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Class III FOMC - Internal (FR)

Part 2

June 18, 2008

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

June 18, 2008

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
The economy appears to have remained soft in recent months but does not yet show the
sharp break in activity that has been characteristic of most recessions in the past.
Consumer sentiment has fallen to historically low levels this spring, and sales of motor
vehicles have dropped noticeably, although other consumer spending has held up well.
Investment in business equipment appears to have slipped a bit further in the second
quarter, and homebuilding remained on a steep descent. Manufacturing activity
deteriorated in April and May, and forward-looking indicators suggest that conditions in
this sector will remain soft. In the labor market, payroll employment continued to post
modest declines in April and May, and the unemployment rate jumped to 5.5 percent.
While core consumer price inflation has remained relatively stable in recent months,
headline inflation has remained elevated because of continued large increases in food and
energy prices.
Labor Market Developments
Labor demand remains on a gradual downward descent. Private payroll employment fell
an average of 53,000 per month in April and May following average declines of 97,000
per month in the first quarter.1 Declines have been widespread during the first five
months of the year, with the notable exceptions of nonbusiness services such as
education, health, and food services. Meanwhile, the workweek held steady at 33.7 hours
in May, the same as its first-quarter average. And aggregate hours of production and
nonsupervisory workers on private nonfarm payrolls fell at an average monthly rate of
0.2 percent over the past two months.
In the household survey, the unemployment rate jumped to 5.5 percent in May from
5 percent in April. Last month’s increase was accompanied by a rise in the labor force
participation rate, especially among those aged 16 to 24, and we think that some of the
surge in the unemployment rate may be related to difficulties in adjusting for seasonal
flows of young people into the labor force.2 Nevertheless, unemployment rates rose in

1

Payroll employment in recent months has been held down by a strike at American Axle &
Manufacturing, which ended on May 22. The strike affected production at nine General Motors (GM)
truck assembly plants and nearly two dozen parts plants at various times over the past three months. In
addition, contract disputes over local issues—which had shut down two GM assembly plants for several
weeks—were also resolved near the end of May. Neither the workers on strike nor those indirectly affected
by the strikes returned to work in time to be counted in the May employment figures. We expect their
return to add between 20,000 and 30,000 to the change in employment in June.
2
Indeed, unemployed re-entrants and new entrants accounted for the bulk of the increase in
unemployment in May. Since young people are primarily labor force entrants, May’s rise in entrants
corroborates the notion that seasonal flows were part of the story behind the jump in unemployment in
May.

II-1

II-2
Changes in Employment
(Thousands of employees; seasonally adjusted)
2007
Measure and sector

2007

Q3

2008
Q4

Q1

Mar.

Average monthly change
Nonfarm payroll employment
(establishment survey)
Private
Natural resources and mining
Manufacturing
Ex. motor vehicles
Construction
Residential
Nonresidential
Wholesale trade
Retail trade
Financial activities
Professional and business services
Temporary help services
Nonbusiness services1
Total government
Total employment (household survey)
Memo:
Aggregate hours of private production
workers (percent change)2
Average workweek (hours)3
Manufacturing (hours)

Apr.

May

Monthly change

91
71
3
-22
-15
-19
-20
1
9
6
-9
26
-7
76
21
22

71
62
2
-23
-20
-22
-18
-5
9
1
-8
22
-13
76
8
58

80
45
4
-17
-8
-41
-39
-2
6
0
-14
44
4
71
35
-16

-82
-97
4
-43
-31
-41
-30
-11
-6
-29
-7
-39
-24
66
15
-81

-88
-103
6
-46
-23
-39
-28
-12
-3
-27
0
-59
-31
65
15
-24

-28
-40
1
-49
-31
-52
-27
-25
-10
-39
1
32
-12
79
12
362

-49
-66
3
-26
-30
-34
-25
-8
-4
-27
-1
-39
-30
75
17
-285

1.3
33.8
41.2

1.1
33.8
41.4

1.0
33.8
41.2

-1.1
33.7
41.1

.3
33.8
41.2

-.4
33.7
41.0

-.1
33.7
41.0

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

Aggregate Hours and Workweek of
Production or Nonsupervisory Workers

Changes in Private
Payroll Employment
Thousands

400

400

35.0

Hours

2002 = 100

110

3-month moving average
300

300

200

200

100

100

0

0

-100

May

108

Aggregate
hours
(right scale)

34.5

106

May
34.0

102

-100

-200

-200

-300

100
Workweek
(left scale)

33.5

-300

-400

2000

2002

2004

2006

2008

-400

104

98
96

33.0

2000

2002

2004

2006

2008

94

II-3
Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2007
Rate and group

2008

2007

Q3

Q4

Q1

Mar.

Apr.

May

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

4.6
15.7
8.2
3.6
3.6

4.7
15.8
8.6
3.6
3.7

4.8
16.4
8.6
3.7
3.8

4.9
16.8
9.0
3.8
3.9

5.1
15.8
9.3
4.0
4.1

5.0
15.4
8.9
4.0
3.9

5.5
18.7
10.4
4.2
4.1

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

66.0
41.3
74.4
75.6
59.7

66.0
40.7
74.4
75.6
59.8

66.0
41.0
74.0
75.5
59.7

66.0
40.3
73.9
75.5
59.9

66.0
39.8
73.9
75.4
60.1

66.0
41.1
74.2
75.2
60.0

66.2
42.6
75.0
75.2
60.0

Percent

Labor Force Participation Rate
and Unemployment Rate

Persons Working Part Time
for Economic Reasons

Percent

67.6

6.5

4.0

Percent of household employment

4.0

67.4
6.0

67.2
Unemployment rate
(right scale)

67.0
66.8

May

3.6

3.6

5.5
3.2

3.2

2.8

2.8

2.4

5.0

66.6

2.4

May

66.4

4.5

66.2

4.0

66.0
65.8
65.6

Participation
rate (left scale)

3.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

3.0

2.0

Job Losers Unemployed
Less Than 5 Weeks
Percent

2.0

Unemployed Due to Job Loss

(as a percent of household employment)
1.4

2000 2001 2002 2003 2004 2005 2006 2007 2008

(as a percent of the labor force)
1.4

4.0

Percent

4.0

3-month moving average (thick line)
3.5
1.2

May

3.5

1.2
3.0

1.0

1.0

0.8

May

3.0

0.8

0.6

2.0

1.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

2.5

2.0

0.6

2.5

1.5

1.0

2000 2001 2002 2003 2004 2005 2006 2007 2008

1.0

II-4
Labor Market Indicators

Unemployment Insurance
4.0

Layoffs and Job Cuts

Millions

Thousands
Insured unemployment
(left scale)

3.5

550

300

500
450

200

2.5

400

150

350

100

300

50

250

0

1.8

Layoffs and discharges
(monthly, right scale)

250

3.0

Percent of private employment

Thousands

1.6

May 31
Apr.

1.2

Initial claims
(right scale)

2.0
1.5
1.0

June 7
2000

2002

1.4

2004

2006

2008

May
1.0

Announced job cuts
(left scale)
2000

2002

2004

2006

2008

0.8

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

Note. 4-week moving averages.

Net Hiring Plans

Job Openings and Hires
Percent

30

30

Percent of private employment

4.5

4.5

Hires (monthly)

Manpower, Inc.
25

25

4.0

20

20

4.0

3.5

3.5
Apr.

15

15
Q3

10
5
0

2002

10

3.0

2.5

2.5
Job openings

National Federation of
Independent Business*
(3-month moving average)
2000

3.0

May
2004

2006

2008

5

2.0

0

1.5

Note. Percent planning an increase in employment
minus percent planning a reduction.
*Seasonally adjusted by FRB staff.

2.0

2000

2002

2004

2006

2008

1.5

Source. Job Openings and Labor Turnover Survey.

Expected Labor Market Conditions

Job Availability and Hard-to-Fill Positions
Index

120

45

105

120

Percent

Index

40

150

Conference Board
105
90

90

35

130
Job availability*
(right scale)

110

30
75

May
Reuters/Michigan

60

30

June
(p)
2000

2002

2004

25
60

45

2006

2008

Note. The proportion of households expecting labor
market conditions to improve, minus the proportion expecting
conditions to worsen, plus 100.
p Preliminary.

90

75
May

20

45

15

30

10

70
50

Hard-to-fill**
(left scale, 3-month moving average)
2000
2002
2004
2006
2008
*Proportion of households believing jobs are plentiful, minus
the proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one
"hard-to-fill" job opening. Seasonally adjusted by FRB staff.
Source. For job availability, Conference Board; for hardto-fill, National Federation of Independent Business.

30
10

II-5

Output per Hour
(Percent change from preceding period at an annual rate;
seasonally adjusted)

Sector
Nonfarm business
All persons
All employees2
Nonfinancial corporations3

2006:Q1 2007:Q1
to
to
2007:Q1 2008:Q1
.6
.5
.5

3.31
2.71
3.01

2007

2008

Q2

Q3

Q4

Q1

2.7
2.9
2.1

6.0
5.2
2.9

1.8
.2
2.4

2.91
2.71
4.61

1. Staff estimates.
2. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of employees.
3. All corporations doing business in the United States except banks, stock and commodity brokers,
and finance and insurance companies. The sector accounts for about two-thirds of business employment.
Nonfinancial corporate output is calculated as an income-side measure.

older age groups as well, albeit by not as much as for young people, and the number of
unemployed job losers increased further in May. On average over the past two months,
the unemployment rate has moved up about ¼ percentage point from its first-quarter
average of 4.9 percent to a level that is ¾ percentage point above its recent low at the end
of 2006.
Some—but not all—indicators of labor market conditions have also continued to worsen.
In the household survey, job losers unemployed less than five weeks have risen further as
a percentage of employment since March, and the fraction of workers who are working
part time for economic reasons has continued to move up. In addition, perceptions of job
availability in the Conference Board survey and of the difficulty of filling vacancies in
the National Federation of Independent Business (NFIB) survey have eroded further
since March, as have households’ expectations for labor market conditions in the
Reuters/University of Michigan and Conference Board surveys. Moreover, the most
recent readings on net hiring plans from both the Manpower and NFIB surveys moved
down, and the level of insured unemployment has continued to move up. However, in
the Job Openings and Labor Turnover survey, the job openings rate and the hiring rate
both turned up in April (the latest available data), while the rate of layoffs and discharges
fell back toward last summer’s levels.
The staff estimates that productivity in the nonfarm business sector rose at an annual rate
of 2¾ percent in the first quarter, which brought the increase over the previous four
quarters to 3¼ percent. The increase in productivity over the past year is quite robust,
especially given the concurrent weakening in economic growth. However, the strong
gains in productivity follow a year of particularly sluggish productivity growth.

II-6

Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2007

Component

(percent)

2007

2008

Q4

20071

2008

Q1

Mar.

Annual rate
Total
Previous

Apr.

May

Monthly rate

100.0
100.0

2.1
2.2

.3
.4

-.3
-.2

.1
.2

-.7
-.7

-.2
...

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

78.7
73.6
69.3

2.3
2.6
1.3

-.6
.3
-1.4

-1.2
-.2
-1.1

.2
.6
.5

-.9
-.5
-.6

.0
-.1
-.2

Mining
Utilities

11.6
9.7

.2
3.1

5.4
2.2

2.6
3.5

-.3
.0

-.6
.0

.1
-1.8

Selected industries
Energy

24.7

2.3

4.7

5.0

-.3

-.2

-.8

High technology
Computers
Communications equipment
Semiconductors2

4.3
1.0
1.3
2.0

22.3
16.7
20.6
25.9

29.5
19.9
30.4
33.7

13.5
22.5
11.4
10.9

2.0
.9
1.5
2.9

1.7
.3
1.8
2.4

1.1
.7
.9
1.4

Motor vehicles and parts

5.1

-2.2

-13.1

-14.4

-4.9

-6.9

1.0

65.9
19.9
3.6
16.3

1.1
.3
-2.4
.9

-1.9
-3.0
-6.9
-2.1

-2.0
-1.6
-10.5
.4

.6
.8
.4
.9

-.7
-.6
-1.0
-.5

-.1
-.1
-.5
.0

Business equipment
Defense and space equipment

7.3
1.7

2.8
4.2

.0
3.3

3.0
-.1

.9
-.4

-1.8
.0

-.1
-.6

Construction supplies
Business supplies

4.2
7.4

-1.9
-.1

-8.8
-1.5

-7.8
-3.3

-.3
1.0

-1.4
-.8

-.2
-.2

25.4
13.6
11.7

1.8
2.9
.6

-.8
-.6
-.9

-2.6
-1.0
-4.5

.3
.1
.6

-.4
-.4
-.4

-.1
-.4
.3

Total ex. selected industries
Consumer goods
Durables
Nondurables

Materials
Durables
Nondurables

1. From fourth quarter of preceding year to fourth quarter of year shown.
2. Includes related electronic components.
... Not applicable.

Capacity Utilization
(Percent of capacity)
19722007
average

199495
high

200102
low

Q3

Q4

Q1

Apr.

May

Total industry

81.0

85.1

73.6

81.3

81.0

80.6

79.6

79.4

Manufacturing
Ex. motor veh. and parts
Mining
Utilities

79.7
79.9
87.5
86.8

84.6
84.3
88.7
93.9

71.5
71.2
84.8
84.6

79.8
80.2
89.0
85.9

79.3
79.8
90.2
85.9

78.7
79.3
90.3
86.3

77.7
78.8
89.6
85.4

77.5
78.6
89.6
83.7

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.6
82.2
77.7

89.5
88.2
80.4

81.9
74.6
69.9

88.3
81.9
78.0

89.3
81.3
77.6

89.4
80.7
77.2

88.8
79.8
76.0

89.0
79.3
75.9

Sector

2007

2008

II-7

Industrial Production
Industrial production (IP) moved down 0.2 percent in May after a 0.7 percent drop in
April. This recent weakness has not been confined to motor vehicles and construction
supplies; the three-month IP diffusion index remained below 50 in May after falling
sharply in April. Manufacturing output also fell in April and was unchanged in May,
putting the index on track to post its third consecutive quarterly decline. The factory
operating rate dipped to 77.5 percent in May, a level 2.2 percentage points below its longrun average.
Motor vehicle production moved up in May even though assemblies were held down by
weak demand and strikes at several plants. We estimate that these strikes reduced
production at General Motors by almost 1 million units (annual rate) from March to May.
At the same time, soft demand for full-size pickups and sport-utility vehicles led other
domestic producers to scale back their assembly rates.
The modest pace of vehicle production over the past few months has kept inventories in
check even as sales have plunged. Days’ supply at the end of May stood at 69, a level
only somewhat higher than the desired ratio. With the end of several strikes in May, the
automakers plan to increase the pace of assemblies in June to an annual rate of
10.1 million units. If realized, this rebound in assemblies and parts production would
contribute nearly ¼ percentage point to the change in IP in June. Initial plans for
assemblies in the third quarter call for production to step up further.
High-tech production decelerated further in April and May after growth slowed sharply in
the first quarter. Computer output increased ½ percent, on average, in April and May,
well below its pace of 2007. The output of communications equipment slowed in May
after having risen at a solid pace in April. Semiconductor production also decelerated in
April and May, as continued weakness in the demand for cell phones and consumer PCs
resulted in slower production for some chip types.
Looking ahead, available indicators point to only modest gains in high-technology output
in the next few months. The International Data Corporation recently revised down its
2008 forecast for PC demand and expects unit sales only to edge up this quarter. In
addition, recent statements from Dell and Hewlett-Packard have expressed concern about
weak U.S. demand. And guidance by telecommunications service providers suggests that
their capital expenditures will decline in the remainder of the year. For semiconductors,
Intel’s revenue guidance for the second quarter is consistent with a solid increase in
microprocessor output, but in other chip categories, efforts to pare elevated inventories

II-8
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2007

2008

Item

Q4

Q1

Q2

U.S. production1
Autos
Light trucks

10.3
4.0
6.3

9.7
3.9
5.7

8.8
3.8
5.0

Days’ supply2
Autos
Light trucks

64
51
76

65
51
76

Inventories3
Autos
Light trucks

2.59
.90
1.69

Memo: U.S. production,
total motor vehicles4

10.5

Q3

Apr.

May

June

July

10.3
4.6
5.7

8.2
3.5
4.7

8.4
3.6
4.8

9.8
4.3
5.5

10.2
4.6
5.6

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

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

72
53
88

69
44
95

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

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

2.45
.84
1.61

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

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

2.47
.85
1.62

2.35
.77
1.58

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

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

9.9

9.0

10.5

8.4

8.6

10.1

10.5

Note. FRB seasonals. Components may not sum to totals because of rounding.
1. Production rates for the second and third quarters reflect the latest industry schedules.
2. Quarterly values are calculated with end-of-period stocks and average reported sales.
3. End-of-period stocks.
4. Includes medium and heavy trucks.
n.a. Not available.

Inventories of Light Vehicles
Millions of units
3.6
3.4
3.2
3.0
2.8
2.6
2.4

May
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2.2

2008

Days’ Supply of Light Vehicles
Days
90
Using sales in current month
Using 3-month moving average of sales

80
May

70
60
50
40

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

30

II-9
Indicators of High-Tech Manufacturing Activity

Industrial Production in the High-Tech Sector

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

2002 = 100, ratio scale
400
350
300

Computers

250

0.65

200

May

Semiconductors

0.70

Millions of units, ratio scale

0.80

19.0

0.60

0.75
Servers (left scale)

Q1
Q2

15.0
PCs (right scale)

150
0.50

2002

2003

2004

2005

2006

2007

100

2008

80

Capital Expenditures by Selected
Telecommunications Service Providers

0.45
0.40

17.0
16.0

0.55

Communications equipment

18.0

2002
2003
2004
2005
2006
2007
2008
Note. FRB seasonals. PCs include desktops, notebooks, ultra
portables, and x86 PC servers. The Q2 value for PCs is a forecast
by IDC.

14.0
13.5
13.0
12.5
12.0
11.5
11.0

Rate of Change in Semiconductor
Industrial Production

Billions of dollars, ratio scale

Percent
75
70
65
60

Annual average
2008 guidance

14
MPUs
Non-MPUs

12
10

55

Q1

8

50

6
4

45
May
40

2
0

35
-2
2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. FRB seasonals. Includes AT&T, Verizon, Sprint Nextel,
and companies related by merger, acquisition, or spinoff.
Source. SEC filings. Guidance from Dell’Oro.

30

FRB Chip Inventory Index

2002
2003
2004
2005
2006
2007
2008
Note. 3-month moving average. MPU is a microprocessor unit.

-4

Circuit Board Orders and Shipments
Billions of dollars

1995 = 100
130
Q1

120

180
Shipments
Orders
160

110
100

Apr.

90

140

120

80
100
70
1996
1998
2000
2002
2004
2006
2008
Note. The staff’s chip inventory index is a sales-weighted
chain-type index constructed from financial data for 10 major
chip manufacturers.
Source. Financial reports.

60

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

80

II-10
Indicators of Industrial Activity

Manufacturing IP Diffusion Index

Motor Vehicle Assemblies
Index

Millions of units
70

Millions of units

0.6

13.5
Autos and light trucks (right scale)

65

12.5

0.5
60
55

11.5
0.4
10.5

50
May

0.3

+

45
0.2
40

2002
2003
2004
2005
2006
2007
2008
Note. The diffusion index equals the percentage of series that
increased over 3 months plus one-half the percentage that were
unchanged.

+ June

35

Trade Shares

0.1

Medium and heavy trucks
(left scale)

9.5
8.5

2002
2003
2004
2005
2006
2007
2008
Note. June values are based on latest industry schedules.

7.5

IP: Construction Supplies and Durable Materials

Percent

Percent

2002 = 100, ratio scale

22

30

114

21

29

112

Apr.

110

28

20

108

Imports/domestic absorption (right scale)

27

19
26

106
Durable materials

May

18
25
17

24

16
15

Exports/shipments (left scale)
2002
2003
2004
2005
2006
2007
Note. Trade shares are 3-month moving averages.
Source. Department of Commerce.

2008

New Orders: ISM Survey and Change in Real
Adjusted Durable Goods Orders
Percent

98
2002
2003
2004
2005
2006
2007
2008
Note. Data exclude motor vehicle parts, high-tech, and aircraft
parts industries.

96

Diffusion index

Diffusion index
80

80

75

ISM (right scale)

70

2

75
Empire State

70

65
Apr.

0

May

65

60

1

60

55

55
May
June

50
45

-1
-2

100

New Orders Diffusion Indexes: Empire State
and Average of Regional Surveys

4
3

102
Construction supplies

23
22

104

40
RADGO (left scale)

Regional average

50
45
40

35

35

30

30
2002
2003
2004
2005
2006
2007
2008
Note. Regional average includes new orders indexes from the
Chicago, Dallas, Kansas City, New York (Empire State), Philadelphia,
and Richmond surveys.

2002
2003
2004
2005
2006
2007
2008
Note. The measure for real adjusted durable goods orders
(RADGO) is a 3-month moving average. The diffusion index equals
the percentage of respondents reporting greater levels of new
orders plus one-half the percentage of respondents reporting
that new orders were unchanged.

II-11

may restrain production. Meanwhile, the book-to-bill ratio for circuit boards climbed
back above 1 after several months of declining orders.
Output excluding the energy, high-tech, and motor vehicles sectors moved down in April
and May. The index for business equipment contracted nearly 2 percent in April and
slipped further in May as the production of industrial and other equipment declined.
Output of consumer goods decreased in April and May, with particularly weak
production of durable consumer goods.
Output of construction supplies, which fell in April and edged down in May, has declined
nearly 10 percent since its peak in January 2006. Output of products associated with
nonresidential construction, which had previously offset some of the production losses
related to residential investment, has turned down in recent months. Production of
durable materials that are destined for further processing in the industrial sector also
stepped down in April and May after having been unchanged, on balance, since mid2007.
Forward-looking indicators of production have been mixed; on balance, they suggest
continued softness in the manufacturing sector. The three-month moving average of real
adjusted durable goods orders has increased, on net, since the start of the year. Although
the May reading of the Institute for Supply Management (ISM) diffusion index for new
orders edged up, this index continued to suggest declining orders. Meanwhile, the
Empire State new orders diffusion index moved down to a modestly negative level in
June, while other regional new orders indexes remained at more neutral levels through
May. And the inventory-shipments ratio from the staff’s flow-of-goods system has
trended upward in recent months, which may imply production cutbacks in the future.
Motor Vehicles
Demand for light vehicles has deteriorated significantly in recent months. Sales tumbled
to an average annual rate of 14.3 million units in April and May, nearly 1 million units
below the pace in the first quarter.
. In addition, the sharp increase in gasoline prices over the past few months
appears to have accelerated the shift in consumer demand away from trucks and toward
cars: The share of pickups, vans, and sport-utility vehicles in total sales plunged in April
and May, while the share of small cars shot up. As a result, the domestic market share of
the Detroit Three automakers, which rely heavily on sales in the full-size pickup and
sport-utility categories, has continued to move down.

II-12
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2007
Category

2007

Total

Q3

2008
Q4

Q1

Mar.

Apr.

May

16.1

15.9

16.1

15.2

15.0

14.4

14.3

7.6
8.5

7.4
8.5

7.8
8.3

7.4
7.8

7.5
7.5

7.5
6.9

8.0
6.2

North American1
Autos
Light trucks

12.3
5.3
7.1

12.3
5.1
7.2

12.3
5.5
6.9

11.5
5.0
6.5

11.1
5.0
6.2

10.6
4.9
5.7

10.4
5.3
5.1

Foreign-produced
Autos
Light trucks

3.8
2.4
1.4

3.6
2.3
1.3

3.8
2.3
1.4

3.7
2.4
1.3

3.9
2.6
1.3

3.8
2.6
1.2

3.8
2.7
1.1

51.2

50.4

50.4

50.1

48.2

47.2

44.1

Autos
Light trucks

Memo:
Detroit Three domestic
market share (percent)2

Note. Components may not sum to totals because of rounding.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.
2. Domestic market share excludes sales of foreign brands affiliated with the Detroit Three.

Content redacted.

Content redacted.

Market Share of Light Vehicles by Segment

Car-Buying Attitudes

Percent
76

0.34
0.30

52

0.26

40

0.22

28

0.18

16
4

0.10

-8

Appraisal of car-buying conditions (right scale)

64

0.14

Pickup/van/SUV

180

88

0.38
Large and
midsize cars

Index

Percent
0.42

160
140
120
100

Small cars
Cross utility

2006

2007

2008

Note. Data through May. FRB seasonals.

June

Bad time to buy:
Gas prices and shortages
(left scale)

80
60

2002

2003

2004

2005

2006

2007

2008

Source. Reuters/University of Michigan Survey.

40

II-13

Indicators suggest that motor vehicle sales will fall further in June. The availability of
cash rebates and cut-rate financing has decreased so far in June, and consumers’ views of
car-buying conditions have continued to deteriorate.

.
Consumer Spending
Real personal consumption expenditures (PCE) rose at an annual rate of 1 percent in the
first quarter, but spending appears to have picked up moderately since then. In light of
the latest retail sales data, we estimate that real expenditures on goods other than motor
vehicles increased a robust ½ percent, on average, in April and May—although, as just
noted, retail purchases of motor vehicles have been quite weak. Outside of the volatile
energy category, real outlays on services were also reported to have expanded through
April. However, real-time estimates for services are often extrapolations of past trends
that may not reflect the actual pace of spending.3
While spending in May appears to have received a boost from the tax rebates, the
fundamentals for consumer spending have deteriorated. In particular, real income has
increased at an average annual rate of just 1 percent since last summer, as labor market
conditions have deteriorated and rising food and energy prices have put a sizable dent in
consumers’ purchasing power.4 In addition, the ratio of household wealth to income
dropped sharply in the fourth and first quarters, developments that reflect declining
values of both equities and houses. As measured by the Reuters/Michigan and
Conference Board surveys, consumer sentiment dropped again in May, continuing the
vertiginous decline that began last summer. Sentiment fell further in the preliminary
Reuters/Michigan survey for June. Both measures of consumer sentiment stand near the
low points reached during the 1990-91 recession. On a more positive note, consumer
credit supply conditions do not appear to have worsened. Interest rates on consumer
loans continue to decline in response to the drop in short-term interest rates, and growth
in consumer credit has not yet slowed despite reports of tight terms and standards.

3

Because the Bureau of Economic Analysis (BEA) lacks timely data on many categories of services
consumption, spending on services has been subject to noticeable downward revisions around the start of
downturns in economic activity.
4
The weakness in real income is evident despite a notable upward revision of $26 billion to the BEA’s
estimate of nominal wages and salaries in the fourth quarter—reflecting information from unemployment
insurance tax records—and a boost to wages and salaries in January through March from an estimated
temporary increase of $15 billion in bonus payments.

II-14
Retail and Food Services Sales
(Percent change from preceding period; seasonally adjusted current dollars)
2007

2008
Apr.
May
Monthly rate

Category

Q3

Q4
Annual rate

Q1

Mar.

Total sales
Retail control1
Ex. sales at gasoline stations
Memo:
Real PCE control2

2.1
3.5
4.7

4.1
6.4
1.8

.8
4.6
2.4

.5
.9
.6

.4
.8
1.0

1.0
1.1
.8

4.1

1.0

.0

.7

.6

.5

1. Total sales less outlays at building material and supply stores and automobile and other motor
vehicle dealers.
2. Total goods spending excluding autos and trucks. The values for March, April, and Q1 are staff
estimates. The value for May is a staff forecast.

Change in Real PCE Goods
2.0

Percent

1.0

1.5

6-month

1.5

Change in Real PCE Services
2.0

0.8

Percent

6-month

0.8

0.6
1.0

1.0

0.6

1.0
0.4

0.5

May

0.5

0.4

0.2

Apr.

0.2

0.0

0.0

-0.0

-0.0

-0.5

-0.5

-0.2

-0.2

-0.4
-1.0

-0.4

-1.0
1-month

-0.6
-1.5
-2.0

-1.5

2004

2005

2006

2007

2008

-1.0

-0.6

-0.8

-2.0

1-month

-0.8
2004

2005

2006

2007

2008

-1.0

Note. The values for March and April are staff estimates.
The value for May is a staff forecast.

Personal Saving Rate
Percent

6
4

6
4

2

2
Apr.

0

0

-2

-2

-4

-4

-6

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Note. Value for December 2004 excludes the effect on income of the one-time Microsoft dividend in that month.

2006

2007

2008

-6

II-15
Fundamentals of Household Spending

Changes in Wages and Salaries and in Disposable Income
Percent, annual rate
Nominal wage and salary disbursements (white)
Nominal DPI (black)
Real DPI (striped)

10

Changes in Real DPI
12-month percent change

8

8

8
6

6

4

4

6
4
2

Apr.

2

2

0
0

0

-2
-4
2007:Q4

2008:Q1

Feb.

Mar.

-2

Apr.

1998
1998

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

-2

Note. Values for December 2004 and December 2005
exclude the effect on income of the one-time Microsoft
dividend in December 2004.

Target Federal Funds Rate
and 10-Year Treasury Yield

Household Net Worth and Wilshire 5000
16200

Index

Ratio

7.0

June 17

14200

Wilshire 5000
(left scale)

Percent

7
6

6

6.5

Treasury
yield

5

12200
6.0

5.5
Q1
Ratio of household
net worth to DPI*
(right scale)

6200
4200

1998

2000

2002

2004

2006

2008

5

4

4

10200
8200

7

Federal
funds
rate

3

3
June 17

2

2

5.0
1
4.5

0

1
1998

2000

2002

2004

2006

0

2008

*The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.

Consumer Confidence
160

1985 = 100

1966 = 100
Reuters/
Michigan
(right scale)

140

115
105

120

95

100

85

80
60

75
Conference Board
(left scale)

May

65

June p
40

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Note. Shaded bars indicate periods of recession as defined by the National Bureau of Economic Research.
p Preliminary.

2005

2006

2007

2008

55

II-16

Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2007
2008
Sector

2007

Q4

Q1

1.36
1.40

1.30
1.34

1.15
1.16

1.05
.98
.99
.109

.99
.93
.96
.114

.78
8.40

Mar.

Apr.

May

1.05
.99

.99
.93

1.01
.98

.98
.97

.83
.76
.79
.109

.73
.65
.67
.097

.71
.62
.65
.097

.68
.65
.66
.095

.67
.62
.63
.093

.73
8.79

.65
9.32

.56
10.23

.51
11.01

.53
10.40

n.a.
n.a.

4.94
8.67

4.76
9.14

4.39
9.97

4.39
10.24

4.36
10.18

4.34
10.54

n.a.
n.a.

.309
.419
.075

.312
.403
.076

.325
.396
.075

.325
.341
.067

.277
.311
.067

.327
.333
.065

.096

.096

.093

.092

.091

.092

n.a.

.713

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

Q3

.701

.608

.560

.580

.550

n.a.

.301
.346
.064

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

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

Millions of units

2.0

1.0

1.8

.9
Single-family starts (right scale)

1.6

.8

1.4

.7

1.2
.6

Single-family adjusted permits (right scale)
1.0

.5
.8
May

.4
.3

May

.6
.4

Multifamily starts (left scale)
.2
.1

.2
1999

2000

2001

2002

2003

2004

2005

2006

Note. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.

2007

2008

.0

II-17

Housing
Activity in the housing sector remains very weak. In May, single-family starts dropped
to an annual rate of 674,000 units. This pace of construction is 36 percent below its level
in July 2007, before the escalation of the turmoil in mortgage markets, and 63 percent
below its peak in early 2006. Adjusted permits—an informative indicator of housing
starts in the following month—slid to an annual rate of 631,000 units in May.
Multifamily starts were at an annual rate of 301,000 units in May, only somewhat below
their average since 1995.
Although production cuts have helped pare inventories of new single-family homes by
20 percent since their peak, new home sales have continued to deteriorate sharply, which
has pushed up the months’ supply of new homes for sale to levels not seen since the early
1980s. The Census Bureau’s measure of new sales agreements dropped another
7½ percent in March and April.
.5
Meanwhile, sales of existing single-family homes have also been little changed, on net,
so far this year after having fallen 14 percent in the latter half of 2007. The index of
pending home sales—an indicator of existing home sales one or two months hence—
jumped in April to its highest reading in six months.
Much of the deterioration of the housing sector since mid-2007 is associated with the
drag on demand from tight conditions in mortgage credit markets. These problems are
particularly apparent for nonconforming mortgages that cannot be purchased by
government-sponsored enterprises (GSEs)—such as nonprime and nonconforming jumbo
mortgages—for which spreads relative to conforming loans have remained elevated and
new originations have fallen dramatically. Moreover, although recent legislation created
a new class of conforming loans with higher loan limits in high-priced cities, the market
for these new jumbo conforming loans has been slow to develop, and offer rates for these
loans are still 25 to 50 basis points above those for standard conforming loans.6 In
contrast, conditions in the conforming market are much better, as rates for standard

5

.
Even before the mortgage-market turmoil, offer rates for prime jumbo loans were about 25 basis
points above those in the conforming market, likely because of a higher risk of prepayment and the lower
liquidity of private-label mortgage-backed securities.
6

II-18
Indicators of Single-Family Housing

Index (2001=100)

New Single-Family Home Sales
140

_
15

130

Millions of units
(annual rate)

1.3

6.0
120

5.5

Content partially redacted.

Existing Single-Family Home Sales
Millions of units
_ (annual rate)
65

1.1

110

0.9
100

5.0

90
4.5
80

0.7
0.5

Note:

Source. National Association of Realtors.

Content partially redacted.

Source.
for sales agreements, Census Bureau.

New Home Sales
Months' Supply

Mortgage Rates
Percent

8

9
Months' supply (right scale)

8

7

7
6

6

5
5

4
3

4

2

Note.
. Months'
supply is calculated using the 3-month moving average of sales.
Source.
for months' supply, Census Bureau.

Note. The June readings are for data through June 11, 2008.

Prices of Existing Homes
40

9

10

Percent change, annual rate
Quarterly OFHEO purchase-only index
Monthly OFHEO purchase-only index
Case-S hiller 1D-eity p ·ce index

Price of New Homes
40

20

Percent change from preceding period, annual rate

20

Constant quality index

15

20

20

15
10

10

10

30

30

5

5

0

0

-10

-10

-5

-5

-20

-20

-10

-10

3~n'ib~-t~~~r~~!'c~~W3~~nd monthly OFHEO indexes are

Source. For purchase-only indexes, OFHEO; for Case-Shiller,
Chicago Mercantile Exchange.

Source. Census Bureau.

II-19

30-year fixed-rate mortgages—at about 6¼ percent—remain low by historical standards.7
Beyond their effect on housing demand, financial market conditions may also be
crimping the supply of new housing. Recent anecdotes from builders suggest that
tightening lending standards for acquisition, development, and construction loans are
putting downward pressure on planned building activity, even in markets that have not
experienced an appreciable reduction in demand.
House prices continue to fall. The monthly version of the purchase-only repeat-sales
price index calculated by the Office of Federal Housing Enterprise Oversight (OFHEO)
decreased at an annual rate of 4¼ percent over the three months ending in March. The
10-city version of the Case-Shiller repeat-sales price index—which, unlike the OFHEO
index, includes houses financed by nonconforming loans and is more heavily
concentrated in urban areas that had seen a more substantial run-up of house prices—
tumbled at an annual rate of 26 percent over the same period. Meanwhile, the constantquality price index for new homes fell at an annual rate of 10 percent in the first quarter.
Although these lower prices may eventually help bolster sales, the large proportion of
respondents in the Reuters/Michigan survey who expect further declines in house prices
over the coming year may signal ongoing hesitation to enter the market on the part of
many prospective buyers.
Equipment and Software
Real spending on equipment and software (E&S) appears to be moving down further in
the second quarter after a slight decrease in the first quarter. Business outlays for motor
vehicles have declined substantially, and real E&S excluding transportation appears to
have been roughly flat since the beginning of the year. The fundamental determinants of
E&S spending are largely consistent with the slowdown we have seen to date, as business
output growth has decelerated and the user cost of capital has not declined at the rapid
pace seen in earlier years.
On balance, monthly surveys of business conditions—both national and regional—
remain downbeat. In addition to its monthly survey, the ISM released its semiannual
economic forecast in May: For the first time since 2003, the number of manufacturing
firms expecting a decrease in their capital expenditures in the current year now slightly
exceeds the number expecting an increase. Most corporate bond yields have increased

7

However, these rates are now available to fewer buyers, as the GSEs have adopted more-stringent
lending standards and are charging higher “delivery fees” for loans to borrowers with lower credit scores
and less collateral.

II-20
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2007
Category

2008

Q4

Q1

Feb.

Annual rate

Mar.

Apr.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

1.0
2.3
18.2
-15.3
2.6

-.1
-.4
-5.8
2.6
-.1

-3.6
-1.3
-1.6
-1.4
-1.3

.3
.8
-1.8
1.1
1.0

1.1
.2
-6.6
-4.2
1.3

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

1.7
-3.2
-6.8
-32.2
.7

-5.6
4.7
-1.7
.6
5.7

1.6
-.9
12.8
6.8
-2.9

1.4
-1.0
-.4
-3.2
-.9

-1.5
4.0
-12.5
2.6
5.9

Memo:
Shipments of complete aircraft1

46.7

44.3

40.3

38.7

39.4

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

Communications Equipment

Non-High-Tech,
Nontransportation Equipment

Billions of chained (2000) dollars, ratio scale

20
17
14

Shipments
Orders

20
17
14

11

8

Billions of chained (2000) dollars, ratio scale

52

Apr.
5

5

47

47
Apr.

42

42

Shipments

37

2

2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. Shipments and orders are deflated by a price index
that is derived from the BEA’s quality-adjusted price indexes
and uses the PPI for communications equipment for
monthly interpolation.

2

32

Computers and Peripherals
240
210
190

2000 = 100

37

2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. Shipments and orders are deflated by the staff
price indexes for the individual equipment types included
in this category. Indexes are derived from the BEA’s
quality-adjusted price indexes.

32

Medium and Heavy Trucks

Billions of chained (2000) dollars

Industrial production
(left scale)

59

52

Orders

11

8

59

May
Apr.

24

1240

21
19

1040
900

Thousands of units, ratio scale

1240
1040
900

Net new orders
of class 5-8 trucks

17

760

150

15

620

620

130

13

480

480

170

110

Real M3
shipments
(right scale)

90

70

11

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

May

340
9

7

760

340

Sales of class 4-8 trucks
200

200
2000
2002
2004
2006
2008
Note. Annual rate, FRB seasonals.
Source. For sales, Ward’s Communications; for orders, ACT Research.

II-21
Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change

8
6

8
6

4

4
Q1

2

2

0

0

-2

-2

-4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source. Bureau of Economic Analysis.

User Cost of Capital

Corporate Bond Yields
4-quarter percent change

15

-4

Percent

15

13.5

12

12

12.5

12.5

9

9

11.5

11.5

6

6

Non-high-tech

3

3

0

-6

-3
-6

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

6.5

-12

High-tech

-15

4.5

June. 17

5.5

7.5
6.5

10-year BBB

5.5
2000 2001 2002 2003 2004 2005 2006 2007 2008
2000 2001 2002 2003 2004 2005 2006 2007 2008

4.5

Note. Daily averages based on Merrill Lynch bond data.

Corporate Cash Flow

Surveys of Business Conditions
Ratio

Billions of chained (2000) dollars

1500

1.4
1300

Q1
Real cash flow
(left scale)

Diffusion index

70
ISM
Philadelphia Fed

1.5

1100

8.5

7.5

Source. Staff calculation.

1.3

60
50

50

1.1
Ratio of cash flow
to fixed investment
(right scale)

500

70

60

May

Q1

700

80

1.2

900

300

9.5

8.5

-9

-9
-12

1700

10.5
10-year high-yield

9.5

0
Q1

-3

-15

10.5

13.5

1.0
0.9

40
40
30

0.8
1990
1991

1995
1995

2000
1999

2003

2005

0.7
2007

Note. Cash flow and fixed investment for the corporate business sector.
Source. Bureau of Economic Analysis; FRB flow of funds accounts.

30

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source. Manufacturing ISM Report on Business;
Philadelphia Fed Business Outlook Survey.

20

II-22

Nonresidential Construction and Indicators
(All spending series are seasonally adjusted at an annual rate; nominal CPIP deflated by
BEA prices through Q4 and by staff projection thereafter)

Total Structures

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

290

290

Billions of chained (2000) dollars

90

90

Apr.
270

Apr.

270

250

250

230

210

80

70

70

Other

230

210

80

60

60
Apr.

50

190
170

40

2002

2004

2006

2008

Apr.

40

Office

190

2000

50

Commercial

30

170

20

30
2000

2002

2004

2006

2008

20

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

Architectural Billings and
Nonresidential Construction Employment

Manufacturing
and Power & Communication
Billions of chained (2000) dollars

70
60

Power & communication

70
60

3.0

50
Apr.

40
30

30

Manufacturing

20

2000

2002

2004

Billings (right scale)

2006

2008

10

60

55

1.5

50

1.0
45

0.5
May
0.0

20
10

40

Diffusion index

2.5
2.0

50

Percent

Change in
employment (left scale)

-0.5
-1.0

2000

2002

2004

2006

May
2008

40

35

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

Vacancy Rates

Drilling and Mining Indicators
Percent

18

18

30

Number

Millions of feet

Apr.
15

Office

15
12

20

Q1

9

9

15

6

6
3
0

0

Drilling rigs
(right scale)

5

0

1800
1600

Footage drilled
(left scale)

10

3

2200
2000

June

Industrial

12

25

2400

Retail

1400
1200
1000
800
600

2000

2002

2004

2006

2008

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

2000

2002

2004

2006

2008

Note. The June readings for drilling rigs are based on
data through June 13, 2008. Both series are seasonally
adjusted by FRB staff.
Source. DOE/Baker Hughes.

400

II-23

since the April Greenbook, and although spreads over Treasury yields have come down
further over this period, they remain at elevated levels.
Business outlays on transportation equipment have continued to fall at a rapid pace in
recent months. Business-sector spending for motor vehicles softened further in April and
May after having declined in the first quarter. Automakers continued to scale back
deliveries of fleet vehicles to daily rental companies, and demand from other businesses
also receded. Sales of medium and heavy trucks in April and May continued, on average,
at the subdued pace recorded in the first quarter. With lackluster volumes for freight
shipping, the pace of new orders in recent months has been sluggish, suggesting that sales
of medium and heavy trucks are unlikely to improve much in the near term. Meanwhile,
April data on shipments and net exports suggest that domestic aircraft outlays remained
relatively stable in the second quarter.
Real outlays on high-tech equipment and software have increased at a subpar pace so far
this year. The latest data from the Quarterly Services Survey show a moderate rise in
spending on software in the first quarter. More recently, industrial production of
computers suggests only a tepid increase in real computer outlays this quarter. Domestic
spending on communications equipment was about flat in the first quarter, and shipments
moved down in April.
After having posted modest declines in the prior two quarters, business spending on
equipment outside of high-tech and transportation seems to have remained weak so far in
the current quarter. Although orders and shipments for this category of equipment
increased noticeably in April, net exports of these capital goods also stepped up, an
indication that a sizable fraction of demand is from abroad.
Nonresidential Construction
Real spending on nonresidential structures excluding drilling and mining rose at an
annual rate of 3¾ percent in the first quarter, down substantially from the double-digit
gains posted throughout 2006 and 2007. This deceleration is largely consistent with the
evolving fundamentals in this sector. Data from commercial property markets show that
sales of existing properties have plunged from last year’s record levels, and prices appear
to be leveling out. Moreover, the market for commercial mortgage-backed securities is
moribund, spreads for corporate bonds remain wide, and recent Senior Loan Officer
Opinion Surveys show that most banks are tightening lending standards for commercial
real estate loans. Signs that the supply of space may be starting to outpace demand have
also begun to emerge: Vacancy rates for office and industrial space ticked up in the first

II-24
Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2007
Measure and sector

2008

Q3

Q4

Q1

Feb.

Mar.

Apr.

26.0
13.3
12.7

-21.7
-25.7
4.0

-13.6
-17.0
3.4

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

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

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

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

18.1
3.1
13.9
1.1

7.6
8.5
-8.8
7.9

8.5
15.6
-.2
-7.0

3.2
.5
7.8
-5.1

-41.6 e
5.7
-24.2 e
-23.1 e

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

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

41.4
16.2
22.0
3.2

70.4
34.7
23.0
12.7

95.8
60.5
39.0
-3.7

70.9
38.1
41.8
-9.1

56.9
61.4
12.8
-17.3

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

82.9
-1.5
56.1
28.3

n.a. Not available.
e Staff estimate of real inventory investment based on revised book-value data.
Source. For real inventory investment, BEA; for book-value data, Census Bureau.

ISM Customer Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.9
1.8

1.9

Index

60

60

1.8

Staff flow-of-goods system

55
1.7

55

50

50

1.7
May

1.6

1.6

1.5

1.5

1.4

1.4

1.3

1.3

1.2

1.2

May

Apr.

1.1

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

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

1.1

45

40
Census book-value data

45

40

35

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

Note. A number above 50 indicates inventories are "too high."

35

II-25

quarter following several years of steady declines, while rates for retail space continued
to move upward. The three-month average of the architectural billings diffusion index—
which is fairly well correlated with construction at a horizon of two quarters or so—has
moved down sharply of late, which suggests outright declines in nonresidential
construction spending in the second half of this year.
The BEA estimates that real spending on drilling and mining structures dipped at an
annual rate of 6½ percent in the first quarter on the heels of robust growth during 2007.
Although escalating energy prices have been stimulating activity in this sector for some
time, spending has been uneven from quarter to quarter. Incoming data on footage drilled
and the number of drilling rigs in operation point to a resumption of gains in investment
in the second quarter.
Business Inventories
Real nonfarm inventories excluding motor vehicles rose only slightly in the fourth and
first quarters, as firms cut production to keep inventories aligned with the sluggish pace
of sales. The indicators we track are sending mixed signals concerning whether firms are
holding excess inventories. According to Census Bureau data, the ratio of book-value
inventories to sales (excluding motor vehicles and parts) ticked down in April and has
changed relatively little, on net, since mid-2007. Industry detail also provides little
indication of widespread imbalances. In addition, businesses surveyed by the ISM in
May reported that their customers were reasonably comfortable with their current stock
of inventories.
In contrast to the Census estimates, the staff’s flow-of-goods inventory system suggests
that the months’ supply of inventories excluding motor vehicles and parts has moved up,
on balance, since November. The recent rise in this measure has been fairly broad-based.
Increases have been particularly evident in construction supplies and in materials.8
Federal Government Sector
The deficit in the unified federal budget continued to widen in April and May, as
$51 billion in stimulus rebates were sent out, tax receipts weakened with the slow pace of

8

Part of the substantial run-up in the flow-of-goods estimate of months’ supply reflects weak domestic
absorption, which appears in the denominator of these ratios. If inventories are instead compared with a
measure of shipments that includes the large contribution of net exports, the recent run-up remains,
although it is somewhat less striking.

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

Surplus or Deficit (-)

Billions of dollars

300

300
12-month moving sum

200

200

100

100

0

0

-100

-100

-200

-200

-300

May

-400
-500

-300
-400

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Outlays and Receipts

2005

2006

2007

-500

2008

Percent change from year earlier

20

20
Receipts

12-month moving sum
15

15

10

10

5

May

Outlays

5

0

0

-5

-5

-10

-10

-15

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-15

2008

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

April-May

12 months ending in May

2007

2008

Percent
change

2007

2008

Outlays
Net interest
National defense
Major transfers1
Other

453.0
44.7
90.7
253.8
63.7

514.8
38.4
103.8
298.8
73.8

13.7
-14.0
14.4
17.7
15.7

2,720.3
235.3
549.7
1,495.6
439.7

2,886.9
245.9
600.2
1,595.0
445.8

6.1
4.5
9.2
6.6
1.4

Receipts
Individual income and payroll taxes
Corporate income taxes
Other

547.9
439.7
57.0
51.2

528.0
425.4
48.7
53.9

-3.6
-3.3
-14.5
5.2

2,536.1
1,944.7
380.9
210.5

2,572.8
2,009.5
337.5
225.9

1.4
3.3
-11.4
7.3

94.9

13.2

...

-184.2

-314.1

...

110.0

-6.6

...

-169.6

-332.5

...

Function or source

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

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

Percent
change

II-27

economic activity, and outlays rose briskly.9 Adjusted for payment-timing shifts and
financial transactions, the unified budget recorded a surplus in the tax-heavy months of
April and May that was $82 billion less than the adjusted surplus in the same period last
year. Over the 12 months ending in May, the adjusted deficit was $314 billion, or
approximately 2¼ percent of nominal GDP.
With a substantial portion of the stimulus rebates distributed in April and May, total net
tax receipts during those two months were 3½ percent lower than their year-earlier level.
Excluding the stimulus rebates, individual income and payroll taxes were only 4 percent
above their year-earlier level, likely reflecting the deceleration in personal income. The
slowing in federal tax payments has been even more pronounced on the corporate side.
In April (which includes corporations’ first quarterly estimated payments on 2008
liabilities) and May, corporate tax receipts were 14½ percent below their year-earlier
level, likely reflecting the decline in corporate profits since the middle of last year.
According to daily Treasury data through June 16, corporate receipts in June, which are
mostly firms’ second quarterly estimated payments on 2008 liabilities, appear to be about
8 percent below the level of corporate payments last June.
Federal outlays in April and May, adjusted for payment-timing shifts and financial
transactions, were 13¾ percent above their level in the comparable year-earlier period.
Defense spending rose briskly in April and May relative to the year-earlier period, which
points to a solid increase in real defense purchases in the second quarter as measured in
the national income and product accounts. Transfer payments moved up smartly relative
to a year ago, boosted in part by a portion of the stimulus rebates sent to households with
little or no tax liability.10 And other outlays also were significantly above their yearearlier level, mostly because of an increase in the estimated subsidy cost of federal
programs for housing loans and student loans.
State and Local Government Sector
Incoming data suggest that real purchases by state and local governments continued to
rise at a sluggish pace in the second quarter after barely edging up in the first quarter.
Nominal construction spending, which fell sharply in the first quarter, was only ½ percent
above its first-quarter average in April. Meanwhile, state and local employment

9

The Economic Stimulus Act of 2008 authorized about $115 billion in stimulus rebates, with
$94 billion expected to be sent out by the end of July, another $5 billion dispersed in the remainder of
calendar year 2008, and around $16 billion distributed during the tax-filing season in 2009.
10
The amount of a rebate that exceeds a household’s income tax liability counts as a transfer payment
in the budget rather than as a tax refund.

II-28

State and Local Indicators

Real Spending on Consumption & Investment

Net Change in Employment

Percent change, annual rate
12

Thousands of jobs, monthly average
12

Spending
4-quarter moving average

10

10

8

6

4

4

50

40

40

30

30

8

6

50

2

Q1

2

0

-2

20

10

10

0

0

0

-2

May

20

-4

1998

2000

2002

2004

2006

2008

-4

-10

Real Construction
Annual rate

1998

2000

2002

2004

2006

2008

-10

Net Saving
Percent of nominal GDP

Billions of chained (2000) dollars

200

200

190

190

180

180

1.0

1.0

0.5

0.5

0.0

0.0

Apr.
170

170

160

160

150

150

Q1

-0.5

140

1998

2000

2002

2004

2006

2008

140

-1.0

1988

1993

1998

2003

2008

-0.5

-1.0

Note. Nominal CPIP deflated by BEA prices through
Q1 and by a staff projection thereafter.

State Revenues

Local Revenues

Percent change from year earlier
20

10

Total
revenues

5

Q4

12

10

Individual and
corporate income
taxes

14

15

4-quarter moving average

15

Percent change from year earlier
20

14

10

4-quarter moving average

12
10
Property taxes

5

8

0

0

6

-5

-5

4

-10

-10

2

-15

0

-15

1999

2001

Source. Census Bureau.

2003

2005

2007

8
Q4

6
4
2

Total revenues
1999

2001

Source. Census Bureau.

2003

2005

2007

0

II-29

increased by an average of 14,000 per month in April and May, slightly below the
monthly pace of 18,000 new hires recorded in the first quarter.
Recent reports suggest that state governments’ fiscal conditions have continued to erode
with the slowing pace of economic activity. According to preliminary data collected by
the Rockefeller Institute of Government, state governments’ tax revenues rose at a tepid
pace in the first quarter.11 Sales tax receipts were lower than their year-earlier level in the
majority of states, at least partly because of reported weakness in sales of housing-related
items. According to the National Conference of State Legislators, growth in receipts has
slowed more rapidly than expected by state officials when fiscal year 2008 budgets—
which cover the period through June 30 for most states—were finalized last year. In
addition, about half of the states are now projecting that revenues will be insufficient to
cover the amount of spending currently planned in fiscal 2009 budgets; these states may
have to scale back planned spending, raise taxes, or dip into reserve funds to meet their
balanced-budget requirements.
Prices
Headline consumer price inflation has remained elevated in recent months, mostly
because of large increases in food and energy prices. On the basis of the May data for
the consumer price index (CPI) and producer price index (PPI), we estimate that overall
PCE prices increased 0.5 percent in May, a rise that would push the three-month change
to an annual rate of just over 4 percent. Furthermore, energy prices have only begun to
reflect the recent surge in crude oil costs. By contrast, core consumer price inflation has
remained relatively stable in recent months.
We estimate that consumer energy prices moved up 4½ percent in May after no change in
April, as a jump in gasoline prices in May more than reversed April’s decline in gas
prices. Retail gasoline prices had been slow to adjust to the surge in prices for crude oil
this spring, squeezing margins. However, in recent weeks margins have begun to recover
to more typical levels, and current survey data point to larger increases in gasoline prices
in June.12 The path of futures prices suggests crude oil costs will remain near their
currently high levels, and if margins continue to move back toward more typical levels,
further sizable increases at the pump are likely this summer. Retail prices for natural gas

11

The preliminary data are based on reports from 41 states, including the 12 largest.
Gasoline inventories rose to quite high levels earlier this year, putting downward pressure on
margins, and refiners responded by cutting back on production. Since then, gasoline inventories have run
down considerably, which brought stocks to the lower end of their seasonal range, and refinery capacity
utilization has begun to recover as the outlook for margins has improved.
12

II-30

Price Measures
(Percent change)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

May
2007

May
2008

Feb.
2008

May
2008

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

2.7
3.9
4.7
2.2
-.7
3.4
3.8
2.9
2.4
2.0

4.2
5.1
17.4
2.3
.1
3.2
2.6
4.0
3.6
2.0

3.1
4.7
7.6
2.3
.4
3.1
2.7
3.6
...
...

PCE prices 2
Total
Food and beverages
Energy
Ex. food and energy
Core goods
Core services
Shelter
Other services
Core market-based
Core non-market-based

2.4
3.6
4.6
2.0
-.8
3.2
3.8
2.9
1.8
2.9

3.1
4.9
12.2
2.1
-.2
3.1
2.7
3.2
1.9
3.3

PPI
Total finished goods
Food
Energy
Ex. food and energy
Core consumer goods
Capital equipment
Intermediate materials
Ex. food and energy
Crude materials
Ex. food and energy

3.9
8.2
6.6
1.6
1.6
1.6
3.8
3.0
11.3
9.0

7.2
6.5
19.7
3.0
3.4
2.3
12.6
7.4
41.5
33.0

Measures

Apr.
2008

May
2008

4.9
6.2
28.2
1.8
-.9
2.9
1.6
4.8
...
...

.2
.9
.0
.1
.0
.1
.0
.3
...
...

.6
.3
4.4
.2
-.1
.3
.2
.5
...
...

2.7
4.8
7.4
2.0
1.1
2.3
2.8
2.2
2.0
2.0

4.1
5.8
28.5
2.0
-1.3
3.2
1.9
3.7
1.6
3.3

.2
.9
-.1
.1
.0
.2
.1
.2
.1
.2

.5
.3
4.5
.2
-.2
.3
.2
.3
.1
.2

3.8
10.3
-2.9
4.5
5.0
3.5
8.6
6.0
40.1
43.5

11.0
8.3
34.7
3.7
4.2
2.7
27.7
18.5
100.9
89.1

.2
.0
-.2
.4
.4
.4
.9
1.2
3.2
7.9

1.4
.8
4.9
.2
.3
.1
2.9
2.0
6.7
5.0

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
2. PCE prices in May 2008 are staff estimates.
... Not applicable.

II-31

Consumer Prices
(12-month change except as noted)

PCE Prices

CPI and PCE ex. Food and Energy
Percent

4

4

3

3

2

2

1

1

0

0

Percent

4

4

Total PCE
3
May*

3

CPI
May*

2

Core PCE

1

0

2000

2002

2004

2006

2008

* Staff estimate.

2
PCE
CPI
chained

2000

1

2002

2004

2006

2008

* PCE for May is a staff estimate.

PCE excluding Food and Energy

PCE Goods and Services
Percent

3

3

Percent

4
3

2

2
May*

May*
Services ex. energy

2
1

Market-based components

1

2000

2002

2004

2006

2008

0

1
0

-1

-3

* Staff estimate.

-1
Goods ex.
food and energy

2000

2002

-2
2004

2006

2008

-3

* Staff estimate.

PCE excluding Food and Energy

CPI excluding Food and Energy
Percent

5

4
3

2

2

Percent

5

3

3

5
4

3-month change, annual rate

4

3

May*

-2
0

4

2

0
1

0

2

5
4

3-month change, annual rate

3
2
May

May*
1

1

1

1

0

0

0

0

-1

-1

-1

2000

2002

* Staff estimate.

2004

2006

2008

2000

2002

2004

2006

2008

-1

II-32

Energy and Food Price Indicators
(Data from Energy Information Administration except as noted)

Total Gasoline Margin

Gasoline Price Decomposition

180

Cents per gallon
180
Retail price less average spot crude price*

160

160

Cents per gallon

450
400

400
June 16

350
140

140

120

120

100

June 16

100

300

Rack price

80

60

60

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

300

250

250

200

200

100
50

Gasoline Inventories

150
100

Average spot crude price**
2005
2006
2007
2008
* Regular grade seasonally adjusted by FRB staff.
** 60% WTI, 40% Maya heavy crude.

50

Ethanol Prices
Millions of barrels

255
245

350

Retail price*

150
80

450

Excluding ethanol
Adjusted for ethanol use*

255
245

Cents per gallon

500
450

Near-futures price, daily
Monthly futures, June 17

500
450

235

225

225

215

215
June 13

400

350

350

300

235

400

300

250

250

205

205

200

200

195

195

150

150

185

185

100

2005
2006
2007
2008
Note. Shaded region is average historical range as
calculated by DOE. Monthly data through March 2008,
weekly data thereafter, as indicated by line weights.
* Adjustment for approximate amount of fuel ethanol to be
blended with RBOB component of inventories; estimated by
FRB staff.

PCE Food Prices
5.5

2008

100

Spot Agricultural Commodity Prices
12-month percent change

5.0
4.5
4.0

2005
2006
2007
Source. Chicago Board of Trade.

5.5
5.0
4.5

Food and beverages

3.5

4.0
May*

3.5

Dollars per bushel

9
8
7

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

3.0

3.0
2.5

10

4

2.0

12

5

2.5

14
June 17

6

16

3

2.0
1.5

Ex. food and energy

1.5

6

2

4

0.5

1

2

0.0

0

1.0

1.0

0.5
0.0

8

2005
2006
2007
*Staff estimate.
Source. Bureau of Economic Analysis.

2008

2005
2006
2007
Source. Commodity Research Bureau.

2008

0

II-33

and electricity rates have posted hefty gains in recent months in response to the surge in
crude energy costs, and spot prices for natural gas set at Henry Hub have climbed further
in recent weeks. All told, retail energy prices have risen more than 12 percent over the
12 months ending in May, much more than their increase over the preceding year.
PCE food prices are estimated to have risen 0.3 percent in May after having increased
0.9 percent in April, putting the estimated annualized three-month change through May at
nearly 6 percent. Most spot prices for farm crops have increased further since the April
Greenbook. Although wheat prices have edged down 1 percent in response to early
reports of plentiful yields for U.S. winter wheat, corn and soybean prices have climbed
further in response to wet weather and flooding in some Midwest growing areas.
Livestock prices have also moved up in recent weeks, partly reflecting stronger demand
from abroad. Even so, futures prices for farm products remain consistent with a
significant deceleration in crude food costs later this year.
Excluding food and energy, PCE prices are estimated to have increased 0.2 percent in
May after a rise of 0.1 percent in April. Over the 12 months ending in May, core PCE
prices are estimated to have risen 2.1 percent, up slightly from a year earlier. While
prices of goods and some services have accelerated over the past year—likely boosted by
rising import prices and energy costs—the indexes for housing and medical services have
decelerated.
Some measures of near-term inflation expectations have risen sharply in the past couple
of months, while measures of longer-term expectations have ranged from unchanged to
up slightly. In the Reuters/Michigan survey, the median expectation for inflation over the
next 12 months continued its upward climb in May as participants reported concerns over
food and energy price increases; median expectations were 5.1 percent in the June
preliminary report, about the same as in May. Median expectations for inflation over the
next 5 to 10 years moved higher, to 3.4 percent, in May and remained at that level in
June; this figure is the highest reading since 1995. According to the Survey of
Professional Forecasters, four-quarter-ahead CPI inflation expectations increased
0.3 percentage point in the second quarter, while inflation expectations over the next 10
years were unchanged. Five-year inflation compensation derived from Treasury
inflation-protected securities (TIPS) moved up further over the intermeeting period to
2.4 percent, about 25 basis points higher than at the beginning of the year. Inflation
compensation 5 to 10 years ahead was roughly flat over the intermeeting period and has
only edged up, on balance, from its value at the turn of the year.

II-34

Broad Measures of Inflation
(Percent change, Q1 to Q1)
Measure

2005

2006

2007

2008

Product prices
GDP price index
Less food and energy

3.3
3.3

3.2
3.1

2.9
2.9

2.2
1.9

Nonfarm business chain price index

3.3

3.3

2.3

1.5

Expenditure prices
Gross domestic purchases price index
Less food and energy

3.5
3.2

3.6
2.9

2.6
2.8

3.2
2.0

PCE price index
Less food and energy

2.8
2.3

3.1
2.0

2.3
2.4

3.4
2.0

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

2.4
1.8

2.9
1.6

2.2
2.2

3.4
1.8

CPI
Less food and energy

3.0
2.3

3.7
2.1

2.4
2.6

4.2
2.4

Chained CPI
Less food and energy

2.6
2.1

3.2
1.9

2.2
2.2

3.7
2.1

Median CPI
Trimmed mean CPI

2.5
2.4

2.7
2.6

3.2
2.7

3.1
2.9

Trimmed mean PCE

2.5

2.4

2.7

2.3

Surveys of Inflation Expectations
(Percent)
Reuters/Michigan Survey

Period

Actual
CPI
inflation 1

1 year 2

Professional
forecasters
(10 years) 4

5 to 10 years 3

Mean

Median

Mean

Median

CPI

PCE

2006:Q3
Q4

3.3
1.9

4.0
3.5

3.4
3.0

3.3
3.5

3.0
3.0

2.5
2.5

...
...

2007:Q1
Q2
Q3
Q4

2.4
2.7
2.4
4.0

3.6
4.2
4.1
4.1

3.0
3.3
3.2
3.3

3.4
3.5
3.5
3.3

2.9
3.0
3.0
2.9

2.4
2.4
2.4
2.4

2.0
2.0
2.1
2.1

2008:Q1
Q2

4.1
n.a.

4.2
6.4

3.8
5.0

3.3
3.8

3.0
3.3

2.5
2.5

2.2
2.2

2008:Feb.
Mar.
Apr.
May
June

4.0
4.0
3.9
4.2
n.a.

3.9
4.6
5.7
7.0
6.6

3.6
4.3
4.8
5.2
5.1

3.4
3.2
3.5
4.0
3.9

3.0
2.9
3.2
3.4
3.4

2.5
...
...
2.5
...

2.2
...
...
2.2
...

1. Percent change from the same period in the preceding year.
2. Responses to the question, By about what percent do you expect prices to go up, on
average, during the next 12 months?
3. Responses to the question, By about what percent per year do you expect prices to go up,
on average, during the next 5 to 10 years?
4. Median CPI and PCE price projections compiled by the Federal Reserve Bank of Philadelphia.
... Not applicable.
n.a. Not available.

II-35

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

Percent

Percent
12

6

10

10

5

8

8

4

4

6

3

3

4

2

2

2

1

1

0

0

12

5

Quarterly

6

Monthly
June

5

Median, next 5 to 10 years
6
4
Q2
2
0

Median, next 12 months

1972 1975
1976

1980
1980

1985 1988
1990
1984
1992 1995
1996

2000
2000

2005 2008
2004

Inputs to Models of Inflation
12

2005

Percent

Quarterly

10

2008

0

5

Quarterly

4

4

3

3

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

6

6
Q2

2
4

2

4
Q2

Distributed lag of
core PCE inflation**

2

2

1

1

0
0
0
1980
1985 1988
1990
2000
2005 2008
2005
2006
2007
2008
1972 1975
1976
1980
1984
1992 1995
1996
2000
2004
*For 2007 forward, the median projection for PCE inflation over the next 10 years from the Survey of Professional Forecasters (SPF);
for 1991 to 2006, the equivalent SPF projection for the CPI; for 1981 to 1991, a related survey for the CPI conducted by Richard Hoey;
and for the period preceding 1981, a model-based estimate constructed by Board staff. The survey data before 2007 are adjusted down
0.5 percentage point to put the CPI projections approximately on a PCE basis.
**Derived from one of the reduced-form Phillips curves used by Board staff.

Inflation Compensation from TIPS
5

2007

Percent

10

8

0

2006

Percent

Percent
5

Quarterly

4

4

4

Weekly

4
3

3
June 17

3

5 to 10 years ahead

3
2

1

0

Next 5 years

2

1

Q1
2

1

2

1

0
0
2001
2002
2003
2004
2005
2006
2007
2008
2005
2006
2007
2008
Note. Based on a comparison of an estimated TIPS yield curve with an estimated nominal off-the-run Treasury yield curve, with an
adjustment for the indexation-lag effect.

0

II-36

Commodity Price Indexes
Journal of Commerce
Ratio scale, 2006 = 100

220
180

June 17

140
100

100
100
Industrials
60

Metals
30

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1992
1994
1996
2002
1998
2000
2004
2006
2008
Note. The Journal of Commerce (JOC) industrial price index is based almost entirely on industrial commodities, with a small
weight given to energy commodities. Copyright for Journal of Commerce data is held by CIBCR, 1994.

Commodity Research Bureau
Ratio scale, 1967 = 100

500

650
600
550
500

400

400

June 17

600

450
Spot industrials
350
300

300
250
Futures

200

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1992
2002
1994
1996
1998
2000
2004
2006
2008
Note. The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial commodities, excluding
energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals.

Selected Commodity Price Indexes
(Percent change)

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

2007 1

12/18/07
to
4/22/08 2

7.6
2.1
8.2
25.5
18.2

17.6
31.9
10.8
17.4
17.5

4/22/08 2
to
6/17/08

52-week
change to
6/17/08

.2
-10.7
-4.8
7.1
5.8

1. From the last week of the preceding year to the last week of the year indicated.
2. April 22, 2008, is the Tuesday preceding publication of the April Greenbook.

14.2
6.1
4.5
31.3
40.6

150

II-37

Excluding food and energy, prices at earlier stages of processing rose rapidly through
May but have eased a bit in recent weeks. The PPI for core intermediate materials
advanced 2.0 percent in May following a string of large monthly increases, bringing the
three-month change to an annual rate of 18½ percent. Price increases were widespread
across materials but were particularly marked for metal products and energy-intensive
categories, such as chemicals and plastics. The PPIs for rail transportation, trucking, and
delivery services also posted sizable increases in May.
In recent weeks, spot prices for a number of metals have partly retraced their large
increases of earlier in the year. The Journal of Commerce (JOC) metals index has
declined about 11 percent since its peak in April and now stands only 6 percent above its
year-earlier level. As a result, the Commodity Research Bureau’s spot index of industrial
materials has declined 4¾ percent since the April Greenbook, whereas the JOC index of
industrial materials, which includes energy products, is unchanged on balance.
Labor Costs
Despite higher overall consumer price inflation, hourly compensation has continued to
rise at a moderate pace. The employment cost index for private-industry workers rose at
an annual rate of 3 percent over the three months ending in March, in line with its
average over the previous three years. Wages and salaries rose at an annual rate of
3.4 percent during this period, and benefits costs rose at a rate of 2.3 percent—both about
the same as in 2007. And nonproduction bonuses in the three months ending in March
also rose at about the same rate as in 2007, despite reports that Wall Street bonuses would
be smaller this year.
The staff estimates that nonfarm compensation per hour increased at an annual rate of
nearly 5 percent in the first quarter and has risen 4 percent over the past four quarters,
down somewhat from its 5 percent pace a year earlier.13 With the notable pickup in
productivity growth, unit labor costs decelerated markedly over the past year.
Turning to the available data for the current quarter, average hourly earnings increased
0.1 percent in April and 0.3 percent in May, bringing the 12-month change ending in May
to 3½ percent, about ½ percentage point below its year-earlier increase.

13

The BEA’s upward revision to wages and salaries in the fourth quarter boosted the Bureau of Labor
Statistics’ estimated increase in compensation per hour in the nonfarm business sector to an annual rate of
6.6 percent, compared with the 4.7 percent estimate reported previously.

II-38

Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2006:Q1 2007:Q1
to
to
2007:Q1 2008:Q1e

Category

2007

2008

Q2

Q3

Q4

Q1 e

Compensation per hour
Nonfarm business

4.9

4.0

1.3

3.3

6.6

4.9

Unit labor costs
Nonfarm business

4.3

.6

-1.3

-2.5

4.7

2.0

e Staff estimate.

Compensation per Hour

Unit Labor Costs

(Percent change from year-earlier period)

(Percent change from year-earlier period)
Percent

8

Percent

8

6

7

5

5

6

6

4

4

5

5

3

3

2

2

7

Productivity and costs*

4

Q1

3

4
3

ECI

1

6

1
Q1

0

0

2

2

-1

-1

1

1

-2

-2

0

0

-3

1996

1998

2000

2002

2004

2006

2008

1996

1998

2000

2002

2004

2006

2008

-3

* Value for 2008:Q1 is a staff estimate.

* Value for 2008:Q1 is a staff estimate.

Average Hourly Earnings

Markup, Nonfarm Business

(Percent change from year-earlier period)
Percent

4.5

4.5
4.0

1.64

3.5

1.62

3.0

3.0

1.60

2.5

2.5

1.58

2.0

2.0

1.56

1.5

1.5

1.54

1.0

1.0

1.52

Ratio

1.66

4.0
3.5

May

1996

1998

2000

2002

2004

2006

2008

1.66
1.64

Q1

1.62
1.60
1.58

Average,
1968-present

1.56
1.54

1996

1998

2000

2002

2004

2006

Note. The markup is the ratio of output price to unit
labor costs. Value for 2008:Q1 is a staff estimate.

Last Page of Domestic Nonfinancial Developments

2008

1.52

Domestic Financial
Developments

III-T-1

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

Change to June 17 from
selected dates (percentage points)

2008

Instrument
Aug. 6

Jan. 31

Apr. 29

June 17

2007
Aug. 6

2008
Jan. 31

2008
Apr. 29

5.25

3.00

2.25

2.00

-3.25

-1.00

-.25

4.74
4.72

1.92
2.02

1.44
1.70

1.96
2.27

-2.78
-2.45

.04
.25

.52
.57

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

5.26
5.29

2.95
2.98

2.50
2.83

2.40
2.84

-2.86
-2.45

-.55
-.14

-.10
.01

Large negotiable CDs1
3-month
6-month

5.34
5.27

3.01
2.93

2.84
2.98

2.80
3.22

-2.54
-2.05

-.21
.29

-.04
.24

Eurodollar deposits3
1-month
3-month

5.33
5.35

3.15
3.15

2.90
3.15

2.70
3.05

-2.63
-2.30

-.45
-.10

-.20
-.10

Bank prime rate

8.25

6.00

5.25

5.00

-3.25

-1.00

-.25

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

4.49
4.52
4.82

2.16
2.83
3.86

2.28
3.11
4.04

2.90
3.68
4.45

-1.59
-.84
-.37

.74
.85
.59

.62
.57
.41

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

2.43
2.48

.68
1.35

1.10
1.71

1.24
1.86

-1.19
-.62

.56
.51

.14
.15

Municipal general obligations (Bond Buyer)6

4.51

4.39

4.68

4.59

.08

.20

-.09

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

5.44
5.34
6.12
6.57
9.21

4.23
4.28
5.62
6.39
9.80

4.39
4.53
6.01
6.82
9.80

4.92
5.06
6.49
7.07
9.91

-.52
-.28
.37
.50
.70

.69
.78
.87
.68
.11

.53
.53
.48
.25
.11

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

6.59
5.65

5.68
5.05

6.06
5.29

6.32
5.09

-.27
-.56

.64
.04

.26
-.20

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

Record high

Change to June 17
from selected dates (percent)

2008

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

Date

Jan. 31

Apr. 29

June 17

Record
high

2008
Jan. 31

2008
Apr. 29

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

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

12,650
1,379
2,390
713
13,897

12,832
1,391
2,426
719
14,033

12,160
1,351
2,458
737
13,841

-14.15
-13.69
-51.32
-13.93
-12.44

-3.87
-2.00
2.84
3.26
-.40

-5.23
-2.88
1.30
2.45
-1.37

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect.
6. Most recent Thursday quote.
7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
9. Home mortgage rates for June 17, 2008, are for the week ending June 12, 2008.
_______________________________________________________________________
NOTES:
August 6, 2007, is the day before the August 2007 FOMC meeting.
January 31, 2008, is the day after the January 2008 FOMC meeting.
April 29, 2008, is the day before the most recent FOMC monetary policy announcement.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
December 2008 Eurodollar Rate
FOMC
statement Nonfarm
payrolls
(April)

Percent

Retail
sales
(April)

FOMC
minutes

Durable
goods

PCE

Retail
sales
(May)

Nonfarm Bernanke
payrolls speech
(May)

4.0
3.8
3.6
3.4
3.2
3.0
2.8
2.6

Apr. 30

May 5

May 8

May 13

May 16

May 21

May 26

May 29

June 3

June 6

June 11

June 17

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

Implied Volatility of Interest Rates

Implied Federal Funds Rate

Basis points

Percent
4.50

Daily

4.25
4.00

Basis points

300

250

Apr. FOMC

6-month Eurodollar (left scale)*
10-year Treasury (right scale)

1100
1000

3.75

June 17, 2008

3.50
3.25

900
200

June
17

3.00
2.75

150

April 29, 2008

400
300

50

1.50
June

Oct.

Feb.

2008

June

Oct.

2009

Feb.

200
Oct.
2005

June

2010

700

500

100

2.00
1.75

800

600

2.50
2.25

1200

Mar.

Aug.
2006

Jan.

June Nov.
2007

Apr.
2008

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

*Width of a 90 percent confidence interval computed from the
term structures for the expected federal funds rate and implied
volatility.

Treasury Yield Curve

Inflation Compensation
Percent

Percent
5.0

June 17, 2008

Daily

Apr. FOMC

4.5

3.2

4.0

April 29, 2008

3.5

3.4

3.0
5 to 10 years ahead

June
17

3.0

2.8
2.6

2.5

2.4

2.0

2.2
2.0

1.5

Next 5 years*

1.8

1.0
1

3

5

7

10

20

Years ahead
Note. Smoothed yield curve estimated from off-the-run Treasury
coupon securities. Yields shown are those on notional par Treasury
securities with semiannual coupons.

Jan.

Apr.

July
2007

Oct.

Jan.

Apr.
2008

Note. Estimates based on smoothed nominal and inflation-indexed
Treasury yields.
*Adjusted for lagged indexation of TIPS.

Domestic Financial Developments
Overview
Over the intermeeting period, investors marked up considerably the expected path of
policy in response to generally stronger-than-expected economic data and growing
concerns about the outlook for inflation, and market quotes now place substantial odds on
policy tightening in the next few months. Nominal Treasury yields rose sharply,
apparently as a result of wider term premiums as well as the upward shift in policy
expectations. Real yields rose by less than their nominal counterparts, and inflation
compensation jumped at relatively short horizons, likely reflecting the expected effects of
surging oil prices. Five-year-forward inflation compensation was little changed.
Strains in short-term funding markets appeared to ease a bit over the intermeeting period,
reflecting in part substantial credit extended under the Federal Reserve’s ongoing
liquidity facilities. In the corporate bond market, credit spreads narrowed slightly, and
gross bond issuance surged in May. Equity prices edged down, on net, over the
intermeeting period, as the surge in oil prices and a more pessimistic outlook for earnings
in the financial sector weighed on the market. Financial firms issued a large amount of
equity shares, continuing their recapitalization efforts. Banks again registered weak
profits in the first quarter because of elevated loan-loss provisions, and asset quality in
nearly all major loan categories deteriorated further. Household debt growth slowed
again in the first quarter, and the performance of both home mortgages and other
household loans continued to worsen.
Policy Expectations and Treasury Yields
The expected path for the federal funds rate rose notably over the intermeeting period.
The decision at the April FOMC meeting to lower the federal funds rate by 25 basis
points prompted a modest decline in federal funds futures rates, but these declines were
subsequently more than reversed, as incoming data were generally firmer than expected,
and speeches by Federal Reserve officials were interpreted as emphasizing concerns
about the outlook for inflation, especially in light of sharply rising energy prices.
Market participants currently place high odds on the Committee leaving the target federal
funds rate unchanged at 2 percent at the June meeting but also assign some probability to
a policy tightening at the upcoming meeting. Futures markets have priced in nearly
50 basis points of rate increases by the October meeting, and they imply cumulative
policy tightening of about 200 basis points over the coming two years, 85 basis points
more than was expected at the time of the last FOMC meeting. In contrast, the Desk’s
survey of primary dealers indicates that most expect the federal funds rate to remain
III-1

III-2

Short-Term Funding and Interbank Markets
Spread between 30-Day Libor and OIS Rates

Spreads on 30-Day Commercial Paper

Basis points
Apr. FOMC

Daily

Basis points
120

Daily

Apr. FOMC

100

200

80
June
18

250

150

60

June 17

100
40

A2/P2

50
20

ABCP

0
July

Sept.
2007

Nov.

Jan.

Mar.
May
2008

July

Sept.
2007

Nov.

Jan.

Mar.
May
2008

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

Note. The ABCP spread is the AA ABCP rate minus the AA
nonfinancial rate. The A2/P2 spread is the A2/P2 nonfinancial
rate minus the AA nonfinancial rate.

Primary Credit Borrowing

Federal Funds Rates
Billions

Weekly Average (Wed.)

Apr. FOMC

Percent
20

Daily

Apr. FOMC

Target

6.0
5.5
5.0

15

4.5

Effective

June 11

4.0
10

3.5
3.0
June 17

5

2.5
2.0
1.5

0
July

Sept.
2007

Nov.

Jan.

Mar.
May
2008

July

Treasury Repo Rates for General Collateral

Sept.
2007

Nov.

Jan.

Mar.
May
2008

Primary Dealer Credit Facility

Percent
Daily

Apr. FOMC

Overnight

Billions
6

Weekly Average (Wed.)

Apr. FOMC

5
4
1-month
June
17

3
June
11

2
1
0
July

Sept.
2007

Nov.

Jan.

Mar.
May
2008

Aug.

Oct.
2007

Dec.

Feb.

Apr.
2008

June

50
45
40
35
30
25
20
15
10
5
0

III-3

unchanged through the first quarter of 2009 and to reach 2.75 percent by the end of that
year, implying about 100 basis points less tightening than is priced in by market
participants. The distribution of the federal funds rate six months ahead became a bit
more skewed toward higher rates, and option-implied measures of uncertainty about
policy rates six months to two years ahead increased noticeably.
The yield on nominal 2-year Treasury securities rose 62 basis points, on net, owing to the
shift in policy expectations and an apparent increase in term premiums. Most of the
increase in nominal yields occurred in intervals around data releases and speeches by
FOMC members. Meanwhile, yields on 5-year and 10-year nominal Treasury securities
moved up about 55 and 40 basis points, respectively.
Real yields rose much less, implying a rise in inflation compensation. The increase in
inflation compensation was concentrated at very short horizons and likely was mainly
due to the expected effects of the substantial increase in oil prices since the April
meeting. Survey evidence also suggests that higher expectations of, and uncertainty
about, inflation likely contributed to the rise in inflation compensation at short to medium
horizons. All told, inflation compensation over the next five years increased about
40 basis points, while five-year-forward inflation compensation was little changed on net.
Money Market Functioning
Over the intermeeting period, strains in some short-term funding markets appeared to
ease a bit. Notably, spreads of one- and three-month Libor over comparable-maturity
overnight index swap (OIS) rates narrowed about 35 and 20 basis points, respectively, on
net. For longer maturities, however, liquidity remained thin, and corresponding term
Libor spreads over OIS were little changed on balance. Spreads on 30-day A2/P2
nonfinancial commercial paper and asset-backed commercial paper (ABCP) also
declined. The Federal Reserve’s liquidity programs may have helped to ease short-term
strains. Primary credit outstanding—both overnight and term—continued to increase,
presumably due in part to the narrow spread of the primary credit rate over the federal
funds rate and the ability of depository institutions to borrow for longer terms. Offerings
at the Term Auction Facility in May and June were fully subscribed; however, with a
significantly increased amount offered, the stop-out rates were lower than those in earlier
months and often well below one-month Libor. Some quarter-end pressures were evident
in short-term interest rates late in the intermeeting period, but anecdotally, market
participants are not especially concerned about their ability to obtain funding over the end
of the quarter.

III-4
Corporate Yields, Risk Spreads, and Stock Prices
Selected Stock Price Indexes

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

Apr. 29, 2008 = 100
Daily
Apr.
FOMC
DJ Financial

S&P 500
June
17

Mar.

June Sept.
2007

Dec.

145
140
135
130
125
120
115
110
105
100
95
90
85

12

Monthly

10
(Trend earnings) / P*

+

6
June
17

1992

1996

2000

4

+

Long-run real Treasury yield

1988

Mar.
June
2008

8

2

2004

2008

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

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Percent
50

Weekly Friday*

12.5

Daily

Apr.
FOMC

Apr.
FOMC

40

10.5

10-year high-yield

30

June
17
June
17

8.5

20
6.5
10-year BBB

10

4.5
2002

2003 2004

2005

2006

2007 2008

2002

* Latest observation is for most recent business day.

2005

2006 2007

Investment-Grade CDS Indexes

Basis points

Basis points

Basis points
450

Daily
Apr.
FOMC

800

2008

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

Corporate Bond Spreads

600

2003 2004

225

Daily
Apr.
FOMC

375

200
175
150

Financial

10-year high-yield
(left scale)

300

125

June
17

400

100

225

200

June
17

150
10-year BBB
(right scale)

25

0

75
2002

2003 2004

75
50

Nonfinancial

2005

2006 2007

2008

Note. Measured relative to comparable-maturity Treasuries.

0
2002

2003 2004

2005

2006 2007

2008

III-5

Conditions in the Treasury general collateral (GC) repo and bill markets generally
remained healthy. Functioning in these markets was likely supported, in part, by further
sales of Treasury securities from the System Open Market Account portfolio and the
substantial amount of Treasury securities lent through the Term Security Lending Facility
(TSLF). Of the seven TSLF auctions held during the intermeeting period, only the most
recent one, on June 12, received bids that exceeded the amount on offer. The modest
demand at these auctions likely reflects some improvements in dealers’ access to
financing. The renewed interest at the most recent auction reportedly reflected liquidity
demands in advance of the upcoming quarter-end. For lower-quality collateral, market
functioning remained impaired, with median haircuts on non-Treasury and non-agency
collateral only a touch below the very elevated levels seen earlier in the spring. On
balance, however, dealers appeared able to secure funding from market sources, and
lending through the Primary Dealer Credit Facility (PDCF) decreased, although a few
institutions have continued to access the PDCF regularly.
Stock Prices and Corporate Interest Rates
Broad stock price indexes fell 1 percent to 3 percent, on net, over the intermeeting period,
as the effect of generally positive economic data releases was outweighed by higher oil
prices and increased concerns about the earnings outlook for the financial sector. As a
result, stocks of securities broker-dealers and banks markedly underperformed the
broader market. The spread between the 12-month-forward trend earnings-to-price ratio
for S&P 500 firms and a real long-term Treasury yield--a rough gauge of the equity risk
premium--ticked up to the high end of its range over the past two decades. Optionimplied volatility on the S&P 500 index seesawed over the intermeeting period but is
little changed on net.
Yields on BBB-rated and speculative-grade corporate bonds rose less than those on
comparable-maturity Treasury securities, leaving their spreads somewhat lower over the
intermeeting period. Both indexes of corporate bond spreads stayed substantially below
their peaks in March but remained elevated by historical standards. Despite the sharp
decline in equity prices for the financial sector, credit default swap (CDS) indexes for this
sector rose only moderately, on balance, an indication that market concerns about default
risk did not worsen appreciably. Estimated bid-asked spreads (not shown) suggest that
the secondary market for corporate bonds continued to function well. In the secondary
market for leveraged syndicated loans, conditions improved somewhat, and the average
bid-asked spread narrowed about 25 basis points.

III-6
Corporate Earnings and Credit Quality
S&P 500 Earnings Per Share

Revisions to Expected S&P 500 Earnings

Percent
40

Change from 4 quarters earlier

Percent
3

Monthly

30
20
Q1 p

2
1

10

0
MidMay

0
-10

-2

Q1 p

All firms
Nonfinancials

-20

All firms
Nonfinancials

-3

-30
1998

2000

2002

2004

2006

2003

2004

2005

Ratio

2008

Percent of outstandings
7

0.35

Liquid assets over
total assets
(left scale)

Debt over
total assets
(right scale)

2007

Selected Default and Delinquency Rates

Ratio

Annual*

2006

Note. Index is a weighted average of the percent change in the
consensus forecasts of current-year and following-year EPS for a
fixed sample.

Financial Ratios for Nonfinancial Corporations
0.12

-4
2002

2008

p Preliminary.
Source. I/B/E/S for S&P 500 earnings per share.

-1

6
5

Q4

0.09

0.30

C&I loan delinquency rate
(Call Report)

4
3

Q4

0.06

2

0.25
Q1

1

Bond default rate*
Apr.

0.03

0

0.20
1989

1992

1995

1998

2001

2004

2007

1990

* Data are quarterly starting in 2000:Q1.
Source. Calculated with Compustat data.

1993

1996

1999

2002

2005

2008

* 6-month moving average, from Moody’s Investors Service.

Expected Year-Ahead Defaults

Bond Ratings Changes of Nonfinancial Companies

Percent of liabilities

Percent of outstandings
30

Annual rate
Upgrades

2.0

Monthly

20
Q1

1.5

10
0

1.0
10
May

20

0.5
30
Downgrades

40

0.0

50
1992 1994 1996 1998 2000 2002 2004 2006 2008
Source. Calculated with data from Moody’s Investors Service.

1993

1996

1999

2002

2005

2008

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

III-7

Corporate Earnings and Credit Quality
With nearly all company reports for the first quarter in hand, earnings per share for S&P
500 firms are estimated to have fallen 18 percent from the year-earlier level, less than the
25 percent drop in the fourth quarter. Write-downs and provisioning by financial firms
accounted for most the weakness in both quarters. In contrast, earnings per share for
nonfinancial firms in the first quarter are estimated to have risen 10 percent from the
year-earlier level, boosted by large gains for the oil and gas industry. Looking ahead,
analyst estimates for year-ahead earnings for financial firms--and for the S&P 500 as a
whole--were revised down in May, while the corresponding revisions for nonfinancial
firms jumped into positive territory because of a sharp rise in energy sector forecasts.
The available data, though stale in some cases, indicate that overall nonfinancial
corporate credit quality has generally remained solid. The aggregate ratio of liquid assets
to total assets for nonfinancial firms stayed high in the fourth quarter, and the aggregate
leverage ratio moved up only slightly from a low level. And although the delinquency
rate on commercial and industrial (C&I) loans ticked up in the first quarter, it remained
low by historical standards. The realized six-month default rate on corporate bonds
remained near zero in April, and there were few ratings changes for nonfinancial
corporations in the first quarter. In May, the KMV forecast of the aggregate year-ahead
default rate continued to hover near the middle of its 15-year historical range.
Business Finance
Both investment-grade and speculative-grade bond issuance by nonfinancial companies
surged in May, buoyed in part by the relative stability of yield spreads, which may have
made it easier for issuers and investors to agree on deal terms. Meanwhile, total
outstanding nonfinancial commercial paper contracted again in May, and C&I loan
growth slowed markedly. This pattern of debt financing flows suggests that some firms
are lengthening the maturity of liabilities to improve liquidity. Aggregating across bonds,
commercial paper, and C&I loans, net debt financing by nonfinancial firms was strong in
May, though issuance of institutional leveraged loans reportedly continued to be very
weak. Issuance of both convertible bonds and equity shares by financial corporations in
April and May was very high by historical standards, reflecting recapitalization by large
financial institutions.
Net equity retirements by nonfinancial firms are estimated to have ebbed a bit in the first
quarter from last year’s record levels. The volume of retirements from completed cashfinanced mergers dropped notably, while those resulting from share repurchases are also

III-8

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2007
Type of security

4.7
1.8
2.9

5.5
1.7
3.9

5.4
1.6
3.8

19.1
8.4
6.4
4.3

29.8
13.0
8.0
8.8

37.9
14.2
15.4
8.3

-.2

2.4

2.4

9.6

6.9
139.3

Financial corporations
Stocks1
Bonds2

4.6
1.7
2.8

1.7

Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3,4

2006

22.7
8.2
9.7
4.9

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

2005

5.4
1.6
3.8

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

H1

2008

2004

H2

5.0
176.3

Q1

Apr.

May

2.3
.3
2.0

4.3
1.6
2.7

6.3
.7
5.5

33.3
20.1
5.1
8.1

29.3
23.9
1.7
3.7

33.6
23.3
4.3
6.0

49.8
29.6
11.6
8.5

1.1

-2.0

4.5

8.3

-9.9

11.7

14.0

28.1

15.6

7.7

4.9

5.3
187.7

9.3
207.1

7.9
104.9

13.2
57.6

24.0
91.2

25.2
87.9

Note. Components may not sum to totals because of rounding.
1. Excludes private placements and equity-for-equity swaps that occur in restructurings.
2. Data include regular and 144a private placements. Bond totals reflect gross proceeds rather than par value of
original discount bonds. Bonds are categorized according to Moody’s bond ratings or to Standard & Poor’s if
unrated by Moody’s.
3. End-of-period basis, seasonally adjusted.
4. Based on adjusted commercial bank credit data through April 9.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

Billions of dollars

70
Monthly rate, nonfinancial firms

50
Monthly rate, nonfinancial firms

Commercial paper*
C&I loans*
Bonds

60

H2

40
H1

H2
Q1

e

50

Total

20
10

H1
May
Q1 Apr.

30

0
40

-10
-20

30

-30
-40

20

-50
-60

10

-70
0
-10

Public issuance
Private issuance
Repurchases
Cash mergers

-80
-90
-100

Total

-110

-20
2004

2005

2006

2007

* Seasonally adjusted, period-end basis.

2008

-120
2004
e Staff estimate.

2005

2006

2007

2008

III-9

Commercial Real Estate
Commercial Mortgage Debt

BBB Commercial Mortgage CDS Index Spreads

Percent change from year earlier

CMBX.NA
18

Quarterly

Basis points
2500

Daily

16

12

Q1

2000

2006:H2*
2006:H1*
2005:H2*

14

1500

10
8

1000
June
17

6

500

4
2

0

0
1998

2000

2002

2004

2006

2008

Oct.
Jan.
2006

Source. Flow of funds.

Apr.

July
2007

Oct.

Jan.
Apr.
2008

July

Note. Measured relative to Libor.
*Corresponds to pools of mortgages originated in that period.
Source. JP Morgan.

Sales of Commercial Real Estate

Prices
Billions of dollars

Index, 1996:Q4=100
140

3-month moving average
Monthly

Quarterly

250

120

Q1

Transacted
property

100

200

80
60

150
All property

40
May

p

20

100

0
2002

2004

2006

2008

1990

1993

1996

1999

2002

2005

Delinquency Rates on Commercial Mortgages

Delinquency Rates on Commercial Mortgages
at Banks

Percent

Percent
4

12

Quarterly

Q1

Residential
construction

3
At commercial
banks*

2008

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

p Preliminary.
Source. Real Capital Analytics.

10
8

CMBS

2

Commercial
construction

6
4

1

At life
insurance
companies

Existing
properties

May
Q1

2

0
0

1996

1998

2000

2002

2004

*Excluding farm land.
Source. Citigroup, Call Report, ACLI.

2006

2008

Q1

Q2

Q3

Q4

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

Q1
2008

III-10
Residential Mortgages
Mortgage Debt

Delinquencies on Mortgages
Percent change from year earlier

Percent of loans
16

Quarterly

14

20

Percent of loans
3.0

Monthly
Apr.

18

2.5

16
12
10

Subprime (left scale)
2.0

14
Apr.

12

1.5

Prime (right scale)
8

10

1.0

8
6
Q1

4
2001

2002

2003

2004

2005

2006

2007

0.0
2002

2004

2006

2008

Note. Percent of loans 90 or more days past due or in
foreclosure. Prime includes near-prime mortgages.
Source. First American LoanPerformance.

Prime Conforming Mortgage Rate and Spread
Basis points

275

4

2008

Source. Flow of funds.

300

0.5

6

Agency and Non-Agency MBS Issuance

Percent

Weekly

Billions of dollars
7.0

Apr.
FOMC

30-year fixed-rate
(right scale)

300

Monthly rate

6.5

Agency
Non-agency

6.0

H1

250

250
June
11

225
200

200

H2

30-year fixed-rate spread
(left scale)

5.5

150
A.
Q1

100

175
5.0

50

150
125

4.5
Oct.
Jan.
2006

Apr.

July
2007

Oct.

Jan.
Apr.
2008

July

2001 2002 2003 2004 2005 2006

0

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

Note. FRM spread relative to 10-year Treasury.
Source. Freddie Mac.

30-Year Option-Adjusted Current Coupon Spreads

GSE Credit Default Swap Index

Basis points

Basis points
250

Apr.
FOMC

Daily

2007 2008

120

Apr.
FOMC

Daily

100

200

Fannie Mae
Ginnie Mae

80
150
June
11

June
13

100

60
40

50

20

0
Oct.
Jan.
2006

Apr.

July
2007

Oct.

Jan.
Apr.
2008

July

Note. Option-adjusted spread from Bloomberg’s prepayment model.
Source. Bloomberg.

0
Oct.
Jan.
2006

Apr.

July
2007

Oct.

Jan.
Apr.
2008

July

Note. Sector index is the median of individual quotes for Fannie Mae,
Freddie Mac, and the Federal Home Loan Bank System.
Source. Markit.

III-11

estimated to have cooled somewhat. In the second quarter, retirements from completed
cash-financed mergers and announcements of new repurchase programs slowed further.
On the other side of the ledger, gross public issuance of equity picked up in May, though
almost entirely because of seasoned offerings; there were scant initial public offerings.
Commercial Real Estate
Growth of commercial mortgage debt moderated in the first quarter, and the market for
commercial mortgage-backed securities (CMBS) has remained virtually shut down.
Yields on investment-grade CMBS (not shown) have been persistently high, likely
discouraging new issuance. Spreads on CDS indexes for CMBS, while below their highs
earlier in the year, remained quite elevated. Moreover, the sales volume for existing
commercial properties slowed further in April and May.
Delinquency rates on commercial mortgages held by commercial banks climbed further
in the first quarter. Much of the increase was due to delinquencies on residential
construction loans, but delinquencies on nonresidential construction loans also rose.
On the other hand, delinquencies on existing properties held by commercial banks and
insurance companies have remained low, and CMBS delinquency rates have drifted only
modestly higher, largely because of loans on multifamily properties.
Household Finance
The deterioration in the performance of residential loans has continued, as delinquencies
on nonprime and prime loans rose further in April. Meanwhile, in the first quarter, the
growth of residential mortgage debt continued to slow, and house prices kept falling, as
the purchase-only index calculated by the Office of Federal Housing Enterprise Oversight
posted a record decline of 6.7 percent at a seasonally adjusted annual rate.
Conditions in the conforming-mortgage market have not improved since the April FOMC
meeting. Spreads between primary-market interest rates on conforming mortgages and
10-year Treasury securities rates were little changed on net. And although agency
issuance of mortgage-backed securities (MBS) was again strong, issuance of private-label
residential mortgage-backed securities was anemic. The market for new conforming
jumbo loans has been slow to take off, with only about $300 million in loans originated
to date. Moreover, the secondary market for agency MBS was volatile, and optionadjusted spreads widened on net. CDS indexes on the government-sponsored enterprises,
Fannie Mae and Freddie Mac, moved up slightly over the intermeeting period, although
they remain well below recent highs.

III-12

Consumer Credit and Household Wealth
House Prices

Delinquencies on Consumer Loans
Percent change, annual rate

Percent
15

Quarterly, s.a.

6

Credit card loans
in securitized pools

10

Apr.
Nonrevolving
consumer loans at
commercial banks

5

OFHEO purchase-only index

5
4

0

Q1

3

Apr.
2

-5
Auto loans at captive
finance companies

Q1

1

-10
1996

1998

2000

2002

2004

2006

1998

2008

Source. Office of Federal Housing Enterprise Oversight.

2000

2002

2004

2006

2008

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

Consumer Credit

Gross Issuance of Consumer ABS by Type
Percent change

Billions of dollars
20

3-month moving average, annual rate

40
Monthly rate

18

Auto
Credit card
Student loans

16
14
12

30
H1

10
8
Apr.

Q2*
H2 Q1

6

20

10

4
2
0
1998

2000

2002

2004

2006

2002

2008

2003

2004

2005

2006

2007

2008

Note. Auto includes car loans, leases, and financing for buyers of
motorcycles, trucks, and other vehicles.
*Through June 13.
Source. Inside Mortgage Finance MBS database, Merrill Lynch.

Net Flows into Mutual Funds
(Billions of dollars, monthly rate)
Fund type

H1
Total long-term funds
Equity funds
Domestic
International
Hybrid funds
Bond funds
High-yield
Other taxable
Municipals
Money market funds

2006

18.9
13.3
0.9
12.4
0.6
5.0
-0.2
4.0
1.3
27.8

2007
H2

Q1

2008
Apr.

Maye

Assets
Apr.

32.0
14.8
1.2
13.5
2.6
14.6
0.2
12.0
2.4
26.3

5.8
1.2
-8.4
9.6
1.1
3.5
-0.7
4.8
-0.6
98.8

1.7
-14.9
-13.4
-1.5
0.7
16.0
-1.3
15.2
2.1
119.6

31.3
12.2
6.2
6.0
2.3
16.7
2.0
11.3
3.4
-84.6

33.5
12.7
4.8
7.9
2.9
17.9
1.9
11.0
5.0
91.3

8,642
6,188
4,584
1,604
699
1,755
155
1,220
380
3,418

Note. Excludes reinvested dividends.
e Staff estimate based on confidential weekly data.
Source. Investment Company Institute.

0

III-13

Delinquency rates on most types of consumer loans moved up further, particularly those
on credit cards, and now stand close to their respective averages over the past decade.
Interest rates on consumer loans (not shown) declined somewhat, as they continued their
typically gradual adjustment to this year’s drop in short-term rates. Growth of consumer
credit in April remained about in line with its average over recent years, despite the
notably tighter terms and standards that banks have reported. Issuance of most types of
consumer asset-backed securities (ABS) was strong in May, led by a surge in auto loan
ABS issuance, and has continued apace in the first two weeks of June. Spreads on
consumer ABS have also started to narrow. Reportedly, policy actions by the Congress
and the Department of Education aimed at increasing the availability of funds for student
lenders have helped to assuage concerns about student loan availability for the 2008-09
school year.
Long-term mutual funds registered strong inflows in April and May. Domestic equity
funds received inflows after several quarters of sizable outflows, and international equity
funds experienced renewed inflows as well. Municipal bond funds also saw strong
demand. The large outflow in money market mutual funds in April and the subsequent
rebound in May largely reflected seasonal tax-related patterns.
Treasury Finance
The Treasury’s midquarter refunding announcement was broadly in line with market
expectations. After a seven-year hiatus, the Treasury announced that it was reintroducing
auctions of 52-week bills to help finance a sharply wider deficit. The first auction of this
security was well received, with a stop-out rate slightly below expectations and a high
bid-to-cover ratio. The Treasury auctioned several other nominal securities over the
intermeeting period, with maturities spanning 2 to 30 years; these auctions were generally
well received, with bid-to-cover ratios within historical ranges. Indirect bidding and
allotments to foreign participants at these auctions continued their modest downward
trend of recent months. However, foreign official holdings of U.S. Treasury securities at
the Federal Reserve have risen briskly over the same period.
Functioning in the Treasury coupon market improved somewhat over the intermeeting
period, and on most days, bid-asked spreads for on-the-run securities stayed near the low
end of their range since last August. Despite improved functioning overall, estimated
yield curves continue to show large fitting errors, the on-the-run premium for the 10-year
note remains close to its peak in early May, and the on-the-run premium for the 2-year

III-14

Treasury Finance
Foreign Participation in Treasury Auctions

Foreign Custody Holdings

Percent of total issue

Billions of dollars
50

6-month moving average

Apr. FOMC

Weekly average

1600
1400

Indirect bids

40

Treasury

June
11

30

1200
1000
800

June 16

20

600
Agency

400

10
Actual foreign allotment

200
0

2000

2002

2004

2006

2008

0
2003

2004

2005

2006

2007

2008

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

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

Securities Lending

Bid-Ask Spread

Cents per
$100 face value

Billions of dollars
25
Weekly (Wed.) average

Apr.
FOMC

5-day moving average

1.10
1.05

20
June
17

15

1.00
0.95

10

2-year on-the-run
Treasury notes

June
11

0.90

5

0.85
0.80

0
2003

2004

2005

2006

2007

2008

Feb.

Note. Volume of securities lent to market participants from the
System Open Market Account portfolio through the overnight
facility.

Average Absolute Nominal Yield Curve
Basis points
Fitting Error

June

Oct.

Feb.

2006

June

Oct.

2007

Feb.

June

2008

Source. BrokerTec Interdealer Market Data.

Treasury On-the-Run Premiums
Basis points
16

Daily

40
Monthly average

14
30

12
June
17

10-year

10

20
June

8

10

6
4

2-year
0

2
0
2001 2002 2003 2004 2005 2006 2007 2008
Note. Calculated from securities with 2 to 10 years until maturity,
excluding on-the-run and first off-the-run securities.

-10
2001 2002 2003 2004 2005 2006 2007 2008
Note. Computed as the spread of the yield read from an estimated
off-the-run yield curve over the on-the-run Treasury yield. June
observation is the month-to-date average.

III-15

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

2007
Type of security

2004

2005

2006

34.7
29.8
10.8
19.0
4.9

38.4
34.2
15.6
18.6
4.2

2.0

2.1

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

2008

H1

H2

Q1

Apr.

May

36.1
32.5
10.6
21.9
3.7

41.9
38.5
16.5
22.0
3.4

38.9
32.6
8.7
23.9
6.3

29.0
27.6
10.7
16.9
1.3

54.3
51.8
26.8
25.0
2.5

42.6
40.9
20.7
20.1
1.7

2.5

2.2

2.6

1.8

5.0

1.9

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

Ratings Changes
Number of ratings changes
3500

Annual rate

2800

May

Upgrades

H1 H2

2100

Apr.

1400
Q1

700
0
700

Downgrades

1400
2100
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
8

Weekly

Ratio
1.2

Weekly

7
20-year

1.1

6
June
12

5

1.0

20-year

4

June
12

3
1-year

June
17

2

0.9

0.8

1
0
1994 1996 1998 2000 2002 2004 2006 2008
Source. Municipal Market Advisors and Bond Buyer.

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

III-16

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)1

(billions
of dollars),

2006

2007

2007
Q4

4.9

5.8

4.8

9.5

2.4

1.2

7,684

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

3.5
.7
18.6
13.0

2.0
4.5
4.1
19.3

1.1
2.1
5.7
20.4

-.6
6.8
2.9
39.0

-3.2
1.0
-6.0
22.0

4.4
8.0
-5.7
-22.6

763
4,646
1,205
1,064

Memo:
Institutional money market funds
Monetary base

15.7
3.1

39.3
2.0

54.1
1.0

46.7
-.5

23.0
-3.5

18.5
2.8

2,223
827

Aggregate and components
M2

Q1

2008
Apr.

Level

May

May

2

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

III-17

note climbed noticeably for the first time since the recent financial turmoil began,
suggesting that investors still have strong demand for relatively liquid securities.
State and Local Government Finance
Gross issuance of long-term municipal bonds continued to be robust in May, reflecting
further restructuring by municipalities out of the now-essentially-defunct auction-rate
security market as well as a general improvement in market conditions. A substantial
share of new capital issuance was for infrastructure projects. Short-term issuance was
moderate, consistent with typical seasonal patterns.
The underlying credit quality of municipal bonds remained strong, and the number of
ratings upgrades outpaced the number of downgrades in May. Although the downgrade
of two large municipal bond insurers in early June triggered a slew of automatic
downgrades to municipal bonds this month, these actions were not surprising and had
little effect on the market. Yields on long-term municipal bonds declined a bit over the
intermeeting period, and the ratio of such yields to those of comparable-maturity
Treasury securities declined sharply, returning to levels that prevailed prior to the
financial turmoil.
Money and Bank Credit
M2 expanded at a sluggish 1¾ percent annual rate in the April and May period, with
growth pulled down both by an unwinding of safe-haven flows associated with the
financial turmoil in prior months and because of large final individual income tax
payments. These effects were partially offset by deposits of economic stimulus payments
and a continued decline in the opportunity cost of holding money. Liquid deposits rose at
a 6 percent annual rate in April and May, while retail money market mutual funds slowed
in April and contracted sharply in May. Small time deposits fell for the third consecutive
month, and the currency component of M2, which has been somewhat volatile, was about
flat, on net, over the two months.
Commercial bank credit decreased modestly over the April-May period, largely because
of a runoff in banks’ holdings of securities and a drop in the volatile “other loan” series.1
That said, C&I lending slowed appreciably, expanding at only about half its first-quarter
pace. Data from the Survey of Terms of Business Lending conducted in early May
1

The April drop in securities is largely accounted for by the decision of a U.S. branch of a foreign
bank to shift some securities holdings to a foreign office. Adjusting to remove the effects of this shift,
securities holdings would have been about flat in April.

III-18

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

Level1
May 2008

2007

Q4
2007

Q1
2008

Apr.
2008

May
2008

10.6

Total

H2
2007
11.1

9.5

6.8

-5.4

2.2

9,004

Loans2
Total
To businesses
Commercial and industrial
Commercial real estate

11.3

11.3

10.5

9.9

.2

2.7

6,816

19.2
10.1

25.2
9.8

27.5
9.0

15.8
9.3

12.3
11.0

3.3
6.5

1,491
1,644

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

5.8
5.7
5.8
7.9
7.2
16.7

-1.4
6.4
-4.0
10.8
9.4
20.8

-5.4
7.3
-9.6
10.6
8.4
20.9

5.4
11.0
3.5
7.5
7.7
12.4

2.1
19.9
-4.2
9.2
9.4
-45.5

-6.0
12.9
-12.8
6.2
8.1
9.1

1,876
508
1,369
822
1,237
984

8.4
-5.5
27.9

10.7
-5.0
30.0

6.3
-17.4
34.2

-2.5
-6.9
2.1

-22.2
-5.4
-39.5

.7
5.1
-4.1

2,188
1,128
1,060

Securities
Total
Treasury and agency
Other5

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

C&I Loan Rate Spreads

Return on Assets at Commercial Banks
Basis points

Percent

240

Quarterly

220

2.0

Quarterly, s.a.a.r.
100 largest banks
All other banks
1.5

Weighted
average

Q2

200
Q1

180

Q1

160

Weighted
average
adjusted*

1.0

0.5

Q2

140
0.0

1998

2000

2002

2004

2006

2008

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

1992

1996

Source. Call Report.

2000

2004

2008

III-19

indicate that, after adjusting for nonprice loan characteristics, the average spread on C&I
loans smaller than $25 million was slightly below that reported in the February survey
and was near the low end of their recent range. In contrast, spreads on commercial
banks’ portions of syndicated loans remained at elevated levels in May. Commercial real
estate loans held by banks rose moderately in April and May. On the household side,
residential mortgage loans fell, on net, over the past two months, whereas revolving home
equity lines of credit continued to expand briskly, as borrowers reportedly drew down
loans under existing low-cost credit lines. Through May, originations of consumer loans
have remained fairly strong.
According to first-quarter Call Report data, commercial bank profitability—as measured
by the return on assets—was adversely affected again by asset write-downs and elevated
rates of loan-loss provisioning. Without the boost from the proceeds of the initial public
offering of Visa Inc., which occurred in mid-March, results at many large commercial
banks would have been worse. Asset quality in nearly all major loan categories
deteriorated further in the first quarter of 2008, with delinquency rates on residential
mortgages as well as construction and land development loans registering very large
increases. All told, the delinquency rate on all loans and leases reached a level not seen
since the early 1990s.
Last Page of Domestic Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to $60.9 billion in April after narrowing to
$56.5 billion in March. The widening of the deficit in April occurred as a jump in
exports was outweighed by an even greater rise in imports.

In April,the value of exports of goods and services jumped 3.3 percent, following a
1.9 percent decline in March. The increase in April occurred across a number of
catagories, with exports of industrial supplies and capital goods exhibiting particular
strength. Exports of consumer goods and automotive products also increased strongly.
The decline in exports in March was also broadly based, although exports of aircraft and
automotive products recorded particularly sharp drops. Exports of services increased in
both months.

IV-1

IV-2

IV-3

IV-4

The value of imports of goods and services rose 4.5 percent in April, after falling
3.3 percent in March. Most catagories of goods recorded declines in March and increases
in April. The value of petroleum imports fell sharply in March before rebounding
strongly in April, largely reflecting higher oil prices. Imports of non-oil industrial
supplies, capital goods, and automotive products also jumped up in April. In contrast,
imports of consumer goods rose only modestly in April following a sharp decline in
March. Imports of services rose at a moderate pace in both months.
Prices of Internationally Traded Goods
Non-oil imports. In April, prices of core imports rose 1.5 percent, the largest one-month
increase in the 13-year history of the index. This increase mostly reflected higher prices
for material-intensive goods, which rose 2.8 percent in April. Import prices for finished
goods also contributed to April’s increase, rising 0.8 percent, due mainly to higher prices
for capital goods (excluding computers and semiconductors). In May, core import prices
increased at a more moderate but still strong pace of 0.6 percent, as prices for both
finished goods and material-intensive goods increased at slower rates.
The average level of core import prices in April and May was almost 12 percent at an
annual rate (a.r.) above the first-quarter average. Prices for material-intensive goods
were up 27 percent, whereas prices for finished goods increased 5¼ percent. The
second-quarter rise in prices for finished goods is the largest increase in this category
since the fourth quarter of 1990 and is well above the 2007 pace of 2 percent.
Oil. The BLS price index of imported oil rose 5.9 percent in April before climbing an
additional 7.8 percent in May. The spot price of West Texas Intermediate (WTI) crude
oil averaged $112.33 per barrel in April, up 7 percent from its March average, and then
spiked an additional 12 percent to an average of $125.39 per barrel in May. The spot
price of WTI has continued to climb higher thus far this month and closed at $134.01 per
barrel on June 17. The price of futures for delivery at the end of 2016, which was at
$137.05 per barrel on June 17, rose even more rapidly during the inter meeting period.

IV-5

IV-6

IV-7

The sharp upward movement in prices over this period appears to reflect increasing
concerns regarding supply, amid continuing strong demand from emerging markets,
particularly China. U.S. inventories for crude oil have fallen notably in recent weeks. In
addition, both the U.S. Energy Information Administration and the International Energy
Agency revised down their respective estimates of non-OPEC supply growth, adding to
the growing sense of pessimism regarding longer term supply prospects.
Exports. Core export prices rose 0.5 percent in both April and May. In April, prices for
finished goods and for material-intensive goods increased at roughly the same rate. In
contrast, in May prices for finished goods rose only 0.2 percent, whereas prices for
material-intensive goods rose 0.9 percent. In April, falling wheat and soybean prices
pulled down prices of agricultural exports 2.2 percent. Although wheat prices continued
to fall in May, higher prices for soybeans, vegetables, and meat resulted in a 0.3 percent
increase in agricultural export prices for the month.
The average level of core export prices in April and May was 8¼ percent (at an annual
rate) above the first-quarter average. Much of the rise can be attributed to the 22 percent
increase in prices of nonagricultural industrial supplies. Agricultural prices, having
increased at a 58 percent pace in the first quarter, were up only 10 percent in the AprilMay period. Prices of exported finished goods were up nearly 3 percent, a rate
comparable to that in 2007.
U.S. Current Account
The U.S. current account deficit was $706 billion (a.r.) in the first quarter of 2008,
$37 billion wider than in the fourth quarter of 2007 (revised). The widening resulted
primarily from a narrowing of the surplus in net investment income, as declines in
income receipts on U.S. portfolio and direct investment abroad more than offset a decline
in payments on foreign portfolio investment in the United States.

IV-8

U.S. Current Account
(Billions of dollars, seasonally adjusted annual rate)
Goods and
Investment
Other
Period
services,
income,
income and
net
net
transfers, net
Annual
-753.3
63.8
-98.6
2006
-700.3
88.8
-119.7
2007
Quarterly
2007:Q2
Q3
Q4
2008:Q1
Change from
previous qrtr.
2007:Q2
Q3
Q4
2008:Q1

Current
account
balance
-788.1
-731.2

-715.3
-672.5
-695.1
-699.7

45.8
98.9
152.6
126.3

-106.9
-118.3
-126.4
-132.1

-776.4
-691.8
-669.0
-705.5

2.9
42.8
-22.7
-4.5

-12.0
53.1
53.7
-26.3

20.5
-11.4
-8.2
-5.7

11.3
84.6
22.8
-36.5

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

U.S. International Financial Transactions
Financial flows for the first quarter of 2008 show relatively modest net purchases of U.S.
securities by private foreign investors (line 4 of the Summary of U.S. International
Financial Transactions table; see also the chart on Private Securities Flows). As has been
the case since the financial turmoil began last summer, “flight to safety” considerations
contributed to very strong net purchases of Treasury securities for the quarter (line 4a);
foreign private demand for corporate stocks was weak (line 4d) and private investors on
net sold agency and corporate bonds (lines 4b and 4c). The net sales of corporate bonds
in the first quarter were larger than in the third quarter of last year and are only the
second such recorded quarterly outflow in these securities in more than 20 years. In part,
these net sales likely reflect weak net issuance of U.S. debt securities early this year.
U.S. investors made moderate acquisitions of foreign securities (line 5). Flows of U.S.
direct investment abroad (line 6) eased a bit in the first quarter, primarily from a
slowdown in reinvested earnings abroad. Foreign direct investment into the United
States (line 7) also slowed, primarily reflecting a shift from an increase to a decrease in
net intercompany debt.

IV-9

Taken together, total private financial flows swung from a net inflow of $92 billion in the
fourth quarter to a net outflow of $52 billion in the first quarter. However, foreign
official inflows (line 1) picked up further from their elevated rate in the fourth quarter,
reflecting strong purchases of both Treasury and agency securities by Asian central banks
as well as further acquisitions of corporate debt and stocks by some sovereign wealth
funds. In large part reflecting the swing in net private flows, the statistical discrepancy in
the first quarter also swung to a sizable positive $53 billion, indicating some combination
of over-reporting of the current account deficit or under-reporting of net financial
inflows.
The most recent data on securities transactions show that foreign private purchases of
U.S. securities picked up a bit in April from the pace recorded in the first quarter, but this
strength was again concentrated in Treasury securities. Foreign private investors on net
sold agency bonds and corporate stocks, but made small net purchases of corporate
bonds.
Foreign official flows into the United States remained quite strong in April,
.
Inflows from OPEC countries were weak in April following a pickup late last year and in
January reflecting the high-profile capital injections into several U.S. financial firms by
Middle East OPEC sovereign wealth funds. In general, data for the OPEC countries have
been volatile and most likely understate actual inflows from these countries. Partial and
confidential data on custody accounts at FRBNY indicate a slower pace of official
inflows in May and early June.
U.S. official assets (line 2) showed a $15 billion outflow in April, reflecting primarily an
increase in the amounts drawn from the reciprocal swap arrangements with the European
Central Bank and Swiss National Bank. These swap arrangements were also the primary
contribution to the $24 billion outflow for this line in the fourth quarter. The increase in
the swap arrangements in May will contribute to a further $26 billion outflow for that
month.
There was a small net inflow in April from U.S. residents’ net acquisitions of foreign
securities in April, as U.S. investors on net sold foreign bonds (line 5a) and made small
net purchases of foreign stocks (line 5b).

IV-10

The volatile banking sector (line 3) posted a further net
outflow in April, following the very large net outflow
recorded in March. Since the turmoil began in August
2007, net lending abroad by banks has increased with
unusual consistency (see inset chart). These outflows,
primarily from foreign-owned banks lending to European
affiliates, likely reflect tensions in interbank funding
markets and cumulate to a sizeable $280 billion between
August 2007 and April 2008.
The balance of payments data released in June showed
upward revisions to foreign net purchases of U.S. securities of about $100 billion for
2006 and nearly $200 billion for 2007, based primarily on newly-released results of the
survey of foreign holdings of U.S. securities as of June 2007. The survey indicated
considerably larger holdings of U.S. corporate bonds than previously available data had
suggested, in part reflecting an apparent under-reporting of foreign acquisitions of U.S.
asset-backed securities. Inflows from foreign direct investment in the United States were
also revised up nearly $100 billion for 2006 and 2007 together.
These increases in financial inflows were partly offset by significant revisions to financial
outflows. There were sizable revisions—amounting to about $180 billion for the period
2004-2007—to U.S. acquisitions of foreign securities, based primarily on results of the
newly-released survey of U.S. holdings of foreign securities as of December 2006, which
found larger holdings of foreign securities than previously estimated. There were also
significant revisions to “other flows” reported in line 10 for 2006, reflecting previously
unrecorded increases in claims of U.S. issuers of asset-backed commercial paper and
medium term notes on their foreign parents.
On net, the revisions to financial flows were nearly offsetting for 2006 but resulted in
much larger inflows for 2007. Combined with the revisions that reduced the size of the
current account deficit in both years, the statistical discrepancy was revised to
-$47 billion in 2006 and -$41 billion in 2007, suggesting some combination of underreporting of the current account deficit or over-reporting of net financial inflows. The
revision to the discrepancy for 2007 was striking, as the previous release had shown a
positive discrepancy of $84 billion.

IV-11

IV-12

IV-13

IV-14

Foreign Financial Markets
Credit markets were relatively stable over the period, but bond yields rose noticeably as
inflationary pressures came into the foreground of central bank concerns.
Yields on sovereign benchmark bonds rose 20 to 50 basis points and sovereign yield
curves flattened in all of the major economies. Although the major foreign central banks
kept policy rates on hold, expectations of future monetary tightening increased as
policymakers signaled greater concern about inflation. Sterling yields rose after the
release of April CPI data showed that inflation had increased to 3 percent, and Governor
King was required to write a letter of explanation to the Chancellor of the Exchequer as
inflation rose further to 3.3 percent in the May CPI release. Euro yields rose as headline
inflation climbed to 3.6 percent and several ECB members indicated that the ECB was
likely to raise rates soon. Canadian yields jumped on June 10, when the Bank of Canada
defied market expectations of a rate cut and chose instead to hold rates fixed. The central
banks of Brazil, Chile, China, Egypt, Hungary, India, Indonesia, Israel, the Philippines,
Russia, and Turkey all tightened policy over the intervening period in order to combat
rising food and energy prices, and yields on local-currency bonds have risen
commensurately.
Conditions in domestic European interbank markets remained strained, but changed little
since the April Greenbook. Spreads between 1-month Libor and overnight index swap
rates jumped 9 basis points in euro and 4 basis points in sterling as the maturity date of
those contracts crossed into July, indicating some pressure associated with the quarter
end. Securitization has picked up modestly, and a few deals to sell asset-backed
securities (ABS) have received attention, although banks may have also used some
recently issued ABS as collateral with the ECB. In spite of the fact that demand for term
funding in euro and sterling appeared fairly stable, implied rates from foreign exchange
and currency basis swaps indicate that demand for dollar funding from European
financial institutions may have appreciably increased. The decision to increase the size
of the Federal Reserve’s swap lines with the European Central Bank and Swiss National
Bank has allowed those institutions to lend greater amounts of dollar funding to their
banks, and demand at the auctions for those funds has been high, with larger bid-to-cover
ratios than at the Federal Reserve’s Term Auction Facility.
A number of major European banks announced further write downs for the first quarter,
and financial stocks helped lead overall European equity indexes down about 5½ percent
since the last Greenbook. Several banks announced rights issues in order to shore up

IV-15

their capital positions, and in some cases they were forced to offer lower prices in order
to place the new equity. Some Japanese banks also reported write-downs, but Japan’s
FSA estimated that the six largest banks have so far suffered losses totaling
$9.1 billion, much less than the losses of their U.S. and European counterparts. Japanese
bank stocks rose over the period and the overall Nikkei index climbed 6½ percent. Other
Asian equity indexes were generally down, led by the Shanghai composite, which fell
10 percent, and the performance of the major Latin American indexes was mixed.
The trade-weighted nominal value of the dollar has moved in a fairly tight range. The
major currencies index rose 2 percent on net and the broad index increased about
1 percent. The dollar tended to move with perceptions of monetary policy and the
relative economic strength of the United States versus foreign economies. Chairman
Bernanke’s discussion of the dollar on June 3 and market participants’ growing
perception that the FOMC might raise rates more quickly than they had expected
prompted the dollar to appreciate late in the period. Of note, the dollar has depreciated
1½ percent against the renminbi since mid-May after having remained essentially
unchanged against that currency for most of April. The dollar generally appreciated
against most other emerging Asian currencies.

IV-16

IV-17

IV-18

IV-19

IV-20

IV-21

Developments in Advanced Foreign Economies
Real GDP in the advanced foreign economies expanded moderately in the first quarter,
but the pace of economic activity varied markedly across economies. In the euro area
and Japan, strong investment contributed to a sharp acceleration in output. In Canada,
GDP contracted 0.3 percent on the back of large negative contribution from exports and
inventories. In the United Kingdom, output moderated to 1.6 percent due to a slowdown
in real estate and business activities. Recent data point to softness across the advanced
foreign economies in the second quarter. Consumer and business confidence indicators
have weakened in all major economies, and the PMIs show increased pessimism
regarding the pace of business activity going forward. Measures of the unemployment
rate have started to drift up from decade lows in most economies.
Inflationary pressures remain elevated on balance because of recent food and energy
price increases. In Europe, the prospect of inflation climbing to nearly 4 percent over the
summer has led market participants to speculate that the European Central Bank and the
Bank of England may increase interest rates this year. The Bank of Canada held rates
unchanged at its June meeting despite expectations of a cut, citing the possibility that CPI
inflation would rise above 3 percent later in the year if current levels of energy prices
persisted. In Japan, headline inflation slid to 0.8 percent in April but interest rate
expectations rose marginally over the intermeeting period.
In Canada, real GDP contracted 0.3 percent (a.r.) in the first quarter. Cutbacks were
widespread in manufacturing, most notably in the automobile sector where production
was hampered by a strike at a major supplier of automotive parts in the United States.
Coming on the heels of rapid growth in the second half of 2007, inventory accumulation
and business investment, especially in machinery and equipment, both eased markedly.
Nevertheless, consumer spending advanced 3.2 percent, although this was the slowest
quarterly rise in consumption in over two years. Imports fell twice as much as exports;
however, excluding autos, exports advanced 3 percent.
Indicators suggest that GDP will avoid shrinking for a second consecutive quarter,
although activity is likely to remain weak. Housing starts in April and May, while
healthy, were below their very strong first-quarter average. The manufacturing sector
rebounded in April, with widespread gains in the volume of sales. However, the volume

IV-22

IV-23

of new orders was down, with decreased orders for durables outweighing a rise in orders
for nondurables. Total employment continued to expand in both April and May, but
more slowly than it did in the first quarter. The unemployment rate held steady at
6.1 percent in May, still near its 33-year low of 5.8 percent reached in February.

The twelve-month rate of consumer price inflation was 1.7 percent in April, up from
March’s 1.4 percent, as disinflationary pressures stemming from the Canadian dollar’s
appreciation seem to have subsided a bit. At 1 percent in April, food price inflation
remains low, although the rise in food prices between March and April was significantly
faster than in the previous several months. The Bank of Canada’s preferred measure of
core inflation, which excludes the eight most volatile components of the consumer price
index as well as the effects of indirect taxes, was 1.5 percent in April.

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In the euro area, real GDP grew 3.2 percent in the first quarter, with better-thanexpected performance in domestic demand and net exports. GDP growth was supported
primarily by a 6.3 percent increase in German GDP, where construction activity was
enhanced by unusually warm weather. Investment remained solid for the euro-area as a
whole, but consumption continued to show signs of weakness, registering a second
consecutive quarter of anemic growth.

Recent data point to a moderation in economic activity in the current quarter, on balance.
Business and consumer confidence indicators continued to deteriorate, and the volume of
retail sales declined in March and April. The PMI for manufacturing and the flash PMI
for services remained only slightly above 50. Nevertheless, IP rebounded in April and
the unemployment rate held at 7.1 percent in April for the third consecutive month.

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The ECB’s survey of euro-area bank lending indicated a further tightening of credit
standards in the first quarter. The percent balance of euro-area banks reporting a net
tightening of credit standards for loans to enterprises was 49 percent in the first quarter,
up from 41 percent in the fourth quarter of 2007. Banks also reported a further increase
in the net tightening of credit standards for loans to households.
Euro-area twelve-month HICP inflation jumped to 3.7 percent in May, a record high
since the start of euro-area statistics in 1997. Inflation excluding energy and unprocessed
food prices continued to meander around 2½ percent. During the June meeting, the ECB
Council left policy rates unchanged, but officials have signaled the possibility of a rate
increase as early as July.
In Japan, real GDP increased 4 percent (a.r.) in the first quarter. Consumption and net
exports both made unusually large contributions to growth (1.8 and 2.0 percentage points,
respectively). Private investment rose a robust 3.2 percent after falling a cumulative
4 percent over the previous three quarters.

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Recent indicators of production have been weak, however. Industrial production
contracted 3.4 percent in March and a further 0.2 percent in April, leaving the April level
well below the first-quarter average. April shipments data also fell short of their firstquarter average. Consistent with the weakening production numbers, export growth has
slowed considerably since the beginning of the year; the 12-month growth rate of exports
declined from 6 percent in January to 0.3 percent in April.
Although the labor market remains relatively strong overall, there are some signs of
weakening. The unemployment rate rose to 4 percent in April, and the job openings-toapplicants ratio (the number of officially posted job openings relative to the number of
officially registered job seekers) fell to 0.93, its lowest level since March 2005. Total
cash earnings (which include bonuses) grew a meager 0.9 percent over the twelve months
ending in April.
The nationwide core consumer price index (excluding fresh food only) rose 0.9 percent in
April from a year earlier, compared with 1.2 percent in March. Consumer prices
excluding food and energy fell 0.1 percent. The timelier core CPI for Tokyo rose
0.9 percent in May from a year earlier.
In the United Kingdom, real GDP moderated to 1.6 percent (a.r.) in the first quarter,
despite a sizeable increase in consumption. Fixed investment contracted sharply after
two quarters of solid growth, and inventories made a large negative contribution. Net
exports made a positive contribution as imports fell and exports moved sideways. The
service sector expanded 2 percent, its slowest pace since 2001, as real estate and business
activities stalled.

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Business and confidence indicators softened markedly through May. The May PMIs for
services and manufacturing indicated equal proportions of respondents expecting
business activity in their sector to either expand or contract. The Labor Force Survey
measure of the unemployment rate ticked up to 5.3 percent in March, and the number of
people claiming unemployment benefits rose marginally in May, although the claimant
count rate was unchanged.
The housing market continues to be a major source of uncertainty for households. Net
nominal mortgage lending in April stood 30 percent below its 2007 average, while the
value of mortgages approved for house purchases nearly halved over the same period,
indicating that financial institutions are considerably limiting the origination of new
loans. The volume of remortgaging activities, on the other hand, continues to grow at a
sustained pace.
The twelve-month rate of CPI inflation climbed to 3.3 percent in May, prompting the
Governor of the Bank of England to write a public letter to the Chancellor. Energy and
food prices, the largest contributors to the current run-up in headline inflation, rose
15.6 and 7.8 percent, respectively, in the year to May. The price of manufactured inputs
soared nearly 30 percent over that period, its largest increase since 1976. By contrast,
average earnings including bonuses grew 3.2 percent in the twelve months to April, their
slowest pace in five years.

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Economic Situation in Other Countries
Recent indicators for emerging market economies generally point toward continued solid
growth, albeit at a slower pace than last year. Strong exports among the emerging market
economies appear to have partially offset weakness in exports to the advanced
economies. Domestic demand remains robust in many of the countries. Headline
inflation rose further in most of the developing world, largely owing to higher food and
energy prices; several countries are facing upward pressure on core inflation as well. The
rising cost of energy subsidies has led several Asian countries to raise state-controlled
fuel prices. Since the April Greenbook, authorities in several countries, including Brazil,
China, India, and Turkey have tightened monetary conditions.
In China, data revisions led the staff to increase its estimate of real GDP growth in the
first quarter to a surprisingly strong 11.7 percent (s.a.a.r.). Data on retail sales, up
22 percent in April and May from a year earlier, suggest that domestic demand has
continued to strengthen. In addition, the trade surplus declined a bit in April and May, on
average, from the first quarter, as imports jumped higher. Since the fourth quarter of last
year, growth of exports to the United States, Europe, and the rest of Asia has slowed.
Exports to Latin America have picked up; however, Latin America accounts for less than
5 percent of Chinese exports.
Twelve-month consumer price inflation was 8.5 percent in April, but fell to 7.7 percent in
May, as food price inflation moderated from 22 percent to 20 percent. To combat
inflation, Chinese authorities have lowered import tariffs on selected foods, medicine,
and cotton. The People’s Bank of China (PBOC) raised the required reserve ratio (RRR)
for banks ½ percentage point in May and another 1 percentage point in June. The latest
increase brings the RRR to 17½ percent for large banks. Bank lending has been subdued
over the past three months, with the twelve-month growth in loans less than 15 percent,
the slowest pace of growth since early 2006. The rate of renminbi appreciation slowed in
April and the first half of May, but picked up again in the second half of the month. The
PBOC continues to accumulate international reserves at a rapid pace; reserves increased
$75 billion in April to reach $1.75 trillion.
On May 12, a massive earthquake struck the Sichuan province in China. It is estimated
that 90,000 people were killed and more than 350,000 people were injured. The impact
of this tragedy on the Chinese economy is not reflected in the data received to date, but
over the next few months there is likely to be some additional upward pressure on prices
as distribution remains hampered and the supply of some agricultural products are

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diminished. In addition, over the next few quarters, reconstruction is likely to provide a
small boost to GDP.

India’s GDP growth in the fourth quarter of last year was revised up from 2.7 percent
(s.a.a.r) to 7.6 percent, in part due to bountiful rains in the monsoon season that resulted
in higher agricultural production than initially estimated. Growth strengthened further in
the first quarter of this year to 9.1 percent, the agriculture and services sectors were
particularly strong but industrial production slowed. The trade deficit widened in the first
quarter and in April, as imports grew faster than exports. Inflation, measured by both
consumer and wholesale prices, remained relatively constant in March and April, but
some prices, particularly of metals and oil seeds, accelerated. In addition, in early June,
the government increased retail gasoline prices 11 percent and diesel prices 9.5 percent.
Amid inflationary pressures, the central bank raised the repo rate 25 basis points to
8 percent on June 11, more than a month before the bank's next scheduled policy meeting
and its first hike in14 months. The central bank also raised the reserve requirement
25 basis points to 8.25 percent and relaxed restrictions on capital inflows by raising
foreign investment limits; greater capital inflows may help reduce downward pressures
on the rupee.

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In the NIEs1, first-quarter GDP growth picked up in Hong Kong and Singapore but
slowed in Korea and Taiwan. Real GDP in Hong Kong was buoyed by strong Chinese
growth. In Singapore, growth surged to 14½ percent (s.a.a.r.) following a marked
contraction in the fourth quarter, as activity in the biomedical sector rebounded sharply.
In Korea and Taiwan, the slowdowns were broad-based. More recently, industrial
production growth for April was unchanged in Korea and plunged in Singapore,
reflecting a contraction in the biomedical sector. Trade surpluses in Korea, Singapore,
and Taiwan have widened thus far in the current quarter from the first-quarter average;
Hong Kong’s trade deficit has narrowed.
Twelve-month consumer price inflation remained elevated in the NIEs, largely reflecting
higher food and energy prices, although there have been some upward moves in core
inflation as well. Specifically, Hong Kong and Singapore experienced large increases in
inflation in April, and Korea saw a large increase in May. To respond to the adverse
effects of inflation on the poor, the Korean government announced a $10 billion relief
package for its lowest-income citizens over the next year. In contrast, inflation in Taiwan
edged lower in April and May. Taiwanese authorities announced a large increase in fuel
prices in late May.

1

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

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Data from the ASEAN-4 show signs of a mild weakening in economic growth. With the
exception of Indonesia, real GDP growth slowed in the first quarter. Final domestic
demand was strong in both Malaysia and Indonesia, but there was a substantial
drawdown in inventories. Domestic demand remained solid in the Philippines, boosted
by strong remittances. In Thailand, domestic demand was weak in the first quarter, but
industrial production rebounded in April.
Thailand, the world’s largest exporter of rice, has benefited from recent record high
prices for the commodity. Nevertheless, the trade balance for Thailand has deteriorated
as exports have failed to keep pace with imports. The Philippines has been hit hard by
the runup in the world prices of both rice and crude oil, which have sharply increased its
import bill.
Across the region, increasing food and energy prices continue to push consumer price
inflation higher. Both the Indonesian and Malaysian governments recently raised the
domestic price of fuel, which is state-controlled. Malaysia has announced plans to
eliminate fuel subsidies altogether in August of this year, while Indonesia has opted to
begin a system of rationing in September. Thailand instituted a small subsidy on diesel
fuel for buses, and the Philippines eliminated its 1 percent import tariff on crude oil. The
central banks of Indonesia and the Philippines have raised rates to combat inflation.

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Mexican real GDP growth decreased to 2.1 percent (s.a.a.r.) in the first quarter, reflecting
in part the slowdown in the United States. Mining, construction, and the manufacture of
textiles and computer equipment decelerated, and the volatile agricultural sector posted a
decline of 7 percent. Data for the current quarter point to continued lackluster
performance. Industrial production declined 1.8 percent in April, with a particularly
large decline in the mining sector, which includes oil and gas extraction. Indexes of
consumer confidence declined in April and May, while the manufacturing opinion survey
has moved sideways since January. The trade deficit continued to widen in April,
reflecting a broad-based jump in imports and a decline in exports. Headline inflation in
May reached 5 percent on a twelve-month basis, pushing inflation further away from the
4 percent upper bound of the central bank’s target range.

In Brazil, first-quarter real GDP growth slowed to 2.9 percent from 6.6 percent in the
fourth quarter. On the production side, the weakness was mainly in the agricultural
sector. On the expenditure side, private consumption growth dropped to 1.3 percent, and
investment moved down from double-digit rates last year to 5.4 percent. The trade
surplus narrowed in the first quarter but rebounded significantly in May as exports
soared, following the end of a customs strike. In April, both auto production and
domestic sales were very strong, and capacity utilization rates remained high. However,
industrial output was up only slightly. Headline inflation continued to move up, reaching

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5.5 percent in May. Both food prices and prices of core goods have been putting upward
pressure on headline inflation. The regulated price category, which includes energy, has
risen only modestly in recent months.
In early June, as expected, the central bank raised its target policy rate 50 basis points to
12¼ percent, following a similar move in April. The government also announced that it
would raise its target for the primary fiscal surplus to 4¼ percent of GDP from
3¾ percent of GDP. The move was primarily aimed at allaying concerns about rapid
growth of government spending. Brazil’s sovereign credit rating was raised to
investment grade by S&P in April and by Fitch in May.

In Argentina, growth of nominal exports and imports jumped in April, with exports
supported by high prices for agricultural commodities. In March, the government
decided to increase export taxes on several agricultural products, including soybeans,
grains, and oilseeds, in an attempt to reduce food price inflation, triggering a strike by
farmers. The confrontation between the government and farmers spilled over into other
sectors in recent weeks, when truckers began blocking roads, leading to some food
shortages. The tensions contributed to a decline in bank deposits and downward
pressures on the peso, prompting the central bank to engage in unsterilized intervention to
support the currency, which put upward pressures on interest rates. On June 9, the
thirty-day bank deposit rate was 12.7 percent, up from about 8 percent in early May.
Headline consumer price inflation reached nearly 9 percent in April on a twelve-month

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basis, amid large increases in prices of services, such as housing, transportation and
health. Despite the introduction of a new CPI index, skepticism about the reliability of
the official inflation data continues.

In Venezuela, real GDP plunged by an estimated 9 percent (s.a.a.r.) in the first quarter on
sharp contractions in manufacturing and construction. Consumer price inflation
continued to climb in May, reaching 30 percent on a twelve-month basis. Food prices
were up 45 percent as a result of the relaxation of price controls. The black-market
exchange rate is currently 3,400 bolivar per dollar, versus an official rate of 2,100.
Finance Minister Rafael Isea resigned in mid-June to run in the forthcoming elections in
November, but policies are expected to remain expansionary under his successor, Ali
Rodriguez, the current ambassador to Cuba and former president of state-oil company
PDVSA.

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In Turkey, real GDP increased 5 percent in the fourth quarter, boosted by strong private
sector investment. Industrial production has shown signs of moderation in recent months.
Twelve-month consumer price inflation reached 10.7 percent in May, significantly higher
than the 6 percent upper limit of the central bank’s year-end target. The Monetary Policy
Committee raised its policy rates 50 basis points at its May meeting, in light of
inflationary pressures resulting from lagged pass-through from exchange rates and rising
prices for energy and processed foods. In early June, the central bank raised its mediumterm inflation targets to 7.5 percent in 2009, 6.5 percent in 2010, and 5.5 percent in 2011.
Twelve-month-ahead inflation expectations increased to 8.6 percent in the mid-June
Survey of Expectations.

Last Page of Part 2


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