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Confidential (FR) Class II FOMC

Part 1

June 18, 2003

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Summary and Outlook

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

Confidential (FR) Class II FOMC

June 18, 2003

Summary and Outlook

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

Domestic Developments
The latest data contain hints that the pace of economic activity may be firming.
Private payrolls were about flat in April and May after declining since last
summer, and activity in the factory sector appears to have stabilized last month
following declines over the preceding three months. Consumer sentiment has
rebounded considerably, on net, from the depressed levels of early spring, and
inflation-adjusted sales at retail establishments in May more than reversed the
drop posted in April. Moreover, low mortgage rates are supporting a high level
of residential construction and have stimulated considerable refinancing activity.
That said, businesses appear to remain exceptionally cautious. Companies are
keeping a tight rein on inventories and are reportedly waiting for moredefinitive signs that a sustained acceleration in demand is under way before
committing to major new investment projects or substantial increases in
payrolls. Given the mixed tenor of the incoming data and anecdotes, it is simply
too soon to assert with confidence that the economy is emerging from the soft
patch.
After increasing at a 1-1/2 percent annual rate in the first half of the year, real
GDP is expected to grow at a 4-1/4 percent annual rate in the second half, about
1/3 percentage point more than in the April Greenbook. The recently enacted
fiscal package is more expansionary than the one we had incorporated in our
April projection, especially in the near term. Stock and bond markets have
rallied impressively over the intermeeting period, driven importantly by an
expectation that monetary policy will remain accommodative for considerably
longer than previously thought. Moreover, the recent depreciation of the dollar
seems likely to shift demand away from foreign-produced goods and services
and toward domestic products.
These positive influences have led us to raise our 2004 real GDP projection to
5-1/4 percent. Although such a rapid pace of economic growth would be a far
cry from recent experience, it reflects our view that the powerful sources of
macroeconomic stimulus will lead to a more durable step-up in the pace of final
demand and that business spending and hiring will gain momentum by the turn
of the year. But the rapid expansion we are projecting for next year also reflects
importantly our above-consensus forecast for the growth of potential
output—and the latest data have done little to dissuade us from our optimistic
outlook for the supply side of the economy. As a consequence, even the
substantial gains in real activity that we are projecting for next year are
insufficient to eliminate the excess capacity in the economy. We project that the
unemployment rate, after peaking at 6-1/4 percent later this year, will drop to
only about 5-1/2 percent by the end of next year.

I-2

Part 1: Summary and Outlook, June 18, 2003

Consumer price inflation remains very low. Although the core CPI increased
0.3 percent in May, it had been unchanged in the preceding two months, and the
twelve-month change was 1-1/2 percent, almost 1 percentage point below the
pace of a year ago. Slack in resource utilization is expected to put further
downward pressure on price inflation over the next year and a half. Following
this year’s deceleration of about 1/2 percentage point, core PCE inflation edges
down a bit further next year, to just under 1 percent.
Key Background Factors
The recently enacted Jobs and Growth Tax Relief Reconciliation Act is expected
to provide considerable fiscal stimulus in the second half of this year and in
2004.1 Although the tax-cut legislation included many of the provisions that we
were anticipating in recent Greenbooks, it included some additional features that
made it more stimulative this year and next. Most notably, the bill’s provisions
for dividend and capital gains tax cuts, the expansion of temporary partial
expensing, and grants to state governments were not part of our assumptions in
the April Greenbook. In addition, the quicker-than-anticipated enactment of the
law allows lower tax withholding to begin this summer, a quarter sooner than
we expected. The new law also provides for an “advance refund” of the
increase in the child tax credit, and checks are expected to be mailed in July and
August.
These new cuts, together with earlier tax cuts and increased spending on
national defense and homeland security, should provide substantial fiscal
stimulus over the projection interval. We estimate that discretionary federal
fiscal policy will boost the growth of real aggregate demand about
1-1/4 percentage points this year and next.2 Although tight budgets are leading
state and local governments to cut spending and—increasingly—to raise taxes,
we estimate that state and local fiscal contraction offsets only a small part—on
the order of 0.2 percentage point per year—of the sizable federal stimulus.
We now expect a federal deficit of $390 billion in the current fiscal year, up
$65 billion from our April projection, mainly because of the tax legislation. For
2004, the deficit projection is $425 billion, up about $15 billion from the April
1. The main provisions of the act are to pull forward to this year the marginal tax-rate cuts
that were scheduled for 2004 and 2006; to allow for marriage-penalty relief and a boost to the
child tax credit in 2003 and 2004; to reduce taxation of dividends and capital gains; and to
expand and extend the partial-expensing provision for equipment investment that was enacted
last year. The act also includes $20 billion in grants to state governments spread over this year
and next.
2. In estimating the implications of the new tax law for aggregate demand, we have assumed
that the provisions of the law that expire at the end of next year—notably the child tax credit and
marriage-penalty relief—will be extended, and that households assume that these provisions will
be extended in making their spending plans.

Domestic Developments

I-3

Greenbook as the stronger economy only partly offsets the effects of the new tax
legislation.
We have assumed a slightly easier stance of monetary policy than in our
previous forecast. In the money market, the expected path for the funds rate has
been revised down substantially more and is now in better alignment with the
staff assumption. In response, a broad array of long-term interest rates have
moved down 1/2 to 3/4 percentage point since the time of the April Greenbook.
Looking ahead, we expect Treasury yields and mortgage rates to move up a bit
from recent levels as the economy improves and markets shift their focus to
possible increases in the funds rate beyond the forecast period. However, yields
on Baa-rated corporate bonds are projected to edge down a bit further over the
forecast period with the improvement in economic conditions.
The current level of equity prices is about 10 percent higher than assumed in the
April Greenbook, and we have raised the near-term path for the stock market
commensurately. In our projection, we assume that broad indexes of stock
prices will rise at an annual rate of about 6 percent in nominal terms, a pace that
equates the risk-adjusted return on equities to that on long-dated Treasury
securities. The rate of increase in equity prices that equalizes returns is slightly
lower than in the previous projection, reflecting the reduction in Treasury yields.
The real trade-weighted foreign exchange value of the dollar has moved down
about 3 percent since the April Greenbook. In our projection, we continue to
assume some modest additional depreciation, as in previous Greenbooks.
Incoming data on foreign economic activity have been weak, and as a
consequence, we have marked down trade-weighted foreign growth this year by
about 3/4 percentage point, to 1-1/2 percent. We anticipate that growth abroad
will pick up next year to about 3-1/2 percent.
Crude oil prices have moved back up somewhat since the April Greenbook, in
part because of expectations that Iraqi oil exports will take longer to return to
pre-war levels than had been anticipated. The spot price of West Texas
intermediate (WTI) is up about $5 per barrel from the time of the last
Greenbook, and we expect it to average nearly $30 per barrel in the third
quarter. In our projection, prices move down in line with futures markets,
falling to a bit below $25 per barrel by the end of 2004, about $1 per barrel
higher than in the April Greenbook.
Recent Developments and the Near-Term Outlook
The latest readings from the industrial sector are somewhat more encouraging
than those from earlier in the year. In particular, manufacturing production rose
0.2 percent in May after falling, on net, in the first four months of the year.
Moreover, surveys of purchasing managers by the ISM and regional groups

I-4

Part 1: Summary and Outlook, June 18, 2003

Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
2003:Q2
Measure
Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Business fixed investment
Government outlays for consumption
and investment

2003:Q3

Apr.
GB

June
GB

Apr.
GB

June
GB

2.0
2.6
2.5
-1.5
5.6

1.5
1.9
2.1
-3.9
3.2

3.4
2.9
2.9
1.4
3.3

3.8
3.7
3.8
1.8
3.7

7.5

7.0

5.3

5.2

Contribution to growth
(percentage points)
Inventory investment
Net exports

-1.0
-.7

-.5
-.9

.2
-.3

-.5
.1

suggest an increase in orders and thus further modest increases in production in
the next few months.
Private payroll employment was about flat in April and May. However, the data
on initial claims for unemployment insurance through early June remain at a
level historically associated with falling employment, making it unclear whether
the labor market has begun a transition to stronger job growth. In the near term,
we are forecasting small private payroll gains of around 25,000 to 50,000 in
June and July along with small increases in hours worked.
Real personal consumption expenditures are expected to rise at an annual rate of
about 2 percent in the current quarter, about the same as in the first quarter.
Boosted by incentives, sales of light motor vehicles appear to be on track for a
current-quarter pace of about 16-1/4 million units at an annual rate, up
somewhat from the first-quarter pace of 15-3/4 million units. The latest data on
retail sales indicate that, after falling in April, spending on goods other than
motor vehicles bounced back in real terms in May. Although consumer
confidence as measured by the Michigan survey retreated a bit in early June, it
remained above the depressed levels of February and March.
Residential construction activity appears to have slipped a bit in the current
quarter from its recent high levels. Housing starts in April and May were below
their first-quarter average, perhaps reflecting the unusually wet weather in many
parts of the country. Nevertheless, home sales in April were up a bit from the

Domestic Developments

I-5

first quarter, and the Mortgage Bankers Association reports that lending for
home purchases continues to be strong.
We anticipate an increase of 7 percent at an annual rate in spending on
equipment and software in the second quarter, following a decline of similar
magnitude in the first. Smoothing through the recent fluctuations, we read the
latest data on nominal computer shipments as moving up, implying a large
increase in real terms. However, orders and shipments for other categories have
shown no particular direction in recent months. Indicators for nonresidential
construction spending have been downbeat, and we have revised down sharply
our current-quarter forecast to show a decline of nearly 8 percent at an annual
rate.
In the April Greenbook, we assumed that real federal expenditures on
consumption and gross investment, pushed up by spending for the war in Iraq,
would rise at an annual rate of 20 percent in the current quarter. The incoming
data on federal spending have so far been consistent with this assumption, and
federal spending thus continues to contribute almost 1-1/2 percentage points to
current-quarter GDP growth. State and local spending is expected to post a
decline in the current quarter because of ongoing budget pressures.
The April trade report indicated that spending on international travel dropped
off sharply, likely as a result of global political uncertainties and SARS.
Though we project that reduced travel will hold down service imports for the
current quarter, we nonetheless anticipate that imports overall will move up
following the first-quarter decline, as goods imports are expected to post an
increase. Exports, importantly affected by the decline in travel, look set to
register their third consecutive quarterly decline. We expect net exports to
reduce current-quarter GDP growth almost 1 percentage point after making a
positive contribution of about the same magnitude in the first quarter.
Recent reports on consumer prices have, on net, come in below our
expectations. We thus expect the core PCE price index to increase 1 percent at
an annual rate in the current quarter, about 1/2 percentage point less than
projected in the April Greenbook. Consumer energy prices have been falling in
the current quarter, reflecting the unwinding of the pre-war run-up in crude oil
prices. As a consequence, overall PCE prices are expected to rise only about
1/2 percent at an annual rate this quarter.
The Longer-Term Outlook for the Economy
As noted above, because of improved financial conditions and greater fiscal
stimulus, we have revised up output growth beginning in the second half of this
year. Taken by themselves, these changes in conditioning assumptions could
have justified an even larger upward revision than we have incorporated. The

I-6

Part 1: Summary and Outlook, June 18, 2003

Projections of Real GDP
(Percent change at annual rate from end of
preceding period except as noted)
Measure
Real GDP
Previous

2003
H1

H2

2004

1.5
1.8

4.2
3.9

5.3
4.8

2.1
2.5

4.5
3.4

4.5
4.2

PCE
Previous

2.0
1.9

4.2
3.3

4.6
4.6

Residential investment
Previous

3.2
4.8

3.5
1.6

4.7
3.8

-1.3
.6

4.5
4.4

14.3
11.2

3.7
4.2

3.5
3.7

.8
1.1

-1.6
.6

8.6
9.3

9.6
9.0

-.6
-.1

4.3
6.9

10.4
10.0

Final sales
Previous

BFI
Previous
Government purchases
Previous
Exports
Previous

Imports
Previous

Contribution to growth,
percentage points
Inventory change
Previous

-.5
-.7

-.3
.4

.8
.5

Net exports
Previous

-.1
.1

.2
-.1

-.6
-.5

smaller markup in our forecast reflects our concern that business caution will
dissipate less quickly than we had previously forecast. We have assumed that
this greater caution will restrain business spending somewhat and will reduce
the stimulative effects that financial conditions and tax incentives have on
investment. Still, with inventories lean, interest rates low, fiscal policy
stimulative, underlying productivity growth strong, and the dollar falling, we
view conditions as conducive to robust growth in economic activity over the
next year and a half.

Domestic Developments

I-7

Household spending. Growth in consumer spending is forecast to pick up
smartly, from an annual rate of 2 percent in the first half of the year to
4-1/4 percent in the second. The recently enacted tax act is expected to make a
major contribution to this acceleration. Indeed, households will begin to see
tangible benefits from the tax cuts in the summer, as new withholding schedules
go into effect and the child-tax-credit advance-rebate checks arrive. We
estimate that tax cuts will contribute about 1-1/4 percentage points to consumer
spending growth in the second half of this year. A number of other factors
support an acceleration in consumer spending both this year and next, including
steady gains in real income that are supported by strong productivity growth and
the waning of the effects of past stock-market declines. For 2004, we are
looking for a rise in consumer spending of about 4-1/2 percent.
As noted earlier, housing starts have recently been off a bit from the very high
levels reached in late 2002 and early this year. We expect single-family starts to
move up from their current-quarter pace of 1.38 million units to 1.45 million
units by the end of the year, boosted by the recent declines in mortgage interest
rates and more-rapid gains in income. With the economy picking up further
next year, we are forecasting single-family starts to average 1.49 million units.
Although multifamily starts are also forecast to rebound in the second half from
their low current-quarter level, high vacancy rates and softness in rents are
expected to limit the improvement in this segment of the market.
Business spending. Underlying conditions appear conducive to a rebound in
business investment. In particular, financing costs are low and tax incentives
are temporarily putting capital equipment on sale. Furthermore, an acceleration
in final sales stemming from the tax cuts and improved financial conditions
should also serve to stimulate new investment. In our forecast, these
fundamentals combine with the lifting of some of the gloom that has beset
business managers to produce a significant acceleration in investment.
The new tax legislation included two important changes to the partial-expensing
program that we had not anticipated in the April Greenbook: The proportion of
equipment purchases eligible for immediate expensing was raised from
30 percent to 50 percent, and the deadline for acquisition was extended from
September 11, 2004, to December 31, 2004. Moreover, firms’ cost of equity
financing was likely reduced by the cuts in dividend and capital gains taxation
that were also part of the recent legislation. These tax-law changes account for

I-8

Part 1: Summary and Outlook, June 18, 2003

the bulk of our upward revision to the growth of equipment and software
spending next year.3
The latest data on nonresidential construction activity have led us to pare our
projection for the second half of this year. For 2004, however, we expect
business construction spending to revive somewhat because of accelerator
effects and low financing costs. Also, high natural gas prices in spot and futures
markets are expected to spur additional drilling activity.
We anticipate a substantial inventory drawdown in the second half of this year
as businesses cautiously adjust output in response to the surge in final sales.
After that, however, we expect inventory investment to move up, putting
stockbuilding into better alignment with sales growth. This step-up in inventory
investment is forecast to contribute 0.8 percentage point to GDP growth next
year.
Government spending. Real outlays for defense, pushed up by war-related
spending, are anticipated to rise about 11 percent this year; next year, they
should drop back a bit. Real nondefense outlays, boosted by spending for
homeland security, are projected to increase 6 percent this year. Next year, they
increase about 3-1/2 percent. At the state and local level, ongoing budget
pressures are likely to hold down spending, and we are projecting real outlays to
edge up this year and to rise just 1-1/2 percent in 2004. The increases for each
year are 1/2 percentage point smaller than in the April Greenbook.
Net exports. Because of the dollar’s depreciation, a recovery of travel-related
services, and the projected pickup in foreign growth, export growth is expected
to step up significantly in the second half of the year, to an annual rate of about
8-1/2 percent. It should move up a bit further next year, as the recovery in
foreign growth firms. We expect imports, restrained by the weaker dollar, to
expand at a 4-1/4 percent annual rate in the second half of this year but to rise
10-1/2 percent in 2004 as U.S. real activity strengthens further. Imports and
exports are expected to rise at about the same pace next year; nonetheless, net
exports subtract 1/2 percentage point from the increase in GDP because imports
are considerably larger than exports. (The International Developments section
provides more detail on the outlook for the external sector.)

3. Because of the extension of temporary partial expensing to the end of 2004, we
eliminated the drop-off in E&S spending growth in the fourth quarter of next year that had been
a feature of our previous forecast. However, if the partial-expensing provision is allowed to
expire as scheduled, the drag on equipment spending in 2005 could be considerable.

I-9

Domestic Developments

Aggregate Supply, the Labor Market, and Prospects for Inflation
Our estimates of structural productivity and potential output growth are little
changed from the April Greenbook. With actual growth in output currently
trailing our estimate of potential, the slack in resource utilization has continued
to widen. We expect that the pickup in growth in the second half of this year
and in 2004 will be sufficient to allow the output and unemployment gaps to
narrow through next year. We project that, by the end of next year, the
unemployment rate will fall to 5.4 percent, 0.2 percentage point lower than
projected in the April Greenbook.
Productivity and the labor market. Our current estimate is that labor
productivity in the nonfarm business sector increased at an annual rate of
2-3/4 percent in the first half of the year. This rapid growth reflects, in part, the
robust pace of structural productivity growth. However, we also think that
hours and employment have been held back by ongoing caution on the part of
firms because of uncertainty about future economic growth.
In the third quarter, firms are expected to remain cautious, limiting the gains in
employment and yielding another large gain in productivity. But later this year,
firms should have the confidence to begin hiring in earnest. As hiring picks up,
productivity growth is forecast to fall short of its underlying structural pace. We
project that next year’s monthly job gains will average more than 350,000 per
Decomposition of Structural Labor Productivity
(Percent change, Q4 to Q4, except as noted)
Measure
Structural labor productivity
Previous
Contributions1
Capital deepening
Previous
Multifactor productivity
Previous
Labor composition
MEMO
Potential GDP
Previous

1973- 19962000
95
99

2001

2002

2003

2004

1.4
1.4

2.5
2.5

2.6
2.6

1.8
1.8

2.3
2.3

2.2
2.2

2.3
2.3

.6
.6
.6
.6
.3

1.3
1.3
1.0
1.0
.3

1.2
1.2
1.1
1.1
.3

.5
.5
1.1
1.1
.3

.4
.4
1.7
1.7
.3

.3
.3
1.6
1.6
.3

.6
.6
1.4
1.4
.3

2.9
2.9

3.5
3.5

3.7
3.7

2.9
2.9

3.3
3.3

3.1
3.1

3.2
3.2

NOTE. Components may not sum to totals because of rounding.
1. Percentage points.

I-10

Part 1: Summary and Outlook, June 18, 2003

The Outlook for the Labor Market
(Percent change, Q4 to Q4, except as noted)
Measure

2001

2002

2003

2004

1.9
1.9

4.1
4.0

2.6
2.0

1.5
1.5

-1.7
-1.4

-.7
-.5

.5
.2

4.1
3.5

-.8
-.8

.3
.3

1.3
1.3

2.9
2.6

Labor force participation rate1
Previous

66.8
66.8

66.5
66.5

66.4
66.4

66.9
67.0

Civilian unemployment rate1
Previous

5.6
5.6

5.9
5.9

6.1
6.1

5.4
5.6

Output per hour, nonfarm business
Previous
Nonfarm private payroll employment
Previous
Household employment survey
Previous

1. Percent, average for the fourth quarter.

month, which should be sufficient to engender a steady decline in the
unemployment rate.
Prices. We expect core consumer price inflation to edge up in the second half
of the year. An important reason for this projection is that we do not expect the
sharp drops in the prices of tobacco, apparel, and motor vehicles to be repeated.
For the year as a whole, we have revised up our outlook for energy prices from a
small decline to an increase of about 4 percent, consistent with higher spot and
futures prices for crude oil and natural gas. As a result, although we have
revised down our outlook for core PCE inflation this year by 1/4 percentage
point, to 1 percent, overall PCE inflation, at 1-1/4 percent, is the same as in the
April Greenbook.
We forecast core PCE inflation to edge down a bit further next year, as
continued slack in labor and product markets puts further downward pressure on
inflation. The overall PCE price index is expected to increase a bit less than the
core measure next year, reflecting falling energy prices.

I-11

Domestic Developments

Inflation Projections
(Percent change, Q4 to Q4, except as noted)
Measure

2001

2002

2003

2004

1.5
1.5

1.8
1.8

1.3
1.3

.8
1.0

3.1
3.1

1.4
1.4

1.9
1.9

1.4
1.5

-10.3
-10.3

7.0
7.0

3.9
-.5

-2.9
-.4

1.9
1.9

1.6
1.6

1.0
1.2

.9
1.0

1.8
1.8

2.2
2.2

1.7
1.6

1.2
1.4

Excluding food and energy
Previous

2.7
2.7

2.1
2.1

1.5
1.7

1.4
1.5

GDP chain-weighted price index
Previous

2.0
2.0

1.3
1.3

1.2
1.5

1.1
1.2

ECI for compensation of private
industry workers1
Previous

4.2
4.2

3.2
3.2

3.7
3.7

3.1
3.1

NFB compensation per hour
Previous

1.4
1.4

3.1
3.2

3.4
3.1

2.7
2.7

Prices of core non-oil
merchandise imports
Previous

-2.9
-2.9

.7
.7

3.7
3.3

1.1
1.3

PCE chain-weighted price index
Previous
Food and beverages
Previous
Energy
Previous
Excluding food and energy
Previous
Consumer price index
Previous

1. December to December.

Financial Flows and Conditions
The debt of the nonfinancial sector has been rising rapidly of late. We have
revised up our forecast of debt growth over the second half of this year, as we
expect the drop in long-term interest rates to spur heavier borrowing for a while.
On balance, we project that total nonfinancial debt will expand 8 percent this
year—which would be the fastest annual pace since 1988—before tapering
down to roughly 7 percent next year.
Federal debt is expected to grow about 12-1/2 percent this year—an upward
revision of 2-1/2 percentage points from the last forecast—and 10 percent in
2004. The pattern of borrowing within the current year is choppy, owing

I-12

Part 1: Summary and Outlook, June 18, 2003

entirely to the Treasury’s maneuvering to remain under the debt ceiling; these
actions have no effect on borrowing for the year as a whole.
After jumping 12 percent in 2002, state and local government debt should
expand at about the same pace this year before slowing sharply in 2004. This
projection has significantly more borrowing in the second half of 2003 than did
the last Greenbook; the greater borrowing is driven mainly by stronger advance
refunding activity in response to the drop in long-term rates and by taxable
issuance to shore up state pension funds. We anticipate that next year, the
improvement in state and local government budgets and a smaller volume of
advance refundings will temper debt growth.
Businesses have been tapping the bond market in volume but have continued to
use much of the proceeds to pay down existing debt. We expect that firms’ net
financing needs will remain modest in the near term but will increase next year
as investment spending picks up more rapidly than internal funds. All told, we
project that nonfinancial business debt will grow 4-1/4 percent this year and
5 percent in 2004, up from 3 percent in 2002.
We have revised up our projection of household borrowing and now anticipate
that total household debt will expand 9 percent this year and then moderate to a
7 percent rise in 2004. The upward revision mainly reflects the recent decline in
mortgage rates. We project that almost half of all home mortgages will be
refinanced this year, with the associated cash-outs boosting mortgage balances.
We have also nudged up the growth of consumer credit this year, but the
projected growth is still relatively slow, as we expect households to continue
substituting toward mortgage debt.
M2 is projected to expand 7-1/2 percent in 2003. This increase is significantly
faster than that of nominal income owing to a gradual adjustment to falling
interest rates. Next year, with declines in interest rates behind us, M2 is
expected to expand about in line with nominal income.
Alternative Simulations
In this section, we use simulations of the FRB/US model to illustrate several
risks to the staff forecast. The first three scenarios primarily concern possible
alternative developments affecting aggregate demand—a faster abatement of the
pessimism now restraining business investment, a more muted response of
households and firms to the new tax cuts, and a further rally in stock and bond
markets. The next two scenarios focus on the supply side and consider the
implications of slower structural productivity growth and a lower NAIRU. In
all these scenarios, we assume that the federal funds rate follows the baseline
path. Finally, we consider three alternative paths for the federal funds rate.

I-13

Domestic Developments

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

2003
Q1

Q2

2004
H2

H1

H2

Real GDP
Greenbook Baseline
Stronger investment
Weaker response to fiscal policy
Financial-market rebound
Slower productivity growth
Low NAIRU
Lower funds rate
Higher funds rate
Market-based funds rate

1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.6

1.5
1.5
1.5
1.5
1.5
1.6
1.5
1.5
1.5

4.2
5.5
3.5
4.6
3.8
4.3
4.3
4.1
4.2

5.3
5.9
4.7
6.0
4.7
5.4
5.5
5.1
5.4

5.4
6.1
4.9
6.0
4.8
5.5
5.6
5.1
5.5

Civilian unemployment rate1
Greenbook Baseline
Stronger investment
Weaker response to fiscal policy
Financial-market rebound
Slower productivity growth
Low NAIRU
Lower funds rate
Higher funds rate
Market-based funds rate

5.8
5.8
5.8
5.8
5.8
5.8
5.8
5.8
5.8

6.1
6.1
6.1
6.1
6.1
6.1
6.1
6.1
6.1

6.1
5.9
6.3
6.1
6.0
6.1
6.1
6.2
6.1

5.9
5.5
6.2
5.7
5.7
5.9
5.9
6.0
5.9

5.4
4.8
5.8
5.0
5.0
5.3
5.2
5.5
5.3

.8
.8
.8
.8
.8
.8
.8
.8
.8

1.0
1.0
1.0
1.0
1.0
.9
1.0
1.0
1.0

1.2
1.2
1.2
1.2
1.3
1.1
1.2
1.2
1.2

1.0
1.0
1.0
1.0
1.3
.8
1.1
1.0
1.0

.9
.9
.8
.9
1.4
.6
.9
.8
.9

PCE prices excluding food and energy
Greenbook Baseline
Stronger investment
Weaker response to fiscal policy
Financial-market rebound
Slower productivity growth
Low NAIRU
Lower funds rate
Higher funds rate
Market-based funds rate
1. Average for the final quarter of the period.

Stronger investment. In the baseline, business pessimism about the outlook
abates slowly, so firms remain cautious about stockbuilding and capital
spending despite low interest rates, tax incentives, and a gradual strengthening
in real activity. However, business sentiment may improve more quickly than
we have assumed. Moreover, there is considerable uncertainty about the effects
of tax incentives on capital spending. In this scenario, real outlays on

I-14

Part 1: Summary and Outlook, June 18, 2003

equipment and software come immediately back into close alignment with the
predictions of the models we track. In addition, we assume a larger degree of
response in investment to the recently enacted tax incentives. Stockbuilding is
also much stronger as firms keep inventory-sales ratios roughly flat at current
levels rather than letting them decline as in the staff projection. The resulting
boost to aggregate demand raises real GDP growth more than 1 percentage point
in the second half of this year and about 3/4 percentage point in 2004, pushing
the unemployment rate below 5 percent by the end of next year. However,
inflation is little changed despite the pickup in real activity because increased
capital spending boosts potential GDP.
Weaker response to fiscal policy. Expansionary fiscal policy is a major reason
that the staff projects a considerable acceleration in real activity later this year.
However, we may have overestimated the response of households and firms to
the new tax act. In this scenario, households are assumed to be more concerned
about shoring up their financial positions than they are in the baseline, and they
are also more doubtful about the permanence of the tax cuts. As a result, they
save the bulk of the tax rebate and are only half as responsive to the other tax
provisions. On the business side, concerns about excess capacity eliminate any
direct stimulus from the expansion of the partial expensing provision and the
lower dividend and capital gains taxes included in the new law. Consequently,
real GDP growth is more than 1/2 percentage point below baseline in the second
half of this year and in 2004, and the unemployment rate remains close to 6
percent through the end of next year. Inflation is a touch lower as a result.
Financial-market rebound. Despite the recent rally in stock and bond
markets, risk premiums on private bonds and corporate equity remain elevated
relative to historical norms and are expected to remain so through next year. In
this scenario, these premiums are assumed to dissipate more quickly than in the
baseline. In particular, risk spreads on investment-grade corporate bonds
relative to Treasuries are assumed to return to their long-run average by the fall
and to remain there through the end of 2004. Relative to baseline, the spread is
60 basis points narrower in the near term but only 20 basis points narrower by
the end of next year. We also assume a permanent reduction of 60 basis points
in the equity premium, which increases equity prices by 15 percent. As a
consequence, spending by households and businesses is higher, and real GDP
expands more than 1/2 percentage point faster in 2004 than in the baseline; the
unemployment rate falls to 5 percent by the end of next year. However, the
decrease in slack is too modest and too delayed to have any appreciable effect
on inflation until after 2004.
Slower productivity growth. Although we believe that we have been cautious
in translating the recent gains in output per hour into past and future structural
productivity, we may nonetheless have overestimated the degree to which

Domestic Developments

I-15

underlying conditions have improved. To illustrate this risk, in this scenario we
assume that structural productivity between 2000 and the end of the projection
period rises 1/2 percentage point per year more slowly than in the baseline.
Thus, in this scenario, the economy not only starts out with less slack in product
markets but also faces a lower long-run potential growth rate. Given the weaker
outlook for gains in personal income and corporate profits, both consumption
and investment grow more slowly than in baseline. As a result, growth in real
GDP falls by more than potential. Nonetheless, the unemployment rate declines
more rapidly than in the baseline so as to gradually bring slack in labor markets
into better alignment with this scenario’s smaller output gap.4 Core inflation
moves up relative to baseline, both because slower growth of productivity
translates into more rapid increases in unit labor costs and because product
markets have less slack.
Low NAIRU. This scenario considers the possibility that the staff’s estimate of
the NAIRU is too high and, as an alternative, assumes that the NAIRU is
currently—and has been for some time—4-1/4 percent. The lower NAIRU puts
significant downward pressure on prices, and core inflation is 1/4 percentage
point below baseline by the end of 2004. The implied higher level of the real
funds rate in 2004 mostly offsets the stimulus to GDP from the higher level of
potential output.
Alternative funds rate paths. We also consider the implications of three
alternative paths for the federal funds rate: 25 basis points higher than in the
baseline, 25 basis points lower, and the funds rate path implied by fed funds
futures contracts.

4. Although the historical output gap in this scenario is significantly lower at the start of the
simulation than in the baseline, the unemployment rate is unchanged. Thus, with the lower
structural productivity growth in this scenario, the unemployment rate is currently less well
aligned with product market slack. In the simulation, this initial tension is gradually resolved
through stronger growth in employment. As a result, the unemployment rate falls relative to
baseline despite weaker growth in real GDP.

(This page intentionally blank.)

I-17
Strictly Confidential <FR>
Class II FOMC

June 18, 2003
STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT
(Percent, annual rate)

Nominal GDP
Interval

GDP chain-weighted
price index

Real GDP

Consumer
price index1

Unemployment
rate2

04/30/03

06/18/03

04/30/03

06/18/03

04/30/03

06/18/03

04/30/03

06/18/03

04/30/03

06/18/03

5.9
2.6
3.6
3.9
5.6

5.9
2.6
3.6
3.8
5.9

3.8
0.3
2.4
2.3
4.3

3.8
0.3
2.4
2.3
4.8

2.1
2.4
1.1
1.6
1.2

2.1
2.4
1.1
1.5
1.1

3.4
2.8
1.6
2.1
1.3

3.4
2.8
1.6
2.2
1.1

4.0
4.8
5.8
6.0
5.9

4.0
4.8
5.8
6.1
5.8

ANNUAL
______
2000
2001
2002
2003
2004
QUARTERLY
_________
2001

Q1
Q2
Q3
Q4

3.0
0.9
1.9
2.2

3.0
0.9
1.9
2.2

-0.6
-1.6
-0.3
2.7

-0.6
-1.6
-0.3
2.7

3.7
2.5
2.2
-0.5

3.7
2.5
2.2
-0.5

4.0
3.2
0.9
-0.7

4.0
3.2
0.9
-0.7

4.2
4.4
4.8
5.6

4.2
4.4
4.8
5.6

2002

Q1
Q2
Q3
Q4

6.5
2.5
5.1
3.2

6.5
2.5
5.1
3.2

5.0
1.3
4.0
1.4

5.0
1.3
4.0
1.4

1.3
1.2
1.0
1.8

1.3
1.2
1.0
1.8

1.4
3.4
2.2
2.0

1.4
3.4
2.2
2.0

5.6
5.9
5.8
5.9

5.6
5.9
5.8
5.9

2003

Q1
Q2
Q3
Q4

4.3
3.1
4.5
5.5

4.1
2.4
4.3
5.7

1.6
2.0
3.4
4.3

1.6
1.5
3.8
4.6

2.6
1.0
1.1
1.2

2.5
0.9
0.4
1.1

3.8
0.3
0.7
1.5

3.8
0.6
1.4
1.0

5.8
6.0
6.1
6.1

5.8
6.1
6.2
6.1

2004

Q1
Q2
Q3
Q4

6.3
6.0
6.0
5.9

6.8
6.4
6.4
6.4

4.7
4.8
4.8
4.8

5.3
5.3
5.4
5.4

1.6
1.2
1.1
1.1

1.5
1.0
1.0
0.9

1.5
1.4
1.4
1.4

1.1
1.2
1.2
1.1

6.1
6.0
5.9
5.6

6.0
5.9
5.7
5.4

TWO-QUARTER3
___________
2001

Q2
Q4

1.9
2.1

1.9
2.1

-1.1
1.2

-1.1
1.2

3.1
0.8

3.1
0.8

3.5
0.2

3.5
0.2

0.5
1.2

0.5
1.2

2002

Q2
Q4

4.5
4.1

4.5
4.1

3.1
2.7

3.1
2.7

1.3
1.4

1.3
1.4

2.4
2.1

2.4
2.1

0.3
0.0

0.3
0.0

2003

Q2
Q4

3.7
5.0

3.3
5.0

1.8
3.9

1.5
4.2

1.8
1.1

1.7
0.8

2.1
1.1

2.2
1.2

0.1
0.1

0.2
0.0

2004

Q2
Q4

6.1
5.9

6.6
6.4

4.7
4.8

5.3
5.4

1.4
1.1

1.3
1.0

1.5
1.4

1.2
1.2

-0.1
-0.4

-0.2
-0.5

4.6
2.0
4.3
4.3
6.0

4.6
2.0
4.3
4.1
6.5

2.3
0.1
2.9
2.8
4.8

2.3
0.1
2.9
2.9
5.3

2.3
2.0
1.3
1.5
1.2

2.3
2.0
1.3
1.2
1.1

3.4
1.8
2.2
1.6
1.4

3.4
1.8
2.2
1.7
1.2

-0.2
1.7
0.3
0.2
-0.5

-0.2
1.7
0.3
0.2
-0.8

FOUR-QUARTER4
____________
2000
2001
2002
2003
2004
1.
2.
3.
4.

Q4
Q4
Q4
Q4
Q4

For all urban consumers.
Level, except as noted.
Percent change from two quarters earlier; for unemployment rate, change in percentage points.
Percent change from four quarters earlier; for unemployment rate, change in percentage points.

I-18
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES
(Seasonally adjusted annual rate)

June 18, 2003

- - Projected - Units1

Item

1996

1997

1998

1999

2000

2001

2002

2003

2004

7813.2
7813.2

8318.4
8159.5

8781.5
8508.9

9274.3
8859.0

9824.6
9191.4

10082.2
9214.5

10446.2
9439.9

10839.3
9655.1

11475.9
10115.2

4.1
4.3
3.9
4.4

4.3
5.0
3.9
5.1

4.8
5.8
4.7
6.3

4.3
5.2
4.2
5.2

2.3
2.9
2.6
3.7

0.1
0.1
1.6
0.9

2.9
3.7
1.7
2.3

2.9
2.7
3.3
2.9

5.3
5.6
4.5
5.7

3.1
5.0
3.2
2.7

4.1
8.8
2.5
3.9

5.0
12.7
5.0
3.6

5.0
10.0
4.9
4.0

3.5
3.8
3.0
3.8

2.8
13.2
1.7
1.3

2.7
1.9
3.4
2.5

3.1
7.0
4.2
1.8

4.6
7.2
4.7
4.0

Business fixed investment
Equipment & Software
Nonres. structures
Residential structures

12.1
11.8
12.8
5.6

11.8
13.7
6.5
3.5

12.3
14.9
4.9
10.0

6.6
9.7
-2.5
4.0

6.2
5.2
9.3
-1.2

-9.3
-8.8
-10.6
1.0

-1.7
3.3
-15.9
6.7

1.5
3.3
-4.3
3.3

14.3
17.3
4.1
4.7

Exports
Imports

9.8
11.2

8.5
14.3

2.3
10.8

4.9
11.9

7.3
11.1

-11.4
-8.0

3.9
10.1

3.4
1.8

9.6
10.4

2.7
2.0
0.8
3.0

2.4
0.1
-1.4
3.7

2.7
0.6
-0.8
3.8

4.5
4.0
4.4
4.8

1.3
-1.2
-2.5
2.6

5.1
7.5
7.4
3.9

3.6
7.5
9.3
1.6

3.6
9.5
11.4
0.3

0.8
-0.3
-2.3
1.5

30.0
21.2
-89.0

63.8
60.6
-113.3

76.7
75.0
-221.1

62.8
64.1
-320.5

65.0
67.2
-398.8

-61.4
-63.2
-415.9

5.2
4.1
-488.5

-7.0
-9.1
-525.5

58.2
57.0
-568.7

EXPENDITURES
____________
Nominal GDP
Real GDP

Bill. $
Bill. Ch. $

Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases

% change

Personal cons. expenditures
Durables
Nondurables
Services

Gov’t. cons. & investment
Federal
Defense
State & local
Change in bus. inventories
Nonfarm
Net exports

Bill. Ch. $

Nominal GDP

% change

6.0

6.2

6.0

5.9

4.6

2.0

4.3

4.1

6.5

Nonfarm payroll employment
Unemployment rate

Millions
%

119.7
5.4

122.8
4.9

125.9
4.5

129.0
4.3

131.8
4.0

131.8
4.8

130.4
5.8

130.4
6.1

133.7
5.8

Industrial prod. index
Capacity util. rate - mfg.

% change
%

5.5
81.2

8.0
82.7

4.0
81.9

4.9
81.4

2.7
81.4

-5.7
75.6

1.4
73.7

1.7
73.3

7.4
77.4

Housing starts
Light motor vehicle sales
North Amer. produced
Other

Millions

1.48
15.05
13.34
1.70

1.47
15.07
13.14
1.93

1.62
15.41
13.39
2.02

1.64
16.78
14.30
2.48

1.57
17.24
14.38
2.86

1.60
17.02
13.94
3.08

1.71
16.70
13.42
3.29

1.76
16.51
13.11
3.40

1.85
17.33
13.74
3.59

Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate

Bill. $
% change

7831.2
5.9
5.9
2.6
4.8

8325.4
6.0
6.3
3.8
4.2

8778.1
5.8
6.7
5.0
4.7

9297.1
6.4
5.1
2.4
2.6

9848.0
4.6
7.7
4.8
2.8

10104.1
2.1
1.4
0.3
2.3

10436.7
3.8
3.9
5.5
3.7

10834.2
4.3
4.1
3.6
4.3

11475.3
6.4
5.7
5.0
4.9

Corp. profits, IVA & CCAdj.
Profit share of GNP
Excluding FR Banks

% change
%

11.4
9.6
9.4

9.9
10.0
9.7

-9.6
8.9
8.6

7.0
8.7
8.4

-9.1
8.0
7.7

8.2
7.2
7.0

-1.9
7.5
7.3

7.2
7.6
7.4

9.7
7.8
7.7

Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds

Bill. $

-136.8
21.4
18.7

-53.3
31.0
29.9

43.8
40.7
40.0

111.9
38.3
37.4

206.9
18.0
17.8

72.0
-31.3
-31.2

-199.9
-51.5
-51.4

-356.2
-39.0
-38.9

-368.9
-8.4
-8.3

Gross natl. saving rate
Net natl. saving rate

%

17.2
5.7

18.0
6.7

18.8
7.5

18.3
6.8

18.4
6.7

16.5
3.8

15.1
2.0

14.2
1.0

15.1
2.1

1.9

1.8

1.1

1.6

2.3

2.0

1.3

1.2

1.1

EMPLOYMENT AND PRODUCTION
_________________________

INCOME AND SAVING
_________________

%

PRICES AND COSTS
________________
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index

% change

1.9

1.4

0.8

1.9

2.5

1.3

1.6

1.5

1.0

PCE chn.-wt. price index
Ex. food and energy

2.3
1.8

1.5
1.7

1.1
1.6

2.0
1.5

2.5
1.8

1.5
1.9

1.8
1.6

1.3
1.0

0.8
0.9

CPI
Ex. food and energy

3.2
2.6

1.9
2.2

1.5
2.3

2.6
2.0

3.4
2.6

1.8
2.7

2.2
2.1

1.7
1.5

1.2
1.4

ECI, hourly compensation2

3.1

3.4

3.5

3.4

4.4

4.2

3.2

3.7

3.1

Nonfarm business sector
Output per hour
Compensation per Hour
Unit labor cost

2.3
3.2
0.9

2.2
3.4
1.1

2.9
5.3
2.3

2.9
4.3
1.4

2.1
7.2
4.9

1.9
1.4
-0.5

4.1
3.1
-0.9

2.6
3.4
0.8

1.5
2.7
1.1

1. Changes are from fourth quarter to fourth quarter.
2. Private-industry workers.

I-19
Strictly Confidential <FR>
Class II FOMC

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)

June 18, 2003

2000
Q1

2000
Q2

2000
Q3

2000
Q4

2001
Q1

2001
Q2

2001
Q3

2001
Q4

2002
Q1

2002
Q2

9649.5
9097.4

9820.7
9205.7

9874.8
9218.7

9953.6
9243.8

10028.1
9229.9

10049.9
9193.1

10097.7
9186.4

10152.9
9248.8

10313.1
9363.2

10376.9
9392.4

2.6
3.6
4.4
6.9

4.8
5.7
3.1
3.8

0.6
1.2
1.7
3.1

1.1
1.3
1.3
1.1

-0.6
-1.1
2.8
1.5

-1.6
-1.1
-0.4
-1.2

-0.3
-0.1
-0.2
0.3

2.7
2.9
4.2
3.0

5.0
5.6
2.4
2.5

1.3
2.6
-0.1
1.3

Personal cons. expenditures
Durables
Nondurables
Services

5.3
17.8
2.2
4.4

3.0
-3.7
4.9
3.6

3.8
8.1
2.0
3.9

2.1
-5.3
2.7
3.3

2.4
11.5
2.3
0.6

1.4
5.3
-0.3
1.5

1.5
4.6
1.3
0.9

6.0
33.6
3.6
2.1

3.1
-6.3
7.9
2.9

1.8
2.0
-0.1
2.7

Business fixed investment
Equipment & Software
Nonres. structures
Residential structures

15.0
15.5
13.8
8.3

10.2
10.9
8.2
-3.0

3.5
0.9
12.1
-9.3

-3.2
-5.4
3.6
0.0

-5.4
-6.3
-3.1
8.2

-14.5
-16.7
-8.4
-0.5

-6.0
-9.2
2.9
0.4

-10.9
-2.5
-30.1
-3.5

-5.8
-2.7
-14.2
14.2

-2.4
3.3
-17.6
2.7

Exports
Imports

7.7
14.7

14.6
18.6

11.6
13.8

-4.0
-1.6

-6.0
-7.9

-12.4
-6.8

-17.3
-11.8

-9.6
-5.3

3.5
8.5

14.3
22.2

-1.2
-13.2
-19.9
5.6

4.6
16.0
15.0
-0.8

-1.0
-7.2
-6.1
2.4

2.9
2.0
4.7
3.3

5.7
9.5
8.3
3.8

5.6
6.0
2.7
5.4

-1.1
1.2
4.6
-2.3

10.5
13.5
14.3
8.9

5.6
7.4
11.6
4.6

1.4
7.5
7.8
-1.7

45.3
58.9
-368.8

91.5
88.6
-394.6

63.1
64.6
-413.1

59.9
56.8
-418.5

-26.9
-32.6
-404.5

-58.3
-54.9
-414.8

-61.8
-63.6
-419.0

-98.4
-101.5
-425.3

-28.9
-35.1
-446.6

4.9
4.2
-487.4

Item

Units

EXPENDITURES
____________
Nominal GDP
Real GDP

Bill. $
Bill. Ch. $

Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases

% change

Gov’t. cons. & investment
Federal
Defense
State & local
Change in bus. inventories
Nonfarm
Net exports

Bill. Ch. $

Nominal GDP

% change

5.7

7.3

2.2

3.2

3.0

0.9

1.9

2.2

6.5

2.5

Nonfarm payroll employment
Unemployment rate

Millions
%

131.0
4.0

131.8
4.0

132.0
4.0

132.3
3.9

132.5
4.2

132.2
4.4

131.7
4.8

130.9
5.6

130.5
5.6

130.4
5.9

Industrial prod. index
Capacity util. rate - mfg.

% change
%

5.4
82.0

7.1
82.4

0.2
81.4

-1.6
80.0

-6.1
77.9

-6.1
76.1

-4.6
74.8

-5.8
73.4

1.4
73.4

4.4
73.9

Housing starts
Light motor vehicle sales
North Amer. produced
Other

Millions

1.66
18.15
15.29
2.86

1.59
17.14
14.27
2.87

1.50
17.42
14.56
2.86

1.54
16.26
13.41
2.85

1.61
16.95
14.04
2.90

1.63
16.54
13.51
3.04

1.60
16.23
13.23
3.00

1.57
18.37
15.00
3.37

1.72
16.34
13.04
3.31

1.68
16.35
13.10
3.25

Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate

Bill. $
% change

9670.5
5.3
13.2
8.4
2.6

9846.4
7.5
6.9
4.8
2.9

9892.5
1.9
6.8
4.3
2.9

9982.8
3.7
4.2
1.8
2.9

10038.0
2.2
3.9
-0.1
2.4

10081.0
1.7
0.8
-0.6
1.9

10109.3
1.1
1.4
10.5
4.0

10188.1
3.2
-0.2
-7.6
0.8

10314.9
5.1
4.8
14.5
3.5

10356.8
1.6
5.1
3.9
4.0

Corp. profits, IVA & CCAdj.
Profit share of GNP
Excluding FR Banks

% change
%

-8.0
8.4
8.0

-0.1
8.2
7.9

-9.4
8.0
7.7

-17.9
7.5
7.2

-21.1
7.0
6.7

8.7
7.2
6.9

-17.7
6.8
6.5

94.4
8.0
7.7

-6.6
7.7
7.5

-6.2
7.6
7.3

Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds

Bill. $

223.2
32.7
32.2

197.2
20.2
20.0

213.2
19.2
19.2

193.8
-0.2
-0.1

173.8
-16.5
-16.4

144.4
-32.3
-32.2

-51.7
-46.2
-46.1

21.3
-30.2
-30.0

-145.8
-55.8
-55.6

-195.6
-45.1
-44.9

Gross natl. saving rate
Net natl. saving rate

%

18.8
7.3

18.4
6.9

18.5
6.8

17.8
5.9

16.9
4.8

16.6
4.1

16.5
3.3

15.8
3.1

15.5
2.7

15.5
2.4

3.1

2.3

1.6

2.1

3.7

2.5

2.2

-0.5

1.3

1.2

EMPLOYMENT AND PRODUCTION
_________________________

INCOME AND SAVING
_________________

%

PRICES AND COSTS
________________
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index

% change

3.7

2.2

2.2

2.1

3.3

1.7

-0.2

0.4

1.2

2.3

PCE chn.-wt. price index
Ex. food and energy

3.4
2.2

2.3
1.8

2.1
1.3

2.2
1.8

3.3
2.8

1.8
1.2

-0.1
0.7

0.8
2.7

1.1
1.4

2.7
1.9

CPI
Ex. food and energy

4.1
2.5

3.3
2.7

3.5
2.7

2.8
2.4

4.0
2.9

3.2
2.6

0.9
2.6

-0.7
2.8

1.4
2.1

3.4
2.1

ECI, hourly compensation1

5.4

4.4

4.1

3.8

4.6

3.7

3.9

4.4

3.6

4.4

0.2
15.2
14.9

6.0
2.2
-3.6

0.6
8.7
8.0

1.7
3.1
1.4

-1.4
2.8
4.3

-0.1
0.1
0.3

2.1
1.0
-1.1

7.2
1.5
-5.4

8.6
2.9
-5.3

1.7
4.0
2.3

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost
1. Private-industry workers.

I-20
Strictly Confidential <FR>
Class II FOMC

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)

June 18, 2003

- - - - - - - - - - - Projected - - - - - - - - - - - - - - - - - - - - - 2002
Q3

2002
Q4

2003
Q1

2003
Q2

2003
Q3

2003
Q4

2004
Q1

2004
Q2

2004
Q3

2004
Q4

10506.2
9485.6

10588.8
9518.2

10696.5
9556.0

10760.9
9591.6

10873.8
9681.6

11025.9
9791.2

11209.3
9917.7

11385.5
10047.5

11564.6
10180.8

11744.1
10314.7

4.0
3.9
3.4
3.4

1.4
2.9
1.1
2.2

1.6
0.8
2.2
1.5

1.5
2.3
2.0
1.9

3.8
3.5
4.3
3.7

4.6
4.1
4.6
4.7

5.3
5.6
3.7
4.9

5.3
5.9
4.2
5.6

5.4
5.8
4.5
6.0

5.4
5.3
5.6
6.6

4.2
22.8
1.0
2.3

1.7
-8.2
5.1
2.2

2.0
-1.7
6.2
0.7

2.1
11.3
0.4
1.2

3.8
10.0
5.3
2.0

4.6
9.1
5.2
3.5

4.3
7.3
4.2
3.8

4.3
6.6
4.4
3.8

4.7
6.6
5.1
4.2

5.0
8.5
5.0
4.4

-0.8
6.7
-21.4
1.1

2.3
6.2
-9.9
9.4

-5.7
-6.7
-2.3
10.8

3.2
6.8
-7.7
-3.9

3.7
6.1
-4.3
1.8

5.3
7.7
-2.7
5.1

9.5
10.7
5.2
3.6

15.3
19.0
2.8
5.2

15.5
18.4
5.6
4.3

17.2
21.4
2.6
5.9

Exports
Imports

4.6
3.3

-5.8
7.4

-1.2
-6.2

-2.0
5.3

6.7
3.5

10.6
5.1

7.1
8.9

9.5
12.0

9.7
11.3

12.2
9.5

Gov’t. cons. & investment
Federal
Defense
State & local

2.9
4.3
6.9
2.2

4.6
11.0
11.0
1.2

0.5
0.9
-3.4
0.3

7.0
22.2
32.7
-0.8

5.2
12.8
17.4
0.8

1.8
3.2
2.3
0.9

0.7
0.1
-2.6
1.2

1.0
0.2
-1.2
1.5

0.5
-1.5
-3.7
1.7

1.0
-0.1
-1.8
1.7

18.8
20.8
-488.0

25.8
26.5
-532.2

9.1
7.6
-509.9

-3.4
-5.5
-535.5

-16.4
-18.5
-532.0

-17.4
-19.9
-524.6

23.8
22.5
-540.8

55.1
53.9
-563.0

79.7
78.5
-582.4

74.3
73.0
-588.6

Item

Units

EXPENDITURES
____________
Nominal GDP
Real GDP

Bill. $
Bill. Ch. $

Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases

% change

Personal cons. expenditures
Durables
Nondurables
Services
Business fixed investment
Equipment & Software
Nonres. structures
Residential structures

Change in bus. inventories
Nonfarm
Net exports

Bill. Ch. $

Nominal GDP

% change

5.1

3.2

4.1

2.4

4.3

5.7

6.8

6.4

6.4

6.4

Nonfarm payroll employment
Unemployment rate

Millions
%

130.2
5.8

130.3
5.9

130.2
5.8

130.1
6.1

130.2
6.2

130.9
6.1

132.0
6.0

133.2
5.9

134.3
5.7

135.4
5.4

Industrial prod. index
Capacity util. rate - mfg.

% change
%

3.4
74.3

-3.4
73.5

0.3
73.2

-3.0
72.6

4.0
73.2

5.9
74.2

7.7
75.5

7.3
76.8

7.7
78.1

7.0
79.2

Housing starts
Light motor vehicle sales
North Amer. produced
Other

Millions

1.70
17.63
14.27
3.35

1.74
16.50
13.25
3.24

1.74
15.84
12.45
3.38

1.70
16.23
12.90
3.32

1.80
16.84
13.46
3.39

1.81
17.13
13.64
3.49

1.82
17.19
13.66
3.53

1.84
17.26
13.71
3.55

1.86
17.34
13.70
3.64

1.88
17.52
13.88
3.64

Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate

Bill. $
% change

10495.3
5.5
2.0
1.8
3.5

10579.7
3.3
3.7
2.4
3.8

10679.0
3.8
3.9
2.3
3.9

10752.2
2.8
3.6
2.5
3.9

10875.2
4.7
3.8
8.4
5.0

11030.3
5.8
5.1
1.1
4.2

11211.7
6.7
5.9
7.1
4.9

11386.1
6.4
5.7
4.4
5.0

11563.1
6.4
5.5
4.3
4.9

11740.2
6.3
5.6
4.4
4.8

Corp. profits, IVA & CCAdj.
Profit share of GNP
Excluding FR Banks

% change
%

-6.9
7.3
7.1

13.7
7.5
7.3

2.7
7.5
7.3

5.2
7.5
7.4

11.1
7.7
7.5

10.1
7.7
7.5

6.5
7.7
7.5

9.2
7.8
7.6

11.5
7.9
7.7

11.6
8.0
7.8

Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds

Bill. $

-210.5
-54.7
-54.6

-247.7
-50.6
-50.5

-261.8
-66.9
-66.8

-296.8
-57.4
-57.3

-460.4
-25.7
-25.6

-405.8
-6.1
-6.0

-413.7
-15.6
-15.5

-389.4
-7.3
-7.2

-348.5
-9.5
-9.4

-324.1
-1.3
-1.2

Gross natl. saving rate
Net natl. saving rate

%

14.6
1.4

14.6
1.5

14.3
1.0

14.3
1.1

14.1
0.9

14.3
1.1

14.7
1.6

15.0
2.0

15.3
2.3

15.5
2.6

1.0

1.8

2.5

0.9

0.4

1.1

1.5

1.0

1.0

0.9

EMPLOYMENT AND PRODUCTION
_________________________

INCOME AND SAVING
_________________

%

PRICES AND COSTS
________________
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index

% change

1.2

1.8

3.6

0.5

1.0

0.8

1.3

0.9

0.9

0.9

PCE chn.-wt. price index
Ex. food and energy

1.7
1.8

1.8
1.5

2.7
0.8

0.6
1.0

1.0
1.2

0.8
1.2

0.9
1.1

0.9
1.0

0.8
0.9

0.8
0.8

CPI
Ex. food and energy

2.2
2.1

2.0
1.7

3.8
1.3

0.6
1.0

1.4
1.8

1.0
1.7

1.1
1.6

1.2
1.5

1.2
1.4

1.1
1.3

ECI, hourly compensation1

2.5

3.0

5.5

3.2

3.1

3.1

3.1

3.1

3.1

3.1

5.5
1.8
-3.4

0.7
3.9
3.2

2.3
3.4
1.1

3.3
4.3
1.0

2.8
3.0
0.2

1.9
2.9
1.0

1.3
2.8
1.5

1.5
2.7
1.2

1.7
2.6
0.9

1.7
2.5
0.8

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost
1. Private-industry workers.

-0.2
-0.5
-0.2
-0.2
0.3

Government cons. & invest.
Federal
Defense
Nondefense
State and local
-0.1
-0.3
0.2

0.5
0.1
0.2
-0.1
0.4

-0.2
-0.5
0.2

-0.4
-0.5
0.1
0.0

1.4
-0.4
0.5
1.3

1.2
1.0

1.1
1.3

2000
Q4

-3.3
-3.4
0.2

1.0
0.5
0.3
0.2
0.5

0.5
-0.7
1.2

-0.7
-0.6
-0.1
0.3

1.5
0.9
0.5
0.2

2.7
1.2

-0.6
-1.1

2001
Q1

Note. Components may not sum to totals because of rounding.

-1.1
-1.0
-0.2

-0.7
1.3
-2.0

Net exports
Exports
Imports

Change in bus. inventories
Nonfarm
Farm

0.5
0.1
0.4
-0.4

2.5
0.6
0.4
1.5

1.7
2.6

0.6
1.3

2000
Q3

-1.1
-0.8
-0.3

1.0
0.4
0.1
0.3
0.6

-0.4
-1.4
1.0

-1.9
-1.6
-0.3
-0.0

0.9
0.4
-0.1
0.6

-0.5
-1.0

-1.6
-1.2

2001
Q2

-0.1
-0.3
0.2

-0.2
0.1
0.2
-0.1
-0.3

-0.2
-1.9
1.7

-0.7
-0.8
0.1
0.0

1.0
0.4
0.3
0.4

-0.2
0.3

-0.3
-0.1

2001
Q3

-1.4
-1.4
0.1

1.9
0.8
0.5
0.3
1.1

-0.3
-1.0
0.7

-1.3
-0.2
-1.1
-0.2

4.1
2.5
0.7
0.9

4.1
2.6

2.7
3.0

2001
Q4

2.6
2.5
0.1

1.0
0.5
0.5
0.0
0.6

-0.8
0.3
-1.1

-0.7
-0.2
-0.4
0.6

2.2
-0.6
1.6
1.2

2.5
2.2

5.0
5.8

2002
Q1

1.3
1.5
-0.2

0.3
0.5
0.3
0.2
-0.2

-1.4
1.3
-2.7

-0.3
0.3
-0.5
0.1

1.2
0.2
-0.0
1.1

-0.1
1.1

1.3
2.7

2002
Q2

CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS

Business fixed investment
Equipment & Software
Nonres. structures
Residential structures

Personal cons. expenditures
Durables
Nondurables
Services

Final sales
Priv. dom. final purchases

Real GDP
Gross dom. purchases

Item

Strictly Confidential <FR>
Class II FOMC

0.6
0.7
-0.1

0.6
0.3
0.3
-0.0
0.3

-0.0
0.5
-0.5

-0.1
0.5
-0.6
0.1

2.9
1.7
0.2
1.0

3.5
2.9

4.0
4.0

2002
Q3

-0.3
-0.4
0.1

0.2
-0.1
-0.1
0.0
0.3

-0.8
0.8
-1.5

0.8
0.5
0.3
-0.1

2.4
0.3
0.6
1.5

2.6
3.1

2.3
3.0

00Q4/
99Q4

-1.5
-1.6
0.0

0.9
0.4
0.3
0.2
0.5

-0.1
-1.3
1.2

-1.2
-0.8
-0.4
0.0

1.9
1.0
0.3
0.5

1.6
0.8

0.1
0.2

01Q4/
00Q4

1.2
1.2
-0.0

0.7
0.5
0.4
0.1
0.2

-1.0
0.4
-1.3

-0.2
0.3
-0.5
0.3

1.9
0.2
0.7
1.0

1.7
2.0

2.9
3.9

02Q4/
01Q4

June 18, 2003

I-21

-1.6
-0.6
-1.0

Net exports
Exports
Imports

0.3
0.2
0.1

-0.6
-0.7
0.1

0.1
0.1
-0.2
0.2
0.0

0.8
-0.1
0.9

-0.6
-0.6
-0.1
0.5

1.4
-0.1
1.2
0.3

2.2
1.3

1.6
0.8

2003
Q1

-0.5
-0.5
0.0

1.3
1.4
1.3
0.1
-0.1

-0.9
-0.2
-0.7

0.3
0.5
-0.2
-0.2

1.4
0.9
0.1
0.5

2.0
1.6

1.5
2.4

2003
Q2

Note. Components may not sum to totals because of rounding.

Change in bus. inventories
Nonfarm
Farm

0.9
0.7
0.5
0.3
0.2

0.2
0.5
-0.3
0.4

Business fixed investment
Equipment & Software
Nonres. structures
Residential structures

Government cons. & invest.
Federal
Defense
Nondefense
State and local

1.2
-0.7
1.0
0.9

1.1
1.8

1.4
3.0

2002
Q4

-0.5
-0.5
-0.0

1.0
0.9
0.8
0.1
0.1

0.1
0.6
-0.5

0.4
0.5
-0.1
0.1

2.7
0.8
1.1
0.8

4.3
3.2

3.8
3.7

2003
Q3

-0.0
-0.0
0.0

0.4
0.2
0.1
0.1
0.1

0.3
1.0
-0.7

0.5
0.6
-0.1
0.2

3.2
0.7
1.1
1.5

4.6
4.0

4.6
4.3

2003
Q4

1.5
1.6
-0.0

0.2
0.0
-0.1
0.1
0.2

-0.6
0.7
-1.2

0.9
0.8
0.1
0.2

3.0
0.6
0.9
1.6

3.7
4.2

5.3
5.8

2004
Q1

1.1
1.1
-0.0

0.2
0.0
-0.1
0.1
0.2

-0.8
0.9
-1.7

1.5
1.4
0.1
0.2

3.0
0.5
0.9
1.6

4.2
4.8

5.3
6.1

2004
Q2

0.9
0.9
-0.0

0.1
-0.1
-0.2
0.1
0.2

-0.6
0.9
-1.6

1.6
1.4
0.1
0.2

3.3
0.5
1.0
1.8

4.5
5.1

5.4
6.1

2004
Q3

CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS

Personal cons. expenditures
Durables
Nondurables
Services

Final sales
Priv. dom. final purchases

Real GDP
Gross dom. purchases

Item

Strictly Confidential <FR>
Class II FOMC

-0.2
-0.2
0.0

0.2
0.0
-0.1
0.1
0.2

-0.2
1.2
-1.4

1.7
1.7
0.1
0.3

3.5
0.7
1.0
1.8

5.6
5.5

5.4
5.6

2004
Q4

1.2
1.2
-0.0

0.7
0.5
0.4
0.1
0.2

-1.0
0.4
-1.3

-0.2
0.3
-0.5
0.3

1.9
0.2
0.7
1.0

1.7
2.0

2.9
3.9

02Q4/
01Q4

-0.4
-0.4
0.0

0.7
0.6
0.5
0.1
0.0

0.1
0.3
-0.3

0.2
0.3
-0.1
0.2

2.2
0.6
0.9
0.8

3.3
2.5

2.9
2.8

03Q4/
02Q4

0.8
0.9
-0.0

0.2
-0.0
-0.1
0.1
0.2

-0.5
0.9
-1.5

1.5
1.4
0.1
0.2

3.2
0.6
0.9
1.7

4.5
4.9

5.3
5.9

04Q4/
03Q4

June 18, 2003

I-22

-80
1.9
1.1

115
0.1
0.6

1.3

1.6

-263

-327

1.2

0.9

-380

-404

0.1

1.7

-100

-151

1885
2031
566
372
194
1464
-146
106

14

51
38
8

0.4

0.3

-137

-201

1884
2079
581
383
199
1498
-196
107

40

21
-26
-11

523
507
16
-58
73

0.1

0.2

-158

-216

1864
2075
590
389
201
1485
-211
108

61

89
-21
-27

452
493
-41
-52
11

Q3a

0.3

0.2

-182

-252

1870
2117
609
403
206
1508
-248
108

33

97
28
-16

428
536
-108
-161
53

Q4a

13

64
20
61

398
542
-144
-168
24

Q1a

2003
Q3

40

118
-26
-71

522
542
-20
-95
75

56

141
-16
-6

432
551
-119
-134
14

Not seasonally adjusted

Q2

58

133
-2
4

445
580
-134
-179
44

Q4

0.0

0.1

-193

-270

0.4

0.5

-245

-309

1885
2182
657
437
220
1525
-297
118

0.9

1.7

-432

-478

1782
2242
676
454
222
1566
-460
124

0.5

-0.5

-379

-423

1865
2271
682
457
226
1589
-406
126

0.1

0.1

-396

-429

1862
2276
694
461
233
1582
-414
125

30

121
28
5

420
574
-155
-197
42

Q1

0.1

-0.1

-386

-404

1903
2292
696
461
235
1596
-389
125

60

104
-30
-24

516
566
-50
-130
80

Q2

45

79
15
-8

462
548
-86
-103
17

Q3

0.1

-0.3

-360

-361

1945
2294
695
458
237
1599
-348
124

2004

0.2

-0.1

-352

-335

1986
2310
697
458
239
1613
-324
124

30

88
15
10

469
582
-113
-160
47

Q4

June 18, 2003

1. Fiscal year data for the unified budget come from OMB; quarterly data come from the Monthly Treasury Statement and may not sum to OMB fiscal year totals.
2. OMB’s February 2003 baseline surplus estimates are -$264 billion in FY 2003 and -$158 billion in FY 2004. CBO’s March 2003 baseline surplus estimates are -$246 billion in FY 2003 and -$200 billion in
FY 2004. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus and the Postal Service surplus are excluded from the on-budget surplus
and shown separately as off-budget, as classified under current law.
3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
4. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises.
5. HEB is gross saving less gross investment (NIPA) in current dollars, with cyclically sensitive receipts and outlays adjusted to the staff’s measure of potential output and the NAIRU. Quarterly figures for
change in HEB and FI are not at annual rates. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. FI is the weighted difference of discretionary changes in federal spending and
taxes in chained (1996) dollars, scaled by real GDP. The annual FI estimates are on a calendar year basis. Also, for FI and the change in HEB, positive values indicate aggregate demand stimulus.
a--Actual

Fiscal indicators5
High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI)
percent of GDP

-138

116

1894
2283
692
459
233
1591
-389
125

45

437
11
-23

413
509
-97
-127
30

2002
Q2a

Seasonally adjusted annual rates
1854
2172
642
426
217
1529
-318
115

56

419
5
-33

1843
2268
-425
-608
183

Q1a

1879
2145
627
409
218
1518
-266
109

1906
2039
570
375
195
1469
-133
106

61

2024
1909
517
337
180
1392
115
98

44

Cash operating balance,
end of period

221
-17
-46

1780
2171
-392
-559
167

2004

Receipts
Expenditures
Consumption expenditures
Defense
Nondefense
Other spending
Current account surplus
Gross investment
Gross saving less gross
investment4

-90
8
-45

Means of financing
Borrowing
Cash decrease
Other3

1853
2011
-158
-317
160

2003

Fiscal year
2002a

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

NIPA federal sector

1991
1864
127
-33
161

2001a

Unified budget1
Receipts2
Outlays2
Surplus/deficit2
On-budget
Off-budget

Item

Strictly Confidential (FR)
Class II FOMC

I-23

1.2
15.5
7.5
5.5
2.2
25.0
12.2
8.6
7.8
20.6
5.1
3.8

5.9
6.9
6.4
8.5
7.4
7.5
7.1
6.4
6.0
5.9
5.8
6.0

7.7
7.1
7.3
6.1

7.2
9.6
8.8
8.4

Total

9.2
8.9
9.6
10.9
10.0
9.4
8.1
7.3
7.1
6.8
6.5
6.5

8.7
10.0
9.0
6.9

6.4
8.1
8.3
8.5

Total

10.3
11.0
12.7
13.5
12.0
11.5
9.8
8.7
8.4
7.9
7.4
7.4

9.8
12.4
10.9
8.0

6.7
8.8
9.0
8.3

Home
mortgages

Households

2.6.3 FOF

4.9
5.3
4.0
-0.2
4.3
4.7
3.2
4.3
4.3
4.3
4.3
4.6

6.8
3.5
4.2
4.4

4.7
5.9
7.4
10.2

Consumer
credit

Nonfederal

Change in Debt of the Domestic Nonfinancial Sectors
(Percent)

Note. Quarterly data are at seasonally adjusted annual rates.
1. Data after 2003:Q1 are staff projections. Changes are measured from end of the preceding period to
end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4.

5.0
8.4
6.6
8.0
6.5
10.5
8.0
6.8
6.3
8.6
5.7
5.6

-0.2
7.6
12.5
9.6

6.2
7.2
8.2
6.7

2001
2002
2003
2004

Quarter
2002:1
2
3
4
2003:1
2
3
4
2004:1
2
3
4

0.6
-1.4
-1.9
-8.0

5.5
6.9
6.4
4.9

Total

Federal
government

Year
1997
1998
1999
2000

Period 1

Strictly Confidential (FR)
Class II FOMC

2.3
3.4
1.9
4.3
3.7
3.9
4.7
4.8
4.4
4.7
4.9
5.4

6.5
3.0
4.3
4.9

9.0
12.1
10.6
9.7

Business

5.3
14.0
10.6
15.0
10.1
14.2
12.9
8.9
7.2
6.3
5.9
5.6

8.9
11.7
12.0
6.4

4.0
6.3
3.4
1.3

State and local
governments

6.5
2.5
5.1
3.2
4.1
2.4
4.3
5.7
6.8
6.4
6.4
6.4

2.0
4.3
4.1
6.5

6.2
6.0
5.9
4.6

Memo:
Nominal
GDP

June 18, 2003

I-24

141.4
-47.4
420.8
613.7
480.2
108.7
99.8
105.7
140.6
-5.6
-5.6
-94.3
289.4
185.8
11.3
-0.1
11.3

Borrowing sectors
Nonfinancial business
4 Financing gap 1
5 Net equity issuance
6 Credit market borrowing

Households
7 Net borrowing 2
8
Home mortgages
9
Consumer credit
10 Debt/DPI (percent) 3

State and local governments
11 Net borrowing
12 Current surplus 4

Federal government
13 Net borrowing
14 Net borrowing (quarterly, n.s.a.)
15 Unified deficit (quarterly, n.s.a.)

Depository institutions
16 Funds supplied

Memo (percentage of GDP)
17 Domestic nonfinancial debt 5
18 Domestic nonfinancial borrowing
19
Federal government 6
20
Nonfederal
191.4
13.3
2.5
10.8

487.8

257.5
257.5
231.2

151.4
128.1

768.0
667.1
60.1
103.3

80.7
-40.5
208.4

1344.9
-40.5
1385.4

2002

198.7
15.6
4.2
11.5

482.2

455.7
455.7
417.6

174.1
143.3

760.6
659.7
73.8
107.8

56.6
-59.6
308.2

1636.2
-59.6
1695.8

2003

Calendar year

201.6
13.1
3.4
9.7

396.7

392.7
392.7
403.8

103.8
182.4

636.9
535.7
81.2
110.1

130.8
-41.5
367.5

1459.4
-41.5
1500.9

2004

2.6.4 FOF

193.4
15.2
1.9
13.4

558.5

198.5
96.2
108.7

209.8
128.3

900.8
790.6
-2.9
105.0

95.2
-27.9
303.7

1584.9
-27.9
1612.8

Q4

194.9
12.5
0.7
11.8

586.6

79.9
63.5
143.9

146.3
108.7

849.2
723.3
75.7
106.4

77.6
-62.0
263.6

1277.1
-62.0
1339.1

Q1

197.9
20.6
8.5
12.1

441.3

912.6
117.7
20.0

210.9
125.7

812.7
718.2
83.4
108.2

76.8
-86.4
277.7

2127.5
-86.4
2213.9

Q2

Q3

200.4
15.9
4.4
11.6

460.3

473.4
141.4
119.4

198.3
158.8

720.2
627.2
57.6
108.1

40.9
-44.0
339.0

1686.9
-44.0
1730.9

2003

201.3
13.6
3.1
10.5

440.6

346.0
133.1
134.3

140.8
180.1

660.2
570.2
78.7
109.6

31.1
-46.0
352.2

1453.3
-46.0
1499.3

Q4

201.2
12.6
2.9
9.8

406.1

320.6
121.0
154.5

116.8
172.4

654.0
561.2
78.1
109.5

76.1
-39.0
325.4

1377.8
-39.0
1416.8

Q1

Seasonally adjusted annual rates

201.8
17.2
7.5
9.6

369.7

857.5
104.0
50.0

104.8
182.6

641.9
543.2
80.0
109.9

123.1
-37.0
351.4

1918.6
-37.0
1955.6

Q2

Q3

202.2
11.4
2.0
9.5

411.4

225.6
79.4
86.0

98.8
182.3

617.5
515.2
80.1
110.4

155.3
-45.0
377.1

1274.0
-45.0
1319.0

2004

202.0
11.2
1.4
9.8

399.7

167.2
88.4
113.3

94.8
192.4

634.3
523.2
86.6
110.7

168.9
-45.0
416.0

1267.2
-45.0
1312.2

Q4

June 18, 2003

4. NIPA surplus less changes in retirement fund assets plus consumption of fixed capital.
5. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP.
6. Excludes government-insured mortgage pool securities.

191.5
12.5
2.5
10.0

749.1

265.7
89.4
41.5

143.9
126.1

768.5
718.1
69.1
103.5

90.2
-140.3
134.4

1172.2
-140.3
1312.5

Q3

2002

Flow of Funds Projections: Highlights
(Billions of dollars except as noted)

Note. Data after 2003:Q1 are staff projections.
1. For corporations: Excess of capital expenditures over U.S. internal funds.
2. Includes change in liabilities not shown in lines 8 and 9.
3. Average debt levels in the period (computed as the average of period-end debt positions)
divided by disposable personal income.

1087.2
-47.4
1134.6

2001

Net funds raised by domestic
nonfinancial sectors
1 Total
2 Net equity issuance
3 Net debt issuance

Category

Strictly Confidential (FR)
Class II FOMC

I-25

(This page intentionally blank.)

International Developments
Data on foreign GDP in the first quarter came in surprisingly weak, and early
indicators for the current quarter are signaling continued sluggishness in
economic activity abroad. Based on these readings, as well as the likely
contractionary effect on foreign net exports of the ongoing depreciation of the
dollar, we marked down our forecast for the pace of near-term growth in foreign
economies.
Later this year and next, foreign growth is projected to pick up, largely because
of the robust recovery forecast for the United States. In addition, some
impediments to stronger economic activity in foreign countries are expected to
diminish. Oil prices are projected to decline, and the negative effects of SARS
are assumed to wane. Capital markets are also positioned to provide support for
stronger economic activity, with longer-term interest rates low and global stock
prices up from earlier lows. However, if the U.S. recovery fails to materialize as
projected, foreign growth in 2004 is likely to remain weak, especially given the
limited prospects for fiscal stimulus, particularly in the euro area and Japan.
Foreign inflation is declining sharply in the current quarter, reflecting the drop in
the price of oil following the Iraq war and, in some areas, currency appreciation.
We project that inflation will remain subdued over the forecast period, as excess
capacity abroad persists.
Summary of Staff Projections
(Percent change from end of previous period, s.a.a.r.)
Projection
Indicator

2002

2003:
Q1

2003
Q2

H2

2004

Foreign output
Previous GB

2.8
2.9

.4
2.2

.8
1.5

2.6
3.0

3.4
3.5

Foreign CPI
Previous GB

2.6
2.6

4.0
3.7

1.0
.9

1.9
2.0

1.9
1.9

NOTE. Changes for years are measured as Q4/Q4; for half-years,
Q2/Q4 or Q4/Q2.

The broad nominal exchange value of the dollar has declined another 2 percent
on balance since the previous FOMC meeting. With the financing pressures
exerted by the U.S. current account deficit expected to continue weighing on the
dollar, we project some slight, further depreciation of the dollar over the forecast
period.

I-28

Part 1: Summary and Outlook, June 18, 2003

U.S. net exports are expected to make a small positive arithmetic contribution to
U.S. GDP growth in the second half of this year, in part reflecting the effect of
the lower dollar. In 2004, however, net exports are projected to subtract
½ percentage point from growth, as the U.S. recovery boosts import growth.
Oil Prices
After reaching a low of less than $26 per barrel in late April, the spot price of
West Texas intermediate (WTI) crude oil rose in May and June, contrary to
futures prices and our projection in the previous Greenbook, as it became
apparent that Iraqi exports would return to the market more slowly than had been
anticipated at the conclusion of the war. Other factors supporting the oil price
include the terrorist attack in Saudi Arabia in mid-May, low oil inventories in
OECD countries, and above-normal demand for oil in Japan, where nuclear
reactors have been closed for safety investigations. The spot price of WTI closed
on June 17 at $31.07 per barrel. Our projection for oil prices, in line with recent
quotes in the crude oil futures market, calls for the spot price of WTI to fall from
its current level to less than $28 per barrel by the end of this year, about $3 per
barrel higher than in the previous Greenbook, and to about $24.50 per barrel by
the end of 2004, nearly $1 higher.
International Financial Markets
The foreign exchange value of the dollar depreciated further during the
intermeeting period, extending its decline from early last year amid ongoing
market concerns about the sustainability of the U.S. current account deficit. In
addition, remarks from Treasury Secretary Snow in mid-May, which were seen
as a step toward reassessing the Administration’s expressed desire for a “strong
dollar” by acknowledging the economic benefits of some dollar depreciation,
also seemed to give the dollar some downward impetus. Long-term interest rate
differentials moved against the dollar as well, with declines in the yields on U.S.
government securities during the period outstripping declines in yields on
comparable government securities of nearly all other industrial countries.
The dollar depreciated against all the other major currencies during the
intermeeting period, declining about 3-1/2 percent on a weighted average basis
against those currencies. The dollar also moved lower against most of the
currencies of our other important trading partners. A key exception is the
Mexican peso, which depreciated 3-1/2 percent against the dollar on concerns
about slowing economic activity in Mexico. On balance, our index of the
dollar’s value against the currencies of our other important trading partners was
unchanged over the intermeeting period.
Incorporating market developments since the close of the April Greenbook
forecast puts the value of the staff’s broad real index for the dollar in the third

International Developments

I-29

quarter about 3-1/2 percent below its level in the previous projection. We project
that the dollar will move down another 1-1/4 percent over the remainder of the
forecast period. We see this outlook as striking a balance between opposing
pressures. Strong U.S. growth compared with that of our trading partners may
raise relative rates of return in the United States, attract capital inflows, and tend
to put upward pressure on the dollar. At the same time the widening U.S. current
account deficit will require investors to add substantially to already large
holdings of U.S. external liabilities and may exert downward pressure on the
dollar. In view of the ultimate need for external adjustment, we adopted a
forecast that keeps a downward tilt to the future path for the dollar. In the
alternative simulation presented later, we explore the possibility that the dollar
might decline more sharply.
Interest rates moved lower during the intermeeting period both in reaction to and
in anticipation of policy moves by central banks. The European Central
Bank (ECB) reduced its policy interest rates 50 basis points in early June.
Central banks in Sweden, Denmark, and New Zealand also cut rates during the
period. The Bank of Japan raised its target range for the quantity of deposits
held at the central bank by financial institutions. And although the Bank of
Canada did not move its policy rate during the intermeeting period, market
expectations for its policy path have come down. Data releases signaling weak
economic activity, along with easier monetary policy stances and the sizeable
declines in U.S. Treasury rates, helped drive yields on longer-term foreign
government securities substantially lower, although they have rebounded some in
the past few days. On balance, the yield on the ten-year government bond in
Canada dropped 70 basis points, and comparable yields on government securities
in most of the rest of the industrial countries declined between 40 and 50 basis
points; the Japanese government bond yield moved down another 6 basis points
on net.
The declines in interest rates boosted share prices, which generally advanced
between 5 and 10 percent in the industrial countries and somewhat more on
average in emerging-market countries. Share prices in the Southeast Asian
economies profited also from a waning of the threat posed by SARS to economic
growth in the region. Emerging-market sovereign bond yield spreads narrowed
about 50 basis points on average over the intermeeting period.
. The Desk
did not intervene during the period for the accounts of the System or the
Treasury.

I-30

Part 1: Summary and Outlook, June 18, 2003

Foreign Industrial Countries
National accounts data and recent indicators suggest that growth in the foreign
industrial countries is weaker than had been anticipated at the time of the
previous Greenbook. First-quarter real GDP came in lower than expected, with
net exports declining in all major foreign industrial countries. Survey data for
the current quarter suggest modest growth for the major foreign industrial
countries, and we expect growth to pick up only slightly in the second half of the
year. We anticipate that activity will gain momentum in 2004, with growth
reaching 2-1/2 percent.
Twelve-month headline inflation rates in most major foreign industrial countries
fell in recent months, helped by earlier oil price declines and local currency
appreciations. Canadian inflation dropped to 3 percent in April, after having
been above the target ceiling for the previous six months, and euro-area inflation
fell to less than 2 percent in May, for the first time in ten months. We expect a
further decline in inflation for all major foreign industrial countries through early
2004, as output remains below potential in most countries and oil prices decline
from current levels. In Japan, deflation is expected to continue over the forecast
period.
Japan’s real GDP growth slowed to a revised 0.6 percent (s.a.a.r.) in the first
quarter, with advances in business fixed investment and private consumption
mostly offset by negative contributions from public investment and net exports.
Recent indicators suggest continued sluggish growth over the near term, and we
expect growth of only 1/4 percent for the year as a whole. The impact of SARS
in several of Japan's trading partners is expected to depress Japanese exports this
quarter and next. Consumption is projected to be roughly flat this year amid high
unemployment, and business investment is expected to weaken somewhat in
coming quarters, as firms in the export sector become more cautious about
spending on new capital. We project that growth will increase to 1 percent in
2004, as the global recovery spurs exports and an expected stabilization in labor
market conditions supports consumption. Fiscal policy is assumed to be roughly
neutral over the forecast period: Reduced supplemental budget spending will
largely offset tax cuts in the 2003 fiscal budget.
Euro-area real GDP was unchanged in the first quarter, with contractions in
Germany, Italy, Finland, and the Netherlands. Business and consumer
confidence indicators have been weak, with Germany suffering a large fall in
consumer confidence in May. We expect Germany to remain in recession for the
remainder of this year, and the euro area as a whole to exhibit only modest
growth, with net exports curtailed by the appreciation of the euro. With inflation
now below 2 percent and expected to remain there, we project that the ECB will
ease again before the end of the year. This stimulus, in combination with the

International Developments

I-31

projected global recovery, should push euro-area growth toward potential by the
end of the forecast period.
British real GDP grew 0.6 percent (s.a.a.r.) in the first quarter, with a sharp
deceleration in consumer spending from the robust pace of last year. Recent data
on housing prices are showing some deceleration and suggest that consumption
growth will remain moderate. However, accommodative monetary policy, fiscal
stimulus, and the depreciation of the pound on a trade-weighted basis over the
past half year should support a recovery in business investment and net exports
and help push growth to 2-1/2 percent in 2004.
Canadian real GDP grew 2.4 percent (s.a.a.r.) in the first quarter, as consumption
and residential construction continued to grow robustly. In the current quarter,
growth appears to be slowing, as SARS damps economic activity, the rate of
inventory accumulation declines, and weak U.S. growth and an appreciated
Canadian dollar hinder Canadian exports. By the end of this year, however, and
throughout 2004, we expect growth to exceed 3 percent, as SARS effects
dissipate and the U.S. economy expands rapidly. We expect the Bank of Canada
to hold policy rates constant over the forecast period as inflation remains within
the Bank’s target range.
Other Countries
Our near-term outlook for the developing Asian economies continues to be
dominated by the effects of SARS. These effects have shown up so far primarily
in tourism, business travel, and retail sales. Merchandise trade may also be
affected in coming months, as various reports suggest that orders have recently
fallen. In light of recent data, which have come in weaker than we had expected,
we project no growth in the developing Asian economies in this quarter and
subpar growth in the next. However, we expect those economies to rebound by
the fourth quarter of this year, with growth at 5 percent (s.a.a.r.), as the negative
economic effects of SARS dissipate and stimulative fiscal policy and higher U.S.
growth provide a boost.
Growth in China, which is estimated to have slowed to a 6 percent pace in the
first half of this year, is projected to bounce back by the end of this year to
8 percent and to continue at this rate in 2004, supported by external demand. In
Taiwan, where the SARS outbreak intensified last month, growth this year is
projected to come in at only 1-1/4 percent. Boosted by stronger demand abroad,
particularly for high-tech goods, growth returns to a robust pace in 2004.
Weaker-than-expected data for the rest of developing Asia, including Hong
Kong, Korea, and the ASEAN economies, have softened the near-term outlook
for economic activity in these economies, but stronger external demand and
some fiscal stimulus should help raise growth to more than 5 percent next year.

I-32

Part 1: Summary and Outlook, June 18, 2003

GDP contracted in Mexico in the first quarter, and indicators for the second
quarter are showing further weakness. We are projecting GDP to increase at an
annual rate of nearly 3 percent in the second half of the year and to accelerate to
5 percent next year, mostly because of the improved economic conditions
projected for the United States. Recent data suggest that the Brazilian economy
remains weak, but lower credit spreads and greater financial stability after last
year’s turmoil lead us to believe that at least modest growth will be registered
this year and next. Argentine data suggest that a mild economic recovery is in
place, although the level of activity remains quite low. Venezuela is still in
critical condition.
We expect average inflation in the developing countries to be little more than
3 percent this year. We forecast inflation to decline slightly next year, in line
with projected declines in oil prices.
Staff Projections of Selected Trade Prices
(Percent change from end of previous period except as noted; s.a.a.r.)
Projection
Trade category
Exports
Core goods
Imports
Non-oil core goods
Oil (dollars per barrel)

2002 2003:
Q1
2.1

4.6

2003
Q2

H2

.9

2004

.5

1.1

.7
5.6
2.0
3.6
1.1
25.75 30.77 26.43 24.95 22.05

NOTE. Prices for core exports and non-oil core imports, which exclude
computers and semiconductors, are on a NIPA chain-weighted basis.
The price of imported oil for multi-quarter periods is the price for the final
quarter of the period.

Prices of Internationally Traded Goods
After having jumped 5.6 percent at an annual rate in the first quarter, prices of
imported core goods are estimated to be rising at a rate of 2 percent in the current
quarter. Recent swings in core import inflation largely reflect gyrations in prices
of imported natural gas, which spiked in March; prices of imported core goods
excluding natural gas and all fuels have been steadier, rising 2 percent (a.r.) last
quarter and an estimated 3 percent in the current quarter, reflecting the ongoing
decline in the value of the dollar.

International Developments

I-33

We expect that the decline in the dollar will boost import price inflation in the
third quarter, but thereafter import prices should increase at a more subdued pace
as the effect of the dollar’s fall becomes more fully incorporated and energy
prices decline.
Prices of core export goods have moved of late in a pattern similar to that of core
import prices, surging in the first quarter, as increases in energy costs boosted
prices of industrial supplies, and slowing in the current quarter, as energy prices
have retreated. Over the remainder of the forecast period, core export price
inflation is expected to remain subdued, in line with projected U.S. domestic
goods prices.
Trade in Goods and Services
Since the previous Greenbook, we have revised down substantially our
expectation for real exports of goods and services in the second quarter and now
estimate them to be declining at an annual rate of 2 percent, following a
1.2 percent (revised) decline in the first quarter. The second-quarter decrease
constitutes the third consecutive quarter of contraction in exports and reflects
both the continued weakness of foreign economies and the disruptions associated
with SARS and the Iraq war. Whereas exports of core goods appear to be
growing at a rate of about 3/4 percent this quarter, exports of services have
dropped significantly, extending their first-quarter decline, owing to a falloff in
travel-related services through April.
We project that real exports of goods and services will turn around in the second
half of 2003, reaching an annualized growth rate of about 8-1/2 percent, and will
accelerate a bit further in 2004. Exports of core goods, which are projected to
increase about 7 percent in the second half of this year and 8 percent in 2004,
reflect the weaker dollar and the projected pickup in foreign GDP. Exports of
services are also projected to increase at an annual rate of 7 percent in the second
half of this year, consistent with a recovery of travel-related activity. In 2004,
exports of services are projected to rise 5-3/4 percent. In addition, exports of
computers and semiconductors should recover from the high-tech slump and
resume growth more in line with historical experience.
Following a sharp reduction in the first quarter, real imports of goods and
services are estimated to be rising moderately in the current quarter, with solid
growth in goods imports restrained by substantial declines in imports of services,
especially travel services.

I-34

Part 1: Summary and Outlook, June 18, 2003

Staff Projections for Trade in Goods and Services
(Percent change from end of previous period, s.a.a.r.)
Projection
Measure

2002

2003:
Q1

2003
Q2

H2

2004

Real exports
Previous GB

3.9
3.9

-1.2
-2.1

-2.0
3.5

8.6
9.3

9.6
9.0

Real imports
Previous GB

10.1
10.1

-6.2
-6.8

5.3
7.2

4.3
6.9

10.4
10.0

NOTE. Changes for years are measured as Q4/Q4; for half-years,
Q2/Q4 or Q4/Q2.

Real imports of goods and services are projected to rise at an annual rate of
4-1/4 percent in the second half of this year, with imported core goods rising
about 5-1/2 percent, restrained by the weaker dollar. Imports of services
continue to fall in the second half as a recovery in travel is more than offset by
the negative impulse from the depreciation of the dollar. In 2004, total import
growth is projected to pick up to a rate of 10 percent, and core goods imports
should rise about as fast, as the expected strengthening of U.S. economic activity
over the forecast period outweighs the relative price effects of the lower dollar.
As in the case of exports, imports of computers and semiconductors are projected
to grow steadily over the forecast period.
Alternative Simulation
We are projecting a small decline in the foreign exchange value of the dollar
over the forecast period, but the financing burden of the large and growing U.S.
current account deficit may prompt a sharper decline in the dollar’s value. In our
alternative simulation, we use the FRB/Global model to assess the effects of a
rise in the risk premium on the dollar in foreign exchange markets that would
generate a larger depreciation. The shock is assumed to occur in 2003:Q3 and
has been scaled so that the real value of our broad dollar index would decline
10 percent in that quarter in the absence of endogenous adjustments in long-term
interest rates. This depreciation stimulates net exports, boosting U.S. GDP
growth about 0.3 percentage point in 2003:H2, relative to baseline, and
0.5 percentage point in 2004. Core PCE inflation rises about 0.2 percentage
point above baseline in the second half of 2003 and 0.6 percentage point in 2004,
mainly because of the direct effect of higher prices for imported goods and
services.

I-35

International Developments

Alternative Simulation:
10 Percent Depreciation of the Broad Real Dollar
(Percent change from previous period, annual rate)
Indicator and simulation

2003

2004

H1

H2

H1

H2

U.S. real GDP
Baseline
Dollar depreciation

1.5
1.5

4.2
4.5

5.3
5.8

5.4
6.0

U.S. PCE prices excl. food and energy
Baseline
Dollar depreciation

.9
.9

1.2
1.4

1.0
1.7

.9
1.3

NOTE. H1 is Q2/Q4; H2 is Q4/Q2. In these simulations, the nominal federal funds rate
remains unchanged from baseline, and the monetary authorities in major foreign economies
adjust their policy rates according to a Taylor rule.

(This page intentionally blank.)

6.2
6.6
6.4
5.3
6.3
7.1
5.2

Developing Countries
Asia
Korea
China
Latin America
Mexico
Brazil

1.5
1.0
2.1
2.7
1.5
1.5

1.5
2.0
0.2
3.2
1.9
1.3

1.1
0.7
2.5
0.8
0.3

1.0

-0.3
-2.1
-5.2
9.5
1.2
2.9
-1.7

4.4
-1.3
2.6
2.0
0.7

2.7

1.6

2.4
-1.1
2.2
1.5
1.1

1.2

6.1
8.6
13.8
4.1
4.2
5.4
3.5

5.9
-0.5
3.2
3.8
3.3

4.2

4.9

3.1
-1.3
2.1
2.5
1.7

1.8

5.3
6.2
5.1
8.0
4.5
4.8
4.0

4.2
5.1
2.2
2.7
1.9

3.8

4.4

1.1
-1.3
2.0
2.1
1.5

1.0

-0.3
0.9
4.2
7.5
-1.4
-1.5
-0.7

1.4
-2.4
1.9
0.6
0.1

0.7

0.3

3.8
-0.4
2.6
2.3
1.2

2.2

3.1
5.5
7.0
8.0
1.1
2.0
3.4

3.5
2.4
2.2
1.2
0.7

2.6

2.8

2.3
-0.7
2.7
1.3
0.4

1.4

1.9
2.9
3.1
6.7
0.9
1.0
1.8

2.3
0.2
1.3
0.5
-0.5

1.4

1.6

2.1
-0.8
2.4
1.2
0.3

1.2

4.8
5.7
5.4
8.1
4.4
5.0
3.0

3.2
1.0
2.5
2.0
1.4

2.5

3.4

1.
2.
3.
4.

Foreign GDP aggregates calculated using shares of U.S. exports.
Harmonized data for euro area from Eurostat.
Foreign CPI aggregates calculated using shares of U.S. non-oil imports.
CPI excluding mortgage interest payments, which is the targeted inflation rate.

Developing Countries
11.1
6.8
9.0
4.6
4.1
2.8
3.1
3.2
2.7
Asia
4.8
2.7
4.4
0.1
1.8
1.0
0.7
1.9
1.8
Korea
5.0
4.9
5.8
1.2
2.5
3.3
3.4
3.3
2.7
China
6.8
0.9
-1.2
-0.9
0.8
-0.2
-0.7
1.5
1.2
Latin America
25.8
15.5
15.4
12.5
8.4
5.3
6.4
5.0
4.2
Mexico
28.0
17.0
17.3
13.4
8.7
5.1
5.3
3.9
3.6
Brazil
9.6
4.6
2.0
8.4
6.4
7.5
10.7
13.2
7.7
___________________________________________________________________________________________________

Industrial Countries
of which:
Canada
Japan
United Kingdom (4)
Euro Area (2)
Germany

CONSUMER PRICES (3)
-------------------

4.4
0.3
3.7
3.1
1.7

2.7
3.3
2.8
1.7
1.4
5.3
5.0
3.4
8.7
6.1
6.8
2.3

3.5

4.2

2.7

4.0

Industrial Countries
of which:
Canada
Japan
United Kingdom
Euro Area (2)
Germany

REAL GDP (1)
-----------Total foreign

Measure and country
1996
1997
1998
1999
2000
2001
2002
2003
2004
___________________________________________________________________________________________________

Projected

Strictly Confidential (FR)
June 18, 2003
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, Q4 to Q4)
___________________________________________________________________________________________________

I-37

3.3
6.4
10.5
8.5
1.1
2.0
7.6

Developing Countries
Asia
Korea
China
Latin America
Mexico
Brazil

1.4
5.3
8.3
6.8
-1.7
-0.1
2.9

1.6
1.5
1.5
0.3
-0.1

1.4

1.4

-1.0
2.5
-1.4
16.3
-4.3
-2.0
-0.2

2.4
0.6
0.6
0.0
-0.9

1.3

0.4

0.9
-0.0
2.5
-3.0
1.4
0.5
2.0

1.0
-0.3
1.2
0.4
-0.5

0.8

0.8

3.1
3.8
5.1
6.5
2.4
1.7
2.5

2.5
-0.1
1.8
0.5
-0.5

1.5

2.1

4.5
5.1
6.2
8.0
4.2
4.0
3.0

3.3
0.5
1.7
1.0
-0.0

2.1

3.1

4.8
5.5
5.4
8.0
4.5
5.2
3.0

3.2
0.7
2.3
1.5
0.7

2.3

3.3

4.9
5.8
5.4
8.0
4.5
5.2
3.0

3.1
1.0
2.3
1.9
1.2

2.4

3.4

4.8
5.8
5.4
8.2
4.2
4.8
3.0

3.2
1.1
2.4
2.3
1.6

2.6

3.4

4.8
5.7
5.4
8.2
4.2
4.8
3.0

3.3
1.1
2.7
2.5
1.9

2.7

3.5

1.0
1.3
-1.1
1.9
2.1
1.2

1.2
1.6
-1.5
2.4
2.6
2.0

2.3
-0.9
2.0
2.1
1.1

1.4
3.8
-0.4
2.6
2.3
1.2

2.2
4.5
-0.3
2.9
2.3
1.1

2.5

3.2
-0.4
3.0
1.9
0.9

2.0

2.7
-0.6
3.0
1.8
0.7

1.7

2.3
-0.7
2.7
1.3
0.4

1.4

1.3
-0.8
2.3
0.9
-0.2

0.8

2.2
-0.8
2.5
1.0
0.0

1.2

2.1
-0.8
2.4
1.1
0.2

1.2

2.1
-0.8
2.4
1.2
0.3

1.2

--------------------------- Four-quarter changes --------------------------

3.4
3.4
3.9
7.5
3.2
2.4
4.1

2.7
2.6
4.3
1.3
1.2

2.5

2.8

1.
2.
3.
4.

Foreign GDP aggregates calculated using shares of U.S. exports.
Harmonized data for euro area from Eurostat.
Foreign CPI aggregates calculated using shares of U.S. non-oil imports.
CPI excluding mortgage interest payments, which is the targeted inflation rate.

Developing Countries
2.7
2.6
2.8
3.1
3.6
3.3
3.2
3.2
2.8
2.8
2.8
2.7
Asia
0.8
0.6
0.5
0.7
1.4
1.4
1.6
1.9
1.6
1.7
1.8
1.8
Korea
2.6
2.6
2.5
3.4
4.1
3.4
3.5
3.3
2.7
2.7
2.7
2.7
China
-0.6 -1.1 -0.8 -0.7
0.5
0.8
1.0
1.5
0.8
1.0
1.2
1.2
Latin America
5.2
5.4
6.0
6.4
7.1
6.4
5.6
5.0
4.6
4.5
4.4
4.2
Mexico
4.8
4.8
5.2
5.3
5.5
4.8
4.1
3.9
4.0
3.9
3.8
3.6
Brazil
7.7
7.9
7.7 10.7
15.6 17.2 16.6 13.2
8.5
7.4
7.6
7.7
______________________________________________________________________________________________________________

Industrial Countries
of which:
Canada
Japan
United Kingdom (4)
Euro Area (2)
Germany

CONSUMER PRICES (3)
-------------------

3.8
5.4
2.4
1.6
0.6

5.8
0.1
0.5
1.7
1.2
4.3
7.1
5.4
9.3
2.0
3.6
-0.8

3.3

3.7

3.2

3.2

-------------------- Quarterly changes at an annual rate ------------------

Industrial Countries
of which:
Canada
Japan
United Kingdom
Euro Area (2)
Germany

REAL GDP (1)
-----------Total foreign

----------------- Projected --------------------2002
2003
2004
------------------------------------------------------------------Measure and country
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
______________________________________________________________________________________________________________

Strictly Confidential (FR)
June 18, 2003
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent changes)
______________________________________________________________________________________________________________

I-38

June 18, 2003

9.8
8.9
21.6
44.6
7.3
11.2
5.3
7.8
17.8
56.7
10.4

Exports of G&S
Services
Computers
Semiconductors
Other Goods 1/

Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

-1.1
0.3
-1.3

-1.0
0.5
-1.5

10.8
8.5
4.1
25.8
-8.7
11.5

2.3
2.9
8.1
9.1
1.3
11.9
5.9
-3.4
26.0
34.2
12.7

4.9
3.2
13.4
34.6
3.2
11.1
10.9
13.3
13.6
22.5
10.4

7.3
4.8
23.0
26.9
5.7

-0.8
0.8
-1.5

Billions of chained 1996 dollars

14.3
14.0
3.9
33.0
32.9
12.7

8.5
1.4
25.8
21.3
9.8

Percentage change, Q4/Q4

-0.8
1.0
-1.7

-8.0
-8.6
0.1
-13.8
-51.4
-6.2

-11.4
-9.2
-23.4
-34.9
-9.4

-0.1
-1.3
1.2

10.1
11.5
4.0
13.6
9.3
10.1

3.9
11.4
-2.1
8.5
0.5

-1.0
0.4
-1.3

1.8
-6.8
-1.2
16.8
21.1
2.8

3.4
-1.6
12.3
33.4
3.6

0.1
0.3
-0.3

10.4
5.4
4.2
33.6
36.3
10.0

9.6
5.7
33.5
36.3
8.2

-0.5
0.9
-1.5

28.6
69.4
-40.8

-102.9

-118.8
-1.5

25.1
72.4
-47.3

-107.0

-127.7
-1.5

12.7
65.5
-52.9

-163.2

-200.0
-2.3

23.9
75.0
-51.1

-261.2

-291.8
-3.1

27.6
88.9
-61.2

-370.7

-402.4
-4.1

20.5
102.6
-82.1

-357.8

-392.9
-3.9

-5.4
77.9
-83.4

-418.0

-485.9
-4.6

0.0
79.0
-79.0

-492.3

-558.1
-5.1

4.5
85.7
-81.2

-525.4

-583.7
-5.1

1. Merchandise exports excluding computers and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

Other Income & Transfers,Net
-44.6
-45.7
-49.6
-54.5
-59.3
-55.6
-62.5
-65.8
-62.9
________________________________________________________________________________________________________________

Investment Income, Net
Direct, Net
Portfolio, Net

Net Goods & Services (BOP)

US CURRENT ACCOUNT BALANCE
Current Acct as Percent of GDP

Billions of dollars

Net Goods & Services
-89.0
-113.3
-221.1
-320.5
-398.8
-415.9
-488.5
-525.5
-568.7
Exports of G&S
874.2
981.5
1002.4
1036.3
1137.2
1076.1
1058.8
1069.9
1157.7
Imports of G&S
963.1
1094.8
1223.5
1356.8
1536.0
1492.0
1547.4
1595.4
1726.4
________________________________________________________________________________________________________________

-0.2
1.1
-1.3

Percentage point contribution to GDP growth, Q4/Q4

Net Goods & Services
Exports of G&S
Imports of G&S

NIPA REAL EXPORTS and IMPORTS

Projected
1996
1997
1998
1999
2000
2001
2002
2003
2004
________________________________________________________________________________________________________________

OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
________________________________________________________________________________________________________________

Strictly Confidential (FR)
Class II FOMC

I-39

June 18, 2003

-1.8
-0.8
-1.0

8.4
0.2
3.9
35.0
23.0
7.8

Exports of G&S
Services
Computers
Semiconductors
Other Goods 1/

Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

-0.7
1.1
-1.8

0.1
1.3
-1.2

-1.1
0.8
-1.9

-1.0
1.5
-2.5

-0.7
1.2
-1.9

14.5
9.7
-5.8
14.4
16.3
17.4

10.6
4.7
20.6
41.3
10.8
9.4
7.1
-31.5
13.5
35.0
13.4

12.6
6.4
9.2
19.0
15.4
14.7
20.7
28.6
2.5
23.5
13.1

7.7
10.2
33.5
14.6
4.2
18.6
9.6
40.4
40.4
50.0
15.5

14.6
11.2
45.9
90.9
9.1
13.8
15.1
-2.3
27.9
69.8
12.3

11.6
-5.9
28.8
43.4
16.7

Billions of chained 1996 dollars, s.a.a.r.

15.4
6.8
29.8
43.7
67.9
12.2

4.3
3.4
24.7
45.2
0.9

-0.2
-0.5
0.3

-1.6
-0.5
-6.5
-9.5
-28.5
1.3

-4.0
4.4
-8.8
-17.5
-5.9

Percentage change from previous period, s.a.a.r.

-1.4
0.4
-1.9

Percentage point contribution to GDP growth

-7.9
0.3
23.3
-21.6
-43.9
-9.4

-6.0
-6.0
-7.3
-34.6
-2.9

0.5
-0.7
1.2

-6.8
8.5
7.2
-24.5
-68.8
-6.2

-12.4
-2.5
-41.7
-47.3
-10.5

-0.4
-1.4
1.0

-11.8
-23.2
-26.9
-18.7
-55.9
-4.7

-17.3
-13.9
-22.8
-40.9
-16.5

-0.2
-2.0
1.7

-5.3
-16.5
3.9
14.6
-27.5
-4.5

-9.6
-13.8
-17.6
-11.7
-6.9

-0.3
-1.0
0.7

24.9
71.4
-46.5

18.3
71.3
-53.0

-284.4

-318.5
-3.4

31.5
85.0
-53.5

-299.5

-331.5
-3.5

25.1
79.0
-53.9

-346.9

-374.6
-3.9

30.6
86.9
-56.3

-364.5

-389.2
-4.0

22.1
89.2
-67.1

-380.1

-415.5
-4.2

32.8
100.3
-67.5

-391.5

-430.3
-4.3

10.3
89.0
-78.7

-373.8

-416.0
-4.1

30.1
111.3
-81.2

-357.8

-381.5
-3.8

9.4
95.6
-86.3

-356.2

-402.4
-4.0

32.4
114.4
-82.0

-343.5

-371.8
-3.7

1. Merchandise exports excluding computers and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

Other Inc. & Transfers, Net -50.0
-52.1
-52.4
-63.5
-52.8
-55.3
-57.5
-71.7
-52.5
-53.7
-55.6
-60.6
___________________________________________________________________________________________________________________________

20.8
72.3
-51.5

-251.8

Net Goods & Services (BOP) -209.1

Investment Income, Net
Direct, Net
Portfolio, Net

-279.0
-3.0

-238.3
-2.6

US CURRENT ACCOUNT BALANCE
Current Account as % of GDP

Billions of dollars, s.a.a.r.

Net Goods & Services
-283.2 -319.6 -339.6 -339.5 -368.8 -394.6 -413.1 -418.5 -404.5 -414.8 -419.0 -425.3
Exports of G&S
1007.5 1018.1 1044.1 1075.6 1095.8 1133.9 1165.5 1153.7 1135.8 1098.8 1048.0 1021.8
Imports of G&S
1290.7 1337.7 1383.7 1415.2 1464.6 1528.5 1578.6 1572.2 1540.3 1513.6 1467.0 1447.2
___________________________________________________________________________________________________________________________

-6.9
-1.5
0.8
34.2
-12.0

Net Goods & Services
Exports of G&S
Imports of G&S

NIPA REAL EXPORTS and IMPORTS

1999
2000
2001
--------------------------------------------------------------------------------Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
___________________________________________________________________________________________________________________________

OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
___________________________________________________________________________________________________________________________

Strictly Confidential (FR)
Class II FOMC

I-40

June 18, 2003

-0.7
0.3
-1.1

8.5
35.7
-19.0
52.4
45.2
1.9

Exports of G&S
Services
Computers
Semiconductors
Other Goods 1/

Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

0.0
0.5
-0.4

-1.6
-0.6
-1.0

0.8
-0.1
0.9

-0.9
-0.2
-0.7

0.1
0.6
-0.5

3.3
3.1
-13.3
-4.4
-5.9
6.3

4.6
5.9
-0.8
21.3
3.3
7.4
13.0
24.1
8.2
-26.4
5.2

-5.8
8.0
17.9
-39.4
-10.7
-6.2
-4.1
-12.5
-1.9
-1.3
-6.3

-1.2
-7.7
-7.4
45.2
0.2
5.3
-18.9
41.7
14.8
21.7
7.2

-2.0
-11.0
-2.0
31.3
0.8
3.5
-4.6
-0.9
23.9
31.3
4.1

6.7
6.9
31.0
21.7
4.2

Billions of chained 1996 dollars, s.a.a.r.

22.2
-2.1
34.5
5.6
41.8
28.8

14.3
10.7
-0.5
65.8
14.2

10.6
7.0
33.5
36.3
9.4

0.3
1.0
-0.7

5.1
1.5
-22.6
33.6
36.3
7.0

Percentage change from previous period, s.a.a.r.

-1.4
1.3
-2.7

Percentage point contribution to GDP growth

8.9
3.2
-0.3
33.6
36.3
9.0

7.1
5.9
33.5
36.3
4.2

-0.5
0.7
-1.2

12.0
5.8
29.8
33.6
36.3
9.9

9.5
5.5
33.5
36.3
8.2

-0.7
0.9
-1.6

11.3
6.4
10.4
33.6
36.3
10.4

9.7
5.5
33.5
36.3
8.5

-0.6
0.9
-1.6

9.5
6.3
-17.4
33.6
36.3
10.7

12.2
5.7
33.5
36.2
12.2

-0.2
1.2
-1.3

-14.7
75.0
-89.7

-5.8
74.5
-80.4

-427.9

-492.2
-4.7

-3.7
74.2
-77.9

-464.5

-531.0
-5.0

-12.4
68.3
-80.7

-486.4

-562.2
-5.3

-3.6
75.5
-79.0

-489.4

-559.4
-5.2

6.5
84.6
-78.0

-502.7

-562.7
-5.2

9.5
87.6
-78.1

-490.8

-548.0
-5.0

7.5
86.8
-79.2

-501.8

-557.0
-5.0

5.8
85.9
-80.2

-520.1

-577.0
-5.1

3.6
85.3
-81.7

-537.2

-596.3
-5.2

1.2
84.8
-83.6

-542.4

-604.7
-5.1

1. Merchandise exports excluding computers and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

Other Inc. & Transfers, Net -70.2
-58.3
-58.5
-62.9
-63.5
-66.5
-66.5
-66.7
-62.7
-62.7
-62.7
-63.5
___________________________________________________________________________________________________________________________

2.5
88.1
-85.5

-419.5

Net Goods & Services (BOP) -360.2

Investment Income, Net
Direct, Net
Portfolio, Net

-492.5
-4.7

-427.9
-4.1

US CURRENT ACCOUNT BALANCE
Current Account as % of GDP

Billions of dollars, s.a.a.r.

Net Goods & Services
-446.6 -487.4 -488.0 -532.2 -509.9 -535.5 -532.0 -524.6 -540.8 -563.0 -582.4 -588.6
Exports of G&S
1030.6 1065.5 1077.7 1061.6 1058.5 1053.2 1070.3 1097.6 1116.5 1142.1 1169.0 1203.1
Imports of G&S
1477.1 1552.9 1565.7 1593.8 1568.4 1588.7 1602.3 1622.2 1657.3 1705.1 1751.4 1791.7
___________________________________________________________________________________________________________________________

3.5
21.7
-21.1
13.7
-3.1

Net Goods & Services
Exports of G&S
Imports of G&S

NIPA REAL EXPORTS and IMPORTS

---------------------- Projected ------------------------2002
2003
2004
--------------------------------------------------------------------------------Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
___________________________________________________________________________________________________________________________

OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
___________________________________________________________________________________________________________________________

Strictly Confidential (FR)
Class II FOMC

I-41