GDP growth, errors were calculated for 1980 through 2014, yielding percentiles of the sizes of the forecast errors. For PCE and core PCE inflation, errors for 1998 through 2014 were used. This shorter range reflects both more limited data on staff forecasts of PCE inflation and the staff judgment that the distribution of inflation since the mid1990s is more appropriate for the projection period than distributions of inflation reaching further back. In all cases, the prediction intervals are computed by adding the percentile bands of the errors onto the forecast. The blue bands encompass 70 percent prediction-interval ranges; adding the green bands expands this range to 90 percent. The dark blue line plots the median of the prediction intervals. There is not enough historical forecast data to calculate meaningful 90 percent ranges for the two inflation series. A median line above the staff forecast means that forecast errors were positive more than half of the time. Stanley Lebergott (1957), “Annual Estimates of Unemployment in the United States, 1900–1954,” in National Bureau of Economic Research, The Measurement and Behavior of Unemployment (Princeton, N.J.: Princeton University Press), pp. 213 –41. 1 Page 79 of 94 Risks & Uncertainty The historical distributions of the corresponding series (with the adjustments described above) are plotted immediately to the right of each of the fan charts. The thin black lines show the highest and lowest values of the series during the indicated time period. At the bottom of the page, the distributions over three different time periods are plotted for each series. To enable the use of data for years prior to 1947, we report annual-average data in this section. The annual data going back to 1930 for GDP growth, PCE inflation, and core PCE inflation are available in the conventional national accounts; we used estimates from Lebergott (1957) for the unemployment rate from 1930 to 1946.1 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Because the staff has produced two-year-ahead forecasts for only a few years, the intervals around the two-year-ahead forecasts are constructed by augmenting the staff projection errors with information from outside forecasters: the Blue Chip consensus, the Council of Economic Advisers, and the Congressional Budget Office. Specifically, we calculate prediction intervals for outside forecasts in the same manner as for the staff forecasts. We then calculate the change in the error bands from outside forecasts from one year ahead to two years ahead and apply the average change to the staff’s one-year-ahead error bands. That is, we assume that any deterioration in the performance between the one- and two-year-ahead projections of the outside forecasters would also apply to the Tealbook projections. Limitations on the availability of data mean that a slightly shorter sample is used for GDP and unemployment, and the outside projections may only be for a similar series, such as total CPI instead of total PCE prices or annual growth rates of GDP instead of four-quarter changes. In particular, because data on forecasts for core inflation by these outside forecasters are much more limited, we did not extrapolate the staff’s errors for core PCE inflation two years ahead. Risks & Uncertainty The intervals around the historical data in the four fan charts are based on the history of data revisions for each series. The previous-year, two-year-back, and three-year-back values as of the current Tealbook forecast are subtracted from the corresponding currently published estimates (adjusted as described earlier) to produce revisions, which are then combined into distributions and revision intervals in the same way that the prediction intervals are created. Page 80 of 94 -.8 6.8 6.4 2.4 -.6 5.0 3.0 3.6 4.2 4.1 4.2 4.0 2.9 4.4 2.2 3.3 4.2 4.1 4.6 3.7 2.7 4.1 4.1 Quarterly 2014:Q1 Q2 Q3 Q4 2015:Q1 Q2 Q3 Q4 2016:Q1 Q2 Q3 Q4 Two-quarter2 2014:Q2 Q4 2015:Q2 Q4 2016:Q2 Q4 Four-quarter3 2013:Q4 2014:Q4 2015:Q4 2016:Q4 2017:Q4 Page 81 of 94 4.6 3.7 2.6 4.1 4.0 2.9 4.4 2.2 3.0 4.1 4.0 -.8 6.8 6.4 2.4 -.2 4.7 3.4 2.7 4.2 4.0 4.0 4.0 07/22/15 3.1 2.4 1.6 2.4 2.2 1.2 3.6 1.0 2.1 2.4 2.4 -2.1 4.6 5.0 2.2 -.5 2.5 1.9 2.3 2.3 2.5 2.5 2.4 06/10/15 3.1 2.4 1.5 2.3 2.1 1.2 3.6 1.1 2.0 2.3 2.3 -2.1 4.6 5.0 2.2 -.2 2.4 1.7 2.3 2.3 2.3 2.3 2.3 07/22/15 Real GDP 1.0 1.1 .6 1.6 1.8 1.9 .4 -.1 1.3 1.6 1.6 1.4 2.3 1.2 -.4 -2.0 1.9 1.4 1.2 1.6 1.6 1.6 1.6 06/10/15 1.0 1.1 .3 1.6 1.7 1.9 .4 .0 .7 1.7 1.6 1.4 2.3 1.2 -.4 -2.0 2.0 1.2 .2 1.7 1.6 1.6 1.6 07/22/15 PCE price index 1.3 1.4 1.3 1.6 1.8 1.6 1.2 1.2 1.4 1.6 1.5 1.2 2.0 1.4 1.1 .8 1.6 1.5 1.3 1.6 1.6 1.6 1.5 06/10/15 Greensheets 1.3 1.4 1.3 1.5 1.6 1.3 1.4 1.3 1.5 1.7 1.6 1.2 1.2 1.4 1.6 1.5 1.2 2.0 1.4 1.1 .8 1.7 1.4 1.3 1.6 1.6 1.5 1.5 07/22/15 7.4 6.2 5.4 5.3 5.2 -.8 -1.3 -.4 -.1 .0 -.8 -.5 -.2 -.2 .0 -.1 6.6 6.2 6.1 5.7 5.6 5.5 5.4 5.3 5.3 5.3 5.3 5.2 06/10/15 7.4 6.2 5.4 5.2 5.1 -.8 -1.3 -.5 .0 -.1 -.8 -.5 -.3 -.2 .0 .0 6.6 6.2 6.1 5.7 5.6 5.4 5.3 5.2 5.2 5.2 5.2 5.2 07/22/15 Core PCE price index Unemployment rate1 Class II FOMC - Restricted (FR) Annual 2013 3.7 3.7 2.2 2.2 1.2 1.2 1.3 2014 3.9 3.9 2.4 2.4 1.3 1.3 1.4 2015 3.0 3.1 2.0 2.1 .3 .3 1.3 2016 4.0 3.8 2.3 2.2 1.5 1.3 1.5 2017 4.1 4.0 2.3 2.2 1.7 1.7 1.7 1. Level, except for two-quarter and four-quarter intervals. 2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points. 3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points. 06/10/15 Interval Nominal GDP Changes in GDP, Prices, and Unemployment (Percent, annual rate except as noted) Authorized for Public Release July 22, 2015 Page 82 of 94 1.7 1.7 -.9 .9 -3.8 3.4 85 85 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local Change in priv. inventories2 Previous Tealbook2 82 82 4.4 4.4 9.9 16.0 .4 1.1 -431 -431 4.5 -.9 8.9 8.9 10.1 10.1 4.8 4.8 3.2 3.2 3.2 3.2 9.2 2.5 2.5 5.0 5.0 4.1 4.1 5.0 5.0 Q3 80 80 -1.9 -1.9 -7.3 -12.2 1.5 1.6 -471 -471 4.5 10.4 4.7 4.7 4.4 4.4 5.9 5.9 3.8 3.8 4.4 4.4 6.2 4.1 4.3 2.3 2.3 4.5 4.5 2.2 2.2 Q4 95 100 1.1 1.3 -1.1 -2.0 .5 2.4 -.6 -.6 .0 -1.2 2.0 -1.0 100 98 -558 -554 3.1 4.0 2.5 1.0 4.5 3.7 -4.3 -8.3 8.4 11.3 2.8 2.8 10.1 2.6 1.7 2.5 2.4 3.0 2.8 2.4 2.5 Q2 -548 -546 -5.9 7.1 -2.0 -2.8 3.5 2.4 -18.8 -18.9 6.5 6.3 2.1 1.8 1.3 .8 2.7 -.6 -.9 1.6 1.3 -.2 -.5 Q1 92 96 .2 .3 -1.4 -1.9 -.5 1.2 -591 -591 .0 5.1 2.6 2.0 2.9 3.2 1.4 -2.2 5.8 6.8 2.9 3.4 6.7 3.2 2.2 1.8 2.0 3.0 3.3 1.7 1.9 Q3 2015 92 88 .6 .5 -.7 -.9 -.4 1.4 -621 -617 1.8 6.0 3.1 3.6 3.6 4.2 1.3 1.7 5.0 6.2 3.3 3.5 7.5 2.8 2.8 2.3 2.6 3.4 3.6 2.3 2.3 Q4 112 92 .3 .6 -1.6 -2.6 .0 1.5 -677 -667 -2.2 6.5 2.6 3.3 4.2 4.7 -3.3 -2.1 11.7 11.6 3.4 3.6 7.0 2.5 3.2 1.8 2.2 3.6 3.9 2.3 2.3 Q1 101 84 .6 .3 -1.1 -1.8 .0 1.6 -711 -699 1.9 6.5 4.0 3.9 4.4 4.5 2.5 1.6 12.9 13.1 3.3 3.5 6.8 2.7 3.0 2.6 2.7 3.8 3.9 2.3 2.5 Q2 101 80 .8 1.6 -.6 -.9 .0 1.7 -751 -738 1.3 6.8 3.8 3.8 4.2 4.6 2.0 .8 11.4 12.4 3.2 3.3 6.5 2.7 2.9 2.4 2.6 3.7 3.8 2.3 2.5 Q3 2016 80 67 .6 .6 -1.4 -2.3 .0 1.7 -763 -746 3.5 4.2 3.6 3.6 4.1 4.5 1.9 .4 10.4 10.8 3.1 2.8 5.6 2.8 2.8 2.9 2.7 3.5 3.3 2.3 2.4 Q4 71 71 .8 .8 .2 -.3 1.1 1.2 -453 -453 2.4 5.6 6.2 6.2 6.1 6.1 6.5 6.5 2.5 2.5 2.9 2.9 8.1 2.2 2.2 2.4 2.4 3.3 3.3 2.4 2.4 20141 95 95 .3 .4 -.8 -1.5 .4 1.0 -580 -577 -.3 5.5 1.5 .9 3.6 3.4 -5.5 -7.3 6.4 7.6 2.8 2.9 6.4 2.4 2.3 1.5 1.5 2.7 2.8 1.5 1.6 20151 98 81 .6 .8 -1.1 -1.9 .0 1.6 -726 -712 1.1 6.0 3.5 3.7 4.2 4.6 .8 .2 11.6 12.0 3.3 3.3 6.5 2.7 3.0 2.4 2.6 3.7 3.7 2.3 2.4 20161 50 39 .8 1.1 -1.0 -1.7 .1 1.9 -804 -785 3.0 3.7 2.9 2.9 3.3 3.6 1.4 .3 6.9 8.0 2.7 2.7 4.2 2.5 2.5 2.5 2.6 2.9 3.0 2.1 2.2 20171 Class II FOMC - Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Billions of chained (2009) dollars. -460 -460 11.1 11.3 Net exports2 Previous Tealbook2 Exports Imports 9.7 9.7 8.9 8.9 12.6 12.6 8.8 8.8 Residential investment Previous Tealbook Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook 2.5 2.5 14.1 2.2 .9 3.2 3.2 3.8 3.8 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 4.6 4.6 Q2 Real GDP Previous Tealbook Item 2014 Greensheets Changes in Real Gross Domestic Product and Related Items (Percent, annual rate except as noted) Authorized for Public Release July 22, 2015 Page 83 of 94 3.3 3.3 8.4 9.4 6.5 .2 -34 -34 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local Change in priv. inventories1 Previous Tealbook1 -148 -148 2.3 2.3 3.9 3.6 4.6 1.3 -395 -395 .8 -6.2 -12.2 -12.2 -6.0 -6.0 -27.1 -27.1 -10.8 -10.8 -.2 -.2 2.5 .2 -.8 -.4 -.4 -2.4 -2.4 -.2 -.2 2009 58 58 -1.1 -1.1 3.2 2.0 5.5 -4.0 -459 -459 10.1 12.0 8.1 8.1 12.0 12.0 -4.0 -4.0 -5.2 -5.2 3.1 3.1 9.3 3.3 2.0 2.0 2.0 3.5 3.5 2.7 2.7 2010 Greensheets 38 38 -3.0 -3.0 -4.0 -4.1 -3.9 -2.3 -459 -459 4.2 3.5 9.0 9.0 9.2 9.2 8.0 8.0 6.0 6.0 1.5 1.5 4.8 .4 1.4 1.5 1.5 2.6 2.6 1.7 1.7 2011 57 57 -1.7 -1.7 -2.6 -4.9 1.4 -1.0 -452 -452 2.4 .4 3.7 3.7 3.3 3.3 4.8 4.8 15.8 15.8 2.0 2.0 7.5 1.0 1.5 2.1 2.1 2.6 2.6 1.6 1.6 2012 64 64 -1.9 -1.9 -6.3 -6.1 -6.6 1.2 -420 -420 5.1 2.5 4.7 4.7 4.8 4.8 4.4 4.4 6.9 6.9 2.8 2.8 5.9 2.5 2.4 2.6 2.6 3.2 3.2 3.1 3.1 2013 71 71 .8 .8 .2 -.3 1.1 1.2 -453 -453 2.4 5.6 6.2 6.2 6.1 6.1 6.5 6.5 2.5 2.5 2.9 2.9 8.1 2.2 2.2 2.4 2.4 3.3 3.3 2.4 2.4 2014 95 95 .3 .4 -.8 -1.5 .4 1.0 -580 -577 -.3 5.5 1.5 .9 3.6 3.4 -5.5 -7.3 6.4 7.6 2.8 2.9 6.4 2.4 2.3 1.5 1.5 2.7 2.8 1.5 1.6 2015 98 81 .6 .8 -1.1 -1.9 .0 1.6 -726 -712 1.1 6.0 3.5 3.7 4.2 4.6 .8 .2 11.6 12.0 3.3 3.3 6.5 2.7 3.0 2.4 2.6 3.7 3.7 2.3 2.4 2016 50 39 .8 1.1 -1.0 -1.7 .1 1.9 -804 -785 3.0 3.7 2.9 2.9 3.3 3.6 1.4 .3 6.9 8.0 2.7 2.7 4.2 2.5 2.5 2.5 2.6 2.9 3.0 2.1 2.2 2017 Class II FOMC - Restricted (FR) 1. Billions of chained (2009) dollars. -558 -558 -2.8 -6.0 Net exports1 Previous Tealbook1 Exports Imports -8.9 -8.9 -11.8 -11.8 -1.2 -1.2 -24.3 -24.3 Residential investment Previous Tealbook Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook -2.0 -2.0 -12.9 -2.7 .3 -2.1 -2.1 -4.1 -4.1 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services -2.8 -2.8 2008 Real GDP Previous Tealbook Item Changes in Real Gross Domestic Product and Related Items (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release July 22, 2015 Page 84 of 94 1.4 1.4 Change in priv. inventories Previous Tealbook .0 .0 .8 .8 .7 .7 .0 .1 .8 .8 .6 .2 1.1 1.1 1.0 1.0 .1 .1 .1 .1 2.2 2.2 .7 .4 1.2 5.0 5.0 3.5 3.5 5.0 5.0 Q3 -.1 -.1 -.4 -.4 -.5 -.6 .0 .2 -1.0 -1.0 .6 -1.6 .6 .6 .4 .4 .2 .2 .1 .1 3.0 3.0 .5 .6 1.9 2.3 2.3 3.7 3.7 2.2 2.2 Q4 .5 .4 -.1 -.1 .0 -.1 .1 -.1 -1.9 -1.8 -.8 -1.1 -.3 -.4 .3 .2 -.6 -.6 .2 .2 1.4 1.2 .1 .1 1.2 -.6 -.9 1.4 1.1 -.2 -.5 Q1 -.1 .1 .2 .2 -.1 -.1 .0 .3 -.2 -.2 .4 -.6 .3 .1 .4 .4 -.1 -.2 .3 .4 1.9 1.9 .7 .4 .8 2.5 2.4 2.5 2.4 2.4 2.5 Q2 -.1 -.1 .0 .1 -.1 -.1 .0 .1 -.8 -.9 .0 -.8 .3 .3 .3 .3 .0 -.1 .2 .2 2.0 2.3 .5 .5 1.0 1.8 2.0 2.5 2.8 1.7 1.9 Q3 2015 .0 -.2 .1 .1 .0 .0 .0 .2 -.7 -.6 .2 -.9 .4 .5 .4 .4 .0 .0 .2 .2 2.3 2.4 .6 .4 1.3 2.3 2.5 2.8 3.0 2.3 2.3 Q4 .5 .1 .1 .1 -.1 -.1 .0 .2 -1.3 -1.2 -.3 -1.0 .3 .4 .4 .5 -.1 -.1 .4 .4 2.4 2.5 .5 .4 1.5 1.8 2.2 3.1 3.3 2.3 2.3 Q1 -.3 -.2 .1 .1 -.1 -.1 .0 .2 -.8 -.7 .2 -1.0 .5 .5 .4 .4 .1 .0 .4 .4 2.3 2.4 .5 .4 1.4 2.6 2.6 3.2 3.3 2.3 2.5 Q2 .0 -.1 .1 .3 .0 .0 .0 .2 -.9 -.9 .2 -1.1 .5 .5 .4 .5 .1 .0 .4 .4 2.2 2.3 .5 .4 1.4 2.3 2.6 3.1 3.2 2.3 2.5 Q3 2016 -.5 -.3 .1 .1 -.1 -.1 .0 .2 -.2 -.2 .4 -.7 .5 .5 .4 .4 .1 .0 .4 .4 2.2 1.9 .4 .4 1.3 2.9 2.7 3.0 2.8 2.3 2.4 Q4 .0 .0 .1 .1 .0 .0 .0 .1 -.6 -.6 .3 -.9 .8 .8 .6 .6 .2 .2 .1 .1 1.9 1.9 .6 .3 1.0 2.4 2.4 2.8 2.8 2.4 2.4 20141 .1 .0 .1 .1 -.1 -.1 .0 .1 -.9 -.9 .0 -.9 .2 .1 .4 .3 -.2 -.2 .2 .2 1.9 2.0 .5 .3 1.1 1.5 1.5 2.3 2.3 1.5 1.6 20151 -.1 -.1 .1 .1 -.1 -.1 .0 .2 -.8 -.8 .1 -.9 .4 .5 .4 .5 .0 .0 .4 .4 2.3 2.3 .5 .4 1.4 2.4 2.5 3.1 3.2 2.3 2.4 20161 -.3 -.3 .1 .2 -.1 -.1 .0 .2 -.2 -.2 .4 -.6 .4 .4 .3 .4 .0 .0 .3 .3 1.9 1.9 .3 .4 1.2 2.4 2.6 2.5 2.6 2.1 2.2 20171 Class II FOMC - Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. .3 .3 -.1 .0 -.1 .4 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local 1.2 1.2 .8 .8 .4 .4 Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook -.3 -.3 1.4 -1.8 .3 .3 Residential investment Previous Tealbook Net exports Previous Tealbook Exports Imports 1.8 1.8 1.0 .3 .4 3.2 3.2 3.2 3.2 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 4.6 4.6 Q2 Real GDP Previous Tealbook Item 2014 Contributions to Changes in Real Gross Domestic Product (Percentage points, annual rate except as noted) Greensheets Authorized for Public Release July 22, 2015 Page 85 of 94 2.4 2.4 2.2 2.2 3.4 3.4 2.9 2.9 -1.0 -1.0 -3.9 -3.9 CPI Previous Tealbook Ex. food & energy Previous Tealbook ECI, hourly compensation2 Previous Tealbook2 Business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook .5 .5 3.3 3.3 2.1 2.1 -1.2 -1.2 2.7 2.7 1.2 1.2 1.4 1.4 1.2 1.2 -4.0 -4.0 3.1 3.1 1.4 1.4 1.4 1.4 1.4 1.4 Q3 -.8 -.8 -2.3 -2.3 3.1 3.1 5.5 5.5 2.0 2.0 -.9 -.9 1.5 1.5 -.4 -.4 -26.0 -26.0 2.1 2.1 1.1 1.1 .7 .7 .1 .1 Q4 -4.4 -4.3 -2.4 -2.8 3.1 3.1 5.6 6.1 3.0 3.0 -3.1 -3.1 1.7 1.7 -2.0 -2.0 -44.5 -44.5 -.2 -.2 .8 .8 .6 .5 .0 -.1 Q1 -3.0 -4.0 2.1 2.3 2.6 2.7 .4 .4 2.5 2.5 3.0 3.0 2.5 2.6 2.0 1.9 15.7 15.6 -1.1 -.9 1.7 1.6 1.7 1.8 2.3 2.5 Q2 -.8 -.2 2.2 2.9 3.2 3.4 1.0 .5 2.6 2.6 .1 1.4 1.7 1.7 .2 1.2 -21.5 -2.8 1.5 1.4 1.3 1.3 1.3 1.3 .4 1.2 Q4 Greensheets -.8 -.6 1.9 2.2 2.3 2.9 .3 .7 2.6 2.6 1.6 1.7 1.9 1.9 1.2 1.4 -3.0 -.7 1.0 .8 1.4 1.5 1.4 1.5 1.7 1.1 Q3 2015 .3 .5 1.8 2.0 3.5 3.5 1.7 1.5 2.8 2.9 2.1 2.0 2.0 2.0 1.7 1.6 4.4 3.2 1.6 1.5 1.6 1.6 1.6 1.6 1.8 1.9 Q1 .9 1.0 1.7 2.0 3.1 3.3 1.4 1.3 2.8 2.9 2.0 2.0 2.0 2.0 1.6 1.6 2.8 2.3 1.7 1.6 1.6 1.6 1.6 1.6 1.7 1.7 Q2 1.2 1.2 1.7 1.9 3.1 3.4 1.4 1.4 2.8 2.9 2.1 2.0 2.0 2.0 1.6 1.6 3.1 2.1 1.8 1.7 1.5 1.6 1.5 1.6 1.6 1.7 Q3 2016 1.2 1.2 1.7 1.8 3.1 3.4 1.4 1.5 2.8 2.9 2.1 2.0 2.0 2.0 1.6 1.6 3.1 1.6 1.9 1.8 1.5 1.5 1.5 1.5 1.6 1.6 Q4 .6 .6 -.4 -.4 2.6 2.6 3.0 3.0 2.3 2.3 1.2 1.2 1.7 1.7 1.1 1.1 -6.1 -6.1 2.8 2.8 1.4 1.4 1.2 1.2 1.2 1.2 20141 -2.3 -2.3 1.0 1.1 2.8 3.0 1.8 1.9 2.7 2.7 .4 .7 2.0 2.0 .3 .6 -16.4 -11.3 .3 .3 1.3 1.3 1.2 1.3 1.1 1.2 20151 .9 1.0 1.7 1.9 3.2 3.4 1.4 1.4 2.8 2.9 2.1 2.0 2.0 2.0 1.6 1.6 3.3 2.3 1.8 1.6 1.5 1.6 1.5 1.6 1.7 1.7 20161 1.4 1.5 1.7 1.9 3.3 3.4 1.5 1.4 2.8 2.9 2.1 2.1 2.1 2.1 1.7 1.8 2.3 1.3 2.0 1.9 1.7 1.8 1.7 1.8 1.8 1.8 20171 Class II FOMC - Restricted (FR) 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. .2 .2 2.3 2.3 5.2 5.2 4.5 4.5 2.0 2.0 1.8 1.8 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 Core goods imports chain-wt. price index3 Previous Tealbook3 2.1 2.1 Q2 GDP chain-wt. price index Previous Tealbook Item 2014 Changes in Prices and Costs (Percent, annual rate except as noted) Authorized for Public Release July 22, 2015 1.5 1.5 -8.2 -8.2 6.9 6.9 1.6 1.6 2.2 2.2 1.6 1.6 2.0 2.0 2.4 2.4 -.2 -.2 2.9 2.9 3.2 3.2 3.9 3.9 PCE chain-wt. price index Previous Tealbook Energy Previous Tealbook Food Previous Tealbook Ex. food & energy Previous Tealbook Ex. food & energy, market based Previous Tealbook CPI Previous Tealbook Ex. food & energy Previous Tealbook ECI, hourly compensation1 Previous Tealbook1 Business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook Page 86 of 94 Core goods imports chain-wt. price index2 Previous Tealbook2 -1.9 -1.9 5.6 5.6 1.3 1.3 -4.2 -4.2 1.2 1.2 1.5 1.5 1.8 1.8 1.2 1.2 2.3 2.3 -1.8 -1.8 1.4 1.4 1.8 1.8 .4 .4 2009 2.3 2.3 1.7 1.7 1.2 1.2 -.4 -.4 2.1 2.1 1.2 1.2 .6 .6 1.3 1.3 6.4 6.4 1.3 1.3 1.0 1.0 .7 .7 1.8 1.8 2010 4.3 4.3 .0 .0 .6 .6 .6 .6 2.2 2.2 3.3 3.3 2.2 2.2 2.7 2.7 12.0 12.0 5.1 5.1 1.9 1.9 1.9 1.9 1.9 1.9 2011 .2 .2 .2 .2 5.6 5.6 5.4 5.4 1.8 1.8 1.9 1.9 1.9 1.9 1.6 1.6 2.1 2.1 1.2 1.2 1.6 1.6 1.5 1.5 1.8 1.8 2012 -1.0 -1.0 2.3 2.3 -.1 -.1 -2.3 -2.3 2.0 2.0 1.2 1.2 1.7 1.7 1.0 1.0 -2.6 -2.6 .7 .7 1.3 1.3 1.2 1.2 1.4 1.4 2013 .6 .6 -.4 -.4 2.6 2.6 3.0 3.0 2.3 2.3 1.2 1.2 1.7 1.7 1.1 1.1 -6.1 -6.1 2.8 2.8 1.4 1.4 1.2 1.2 1.2 1.2 2014 -2.3 -2.3 1.0 1.1 2.8 3.0 1.8 1.9 2.7 2.7 .4 .7 2.0 2.0 .3 .6 -16.4 -11.3 .3 .3 1.3 1.3 1.2 1.3 1.1 1.2 2015 .9 1.0 1.7 1.9 3.2 3.4 1.4 1.4 2.8 2.9 2.1 2.0 2.0 2.0 1.6 1.6 3.3 2.3 1.8 1.6 1.5 1.6 1.5 1.6 1.7 1.7 2016 1.4 1.5 1.7 1.9 3.3 3.4 1.5 1.4 2.8 2.9 2.1 2.1 2.1 2.1 1.7 1.8 2.3 1.3 2.0 1.9 1.7 1.8 1.7 1.8 1.8 1.8 2017 Class II FOMC - Restricted (FR) 1. Private-industry workers. 2. Core goods imports exclude computers, semiconductors, oil, and natural gas. 1.9 1.9 2008 GDP chain-wt. price index Previous Tealbook Item Greensheets Changes in Prices and Costs (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release July 22, 2015 Page 87 of 94 58.9 60.2 -2.3 -2.3 5.7 5.7 5.9 7.0 75.1 77.1 1.0 16.5 Employment-to-Population Ratio3 Employment-to-Population Trend3 GDP gap4 Previous Tealbook4 Industrial production5 Previous Tealbook5 Manufacturing industr. prod.5 Previous Tealbook5 Capacity utilization rate - mfg.3 Previous Tealbook3 Housing starts6 Light motor vehicle sales6 17.9 2.9 Gross national saving rate3 Net national saving rate3 18.1 3.1 12.8 12.2 6.4 2.4 2.4 4.8 4.8 1.0 16.7 3.9 4.1 3.8 4.4 75.7 77.5 -1.4 -1.3 59.0 60.1 .7 6.1 6.1 5.1 5.2 Q3 18.2 3.2 -5.5 12.0 2.4 4.1 4.1 4.7 4.7 1.1 16.7 4.7 4.6 3.4 3.8 76.2 77.8 -1.0 -1.0 59.2 60.0 .9 5.7 5.7 5.1 5.2 Q4 18.5 3.4 -19.2 11.4 -.2 5.3 5.4 5.4 5.5 1.0 16.6 -.2 -.7 -.7 -1.0 75.9 77.3 -1.5 -1.5 59.3 60.0 .8 5.6 5.6 5.1 5.2 Q1 18.0 3.1 16.3 11.7 4.7 3.0 2.3 5.4 5.3 1.1 17.1 -1.7 -1.8 1.5 .1 75.9 77.0 -1.3 -1.3 59.4 59.9 .6 5.4 5.5 5.1 5.2 Q2 2015 17.9 2.9 4.0 11.7 3.4 1.7 2.1 5.1 5.0 1.1 16.9 1.2 1.3 1.7 1.3 76.0 76.9 -1.2 -1.2 59.4 59.8 .7 5.3 5.4 5.1 5.2 Q3 17.8 2.8 -9.9 11.3 2.7 2.6 2.0 5.0 4.6 1.1 16.8 .0 -.5 1.2 1.1 76.0 76.8 -1.0 -1.0 59.4 59.7 .6 5.2 5.3 5.1 5.2 Q4 17.6 2.5 -.7 11.2 4.2 3.9 3.6 5.1 4.7 1.2 16.8 1.2 1.2 1.4 1.2 76.0 76.7 -.9 -.9 59.4 59.7 .6 5.2 5.3 5.1 5.2 Q1 17.6 2.4 -.5 11.1 4.0 2.3 2.4 4.8 4.4 1.3 16.8 2.7 2.6 2.5 2.4 76.1 76.9 -.7 -.7 59.4 59.6 .5 5.2 5.3 5.1 5.2 Q2 2016 17.5 2.2 3.4 11.1 4.0 2.3 2.5 4.6 4.2 1.4 16.8 2.1 1.8 2.3 2.1 76.3 76.9 -.5 -.5 59.4 59.5 .5 5.2 5.3 5.1 5.2 Q3 17.4 2.1 4.5 11.1 4.0 2.3 2.6 4.4 4.2 1.4 16.8 1.9 1.7 2.2 2.0 76.4 76.9 -.4 -.4 59.4 59.4 .5 5.2 5.2 5.1 5.2 Q4 Greensheets 18.2 3.2 -.2 12.0 3.7 3.3 3.3 4.7 4.7 1.0 16.4 4.5 4.6 3.4 4.1 76.2 77.8 -1.0 -1.0 59.2 60.0 2.9 5.7 5.7 5.1 5.2 20141 17.8 2.8 -3.1 11.3 2.6 3.2 2.9 5.0 4.6 1.1 16.8 -.2 -.4 .9 .4 76.0 76.8 -1.0 -1.0 59.4 59.7 2.7 5.2 5.3 5.1 5.2 20151 17.4 2.1 1.6 11.1 4.1 2.7 2.8 4.4 4.2 1.3 16.8 2.0 1.8 2.1 1.9 76.4 76.9 -.4 -.4 59.4 59.4 2.1 5.2 5.2 5.1 5.2 20161 17.2 1.6 -.1 10.6 4.0 2.5 2.5 4.2 4.0 1.5 16.7 2.0 1.9 1.8 1.7 76.6 76.8 .1 .1 59.2 59.1 1.7 5.1 5.2 5.1 5.2 20171 Class II FOMC - Restricted (FR) 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. 38.3 12.0 Corporate profits7 Profit share of GNP3 6.8 3.1 3.1 5.1 5.1 .8 6.2 6.2 5.2 5.2 Employment and production Nonfarm payroll employment2 Unemployment rate3 Previous Tealbook3 Natural rate of unemployment3 Previous Tealbook3 Income and saving Nominal GDP5 Real disposable pers. income5 Previous Tealbook5 Personal saving rate3 Previous Tealbook3 Q2 Item 2014 Other Macroeconomic Indicators Authorized for Public Release July 22, 2015 Page 88 of 94 -3.8 -3.8 -8.9 -8.9 -11.5 -11.6 70.2 70.0 .9 13.1 GDP gap3 Previous Tealbook3 Industrial production4 Previous Tealbook4 Manufacturing industr. prod.4 Previous Tealbook4 Capacity utilization rate - mfg.2 Previous Tealbook2 Housing starts5 Light motor vehicle sales5 14.9 -1.6 Gross national saving rate2 Net national saving rate2 14.6 -1.7 53.7 10.6 .1 -.7 -.7 5.6 5.6 .6 10.4 -5.4 -5.5 -6.1 -6.1 67.1 67.1 -5.5 -5.5 58.4 61.3 -5.6 9.9 9.9 6.2 6.2 2009 15.2 -.4 18.0 12.0 4.6 2.6 2.6 5.5 5.5 .6 11.5 5.9 6.2 6.0 6.4 72.5 72.7 -4.4 -4.4 58.3 60.9 .8 9.5 9.5 6.2 6.2 2010 16.1 .8 6.8 12.3 3.6 1.7 1.7 5.8 5.8 .6 12.7 2.8 3.2 2.7 3.1 74.4 74.6 -4.2 -4.2 58.5 60.6 2.0 8.7 8.7 6.0 6.0 2011 17.8 2.8 3.8 12.4 3.5 5.0 5.0 8.6 8.6 .8 14.4 2.1 3.2 1.5 3.5 74.1 75.5 -4.1 -4.1 58.7 60.3 2.2 7.8 7.8 5.8 5.8 2012 17.9 3.0 4.7 12.4 4.6 -1.9 -1.9 4.4 4.4 .9 15.5 2.3 3.3 1.3 2.9 74.2 76.4 -2.8 -2.8 58.5 60.2 2.5 7.0 7.0 5.4 5.4 2013 18.2 3.2 -.2 12.0 3.7 3.3 3.3 4.7 4.7 1.0 16.4 4.5 4.6 3.4 4.1 76.2 77.8 -1.0 -1.0 59.2 60.0 2.9 5.7 5.7 5.1 5.2 2014 17.8 2.8 -3.1 11.3 2.6 3.2 2.9 5.0 4.6 1.1 16.8 -.2 -.4 .9 .4 76.0 76.8 -1.0 -1.0 59.4 59.7 2.7 5.2 5.3 5.1 5.2 2015 17.4 2.1 1.6 11.1 4.1 2.7 2.8 4.4 4.2 1.3 16.8 2.0 1.8 2.1 1.9 76.4 76.9 -.4 -.4 59.4 59.4 2.1 5.2 5.2 5.1 5.2 2016 17.2 1.6 -.1 10.6 4.0 2.5 2.5 4.2 4.0 1.5 16.7 2.0 1.9 1.8 1.7 76.6 76.8 .1 .1 59.2 59.1 1.7 5.1 5.2 5.1 5.2 2017 Class II FOMC - Restricted (FR) 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. -30.8 6.9 Corporate profits6 Profit share of GNP2 -.9 1.1 1.1 6.1 6.1 61.4 62.0 Employment-to-Population Ratio2 Employment-to-Population Trend2 Income and saving Nominal GDP4 Real disposable pers. income4 Previous Tealbook4 Personal saving rate2 Previous Tealbook2 -2.8 6.9 6.9 5.6 5.6 2008 Employment and production Nonfarm payroll employment1 Unemployment rate2 Previous Tealbook2 Natural rate of unemployment2 Previous Tealbook2 Item Greensheets Other Macroeconomic Indicators (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release July 22, 2015 Page 89 of 94 -445.9 .2 .2 .2 -.1 .1 .2 -403.1 -1.0 -.1 -.1 .0 .1 -.2 .2 .3 -.1 .2 .1 .2 -490.1 -534 3,566 4,135 970 613 356 3,166 -569 250 147 401 62 -20 3,426 3,869 -443 -444 .2 .3 -.1 .2 .1 .4 -584.0 -595 3,703 4,341 982 616 366 3,359 -638 248 145 596 2 -120 3,550 4,029 -478 -470 2017 -.6 -.6 .0 -.1 -.5 -.1 -342.2 -539 3,243 3,803 957 610 347 2,846 -560 251 142 262 20 -42 656 897 -241 -241 Q1a .0 .0 -.1 .4 -.3 .5 -425.5 -580 3,277 3,875 956 610 345 2,920 -599 255 139 -46 3 -4 938 890 47 47 158 211 -19 -74 760 877 -117 -117 Q3a .7 .7 .7 .1 -.1 .3 -486.4 -589 3,342 3,953 988 641 347 2,965 -611 254 2014 Q2a -.4 -.4 -.5 .2 -.1 -.2 -453.9 -532 3,349 3,901 961 614 347 2,940 -552 256 223 240 -65 1 739 916 -177 -177 Q4a 2015 Q3 254 -16 -154 44 1,027 901 126 81 209 32 45 3 812 892 -80 -82 Q4 56 29 154 70 751 1,003 -253 -239 Not seasonally adjusted Q2 -.2 -.1 .0 -.1 .0 -.4 -386.6 -464 .4 .4 -.1 .3 .2 .5 -479.9 -544 .3 .3 -.1 .1 .2 -.1 -463.3 -524 .3 .3 .0 .2 .2 -.2 -427.3 -482 Seasonally adjusted annual rates 3,418 3,471 3,508 3,522 3,906 4,041 4,061 4,035 962 963 962 963 612 612 611 611 350 351 352 352 2,944 3,078 3,099 3,072 -488 -571 -553 -514 254 253 251 251 100 67 123 73 680 943 -263 -263 Q1a .1 .2 -.1 .2 .1 .5 -519.0 -569 3,539 4,142 971 614 357 3,172 -603 250 155 353 -99 -30 722 946 -223 -230 Q1 .2 .2 -.1 .2 .1 -.1 -497.8 -539 3,579 4,155 971 613 358 3,183 -575 249 169 -94 -14 -30 1,087 950 138 130 147 113 21 -30 866 971 -105 -106 Q3 .3 .4 .0 .2 .1 .1 -516.2 -546 3,625 4,209 973 614 359 3,236 -584 249 2016 Q2 Greensheets .2 .2 -.1 .2 .1 .1 -531.7 -551 3,669 4,260 973 613 361 3,287 -591 248 132 195 16 -30 803 983 -180 -166 Q4 Class II FOMC - Restricted (FR) 1. Other means of financing include checks issued less checks paid, accrued items, and changes in other financial assets and liabilities. 2. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises. 3. 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 natural rate of unemployment. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. Quarterly figures for change in HEB are not at annual rates. 4. Fiscal impetus measures the contribution to growth of real GDP from fiscal policy actions at the general government level (excluding multiplier effects). It equals the sum of the direct contributions to real GDP growth from changes in federal purchases and state and local purchases, plus the estimated contribution from real consumption and investment that is induced by discretionary policy changes in transfers and taxes. a Actual. Fiscal indicators High-employment (HEB) surplus/deficit3 Change in HEB, percent of potential GDP Fiscal impetus (FI), percent of GDP4 Previous Tealbook Federal purchases State and local purchases Taxes and transfers -516 -561 209 3,436 3,977 962 612 350 3,015 -541 253 158 Cash operating balance, end of period 323 -51 122 3,259 3,652 -393 -441 2016 Fiscal year 2015 3,267 3,844 963 617 346 2,882 -577 256 798 -70 -245 Means of financing: Borrowing Cash decrease Other1 NIPA federal sector Receipts Expenditures Consumption expenditures Defense Nondefense Other spending Current account surplus Gross investment Gross saving less gross investment2 3,021 3,504 -482 -482 2014 Unified budget Receipts Outlays Surplus/deficit Previous Tealbook Item Staff Projections of Federal Sector Accounts and Related Items (Billions of dollars except as noted) Authorized for Public Release July 22, 2015 2.0 2.0 1.4 3.2 .7 1.5 .4 .4 2.5 1.4 1.4 .8 5.3 4.8 6.5 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil Page 90 of 94 2 2.0 2.0 .8 1.2 1.3 1.2 .4 1.4 2.9 2.1 .6 2.2 4.9 4.4 6.2 2.9 2.8 1.8 3.2 -2.0 2.9 .7 .3 3.9 6.2 3.2 8.1 2.1 2.1 .6 Q3 GDP aggregates calculated using shares of U.S. exports. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. 2.9 3.0 3.0 3.3 9.3 1.7 .4 .3 2.9 2.4 2.2 2.0 4.3 3.3 7.4 2.4 2.3 1.4 3.4 -6.8 3.7 .4 -.3 3.3 4.9 2.0 7.6 2.1 3.7 -5.5 Q2 1.1 1.1 -.4 .0 -.8 -.7 -.5 -.4 2.3 1.2 -.2 1.0 4.8 4.2 6.0 2.5 2.4 2.0 2.2 1.2 3.4 1.4 2.8 3.0 4.0 1.1 7.0 2.1 2.7 1.1 Q4 -.1 -.1 -.9 -.2 -.3 -1.7 -1.5 -1.7 .4 -.3 -.3 -.4 1.6 .3 11.1 1.6 1.6 .8 -.6 3.9 1.5 1.5 1.1 2.4 4.0 3.3 5.1 1.1 1.6 -.6 Q1 2.6 2.1 1.9 2.5 1.0 1.1 2.5 2.3 3.1 2.8 2.0 2.6 3.9 2.8 10.8 1.7 2.2 .7 -.2 .5 2.4 1.6 1.7 2.7 4.8 2.3 7.8 1.0 2.3 -4.2 2.2 2.2 1.0 1.4 .2 1.5 1.1 1.4 3.1 2.7 2.6 2.5 3.9 3.1 7.9 2.5 2.7 1.8 2.0 1.5 2.5 1.4 1.7 3.2 5.0 3.5 7.2 1.8 2.9 -1.1 2.2 2.4 1.3 1.8 .5 1.6 1.3 1.4 2.9 2.5 2.8 2.2 3.9 3.3 5.7 2.8 2.9 2.1 2.4 1.4 2.5 1.8 1.9 3.5 5.1 4.2 6.8 2.1 3.0 .4 2.4 2.4 1.4 1.8 .8 1.8 1.4 1.5 3.1 2.8 3.1 2.5 3.9 3.3 5.7 3.0 3.0 2.3 2.6 1.3 2.8 1.9 2.0 3.8 5.2 4.2 6.6 2.6 3.1 1.2 2.4 2.4 1.5 1.8 1.0 1.8 1.4 1.6 3.1 2.8 3.2 2.5 3.8 3.3 5.7 3.1 3.0 2.3 2.6 1.3 2.8 2.1 2.2 3.8 5.2 4.2 6.6 2.6 3.1 1.6 2.4 2.5 1.6 1.9 1.1 1.8 1.5 1.7 3.1 2.8 3.2 2.5 3.8 3.3 5.7 3.1 3.1 2.3 2.5 1.2 2.8 2.2 2.3 4.0 5.2 4.2 6.6 2.9 3.1 1.7 2.5 2.5 1.6 1.9 1.2 1.9 1.6 1.8 3.1 2.8 3.2 2.5 3.8 3.3 5.6 3.1 3.1 2.3 2.3 1.4 2.8 2.3 2.4 4.0 5.2 4.1 6.6 2.9 3.1 1.9 ------------------------------Projected------------------------------2015 2016 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Class II FOMC - Restricted (FR) 1 Foreign 2.2 2.1 1.7 1.0 4.4 3.6 .9 3.1 2.8 4.5 4.4 6.4 1.2 2.0 2.9 Q1 Real Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil GDP 1 Measure and country 2014 Foreign Real GDP and Consumer Prices: Selected Countries (Quarterly percent changes at an annual rate) Greensheets Authorized for Public Release July 22, 2015 Page 91 of 94 1.2 1.2 .2 .8 -2.0 2.2 .4 .3 2.0 1.2 2.4 .6 3.9 4.0 4.3 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 3.2 3.2 1.7 2.2 -.3 3.4 2.0 1.6 4.3 4.3 3.2 4.6 4.4 4.3 5.6 4.8 4.8 3.1 3.6 3.6 2.2 2.3 4.4 6.7 8.3 6.1 9.7 4.7 4.4 5.8 3.4 3.4 2.2 2.7 -.3 4.6 2.9 2.6 4.3 4.5 3.9 4.6 4.0 3.5 6.7 3.2 3.2 1.8 3.0 .3 1.5 .6 2.4 4.6 4.9 2.9 8.7 4.2 4.2 2.5 2011 2 Foreign 2.3 2.3 1.3 1.0 -.2 2.6 2.3 2.0 3.1 2.6 1.7 2.1 4.3 4.1 5.6 2.3 2.3 .3 1.0 .0 .4 -.9 .1 4.3 5.7 2.1 7.8 3.4 3.4 2.3 2012 Greensheets Foreign GDP aggregates calculated using shares of U.S. exports. CPI aggregates calculated using shares of U.S. non-oil imports. .9 .9 -1.5 -1.4 -.6 -1.5 -2.4 -3.0 3.7 7.5 4.9 11.4 .0 -1.2 5.2 Real GDP 1 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 2010 2.3 2.3 1.0 1.0 1.4 2.1 .8 1.3 3.3 3.1 1.1 2.9 4.0 3.7 5.9 2.7 2.6 1.9 2.7 2.3 2.4 .5 1.1 3.4 5.3 3.4 7.5 1.5 1.0 2.1 2013 2.0 2.0 1.2 1.9 2.5 .9 .2 .4 2.6 1.8 1.0 1.5 4.8 4.2 6.5 2.5 2.4 1.7 2.5 -.9 3.4 .9 1.5 3.2 4.9 2.7 7.3 1.9 2.6 -.3 2014 1.7 1.6 .8 1.4 .4 .6 .8 .8 2.4 1.9 1.8 1.7 3.3 2.4 8.9 2.2 2.3 1.3 .9 1.8 2.2 1.6 1.6 2.9 4.7 3.3 6.7 1.5 2.4 -1.4 2.4 2.4 1.5 1.8 1.0 1.8 1.5 1.6 3.1 2.8 3.2 2.5 3.8 3.3 5.6 3.1 3.0 2.3 2.5 1.3 2.8 2.1 2.2 3.9 5.2 4.2 6.6 2.7 3.1 1.6 2.6 2.6 2.0 2.0 2.6 2.0 1.7 1.8 3.1 2.8 3.2 2.5 3.7 3.3 5.4 3.0 2.9 1.9 2.1 -.3 2.4 2.2 2.2 3.9 5.1 3.8 6.5 3.0 3.1 2.3 -------------Projected------------2015 2016 2017 Class II FOMC - Restricted (FR) 1 2009 Measure and country Foreign Real GDP and Consumer Prices: Selected Countries (Percent change, Q4 to Q4) Authorized for Public Release July 22, 2015 Page 92 of 94 -384.0 -380.8 -2.7 -2.6 -383.8 132.3 257.7 -125.4 -132.5 2009 -385.8 -411.5 -2.3 -2.4 -501.7 242.1 302.8 -60.7 -126.2 Q3 2010 -391.6 -403.4 -2.2 -2.3 -503.5 256.4 306.9 -50.4 -144.6 -442.0 -443.9 -3.0 -3.0 -494.7 185.7 288.0 -102.3 -133.0 -368.2 -383.1 -2.1 -2.2 -514.8 241.2 289.6 -48.4 -94.6 Q2 -460.4 -459.3 -3.0 -3.0 -548.6 229.0 298.6 -69.5 -140.8 2011 Q2 Q3 -449.7 -459.9 -2.8 -2.8 -536.8 220.8 290.2 -69.4 -133.7 2012 2013 -470.5 -535.4 -2.6 -3.0 -521.6 192.7 284.2 -91.5 -141.7 -376.8 -402.3 -2.2 -2.4 -478.4 233.6 301.7 -68.1 -132.0 2014 -507.2 -561.7 -2.8 -3.1 -555.5 187.5 286.7 -99.2 -139.3 Q4 -389.5 -414.2 -2.2 -2.4 -508.3 247.4 300.5 -53.1 -128.6 Billions of dollars -440.7 -496.2 -2.5 -2.8 -508.1 206.5 295.6 -89.1 -139.1 Billions of dollars, s.a.a.r. Q1 -453.3 -499.4 -2.6 -2.8 -521.0 212.7 283.6 -71.0 -145.0 Annual Data -412.6 -459.0 -2.3 -2.6 -513.3 249.9 302.5 -52.7 -149.1 Q4 -596.3 -630.0 -3.2 -3.4 -642.2 185.0 305.3 -120.3 -139.1 Q2 -643.9 -676.9 -3.4 -3.6 -686.7 184.5 318.9 -134.4 -141.7 Q3 -664.0 -697.8 -3.5 -3.7 -707.3 182.5 332.4 -149.9 -139.3 Q4 -468.0 -523.2 -2.6 -2.9 -526.6 199.9 287.6 -87.7 -141.2 -622.7 -658.3 -3.3 -3.5 -662.8 184.6 312.9 -128.3 -144.4 -723.0 -747.6 -3.7 -3.8 -754.6 176.1 371.4 -195.3 -144.4 -------------Projected------------2015 2016 2017 -586.6 -628.4 -3.2 -3.4 -615.1 186.3 295.1 -108.8 -157.8 Q1 -------------------------------Projected-----------------------------2015 2016 Class II FOMC - Restricted (FR) U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net Q1 2014 Quarterly Data U.S. Current Account Greensheets Authorized for Public Release July 22, 2015 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 Abbreviations ABS asset-backed securities AFE advanced foreign economy BEA Bureau of Economic Analysis BOC Bank of Canada BOE Bank of England C&I commercial and industrial CMBS commercial mortgage-backed securities CPI consumer price index CRE commercial real estate Desk Open Market Desk DPI disposable personal income DSGE dynamic stochastic general equilibrium ECB European Central Bank EDO Estimated Dynamic Optimization-based Model EMBI Emerging Market Bond Index EME emerging market economy FOMC Federal Open Market Committee; also, the Committee GDP gross domestic product GSE government-sponsored enterprise M&A mergers and acquisitions MBS mortgage-backed securities MERS Middle East Respiratory Syndrome OIS overnight index swap ON RRP overnight reverse repurchase agreement OPEC Organization of the Petroleum Exporting Countries PCE personal consumption expenditures PMI purchasing managers index QE quantitative easing Page 93 of 94 Authorized for Public Release Class II FOMC - Restricted (FR) July 22, 2015 QS quantitative surveillance repo repurchase agreement RRP reverse repurchase agreement SEP Summary of Economic Projections SLOOS Senior Loan Officer Opinion Survey on Bank Lending Practices SNB Swiss National Bank SOMA System Open Market Account S&P Standard & Poor’s TIPS Treasury Inflation-Protected Securities Page 94 of 94
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