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Confidential (FR) Class III FOMC

Part 2

June 20, 2002

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

Confidential (FR) Class III FOMC

June 20, 2002

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
Economic activity has continued to expand in recent months, but at a much
more moderate pace than in the first quarter. Personal consumption
expenditures, outlays for residential construction, and government spending
have posted relatively modest gains so far this quarter after large increases early
in the year. Although outlays for nonresidential construction are still falling, the
contraction in business spending for equipment and software appears to be
ending. Meanwhile, employment is rising, but the gains, on net, have been quite
small, and the rate of unemployment is up from its level in the first quarter.
Core inflation still appears to be decelerating slightly.
Labor Market Developments
Employment reports of the past two months point to a bottoming out in the labor
market, but not much more than that yet. For April and May, private nonfarm
employment gains averaged 23,000, following thirteen months of decline. Even
so, the unemployment rate in April and May was above its first-quarter average.
By industry, manufacturing employment fell only modestly in May for the
second straight month. Moreover, employment in the help-supply industry rose
strongly for the third consecutive month, and anecdotes from help-supply firms
point to the manufacturing sector as the source of many of these new temporary
hires. Taken together, the average monthly gains in employment in help supply,
manufacturing, and wholesale trade (which is also dependent on manufacturing
activity) have averaged 23,000 thus far in the second quarter, compared with
average declines of 83,000 per month in the first quarter and 179,000 per month
in 2001.
After having fallen by 250,000 over the second half of last year, employment in
retail trade has changed little on net since December. In addition, employment
in the services industry excluding help supply has been rising, but the average
gains over the past two months are only on par with average gains in the first
quarter and below last year's average increases. Elsewhere, although
construction employment was essentially unchanged in May, it has declined by
an average of 20,000 jobs per month so far this year.
In keeping with usual practice, the May labor market report included the BLS's
comprehensive benchmark of the payroll survey to unemployment insurance
records as well as other annual updates to the payroll employment estimates.'
Although benchmark revisions to the March 2001 level of employment were
relatively small, other revisions now show that employment fell more sharply in

1.These changes include recalculation of seasonal factors, reweighting of sampled firms,
updates to bias adjustment factors, reestimation of net birth/death models, and the introduction of
a new sample design for the following industries: retail trade; finance, insurance, and real estate;
and transportation and public utilities.

II-2
CHANGES IN EMPLOYMENT
(Thousands of employees; based on seasonally adjusted data)

2000

Nonfarm payroll employment 1
Previous
Private
Mining
Manufacturing
Construction
Transportation and utilities
Retail trade
Wholesale trade
Finance, insurance, real estate
Services
Help supply services
Total government
Total employment (household survey)
Nonagricultural

2001

2001
Q4

2002
Q1

-- Average monthly change-159
-119
-310
-63

Mar.

2002
Apr.

May

-5

167

-87

-303

-45

-21

138
1
-11
8
17
32
-7
5
92
-0

-158
1
-109
-3
-23
-15
-16
10
-2
-54

-336
-2
-123
-13
-63
-64
-15
3
-60
-82

-88
-2
-80
-14
-14
5
-7
-3
27
4

-39
-4
-58
-4
-23
1
-8
-5
62
37

115
119

-153
-154

-316
-338

-54
-14

-425
-305

82
55

441
497

-2.1
34.2
40.7

-4.1
34.1
40.5

-0.5
34.2
40.8

-0.1
34.2
41.0

0.1
34.2
40.9

-0.1
34.2
40.9

Memo:
Aggregate hours of private productio
1.1
workers (percent change) 1, 2
34.4
Average workweek (hours)
11.6
Manufacturing (hours)

Note. Average change from final month of preceding period to final month of period indicated.
1. Survey of establishments.
2. Annual data are percent changes from 04 to 04. Quarterly data are percent changes from
preceding quarter at an annual rate. Monthly data are percent changes from preceding month.

Private Payroll Employment Growth

Aggregate Hours of Production or

Nonsupervisory Workers 1962= 100

Thousands of employees
r 3-month moving average

1 300

1154

II-3
SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data, as published)

2000

Civilian unemployment rate
(16 years and older)

2001

_2001
04

2100_
Ql

Mar.

-2002
Apr.

May

4.0

4.8

5.6

5.7

6.0

5.8

Women, 25 years and older

13.0
7.1
2.8
3.2

14.7
8.3
3.6
3.7

15.8
9.5
4.4
4.4

16.0
9.8
4.5
4.4

16.4
10.3
4.5
4.4

16.8
10.0
4.8
5.0

16.9
8.9
4.8
4.8

Labor force participation rate

67.2

66.9

66.5

66.6

66.8

Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

52.2
77.9
76.0
59.7

49.9
77.2
75.9
59.7

49.1
76.9
75.9
59.6

48.2
76.3
75.6
59.6

48.9
76.4
75.6
59.5

47.7
76.2
75.9
59.9

47.7
77.5
76.1
59.6

Teenagers
20-24 years old

Men, 25 years and older

Labor Force Participation Rate and Unemployment Rate
Percent
67.5 1

Percent

10
9

Job Losers Unemployed for Less Than 5 Weeks and Duration of Unemployment
Weeks

Percent

1.5

Mean duration (left scale)

1.4

1.3

Note. Job losers unemployed for less that five weeks measured as a percentage ol household employment.

Labor Market Indicators

Initial Claims for Unemployment Insurance
Millions

Thousands
650
ne

4.0

600

3.5

550
Uemployent insurma

500
450

2.5

S400
350
300

Initial claims
1.0

' i

(right scale)
I

i i

Current Employment Conditions
Conference Board

.---

250

Help Wanted Index
Index
140

Percent
,60

130
120
110
100

Expected Employment Conditions

Net Hiring Strength
Index

Percent
25 r

Note. Expected conditions index is the proportion of
households expecting unemployment to fall, minus the
proportion expecting unemployment to rise, plus 100.

Note. Percent planning an increase inemployment
minus percent planning a reduction.

Percent
30

II-5
the spring of last year than had previously been reported and that large
employment declines continued into February of this year. Overall, the level of
employment in April 2002 was revised down 523,000 on a seasonally adjusted
basis; revisions to both employment and production worker hours suggest a
downward revision to the first-quarter level of nonfarm business employee
hours of 0.4 percent.
Aggregate hours of production or nonsupervisory workers on private nonfarm
payrolls ticked down 0.1 percent in May and have maintained a virtually flat
profile since November. After having moved up between October and February,
the workweek has held steady at 34.2 hours. However, manufacturing overtime
hours rose another 0.1 hour in May and are now one-half hour above the level at
the end of last year.
The unemployment rate in May partly reversed its increase in April, but at
5.8 percent, it was still 0.2 percentage point above its average level in the first
and fourth quarters. Job losers unemployed for fewer than five weeks as a
percentage of household employment fell in May for the seventh consecutive
month. Although still above levels prevailing in the extremely tight labor
market of the late 1990s and 2000, this proxy for the layoff rate has now fallen
to near its average in the mid-1990s following the recovery of employment from
the downturn of the early 1990s. In contrast, the number of individuals
unemployed longer than twenty-seven weeks increased more than 140,000 in
May following the typical cyclical pattern in which the average duration of
ongoing unemployment spells continues to rise well after job losses begin to
moderate; the Temporary Extended Unemployment Compensation (TEUC)
program may also have contributed to the increase in long-term unemployment.
Both the run-up in initial claims at the end of March and the decline since then
were likely caused by the onset of the TEUC program, which required some
individuals ineligible for state unemployment insurance benefits to establish
their eligibility for federal benefits by filing state unemployment insurance
claims. 2 For the week ended June 8, when the TEUC effect was likely small,
initial claims totaled 390,000, a little below the level of claims before the start
of the TEUC program. By assuring recipients of state unemployment benefits
access to federal benefits following the exhaustion of their state entitlements,
the TEUC program probably prolonged the job search of those already on state
benefit rolls as well, thereby boosting the level of insured unemployment; after

2. Using monthly data from the Employment and Training Administration (ETA) on the

number of initial claimants who began receiving state benefits, we estimate that TEUC-related
claims numbered approximately 32,000 per week in late March and April. Data from the ETA
on states that report TEUC-related claims indicate that the level of these claims likely had fallen
below 5,000 per week by the end of May.

II-6
having climbed abruptly at the end of March and beginning of April, the level of
insured unemployment appears to have leveled off.
Other labor market indicators bolster the view that the labor market has touched
bottom and offer some hints of stronger hiring in coming months. The
Conference Board reported that individuals' assessments of current labor market
conditions in recent months have remained at a marginally improved level
relative to the fourth quarter of last year. Similarly, after having reached its low
point in November, the index of help wanted advertising has edged up slightly.
Households' expectations of future labor market conditions, as reported by the
Conference Board and the Michigan SRC survey, have flattened since March
but remain above levels in the first two months of the year. At the same time,
the hiring plans of firms reporting to the National Federation of Independent
Business and Manpower, Inc., are up from the first quarter.
The BLS now reports that output per hour of all persons working in the nonfarm
business sector increased at an annual rate of 8.4 percent in the first quarter of
2002. 3 For the four quarters ended in the first quarter of 2002, productivity rose

Labor Output per Hour
(Percent change from preceding period at compound annual rate;

based on seasonally adjusted data)
Sector

20001

2001'

~______________
Nonfarm businesses
All persons 2

All employees
Nonfinancial corporations 3

2001

2002

2.6

2.1

1.1

5.5

8.4

2.2
2.9

2.2
3.9

1.0
0.9

5.8
11.2

7.2
6.7

1. Changes are from the fourth quarter of the preceding year to the fourth quarter of

the year shown.
2. Includes non-employees (published definition).
3. The nonfinancial corporate sector consists of all corporations doing business in
the United States with the exception of banks, stock and commodity brokers, and
finance and insurance companies; the sector accounts for about two-thirds of business
employment.

3. This estimate does not include the benchmark and other revisions to employment and
hours from the May employment report, which, along with the annual revisions to the NIPAs,
will be incorporated into the productivity and cost estimates released in August. Factoring in the
employment and hours revisions together with data on spending published since the most recent
GDP release, we estimate that productivity will be revised to show a 8.6 percent rise in the first
quarter.

4.2 percent, an unusually strong performance for a four-quarter period when
economic activity was weak. The BLS also reports that productivity in the
nonfinancial corporate sector rose at an annual rate of 6.7 percent in the first
quarter and 5.5 percent over the four quarters ended in the first quarter of 2002.
Industrial Production
Output in the industrial sector increased 0.2 percent in May, extending the
upturn that began in January. Production of motor vehicles and electricity
generation in May declined, but output in manufacturing industries excluding
motor vehicles increased 0.3 percent, the average monthly pace for the year.
Compared with the typical postwar cyclical experience, the downturn in
industrial production (measured from its own peak to its own trough) appears to
have been a bit less than average, while the pace of recovery thus far, which is
averaging monthly gains of 0.4 percent, is considerably sub-par.4 The factory
operating rate in May, at 73.9 percent, was 1 percentage point above its recent
low in December 2001 but remains 7 percentage points beneath its 1967 to 2001
average.
Output in the high-tech sector increased 1.2 percent in May. Semiconductor
output rose 2.2 percent, a bit faster than in April but below the average rate of
increase during the first quarter. Intel and AMD (the first and second largest
producers of microprocessors, respectively) recently cautioned that demand for
microprocessors is running below expectations. Intel cited weak European
demand and AMD cited weak demand in North America and Europe.
Furthermore, Intel stated that demand appears to be shifting toward low-end
chips.5 Nonetheless, if, as our industry contacts suggest, customers' inventories
of semiconductors have been worked down to very low levels, increases in final
demand should quickly translate into increases in chip production. 6 Orders for
equipment used by semiconductor manufacturers have risen nearly 70 percent
over the past four months, but they remain at a fairly subdued level.
Downstream, the production of computers rose 0.6 percent in May after an
increase of 1.5 percent in April. These gains mark a deceleration from the rapid
pace of production in the first quarter, when the output of computers for
business use, which had lagged the earlier recovery in the production of
computers for consumer use, picked up sharply. A moderation in demand may

4. The cumulative decline in total industrial production during the recent contraction was
7.1 percent, whereas the average during the nine downturns in IP since 1953 is 9.1 percent. The
average pace of increase for the first five months after the trough in IP is 0.9 percent per month.
5. The large price cuts recently announced by Intel and AMD-up to 53 percent on some

chips-are not unusual at this time of year. Intel has used this tactic in the past to clear out
inventories that will be supplanted by newer-generation processors.
6. The low level of customer inventories is corroborated by the staffs flow-of-goods
system, which also indicates a low days' supply measure for electronic components.

II-8
Selected Components of Industrial Production
(Percent change from preceding comparable period)

Proportion
Component

Total
Previous

20012

20022

20023

Mar.

Apr.

May

2001'

2001

100.0
100.0

-5.9
-5.9

-6.7
-6.7

2.8
2.6

A
.4

3
.4

86.7
80.4
73.8

-6.1
-6.6
-5.5

-6.3
-6.0
-6.6

3.2
1.7
-.1

.5
.5
.4

.2
.0
-.1

.2
.3
.3

Mining
Utilities

6.2
7.1

-2.4
-6.1

-11.8
-7.2

-9.0
8.4

-1.3
1.4

1.0
.9

.7
-.9

Selected industries
High technology
Computers
Communication equipment
Semiconductors 4

6.6
1.5
1.5
3.5

-15.6
-8.2
-24.4
-14.9

13
3.6
-25.9
14.4

24.5
35.5
-18.3
40.3

1.6
2.3
.4
1.7

.8
1.5
-2.4
1.6

1.2
.6
-1.0
2.2

Motor vehicles and parts

6.3

-.4

-10.1

22.9

2.3

-.9

Aircraft and parts

2.6

-11.6

-26.6

-30.5

-3.6

-3.3

-3.8

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

24.0
3.5
20.6

-1.6
-8.0
-.5

-3.0
-10.5
-1.7

1.5
7.0
.6

.6
1.3
.5

-.4
.0
-.4

.1
1.2
-.1

Business equipment
Defense and space equipment

7.9
2.0

-10.8
.2

-8.3
4.2

-4.9
3.2

-.2
.4

-.1
1.3

1.2
-.1

Construction supplies
Business supplies

6.6
7.1

-3.8
-8.4

-9.3
-5.1

8.6
-4.1

2.1
.9

-.8
.0

.4
.5

23.9
16.3

-6.9
-73

-9.3
-12.3

.6
-.3

.2
.0

.5
.6

.3
.4

7.6

-6.1

-2.7

2.6

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

Materials
Durables

Nondurables

1. Fourth-quarter to fourth-quarter change.
2. Annual rate.
3. Monthly rate.
4. Includes related electronic components.

Capacity Utilization
(Percent of capacity)
19672001

1982

199091

average

low

Apr.

May

Total industry

81.9

71.1

78.1

76.2

74.7

75.1

75.4

75.5

Manufacturing
High-tech industries
Excluding high-tech industries

80.9
80.0
81.0

69.0
77.3
68.0

76.6
72.4
76.8

74.5
613
76.1

73.1
60.7
74.7

73.5
63.0
75.0

73.8
64.0
75.2

73.9
64.2
75.3

Mining
Utilities

87.6
87.6

80.3
75.9

87.0
83.4

90.7
86.3

87.6
83.6

85.3
84.3

85.3
86.4

86.0
85.3

Sector

2001

2002

Indicators of High-Tech Manufacturing Activity

Semiconductor IPComponents

Semiconductor IP

Billons of 2001 dollars
32
MPU production (left scale)
3.0

**** Semiconduct

2.8

3-month moving average

Billions of 2001 dollars
5.0

ex. MPUs (ght scae)

4.5

4.0

2.6

3.5

2.4
3.0

2.2
Apr

2.0

1.8

2.0

1.6

.
. .
. . .
. . .
. . . . . . . . . 1.5
1997 1998
1999 2000
2001
2002
Source. Semiconductor Industry Association and FRB
staff estimates.

Computers and
Communications Equipment IP

Semiconductor Equipment
Orders and Shipments
Billions of dkDUn

3.5
olars

Orders
***** Shipments

3.0

2.5
2.0
1.5
•

_Ma
May.

1.0
0.5

.. . 1

.. . ... .. .. . ..
r

1997

1998

1999

2000

2001

2002

0.0

Source. Semiconductor Equipment and Materials International.

Personal Computer Sales

Networking Equipment Spending Plans
Milions of units, ratio scale

55
Annual rate

Difusin index
475

50
45
40
38
36
34
32

30
1997

1998

1999

2000

2001

2002

Note. FRB seasonals. Includes notebooks. Value for Q2
is a Dataquest forecast
Source. Dataquest

Feb. Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun
2001
2002
Note. The diffusion index equals 50 plus half the percentage
of respondents planning to increase future spendng, less the
percentage of respondents planning to reduce future spening.
The average number of respondents per month from February
2001 to May 2002 was 255.
Source. CIO Magazine.

II-10
underlie the slowing in computer production: After having jumped nearly
5 percent in the first quarter (not at an annual rate), industry analysts expect unit
sales of personal computers to decline slightly in the second quarter.
The output of communications equipment, which decreased 1 percent in May,
continues to be restrained by weak capital spending by telecom service
providers. The output of network equipment (such as routers, switches, and
hubs) used by general business, on the other hand, has been increasing since
December. Moreover, the prospects for continued production gains in this
segment of communications equipment may be improving; when surveyed
about future spending on data networking equipment, the share of chief
information officers planning to increase spending has risen, on balance, in
recent months. Even so, prospects for the communications equipment sector
overall remain problematic.
Total production of motor vehicles ran at an annual rate of 12.1 million units in
May, putting production at the low end of the narrow range that has persisted
since the beginning of the year. However, production of medium and heavy
trucks edged up in the past two months in order to fill a rising backlog of orders
for class 8 trucks to be delivered in advance of the October switch to
environmentally friendly, but more costly, engines. Scheduled assemblies of all
vehicles in the next four months point to a significant step-up in production,

Production of Domestic Autos and Trucks
(Millions of units at an annual rate except as noted; FRB seasonal basis)
Item
Item

2001

2002

Q21

Mar.

Apr.

May

June'

U.S. production
Autos
Trucks

11.6
4.8
6.8

12.2
5.2
7.0

12.4
5.1
7.2

12.1
5.2
6.9

12.3
5.2
7.1

12.1
5.0
7.0

12.7
5.2
7.6

Days' supply 2
Autos
Light trucks3

38.3
52.1

51.1
61.1

n.a.
n.a.

47.9
60.8

47.8
62.1

54.4
72.3

n.a.
n.a.

Inventories4

2.27

2.41

n.a.

2.41

2.50

2.62

n.a.

Note. Components may not sum to totals because of rounding.
1. Production rates reflect Ward's Communications' latest estimates for Q2 and June.
2. Quarterly average calculated using end-of-period stocks and average reported sales.
3. Excludes medium and heavy (classes 3-8) trucks.
4. End-of-period stocks; excludes medium and heavy (class 3-8) trucks.
n.a. Not available.

II-11
although output for all cars and trucks in the third quarter typically has fallen
short of schedules by 3-1/2 percent; with inventories of automobiles and light
trucks already at target levels, a similar shortfall looks likely to occur again this
year. Stocks of medium and heavy trucks are comfortable.
Apart from the high-tech and motor vehicle industries, increases in factory
production by major market group were widespread in May. Excluding motor
vehicles and computers, the production of durable consumer goods, which
increased 1.2 percent, has been supported by the output of home appliances; the
production of these goods has been spurred by the high levels of activity in the
homebuilding and real estate markets. The output of construction supplies,
which has been similarly buoyed by the strength in housing starts, also increased
in May. Nonetheless, recent gains in these industries have been short of those in
a typical cyclical rebound because production in these categories (in addition to
motor vehicles) was relatively well maintained during the downturn.
As a result of restrained spending by businesses, the output of business supplies
(particularly job printing) and the production of business equipment outside
motor vehicles, high-tech, and aircraft have been slow to turn around;
historically these two market groups have been among the last to show
significant increases after a trough in industrial production. In May, however,
both categories posted output gains. The output of aircraft and parts continues
to be pulled down by declines in commercial aircraft production, which has
fallen 37 percent since September 2001.

.
Available indicators of future industrial activity point to continued output gains,
though again along a relatively tepid track. Data for early June suggest that the
weekly physical product aggregate is likely to add about 0.3 percentage point to
the change in IP; motor vehicle assemblies and electricity generation contribute
the bulk of the increase. The staffs series on real adjusted durable goods orders
rose 4.5 percent in April, more than offsetting the declines in the previous two
months; the increases were widespread among industries. The Institute for
Supply Management's new orders diffusion index increased in May, and the
new orders index from the Federal Reserve Bank of Philadelphia's Business
Outlook Survey remained positive. By contrast, the level of the staff's series of
manufacturing layoff announcements through June 18 already exceeds its May
total; recent layoffs are concentrated in high-tech industries.

II-12
Indicators of Manufacturing Activity

Consumer Durables IP

Construction Supplies IP

Index
170
160

.,
1Total
(leftscale)

150

.May;

140

" ..; /130 ' '

, ,
"

,a.
. "

*,
:

Ex. motor
vehicles and pans
(rightscale)

Index
140

Index
145

135

140
3

•
"

130

125

130

120

125

115

120

120
110

.. .I
. . .
. .
..
1997
1998 1999 2000 2001
Note. Excludes high-tech and energy.

- 110
2002

Business Equipment
and Business Supplies IP

•13.~I • •

. . . I . . . I . . .
1998
1999 2000

. ,
2001

.. 115
2002

Index
120
110

3-moh moving average

**.'.115

100

I•

I
*110

80
70

Equipment (left scale)

130

135

105

125
1060
120

100
1997

1998

1999

2000

2001

2002

1997 1998 1999 2000 2001 2002 2003
Note. 1996 price-weighted index. Actual completions equal
deliveries plusthe change inthe stock of finished aircraft
Data through May are actual completions; the remainder
are estimates of future assembly rates.

Note. Excluding high-tech, motor vehicles and parts,
aircraft and parts and enrgy.

New Orders, ISM and
FRB Philadelphia Surveys

Announced Manufacturing Layoffs

Diffusion index
ISM (et scale)
70 -SFRB Philadelphia survey (ight scale)
65

Percent
60

Thousands
120

100

60.M.8

1990

1992

1994

1996S601998

2000

Mar.

2002

Jso.

Sep.

Dec.

Mar

Jun.

0
2-20

Survey
the dif elevels
renceversus
betweenowerthe percent
s
reportingis
greater
levels ofage
newof respondent
rders.
1990 1992 1994 1996 1998 2000 2002
___

Note. The ISM index equals 50 plus half the difference
between the percentage of respondents reporting greater levels
versus lower levels of new orders. The FRB Business Outlook
Survey isthe difference between te percentage of respondenrts
reporting greater levels versus lower levels of new orders.

""-40
Mar. 2001 Jun.
Sep.
Dec.
Mar. 2002Jin. 0
Note. Data are ihrsugh June 18, 20p2.
news report
Souce. ompiled by staf

Content partially redacted.

Index
120
Suppiles (right cal)

...
1997

May

Boeing Commercial Aircraft Completions

Index
145
140

II-13
New Orders for Durable Goods
(Percent change from preceding period except as noted; seasonally adjusted)
Share,
2001:
H1
(percent)

Component

100.0

Total orders
Adjusted orders'
Computers
Communication equipment
Other capital goods
Other2

1.1

71.0
4.0
3.0
23.0
37.0

Memo:
Real adjusted orders
Excluding high tech

2.6

1.5

-1.0
-3.6
.9
1.8
-2.5

-2.2
-7.5
-11.7
-1.4
-1.3

4.3
11.6
3.8
4.5

-.3

-.7

2.7

-1.0

-2.2

4.5

-2.1

2.7

-1.1

-2.4

4.7

1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle
parts.
2. Includes primary metals, most fabricated metals, most stone, clay, and glass
products, household appliances, scientific instruments, and miscellaneous durable goods.
... Not applicable.

The industrial production release for May included revisions to the staff
estimates of industrial capacity for 2002. Downward revisions to capacity in
high-tech industries were offset by revisions that, on balance, increased capacity

Industrial Capacity
(Percent change, fourth quarter to fourth quarter)
Category

19942000

2002
2001
Previous Revised

average

Total
Mining
Utilities
Manufacturing
High-tech'
Ex. high-tech

5.2
-.7
1.6
5.9
40.0
2.8

1.7
.6
5.1
1.6
12.7
.3

1.0
.3
4.0
1.0
12.9
-.1

1.0
.4
3.9
1.0
10.1
.2

1. High-tech industry consists of computers and office
equipment, communications equipment, and semiconductors and
related electronic components.

II-14
SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate, FRB seasonals)

Total
Autos
Light trucks
North Americani
Autos
Light trucks
Foreign-produced
Autos
Light trucks

2001

2002

2000

2001

Mar.

Apr.

May

17.2

17.0

18.5

16.4

16.8

17.2

15.5

8.8
8.4

8.4
8.6

8.7
9.7

7.9
8.4

8.3
8.5

8.6
8.6

7.8
7.7

14.4
6.8
7.5

14.0
6.3
7.6

15.1
6.4
8.6

13.0
5.7
7.4

13.4
6.0
7.4

13.8
6.3
7.5

12.5
5.7
6.8

2.9
2.0
.8

3.1
2.1
1.0

3.4
2.3
1.1

3.3
2.3
1.1

3.4
2.3
1.1

3.0
2.1
.9

Data on sales of trucks
Note.
Components may not sum to totals because of rounding.
and imported autos for the most recent month are preliminary and subject to revision.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.

Sales of Light Vehicles
(Annual rate; FRB seasonals)
Millions of units

2002
2001
1999 2000
1997 1998
Note. Staff estimates based on confidential data.

Total Value of Incentives as a Share of
Average Vehicle Price before Incentives
Percent

2001
2000
Source. J.D. Power and Associates.

2002

II-15
elsewhere. The revisions were based on updated estimates of industry capital
input, which in turn were derived from benchmark investment data from the
Census Bureau's Annual Survey of Manufactures for 2000 and staff estimates of
industry capital spending for 2001 and 2002. The 1 percent rate of increase
estimated for manufacturing during 2002 is the slowest in the history of the
series, which dates back to 1948.
Consumer Spending
The pace of consumer spending slowed appreciably, on balance, this spring
from the rapid rate posted in the first quarter. Consumer spending on motor
vehicles and other goods fell back in May, offsetting the advance the month
before.
After having shot up to 17.2 million units in April, sales of light motor vehicles
dropped to an annual rate of 15.5 million units in May.7 Average sales for the
two months about matched the first-quarter level. Confidential data from the
Big Three indicate that fleet sales were flat in May; thus, last month's decrease
in sales occurred entirely on the retail side. The decline was widespread; no
automaker reported an increase in sales on a seasonally adjusted basis.
Automakers appear to be interpreting the May dip in sales as an aberration, and
our contacts in the industry currently expect sales to move back up in June.
Indeed, a payback from the sharp increase in April seems to be the only obvious
explanation for the May slide in sales. Available data from J.D. Power indicate
that rebates and interest rate subsidies continued at near record levels through
the beginning of June. More recently, General Motors boosted incentives on
certain auto and truck models, and the firm now estimates that the pricing
environment will be even more competitive than it had expected earlier in the
quarter. Consumers remain fairly upbeat about car-buying conditions; although
the index of car-buying conditions in the Michigan SRC survey ticked down in
early June, it has remained at a generally favorable level.
In May, nominal sales in the retail control group of stores, which excludes
automotive dealers and building materials and supply stores, fell 0.4 percent
following an upward-revised gain in April of 1 percent. Spending was off
sharply at clothing stores and gasoline stations, but the decline at the latter was
probably due mostly to falling gasoline prices last month. Sales by general
merchandisers also fell back in May. Nevertheless, merchants of furniture and
appliances posted advances in May, and sales by nonstore retailers, namely
electronic and mail-order houses, rose smartly for the second consecutive
month. Factoring in price changes, we estimate that sales of goods other than

7. Sales of light vehicles since September have been revised a little because of a correction
by DaimlerChrysler to the mix of light and medium trucks sold.

II-16
Total Retail Trade and Food Services Sales
(Percent change; seasonally adjusted)
Expenditure
Total sales
Previous estimate
Retail control'
Previous estimate
Furniture and home furnishings
Electronics and appliances
Clothing and accessories
Food and beverage stores
General merchandise
Gasoline stations
Health & personal care
Nonstore retailers 2
Other retailers 3
Food services

2001
Q3
-.2
......
.1
...
.0
1.8
-1.4
.7
1.9
-4.9
2.1
-2.1
1.3
.6

3.1

-.6
-.6
1.8
1.8
2.3
.6
3.6
.5
2.2
.9
2.7
3.1
-. 1
3.4

.6
...
1.8
5.4
1.9
1.2
2.5
-8.2
2.0
.2
1.3
1.1

2002
Mar.
-.1
.1
.1
.1
.7
.7
-.1
-.1
-.1
3.5
-.3
-.4
-.6
-.2

Apr.

May

1.2
1.2
1.0
.8
.0
-.5
.5
-.3
1.1
4.4
2.2
2.0
.6
.2

-.9
...
-.4
...
.9
2.1
-2.8
.5
-.9
-3.1
.0
1.6
.2
-.3

1. Total retail trade and food services less sales at building material and supply stores and automobile
and other motor vehicle dealers.
2. Includes electronic shopping and mail order houses.
3. Includes miscellaneous retailers and sporting goods, hobby, book, and music stores.
... Not applicable.

Real PCE Goods

Real PCE Services

Billions of chained (1996) dollars

* Quarterly average

3750

Apr.
3700

3650

3600

3550

35 00

2000
Note. March through May is a staff estimate.

~~i ~ ~

2002

343MJ

II-17

Household Indicators

Real Consumer Spending and Income
12-month percent change
18

Household Net Worth and Saving

Consumer Confidence
1966=100
120

1985=100
160

110

140

120

100

Michigan

/May

(right ,

100

une(p) 90
80

Vi
v

1989

1990

1991

"
1992

1993

Conference Board Index
(left scale)
1994

1995

1996

1997

1998

1999

2000

2001

2002

II-18
Private Housing Activity

(Millions of units; seasonally adjusted annual rate)
2001
2001

2002

Q1r

Mar.r

Apr.r

May P

All units
Starts
Permits

1.60
1.64

1.60
1.59

1.57
1.64

1.73
1.69

1.68
1.63

1.55
1.63

1.73
1.67

Single-family units
Starts
Permits
Adjusted permits'

1.27
1.24
1.28

1.28
1.22
1.27

1.26
1.23
1.26

1.37
1.31
1.34

1.30
1.25
1.30

1.27
1.26
1.30

1.39
1.27
1.29

New home sales
Existing home sales

.91
5.30

.87
5.27

.93
5.24

.90
5.78

.91
5.41

.92
5.79

n.a.
n.a.

Multifamily units
Starts
Permits

.33
.40

.33
.37

.32
.41

.35
.39

.38
.38

.29
.37

.34
.41

Mobile homes
Shipments

.19

.20

.21

.18

.17

n.a.

1. Adjusted permits equals permit issuance plus total starts outside of permit-issuing areas.
p Preliminary. r Revised. n.a. Not available.

Private Housing Starts

(Seasonally adjusted annual rate)
Millions of units
1 2.5

1986

1988

1990

1992

1994

1996

1998

2000

II-19
motor vehicles were about unchanged in real terms in May following an
increase of 0.1 percent in April.
Real outlays on services were unchanged in April, the most recent month for
which data are available. Spending on energy services and on brokerage and
investment counseling is estimated to have dropped back, but these declines
were offset by increases in other services outlays, such as medical care.
Meanwhile, the increase in stock market volumes points to a rebound in
spending on brokerage services in May.
Despite fairly modest gains in the past few months, real consumer spending rose
3-1/4 percent over the twelve months ending in April: The increase in spending
was supported by a 4-1/2 percent rise in real disposable income over the same
period, which was buoyed by a decline in personal tax payments and an increase
in transfer payments. The fallback in personal tax payments reflects both last
year's tax legislation and the combination of extraordinarily weak final
payments (relative to the BEA's estimate of personal income) and large income
tax refunds this tax season. The increase in transfer payments was boosted by a
cyclical expansion in social programs. More recently, the labor market report
suggested only a modest rise in private wages and salaries last month.
With the increase in income outpacing gains in consumer spending over the
twelve months ending in April, the level of the saving rate was nearly
1-1/2 percentage points above a year ago. Reductions in wealth during the past
two years have put substantial downward pressure on spending, and the declines
in the stock market so far this spring likely pushed the ratio of net worth to
disposable personal income down further.
Consumer confidence, as measured by either the Michigan SRC index or the
Conference Board index, continued to increase through May, but the
preliminary, early-June reading of the Michigan survey dipped back to the low
end of the range seen so far this year. Taking a longer perspective, consumer
confidence measures stand close to their averages over the past decade, at levels
consistent with moderate increases in overall consumer spending.
Housing Markets
After having dipped in April, starts of single-family homes jumped 9.6 percent
in May to an unexpectedly brisk annual rate of 1.39 million units. The May
volume of starts slightly exceeded the average pace in the first quarter, which
was the highest quarterly figure in twenty-three years. However, permits for
single-family construction-adjusted to include construction in areas where
permits are not required-were little changed at 1.29 million units, putting the
ratio of starts to adjusted permits two standard deviations above the average.
Because single-family starts typically adjust toward a better alignment with

11-20
House Prices
(Percent change from year earlier)

New Homes
-

Percent
30

Constant qualty
Median price

-,, rI

-5

°i

,-W
iii' i

1988

1990

1992

1994

1996

1998

2000

2002

Existing Homes
-

Repeat sales
Median price

Percent
20

II-21
permits, the starts estimate for May appears unsustainably robust. Nevertheless,
starts are expected to remain quite strong in coming months.
Most indicators of financial conditions continue to support strong housing
demand. The contract rate on thirty-year fixed-rate conventional mortgages
edged down in mid-June to 6-3/4 percent, the lowest level since last November,
and initial rates on adjustable-rate mortgages slid to 4-3/4 percent. The share of
mortgage originations financed with ARMs increased to 19 percent in April
(most recent data), the highest percentage since fall 2000. And as of mid-June,
the Mortgage Bankers Association index of mortgage applications for home
purchase was near a record high. In contrast, homebuying attitudes, as
measured by the preliminary Michigan survey, fell substantially in early June.8
Sales of new homes increased 1 percent in April to an annual rate of
915,000 units. The pace of sales in both March and April closely matched the
total for last year, which was the highest on record. The inventory of new
homes for sale rose in April to 316,000 units, but the months' supply of homes
for sale was unchanged at 4-1/4 months-a low ratio that provides no hint that
production has been excessive. Sales of existing homes jumped 7 percent in
April, to an annual rate of nearly 5.8 million units. The increase partly offset a
drop in March, bringing these sales to their third highest level on record.
Median prices of new homes and existing homes increased in March and April
at twelve-month rates of 6 percent to 7 percent-somewhat less rapidly than in
earlier months, although still a brisk pace. The constant-quality price index for
new homes, which adjusts for changes in geographic composition and in home
size and other amenities, rose 5-1/4 percent in the first quarter from twelve
months earlier, the largest increase since the fourth quarter of 2000. The
repeat-sales price index for existing homes decelerated to 6-1/4 percent,
year-over-year, in the first quarter. Although this was the slowest rise since late
1999, it still was noticeably elevated compared with price increases for existing
homes during the 1990s.
Multifamily housing starts continued their recently erratic monthly pattern; they
rose 20 percent in May to an annual rate of 344,000 units, partly offsetting a
drop in April. However, the pace of multifamily starts so far in the second
quarter is 11 percent below the average for the first quarter. Recent readings on
market conditions for rental apartments have been downbeat. In the first
quarter, the vacancy rate for apartments jumped to the highest level since the
8. The rise in negative homebuying opinions reflected increased concern in early June about

high home prices and about current and expected economic conditions. Surprisingly, the
decrease in positive homebuying opinions mainly reflected a drop in the proportion of
respondents that mentioned low interest rates, even though rates for fixed-rate mortgages and
adjustable-rate mortgages have declined, on balance, since March.

II-22
Condominiums and Existing Homes

Sales
Thousands of units, annual rate
1000

Thousands of units, annual rate
6000

900

Existing homes
(right scale)

800

5500

1 01

asoo
5000

700
4500

600

Condom iniums
(left scala)

500

4000

400
3500

300
3000

200

2500

100

Median Price
Change from year earier

Change year erer

Note. Data for condominiums also include cooperative apartments.
Source. National Association of Realtors.

Percent
20

II-23
late 1980s; rents decreased relative to four quarters earlier, as measured by the
National Real Estate Index; and property values declined from a year earlier.
Demand for rental apartments has softened, owing partly to cyclical declines in
employment; in addition, home ownership has become more affordable,
reflecting both low mortgage rates and reduced down-payments.
By contrast, conditions in the market for condominiums and cooperative
apartments-together referred to here as "condos"-appear robust. Sales of
existing condos jumped nearly 16-1/2 percent in the first quarter, to a record
annual rate of 838,000 units. 9 The demand for condos has been stimulated by
many of the same conditions that have contributed to the strong demand for
single-family homes, including low mortgage rates, population growth, and
substantial house-price appreciation. Moderately priced condos provide a
relatively affordable entry into home ownership, particularly in areas with high
house prices. Even though the median price of existing condos jumped
15-1/4 percent in the first quarter from a year earlier, almost twice as fast as the
rise in the median price of existing single-family homes, the median condo price
was still 11 percent below the median price of existing homes.10

Business Fixed Investment
Equipment and software. Real outlays on equipment and software declined at
an annual rate of about 2 percent in the first quarter after having fallen at about a
5 percent rate in the fourth quarter.11 Real spending for computer equipment
rose 30 percent, but because of small declines in outlays for software and
communications equipment, overall spending on high-tech equipment eked out
only a small gain. Business spending on both motor vehicles and aircraft

9. Data are available for condominium and cooperative sales beginning in 1981.
10. Note that some of the more rapid rise in prices for existing condos likely reflects their
considerably greater concentration, compared with existing single-family homes, in urban areas,
where zoning and other controls on land use limit the supply of land available for construction.
11. Historical data on orders and shipments of capital goods have been revised for the
period January 1992 through April 2002. The revisions mainly reflect the benchmarking to the
2000 Annual Survey of Manufactures. The revisions after 2000 incorporate late filers and
updated seasonal adjustment factors. Census has not yet released all of the detailed data that we

use in the equipment and software forecast.
A preliminary reading of the data we have in hand indicates that there were large downward
revisions in orders and shipments for some categories in 2000, notably computers and peripheral
equipment. Revisions to growth rates since then appear small.
Our contacts at the BEA indicated that they plan to incorporate the revisions in the final
GDP release for the first quarter and in the advance GDP release for the second quarter. At the
time of the annual revision, the BEA intends to incorporate the revisions to earlier quarters.

II-24
EQUIPMENT AND SOFTWARE SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
2001
Q3

2002
Q4

Feb.

Mar.

Apr.

Monthly Rate

Annual Rate
Shipments of nondefense capital goods
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

2002

-24.2
-25.4
-48.8
-39.7
-17.1

-10.1
-12.8
6.7
-31.1
-13.3

-1.6
1.0
-6.6
-10.9
4.3

-1.2
-1.6
-4.7
-.4
-1.1

-.1
-.7
-3.5
-2.3
.0

39.9

-4.7

-27.9

6.9

14.3

-10.3

Medium & heavy truck sales (units)

-22.7

4.1

-43.2

-3.3

-.5

11.7

Orders for nondefense capital goods
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

-36.1
-30.3
-57.7
-51.6
-19.5

-7.2
-2.7
38.7
18.3
-11.3

2.9
-.9
-7.7
23.4
-2.3

4.6
.9
-3.6
.9
1.8

-3.1
-3.4
-7.5
-11.7
-1.4

2.2
4.0
-.3
11.6
3.8

Shipments of complete aircraft

Fleet Sales of Light Vehicles
(Annual rate; FRB seasonals)
Millions of units

1998
1999
2000
2001
2002
Note. Staff estimates based on confidential data.

-.0
.8
2.5
2.7
.2

Net New Orders of Trucks
(FRB seasonals)
Thousands of units

Note. Net orders are orders less cancellations.
Source. Act Research. May data are staff estimates
based on preliminary orders.

II-25

Recent Data on Orders and Shipments

Computers and Peripherals

Communications Equipment
Billions of dollars
14
12

I
1995

1996

1997

1998

1999

2000

Other Equipment (Total Ex. Transportation, Computers, Communications)

2001

II-26

Nonresidential Construction
(Seasonally adjusted, annual rate)

Total Building
Ratio scale, billions of dollars

235

Apr 175

120

1980

1982

1984

1986

1988

Office

1990

1992

1994

1996

1998

2000

2002

Other Commercial
Ratio scale, billions of dollars

Ratio scale, billions of dollars

Industrial

Institutional
Ratio scale, billions of dollars

Ratio scale, billions of dollars

II-27

decreased sharply. Excluding the high-tech and transportation categories,
spending increased moderately.
For the current quarter, the incoming shipments data point to a small upturn in
equipment spending, and the orders data through April (latest available) hint at
further recovery in business spending in the second half of the year. While
shipments outside the high-tech categories were about unchanged in April,
shipments of high-tech equipment posted their first gain since the start of the
year. At the same time, new orders for nondefense capital goods excluding
aircraft jumped 4 percent in April after having posted a small decrease in the
first quarter. In the high-tech categories, orders for computers were about
unchanged, and orders for communications equipment increased about
12 percent, to a level above that of shipments. Outside the high-tech categories
(excluding aircraft), new bookings rose 3.8 percent, on the strength of increases
in orders for machinery, electrical equipment, and engines and turbines.
In the transportation equipment sector, recent developments have been mixed.
Production data from Boeing and the most recent data on shipments and
international trade suggest that business spending on aircraft is likely to be down
in the second quarter. In contrast, business demand for motor vehicles has
firmed. Fleet sales of light motor vehicles averaged 3-1/4 million units in April
and May, 390,000 units above the level in the first quarter and just a little less
than the average in the first half of 2001, before demand plunged in the wake of
September 11. Sales of medium and heavy trucks edged up again in May, and
orders for class 8 trucks have remained at a relatively high level before the
October switch to lower-emissions engines.
Nonresidential construction. Real expenditures on nonresidential construction
contracted further in the first quarter. 12 Outlays for office and industrial
structures, lodging facilities, and public utilities declined substantially, and
expenditures for drilling and mining continued to move lower. The overall
decline of $15.4 billion in real terms resulted in the second largest percentage
decrease recorded for this sector since the third quarter of 1991.13

12. After taking into account the revisions included in the April construction put-in-place
release, we estimate that real spending on nonresidential construction declined at an annual rate
of 22-1/2 percent in the first quarter, compared with a 23-3/4 percent decrease included in the
BEA's preliminary estimate of real GDP.
13. The huge $26.9 billion decline in the fourth quarter-the largest since 1991-was
artificially magnified by the long-term lease in July 2001 of the World Trade Center by two
private companies. The BEA treated this transaction as a purchase of property by private
nonresidential business, which boosted investment in the third quarter. Excluding this special
factor, private construction spending would have declined $16.2 billion in the fourth quarter.

II-28
II-28

Indicators of Nonresidential Construction
Office Buildings

Property Values and Rent

Vacancy Rate

Percent

Percent
25

4-quarter change

21
Suburban mar

17
5\
5
0

13
Q1

Property values

9
-10

990

1992

1994

1996

1998

2000

2002

990

1992

1994

199

Source. CB Richard Ellis.

Source. National Real Estate Index.

Retail Space
Property Values and Rent

Wareho uses
Property Values aind Rent
Percent

Percent
4-quarter change

4-quarter change

\ Rent

I//

iKJV~

Rent
5

0
Q1
-5

-5
-10

Property values
1990

1992

1994

1996

1998

2000

2002

S -15

Sin

Source. National Real Estate Index.

Industrial

Manufacturing Capacity Utilization

Vacancy Rate
Percent

Source. CB Richard Blis.

II-29
In April, real outlays for the buildings component of nonresidential structures
turned up slightly. 14 But the level still is 1-1/4 percent below the average for the
first quarter, and it is down 18 percent from April of last year. Institutional
construction, which comprises educational, religious, and hospital structures, is
the only category of nonresidential buildings for which expenditures have risen
from twelve months ago.
The vacancy rate for office buildings in downtown areas and in suburban
locations rose in the first quarter to 11.7 percent and 15.6 percent respectively;
although these rates are noticeably above the lows at the end of 2000, they are
still well below the peaks in the late 1980s and early 1990s. Partly reflecting the
drag from subleasing of unneeded space, office rents in the first quarter fell
almost 9 percent from their year-earlier level, and the value of office property
was down 6 percent. Real spending for construction of office buildings fell at
an annual rate of 36 percent in the first quarter following a 22-1/2 percent
decline in the preceding quarter.
Spending for other commercial structures (including retail space and
warehouses) is estimated to have risen at an annual rate of 18-1/2 percent in the
first quarter, marking the first increase in a year.15 The ongoing declines in
retail property values and rents appear to have moderated a bit in the first
quarter; property values and rents for warehouse space decreased slightly more
rapidly.
Real outlays for industrial buildings declined at an annual rate of 52 percent in
the first quarter after having dropped at a 70 percent rate in the fourth quarter.
The vacancy rate for industrial buildings jumped to 10.8 percent in the first
quarter, which is the highest level on record, dating back to late 1982.
The rate of decline in outlays for lodging and other miscellaneous facilities
doubled to an annual rate of 33 percent in the first quarter. Expenditures for
drilling and mining fell at a 44 percent rate, reflecting sharp declines last year in
the prices of petroleum and natural gas. Drilling activity for petroleum and
natural gas typically responds to changes in oil and gas prices with a lag, and
despite the upturn in energy prices this year, the number of oil drilling rigs in
operation has been about flat. The number of gas drilling rigs in operation
declined through early April but rose between then and early June.
Construction outlays by public utilities turned down again in the first quarter
and now stand 19-1/2 percent below the level of a year ago.

14. The buildings component includes construction of office, industrial, retail, warehouse,
lodging, and institutional facilities and excludes mining, drilling activity, and utility construction.
15. The preliminary GDP estimate indicated an increase of 5.9 percent, but the April report
on construction put-in-place included fairly substantial upward revisions to the estimates for
February and March.

II-30
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars; annual rate except as noted;
based on seasonally adjusted Census book value)
2001

2002

Category
Q4

Feb.

Mar.

Apr.

-60.5

-144.1

-29.7

-28.3

-49.5

-29.5

-65.6

-90.9

-48.1

-57.0

-46.4

-30.0

Manufacturing

-42.5

-51.8

-33.9

-27.6

-33.6

-11.6

Merchant wholesalers
Less motor vehicles

-20.6
-20.3

-31.4
-28.6

-17.1
-13.3

-29.8
-25.2

-9.3
-6.2

-23.6
-18.2

2.6
5.4
-2.9

-60.9
-50.3
-10.6

21.3
22.1
-.8

29.1
33.3
-4.2

-6.7
.0
-6.7

Q3
Manufacturing and trade
Less wholesale and retail
motor vehicles

Retail trade
Automotive dealers
Less automotive dealers

5.7
6.0
-.3

SELECTED INVENTORY-SALES RATIOS IN MANUFACTURING AND TRADE
(Months' supply, based on seasonally adjusted Census book value)
2001

2002

Category

Feb.

Mar.

Apr.

1.42

1.38

1.39

1.38

1.35

1.38

1.37

1.34

1.36

1.34

1.32

Manufacturing
Primary metals
Steel
Machinery
Computers and electronics
Electrical equipment
Transportation equipment
Motor vehicles
Aircraft
Fabricated metals
Textiles
Paper
Chemicals
Petroleum
Rubber and plastics

1.39
1.73
2.19
2.09
1.64
1.46
1.42
.58
3.77
1.67
1.60
1.20
1.46
.70
1.18

1.37
1.76
2.17
2.12
1.53
1.48
1.39
.55
3.80
1.62
1.56
1.23

1.35
1.68
2.08
2.05
1.50
1.51
1.33
.53
3.65
1.61
1.50

1.35
1.66
2.06
2.08
1.51
1.51
1.35
.55
3.55
1.62
1.46

1.32
1.61

1.45

.72
1.16

1.48
.73
1.15

1.38
1.76
2.17
2.04
1.53
1.54
1.38
.53
3.78
1.63
1.50
1.29
1.51
.74
1.16

1.49
.70
1.16

2.06
1.48
1.46
1.26
.50
3.59
1.57
1.41
1.21
1.48
.71
1.12

Merchant wholesalers
Less motor vehicles

1.31
1.30

1.30
1.29

1.27
1.26

1.26
1.26

1.23
1.23

1.59
1.03

1.57
1.03

1.52
1.01

1.53
1.00

1.49
.98

1.57
1.47

1.46
1.45

1.50
1.42

1.48
1.40

1.84
1.83
2.49
.85

1.50
1.76
2.33
.85

1.71
1.69
2.25
.83

1.69
1.70
2.26
.83

1.72
1.68
2.25
.83

1.70
1.66
2.25
.83

814.7

812.9

811.6

811.7

826.3

Manufacturing and trade
Less wholesale and retail
motor vehicles

Durable goods
Nondurable goods
Retail trade
Less automotive dealers
Automotive dealers
General merchandise
Apparel
Food
Memo: Manufacturing and trade
shipments and sales
(billions of dollars)

1.25

808.3

1.24

1.97

II-31
Business Inventories
The slowdown in the pace of liquidation appears to be continuing: The book
value of manufacturing and trade inventories excluding motor vehicles fell at an
annual rate of $30 billion in April, the latest month for which data are available,
following a $48 billion reduction in the first quarter. Virtually all the slowing in
inventory liquidation in April occurred in the manufacturing sector. Stocks held
by manufacturers of durable goods declined in almost every category. In most
durable goods categories, inventory-shipments ratios decreased, and in a few
categories, inventory-shipments ratios were nearing, or at, record lows. For
most types of nondurable goods, inventory-shipments ratios also trended down,
although they remain somewhat elevated at manufacturers of chemicals and of
beverage and tobacco products. Wholesalers liquidated inventories at a
somewhat faster pace in April than in the first quarter, while the small decline in
stocks at retailers was about the same in April as during the first quarter. In
general, wholesale and retail inventory-sales ratios do not appear elevated
relative to trend in any of the major subcategories.
Data from the staffs flow-of-goods system identify only a few products for
which days' supply ratios remain elevated-paper products, communications
equipment, and electrical machinery excluding high-tech equipment. 16 Days'
supply ratios are no longer excessive for any of the remaining categories,
including those such as furniture and fixtures, printing and publishing, primary
metals, and miscellaneous manufactures, that were listed as elevated in the May
Greenbook. By market group, excessive stocks of consumer goods and
intermediate products (particularly construction supplies) appear to have been
eliminated. Although the days' supply ratio for materials remains slightly
above levels reached before the downturn in industrial production, it has
declined sharply during the past few months. In contrast, the ratio for business
equipment is substantially below its peak in mid-2001, but it has come back up
from its lows earlier this year.

16. The FRB staffs flow-of-goods system measures changes in inventories by tracking the
flow of goods in the economy. The system divides the output from the staff's industrial
production indexes into more than 70 product categories. For each product category, the system
estimates the supply of goods flowing into the economy-that is, domestic production plus
imports. The system then estimates how much of the supply flows out, whether as final demand,
including exports, or as inputs for other goods. The difference between the amount flowing in
and the amount flowing out represents that change in inventories. We find inventory
accumulation if inflows exceed outflows and inventory liquidation if outflows exceed inflows.

II-32
Inventory-Sales Ratios
(Seasonally adjusted book value)

Manufacturing
Ratio
1.65
1.60
1.55
1.50
1.45
1.40
1.35
1993
1993

1992
1992

1997
1997

1996
1996

1995
1995

1994
1994

1998
1998

1999
1999

2000
2000

2001
2001

Apr.
2002
2002

1.30

Wholesale Trade Excluding Motor Vehicles
Ratio

1992

1993

1995

1994

1997

1996

1998

1999

2000

2001

2002

Retail Trade Excluding Motor Vehicles
Ratio
1.70
1.65
1.60
1.55
1.50
1.45
Apr.
i1992

1982

1993

1994

'19

1995

'1;6

1996

19 7

1997

1998

1999
'

1999

2000

2001

2002
i1.

2002

1.40
35

II-33
Status of Inventory Overhangs
Product

Overhang
None evident

Chemicals and products
Petroleum products
Stone, clay, and glass products
Transportation equipment
Miscellaneous manufactures

Largely eliminated

Textile mill products
Lumber and wood products
Furniture and fixtures
Printing and publishing
Rubber and plastics
Leather and products
Primary metals
Fabricated metals
Computer and office equipment
Electronic components (incl. semiconductors)
Industrial machinery excl. computing equipment
Instruments

Evident but some
improvement

Apparel products

Evident and little
improvement

Paper and products
Electrical machinery excl. high-tech equipment
Communications equipment

SOURCE. FRB staff, flow-of-goods inventory system.

Government Sector
Federal. The federal government recorded a $67 billion surplus in April, far
below the $190 billion surplus recorded last year. Most of this deterioration
owes to a sharp falloff in receipts. Nonwithheld individual income and selfemployment taxes, which are mostly final payments on 2001 tax liability, were
$66 billion lower this April than last. According to Daily Treasury Statements,
the decline continued into May, leaving nonwithheld payments for the filing
season as a whole about 35 percent lower than last year. In addition, individual
income tax refunds were up about 20 percent for the filing season as a whole.
Corporate receipts have also been well below last year's levels, likely because
of weak corporate profits and the business tax provisions enacted in March. In
April, corporate receipts were about 60 percent lower than a year earlier, in

II-34
Federal Government Outlays and Receipts
(Unified basis; billions of dollars)
12 months ending in Apr.

April
2001

2002

Percent
change

Outlays
Deposit insurance
Spectrum auctions
Sale of major assets
Other

142.0

170.3

19.9

0.2

-0.0

...

0.0

...

0.0

141.8

170.3

Receipts

331.8

237.4

Surplus

189.8

67.2

Function or source

Percent
change

2001

2002

20.0

1,828.4
-2.0
-1.2
0.0
1,831.6

1,958.3
-0.0
0.0
0.0
1,958.3

-28.4

2,106.1

1,853.9

-12.0

277.7

-104.4

-137.6

...

Outlays excluding deposit insurance, spectrum auction, and sale
of major assets are adjusted for payment timing shifts'
Outlays
National defense
Net interest
Social security
Medicare
Medicaid
Other health
Income security
Agriculture
Other

151.9
24.8
17.8
36.1
17.9
11.4
3.5
22.4
1.3
16.8

170.3
28.3
14.9
38.0
20.8
12.7
4.2
27.5
0.6
23.4

12.1
14.2
-16.4
5.0
16.3
11.8
21.0
22.7
-55.8
39.4

1,831.4
298.3
217.1
424.7
204.9
125.1
39.0
254.8
32.5
235.0

1,955.8
328.2
182.8
447.3
224.8
139.9
47.3
290.0
29.0
266.5

6.8
10.0
-15.8
5.3
9.7
11.9
21.3
13.8
-10.7
13.4

Receipts
Individual income and
payroll taxes
Withheld + FICA
Nonwithheld + SECA
Refunds (-)
Corporate
Gross
Refunds (-)
Other

331.8

237.4

-28.4

2,106.1

1,853.9

-12.0

288.7
117.6
202.3
31.1
23.4
26.7
3.3
19.7

208.1
110.3
135.9
38.1
9.8
20.8
11.0
19.5

-27.9
-6.2
-32.8
22.5
-58.0
-22.1
231.2
-0.8

1,704.5
1,413.7
432.0
141.3
202.8
238.2
35.4
198.8

1,533.7
1,387.0
349.6
202.9
135.9
188.5
52.6
184.3

-10.0
-1.9
-19.1
43.7
-33.0
-20.9
48.5
-7.3

Surplus

179.9

67.2

274.7

-101.9

-137.1

Note. Components may not sum to totals because of rounding.
1. A shift in payment timing occurs when the first of the month falls on a weekend or holiday, or
when the first three days of a month are nonworking days. Outlays for defense, social security,
Medicare, income security, and "other" have been adjusted to account for these shifts.
... Not applicable.

II-35
large part because of a surge in refunds. Treasury data indicate that corporate
estimated tax payments, which were due June 17, were just slightly below last
year's level.
After adjustment for routine payment timing shifts, outlays in April were up
12 percent from a year earlier, as robust increases in most spending categories
were only partially offset by a decline in net interest payments. Defense
spending continued to be strong, up almost 14 percent over last April. Spending
on income security in April was substantially above last year's level, reflecting
higher unemployment insurance payments and a jump in outlays for child tax
credits (which are claimed on year-end tax returns and are deemed outlays to the
extent that they bring a taxpayer's liability below zero).
The Senate and the House have passed slightly different versions of a
supplemental appropriations bill that boosts spending about $10 billion in both
fiscal 2002 and fiscal 2003. About half of the additional spending is for
defense, and most of the rest is for homeland security.
State and local governments. Indicators of state and local spending have been
relatively weak so far in the second quarter. Employment gains averaged 4,500
per month in April and May, down from 26,000 per month, on average, during
the first quarter. In response to recent budgetary difficulties, some states have
taken steps to restrain employee-related spending, primarily through hiring
freezes, furloughs, and travel restrictions; a number of states have also instituted
layoffs. These actions have mainly affected state employees other than those
working for educational institutions. Local education employment (largely
public elementary and secondary schools) has held up rather well. 17 Meanwhile,
construction spending edged down in April from an exceptionally high level in
the first quarter.
According to a May report by the National Association of State Budget Officers,
in the absence of budget remedies, aggregate state budget gaps-the extent to
which general fund expenditures would have surpassed general fund
receipts-would have reached $40 billion during fiscal 2002, which ends
June 30 for most states. To prevent these gaps, governments cut spending
$15 billion and instituted almost $12 billion in fund transfers, drawing down
both general fund balances and budget-stabilization (rainy-day) funds. The
remaining shortfall was to be covered through a variety of other measures,
including increases in taxes and fees. States also appear to be working hard to
deal with budget difficulties now projected for fiscal 2003. In addition to

17. Much of K-12 spending cannot be cut during a current budget year because of contracts
with teachers and others. Moreover, because K-12 education is a high priority for most state
governments, the potential for sizable future cuts may be limited as well.

II-36
State and Local Employment
(Semiannual average of monthly change)
Total
Thousands

State Non-Education
Thousands

25
20
15
10

I
1990

CBE]
0
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Local Education
Thousands

1990

1991

1992

1993

1994

2002:H1 is the average for January through May.

II-37
another round of spending cuts and fund transfers, significantly more tax and fee
hikes have been proposed. While only eleven states raised taxes, tuition, and
other fees in 2002, the count is now up to around thirty states that are planning
these kinds of revenue actions for fiscal 2003.
Prices and Labor Costs
The March and April increases in energy prices briefly pushed up overall
inflation, but a drop in energy prices in May left the CPI unchanged last month.
All told, the CPI has increased at an annual rate of 3 percent so far this year.
Excluding food and energy, consumer prices still appear to be decelerating
slightly. The core CPI rose at an annual rate of 2.3 percent in the first five
months of this year, compared with 2.7 percent over the whole of 2001;
incorporating our estimate for May, core PCE price inflation has edged down
from a 1.6 percent increase in 2001 to a 1.5 percent rise (annual rate) over the
first five months of this year.
Consumer energy prices rose sharply in March and April, reflecting a rise in
crude oil prices and a widening of retail gasoline markups. However, these
markups fell back in May. More recently, spot prices of crude oil have eased a
bit, and survey data suggest that gasoline prices have been falling so far in June.
Inventories of natural gas remain plentiful, and spot prices of natural gas have
fallen about 15 percent over the past month. However, futures quotes on natural
gas prices through the December 2002 contract imply a larger-than-average
seasonal increase in prices this fall and early winter.
Over the past couple of months, supplies of many fresh vegetables have
increased and prices have fallen steeply, holding down the rise in retail food
prices. In addition, consumer prices for meats and poultry, which began to
weaken late last year, have remained subdued this spring. All told, retail prices
for food have risen about 2 percent over the past twelve months.
Consumer prices other than for food and energy appear to have slowed a bit in
recent months. Tobacco prices surged in April, but this increase was partially
retraced in May. Outside of tobacco, the core CPI increased only 0.2 percent
per month in April and May. Core PCE prices excluding tobacco have
increased more slowly-about 0.1 percent in each of the past two months.
Consumer prices of non-energy goods, which declined about 0.2 percent in
May, continue to be very soft. In contrast, inflation in non-energy services
picked up last month, as an acceleration in airfares and the price of medical
services more than offset a relatively small increase in the cost of shelter, which
increased at an annual rate of 4-1/4 percent during the first four months of the
year. Between May 2001 and May 2002, core services prices rose 3.9 percent,
0.3 percentage point more rapidly than in the previous twelve months.

II-38
RECENT PRICE INDICATORS
(Percent)
From 12
months earlier
May
2001

May
20021

From 3
months earlier
Feb.
2002

May
20021

-Annual rateTotal
Food
Energy
Ex. food and energy
Ex. tobacco

1.2
3.1
15.8
2.5
2.5

1.9
-12.3
2.5
2.5

0.1
-0.2
3.6

-0.9

1.1
2.3
-11.2
2.1
2.2

2002
Apr.

May 1

-Monthly rate-

3.4

0.0

-0.2
-0.7
0.2
0.2

34.4
2.1
2.2

-3.0
-2.9
4.4

-1.4
-1.4
3.4

0.1
-0.2
0.4

-0.3
-0.2
0.3

1.2
2.5
2.4

1.2
2.2
2.3

3.4
2.1
2.2

0.5
0.3
0.2

0.0
0.2
0.2

1.0

0.4

2.7

0.4

0.0

2.9
15.2
1.5
1.4

2.2
-12.2
1.6
1.5

2.6
-11.8
0.7
0.7

-0.0
35.5
1.7
1.7

0.1
4.7
0.2
0.1

-0.2
-0.9
0.1
0.1

Core commodities
Ex. tobacco
Core services

-0.8
-1.2
2.5

-1.0
-1.4
2.7

-2.8

-0.8
-0.8
2.8

0.2
-0.1
0.2

-0.2
-0.1
0.2

Core market-based
Core nonmarket-based

1.5
1.4

1.6
1.4

1.7
1.5

0.3
-0.0

0.1
0.1

Core commodities
Ex. tobacco
Core services
Current-methods total
Ex. food and energy
Ex. tobacco

3.6
2.6
2.5

-1.3
3.9

PCE Prices
Total
Food
Energy
Ex. food and energy
Ex. tobacco

-3.1
2.3
0.7
0.8

PPI
Total finished goods
Food
Energy
Ex. food and energy
Ex. tobacco
Core consumer goods
Ex. tobacco
Capital equipment
Intermediate materials
Ex. food and energy
Crude materials
Ex. food and energy
1.

-2.7

-0.6

1.5

-0.2

-0.4

3.0
15.1
1.6
0.9

-2.0
-15.0
0.1
-0.1

6.7
-10.7
-0.3
0.1

-10.7
24.5
0.8
0.0

-3.2
2.5
0.1
-0.1

-0.2
-2.3
0.0
-0.0

2.2
1.1
0.6

0.4
0.0
-0.2

-0.8
-0.2
0.0

2.1
0.7
-0.6

0.3
-0.0
-0.1

0.0
-0.0
-0.1

2.3
0.5

-3.1
-1.4

-3.4
-0.9

5.5
2.1

-0.5
0.0

13.3
-11.6

-15.8
3.4

-17.1
1.9

54.6
28.4

1.7
3.4

3.9

PCE prices in May are staff estimates.

II-39

Measures of Core Consumer Price Inflation
(12-month change)

CPI and PCE excluding Food and Energy

PCE excluding Food and Energy
Percent

Percent

* Staff estimate

*Staff estimate

CPI excluding Food and Energy
(Current Methods)

CPI Services and Commodities
Percent
1 4.5

II-40
BROAD MEASURES OF INFLATION

(4-quarter percent change)
1999
Q1
Product prices
GDP chain price index

2000
Q1

2001
Q1

2002
Q1

1.3

2.1

2.3

1.3

1.4

2.1

1.9

1.4

0.9

1.8

1.9

0.4

1.1
1.3

2.6
1.9

2.2
1.7

0.6
1.1

PCE chain price index
Less food and energy

1.3
1.5

2.7
1.8

2.4
1.9

0.7
1.2

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

1.1
1.4

2.6
1.5

2.5
1.8

0.6
1.3

CPI
Less food and energy

1.7
2.2

3.2
2.2

3.4
2.7

1.2
2.5

Current-methods CPI
Less food and energy

1.6
2.0

3.2
2.2

3.4
2.6

1.2
2.5

Median CPI
Trimmed mean CPI

2.9
1.8

2.4
2.2

3.3
2.9

3.9
2.3

Less food and energy
1

Nonfarm business chain price index

Expenditure prices
Gross domestic purchases chain price index
Less food and energy

1. Excluding housing.

SURVEYS OF (CPI) INFLATION EXPECTATIONS
(Percent)
University of Michigan
1 year
Actual
inflationi

Mean

5 to 10 years

Median

Mean

Median

Professional
forecasters4
(10-year)

2000-Q3
Q4

3.5
3.4

3.6
3.8

2.9
3.0

3.4
3.7

2.9
3.0

2.5
2.5

2001-01
02
03
Q4

3.4
3.4
2.7
1.9

3.4
3.9
3.1
1.5

2.9
3.1
2.7
1.1

3.6
3.6
3.5
3.1

3.0
3.0
2.9
2.8

2.5
2.5
2.5
2.6

2002-Q1
Q2

1.3

2.6
3.2

2.2
2.8

3.1
3.4

2.8
2.9

2.5
2.5

2002-Jan.
Feb.
Mar.

1.1
1.1
1.5

2.2
2.4
3.1

1.9
2.1
2.7

3.0
3.1
3.3

2.7
2.8
2.8

2.5

Apr.
May
June

1.6
1.2

3.1
3.1
3.4

2.8
2.7
3.0

3.2
3.6
3.5

2.8
3.0
2.9

2.5

1. CPI; 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 the 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 the average, during the next 5 to 10 years?
4. Compiled by the Federal Reserve Bank of Philadelphia.

II-41

Broader measures of price inflation have slowed in recent quarters. The chainweighted price index for GDP increased 1.3 percent in the four quarters ending
in the first quarter, compared with 2.3 percent the previous year. Much of this
slowdown owed to falling energy prices, but a deceleration in business software
prices also contributed, as did the slowdown in core PCE inflation since the
beginning of the year.
While inflation appears to have come down over the past year, survey measures
of inflation expectations have not. The preliminary Michigan survey for June
showed median one-year-ahead inflation expectations at 3 percent, a little higher
than the levels recorded last year prior to September. However, longer-term
inflation expectations have remained more stable; the median five- to ten-yearahead inflation expectation was 2.9 percent in early June, virtually the same as
the 3 percent figure reported last summer.
At earlier stages of processing, prices have firmed in recent months. Although
the PPI for intermediate materials excluding food and energy was unchanged in
May, it has risen 1/2 percent (not at an annual rate) over the past three months.
The PPI for crude materials excluding food and energy rose sharply in May,
following a large April increase. Both increases were due in part to a surge in
prices of steel scrap, but more broadly, prices at the earlier stages of processing
are likely responding to the upturn in industrial activity.18 The latest increases in
core crude materials prices have pushed up that index 6.5 percent since
February, a sharp contrast with the 6.9 percent decline in the preceding twelve
months. Since the May PPI pricing date, commodity prices appear to have
picked up further; in particular, the Journal of Commerce index has risen
4.7 percent since May 14.
We have received very little new information regarding labor costs.
Compensation per hour (CPH) in the nonfarm business sector increased at an
annual rate of 2.8 percent in the first quarter of this year, down from the nearly
4 percent rise during 2001. Average hourly earnings (AHE) of production or
nonsupervisory workers, the main indicator used to construct CPH, shows a
similar pattern. Recent benchmark revisions to this AHE series put its rise over
the course of 2001 at 4 percent, but AHE rose much more slowly between
December 2001 and May of this year-only 2.3 percent at an annual rate.

18. The price of steel was boosted partly by trade restraints and partly by an increase in
demand.

II-42

Commodity Price Measures
Journal of Commerce Index

1185
S80

Apr

May
2002

Jun

Metals

Apr

L
May
2002

Jun

CRB Spot Industrials
Ratio scale. 1967=100

400
380
360

CRB Industrials

340

248

320

242

300
280
1

June

Apr
240

./\
.

V|)IN

1988

1990

1992

.
4

991

1996

.. -200

1998

222

May
2002

S220

VI
1986

S260

__.2

200

CRB Futures
Ratio scale, 1967=100

320

310

290

CRB Futures

210

270
J 250

200

230

-V

210

Apr

May

Jun

185

2002
190

June 18
170
1986

1988

1990

1992

1994

1996

1998

2000

2002

Note. Weekly data. Tuesdays. Vertical lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost
entirely on industrial commodities, with a small weight given to energy commodities, and the Commodity Research Board (CRB) spot price 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. Copyright for Journal o Commerce data is held by CIBCR, 1994.

II-43
SPOT PRICES OF SELECTED COMMODITIES

Percent change--------------

------------

Current
price
(dollars)

2000

2001

-22.0
-17.7
-14.3

Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)

0.800
101.667
0.610

5.7
-32.7
1.9

Precious metals
Gold (oz.)
Silver (oz.)

318.350
4.865

-4.7
-11.2

Plywood (m. sqft.)

240.000
318.000

-41.5
-4.9

Petroleum
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)

24.610
0.728
0.651

Livestock
Steers (cwt.)
Hogs (cwt.)
Broilers (Ib.)

64.000
36.500
0.600

9.9
10.2
-13.9

U.S. farm crops
corn (bu.)
Wheat (bu.)
Soybeans (bu.)
Cotton (lb.)

2.000
3.583
4.875
0.357

Other foodstuffs
Coffee (lb.)

0.410

Forest products 3
Lumber (m. bdft.)

Memo:
JOC Industrials
JOC Metals
CRB Futures
CRB Spot Industrials

82.700
77.200
202.040
244.480

Dec. 25
to
Apr. 302

Apr. 302
to
June 18

Memo:
Year
earlier
to date

8.5
42.8
3.0

3.9
9.5
-2.3

3.9
29.2
-8.4

1.2
-3.5

11.1
0.7

3.3
7.3

16.4
9.6

25.0
3.2

16.9
14.2

-8.7
-3.6

-22.6
-7.8

44.8
42.3
25.9

-8.7
-3.2
-5.1

-7.1
-3.1
-15.5

-19.7
-9.9
3.7

2.8
-13.2
-3.9

0.6
23.7
21.1

-12.1
-31.5
0.9

11.4
31.4
13.1
31.4

-4.1
-8.9
-13.4
-45.7

-6.8
-1.6
6.7
-7.1

7.8
14.6
7.4
20.5

13.6
9.3
5.2
-1.1

-47.8

-35.3

1.1

-7.9

-17.1
-17.0
-16.3
-14.6

9.2
10.5
5.0
3.9

-1.1 -16.3
7.6 -28.0
24.6 -42.6

-0.1
-9.3
12.0
-2.7

-26.5
0.5
1.0
-3.1
-0.0

1. Changes, if not specified, are from the last week of the preceding year to
the last week of the period indicated.
2. Week of the April Greenbook.
3. Reflects prices on the Friday before the date indicated.

II-44
AVERAGE HOURLY EARNINGS
(Percent change; based on seasonally adjusted data)
Percent change
to May 2002
from month indicated

12-month
percent change
May
2001

May
2000
Total private nonfarm

- - - - - -- 3.6
4.2

May
2002

- - -

May
2002

Apr.
2002

Feb.
2002

Nov.
2001

Annual rate- - - 3.2
2.5

Percent change

- 2.2

-Monthly rate0.2
0.1

Manufacturing

3.1

3.5

3.3

3.2

2.7

0.0

0.5

Construction
Transportation and
public utilities
Finance, insurance,
and real estate

3.7

2.7

2.8

3.1

1.5

0.4

-0.3

3.2

3.5

3.6

3.3

3.5

0.0

0.3

3.1

4.3

3.1

2.4

2.8

0.2

0.1

Retail trade

4.1

2.9

3.0

1.6

2.4

0.3

0.0

Wholesale trade

3.9

4.4

2.4

1.9

-1.5

-0.9

Services

3.8

5.3

4.2

3.1

3.5

0.3

0.2
0.3

LABOR COSTS
(Percent change; annual rate; based on seasonally adjusted data)
2001
20001
2000

Compensation per hour
Total business
Nonfarm business
Nonfinancial
I
corporations
Unit labor costs
Total business
Nonfarm business
Nonfinancial
2
corporations

2001
2001

2002

2001:01
to
2002:Q1

7.9
7.8

4.0
3.9

5.2
4.7

3.3
3.7

2.2
2.3

2.9
2.8

3.4
3.4

7.8

5.0

6.1

4.7

3.6

4.5

4.9
5.0

1.9
1.7

3.0
2.6

2.6
2.6

-3.0
-3.1

-5.0
-5.2

-0.7
-0.8

4.7

1.1

2.7

3.8

-6.8

-2.9

-0.9

1. Changes are from fourth quarter of preceding year to fourth
quarter of year shown.
2. The nonfinancial corporate sector includes all corporations
doing business in the United States with the exception of banks,
stock and commodity brokers, finance and insurance companies; the
sector accounts for about two-thirds of business employment.

Domestic Financial
Developments

Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2002

Change to June 18 from
selected dates (pcrcentage points)

May 6

June 18

2000
June 26

2001
Sept. 10

2002
May 6

3.50

1.75

-4.75

-1.75

.00

5.66
5.94

3.19
3.13

1.75
1.86

1.70
1.78

.3.96
-4.16

-1.49
-1.35

-.05
-.08

6.56
6.56

3.42
3.24

1.73
1.77

1.74
1.75

-4.82
-4.81

-1.68
-1.49

.01
-.02

-4.84
-4.93
-5.00

-1.66
-1.46
-1.35

6.69

-4.86
-4.88

-1.64
-1.45

-.01
-.01

Bank prime rate

9.50

-4.75

-1.75

.00

Intermediate- and long-term
3
U.S. Treasury
2-year
10-year
30-year

6.54

-3.63

-.68

-.27

6.35
6.22

-1.24
-.56

-.03
.11

-.23
-.06

U.S. Treasury 10-year indexed note

4.09

-1.02

-.19

-.01

Municipal revenue (Bond Buyer) 4

5.99

-. 54

.20

-07

-1.43
-2.55

-.18
-.97

-.07
-.08

2000

2001

June 26

Sept. 10

6.50

2002

Instrument
Shon-rerm
FOMC intended federal funds rate
Treasury bills
3-month
6-month

Commercial paper (AI/PI rates)
1-month
3-month
Large negotiable CDs 1
I-month
3-month
6-month
Eurodollar deposits
1-month
3-month

6.64
6.73

6.89

6.63

Private instruments
10-year swap
10-year FNMA
10-year AA 5
10-year BBB 5
High yield6

738
7.15

7.64
8.40
12.30

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

8.14
7.22

Record high

6.89
5.64

2001

6.78
4.75

6.71
4.67

Change to June 18
from selected dates (percent)

2002

Level

Date

Sept. 10

May 6

June 18

Record
high

2001
Sept. 10

2002
May 6

11,723
1,527
5,049
606
14,752

1-14-00
3-24-00
3-10-00
3-9-00
3-24-00

9,606
1,093
1.695
441
10,104

9,808
1,053
1,578
503
10,016

9,706
1,037
1,543
470
9,815

-17.20
-32.10
-69.44
-22.51
-33.47

1.05
-5.07
-8.99
6.58
-2.87

-1.04
-1.48
-2.25
-6.60
-2.01

Stock exchange index
Dow-Jones Industrial
S&P 500 Composite
Nasdaq (OTC)
Russell 2000
Wilshire 5000

1. Secondary market.
2. Bid rates for Eurodollar deposits collected around 9:30 a.m. Eastern time.
3. Derived from a smoothed Treasury yield curve estimated using off-the-nm securities.
4. Most recent Thursday quote.
5. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. The 10-year BBB index fell 8 basis points
on May 31 owing to a rebalancing of bonds in the index.
6. Merrill Lynch Master II high-yield bond. Index rose 15 basis points on May 31 owing to a rebalancing of bonds in the index.
7. For week ending Friday previous to date shown.
NOTES:
June 26, 2000, is the day before the FOMC meeting that ended the most recent period of policy tightening.
September 10, 2001, is the day before the terrorist attacks.
May 6,2002, is the day before the most recent FOMC meeting.
BA:DAM

Selected Interest Rates
Percent

Selected Short-Term Interest Rates

Daily

Statement week averages
*-'""* ",

-*'

Percent

Federal Funds

-2.5
25

FOMC
Ma 7

S2.0

Federal funds

Discount rate
(daily)

Apr. 26

1.5

June 18

Note.Vertical deshed linesindicate
end of reserveperiod.

Percent

2-Year Treasury

2-year
Treasury

3.5

Daily

3.0
FOMC
May7

I I I I I I I I I I

2000

I I I I I I I I

2001

2.5

... .. ll
...l lllI I
. . ... ..... . rl

2 002

Apr. 26

June 18

Perceent

Selected Long-Term Interest Rates

Weekly Friday
"-..- 10-year BBB
'

Treasury note
10-year

Percent
9

Daily

FOMC
May 7
.... ........

10-year BBB**-

"'i

Municipal
SMunicipal bonds

Bond Buyer Revenue
(Thursday)
2000

2
200 2

2001

5
10-year Treasury
I I
r
I I II
Apr. 25
June 18
"Weekly Thursday frequency.

Percent

Selected Mortgage Rates

Weekly Friday

Percen t

-0

Weekly
Friday

FOMC
May 7

FRM
FRM
ARM
-ARM----a

*
*l-l.

2000

2001

«*"*

ARM
c

I*
2002

Apr. 26

"";'""","--"**

.....

"
June 14

Domestic Financial Developments
Over the intermeeting period, the news about the economy was somewhat less
upbeat, on balance, than investors had expected. In addition, further reports of
deficiencies in corporate governance and transparency intensified doubts about
the quality of some firms' balance sheets, and tensions flared in a few key
trouble spots around the world. These developments, in concert, prompted a
retrenchment in risk-taking.
Broad equity price indexes posted moderate decreases, leaving some below
levels prevailing just before the terrorist attacks last fall, and risk spreads on
speculative-grade bonds widened significantly. The somewhat weaker tone of
economic data and investor demand for safe assets, along with the declines in
equity prices, pushed down yields on longer-dated Treasury securities and
investment-grade corporate bonds. Corporate borrowers have been trying to
pare their risks as well, by curbing overall borrowing and continuing to pay
down commercial paper to minimize rollover risk. In contrast, the household
sector apparently continued to borrow at a brisk pace, especially against home
equity.
Against the backdrop of weak tax receipts and increased outlays, federal debt
expanded over the second quarter to levels that have bumped up against the
federal debt ceiling. The Treasury has resorted to emergency measures to avoid
breaching the ceiling, but current estimates suggest that the debt ceiling will
need to be raised by late this month.
Policy Expectations, Stock Prices, and Interest Rates
Market participants had largely anticipated the FOMC's decision at its May
meeting to leave the target federal funds rate unchanged and to maintain a
balanced assessment of risks. However, investors interpreted the accompanying
statement as suggesting that the FOMC was in no hurry to tighten policy absent
clear signs of a sustained economic expansion, and eurodollar futures rates
dropped a few basis points that afternoon. Futures rates dropped further over
the intermeeting period, and policy uncertainty implied by options prices edged
up, on net, from already elevated levels.
Both current futures quotes and market surveys suggest that investors have
essentially ruled out a hike in the target federal funds rate at the upcoming
FOMC meeting. In addition, investors now view an increase in the target rate at
the August meeting as very unlikely and place less than even odds on a policy
tightening by the September meeting. Recent surveys suggest that most market
participants expect the FOMC to retain a statement of balanced risks through the
September meeting.

III-2
Policy Expectations, Stock Prices, and Corporate Risk Spreads
Lower-Tier Risk Spreads to 10-Year Treasury

Expected Federal Funds Rate Estimated
from Financial Futures

Percent

Basis points

Basis points
6

380

Week-end

340
5
4
May 6, 2002

ne 18e

High yield

300

(right scale)

260
220

3
June 18. 2002

180
140

2
100
l

I I

June Oct.
2002

II,I

Feb.

I Ii

June Oct.
2003

Ill'

Feb.

June
2004

2002

2001

2000

1999

1998

Oct.

Stock Prices
July 2, 2001=100

1998

1999

2000

2001

Jul.

2002

Sep.

Nov.

Jan.

Mar.

2001

Implied Volatility on S&P 100 (VIX)

Percent

May

2002

12-Month Forward Earnings-Price Ratio
for S&P 500 and 10-Year Treasury

Percent

Monthly

Jul.

Sep.
2001

Nov.

Jan.

Mar.
2002

May

1993

1995

1997

1999

2001

10-year Treasury yield minus Philadelphia Fed 10-year expected inflation.
+ Denotes the latest observation using daily prices and latest earnings
data from /BIE/S.
-

III-3
Yields on Treasury coupon securities were somewhat volatile during the
intermeeting period. In the weeks immediately after the May 7 FOMC meeting,
generally stronger-than-expected data releases and firming equity prices pushed
up yields across the maturity spectrum. However, Treasury yields declined in
subsequent weeks as incoming data painted a somewhat less upbeat picture of
the economy, equity prices sagged, and global tensions rose. On balance over
the period, Treasury coupon yields out to ten years declined about 25 basis
points. Yields on Treasury indexed debt were about unchanged, which,
combined with the decrease in nominal Treasury yields, implied a drop in
inflation compensation.
Favorable first-quarter earnings reports from major retailers and a few high-tech
manufacturers bolstered equity prices early in the intermeeting period.
However, the gains were more than offset over the next several weeks on
several new revelations of shoddy corporate governance and various
disappointing sales forecasts from bellwether technology and telecom firms. On
balance, most major stock indexes fell between 1 and 2-1/2 percent, and stock
market volatility climbed substantially. The decline in stock prices boosted the
ratio of expected year-ahead earnings to price for the S&P500 to nearly
5-1/2 percent. The gap between this earnings-price ratio and the real ten-year
Treasury yield, a crude measure of the required equity return premium, rose to
levels more in line with those before 1997.
While spreads on investment-grade corporate bonds edged a bit lower over the
intermeeting period, spreads on high-yield bonds widened considerably across
many sectors. Consistent with some pullback from risk-taking on the part of
investors, inflows to equity and junk bond mutual funds have slowed to a trickle
in recent weeks, with flows being redirected toward government and
investment-grade corporate bond funds.
Business Finance
With gross bond issuance by nonfinancial firms falling off markedly in May and
bond retirements picking up, net bond issuance cooled substantially.
Investment-grade issuance fell, even as yields eased over the month, and these
offerings remained fairly light in the first half of June. Issuance of belowinvestment-grade bonds in May and the first half of June was only a bit below
its average pace of the past several months, but investors continued to strongly
favor firms at the upper end of the speculative-grade spectrum.
Interest rates and risk spreads were little changed in the commercial paper
market. However, outstanding commercial paper of nonfinancial corporations
posted its fifth straight monthly decline in May and contracted further in early
June. Thus far this year, nonfinancial commercial paper outstanding has shrunk
about 25 percent, after dropping by a third last year. The most recent declines
appear to have been fairly broad-based and can probably be attributed, in part, to

III-4
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2001
Type of security
Nonfinancialcorporations
Stocks
Initial public offerings
Seasoned offerings
2

Bonds
3
Investment grade
Speculative grade 3
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper4
Change in C&I loans at
commercial banks 4

1999

2000

9.2
4.2
5.0

9.9
4.4
5.5

7.5
3.2
4.2

5.5
1.0
4.5

24.5
13.9
7.5
3.1

20.2
11.9
4.5
3.7

43.1
28.9
11.9
2.4

31.2
24.0
5.8
1.4

3.6

4.5

4.7

7.4

Financialcorporations
Stocks 1
Bonds

20 .02

Apr.

May

-1.5

-13.0

-8.0

-8.6

-2.8

-8.1

1.0

-16.5

3.0
69.9

5.5
64.7

5.1
73.6

-14.5

2.6
57.0

Note. Components may not sum to totals because of rounding. These data include speculative-grade bonds issued privately
under Rule 144A. All other private placements are excluded. Total reflects gross proceeds rather than par value of
original discount bonds.
1. Excludes equity issues associated with equity-for-equity swaps that have occurred in restructurings.
2. Excludes mortgage-backed and asset-backed bonds.
3. Bonds sold in U.S. categorized according to Moody's bond ratings, or to Standard & Poor's if unrated by Moody's.
4. End-of-period basis, seasonally adjusted.
e Staff estimate.

Equity Retirements

Components of Net Debt Financing
Billions of dollars

Billions of dollars
Monthly rate, nonfinancial firms
_

]
S

Completed share repurchases
Cash-financed mergers

0()

2000
* Seasonally adjusted.

2001

1998

1999

2000

e Based on staff estimate for share repurchases.

2001

2002

III-5
increased pressure by bond rating agencies for firms to reduce rollover risk. The
decline in C&I loans at commercial banks has appeared to flatten out of late, but
total net debt financing remained sluggish.
In contrast, seasoned equity offerings continued at the relatively strong pace that
has prevailed since October, boosted in part by some firms' raising equity to
deleverage and improve access to credit markets. Seasoned offerings averaged
over $5-1/2 billion per month in April and May, and a large issue by AT&T in
early June helped push issuance to almost that amount by midmonth. Initial
public offerings rose somewhat in May from the anemic pace earlier this year,
and the flow of new filings suggests that IPOs could pick up a bit further in June
and July.
At the same time, merger activity has remained nearly moribund, and equity
repurchases have been light. So far in the second quarter, announcements of
cash-financed merger deals are on track to total only $18 billion, about a third of
the quarterly pace in 2000. Announcements of new equity repurchase programs
look to about match the $10 billion posted in the first quarter, the lowest
quarterly pace since 1994, as firms continued to conserve their cash balances.
Corporate credit quality continued to be weak. Moody's downgrades remained
large during April and May, reflecting revelations of aggressive accounting and
further weakness in the telecommunications sector. Bond defaults also stayed
high in April and May, leaving the three-month moving average at more than
2-1/2 percent, roughly in line with last year's average pace. The delinquency
rate on business loans at commercial banks edged up again in the first quarter of
2002, bringing the cumulative rise since the end of 1998 to nearly 2 percentage
points. The charge-off rate on these loans declined a bit relative to last year's
final quarter but remained quite high. A forward-looking measure of aggregate
credit quality based on KMV's year-ahead firm-level expected default
frequencies has continued to hover at the high end of its range over the past
decade.
Corporate earnings have shown signs of improvement. Although first-quarter
earnings came in 8 percent below year-earlier levels for the S&P500 as a whole,
those results were more than 10 percent higher than fourth-quarter earnings (at a
seasonally adjusted quarterly rate). The preliminary estimate of first-quarter
NIPA profits, a broader gauge of U.S. corporate sector performance, came in
5 percent above year-earlier results. Overall, corporate guidance regarding
prospective second-quarter results has been reasonably balanced between
positive and negative pre-announcements; however, the early warnings from
technology and telecom companies continue to be less encouraging than those
from other sectors. Equity analysts currently expect second-quarter S&P500
earnings per share to top year-earlier results by roughly 6 percent, the first such
gain since the third quarter of 2000.

III-6

Corporate Credit Quality and Earnings

Percent

1998

1999

2000

2001

Percent
of outstandings

Bond Default and
Loan Delinquency Rates

Ratings Changes

2002

1990

Note. Nonfinancial debt upgrades (downgrades) as a percentage
of par value of all bonds outstanding.
*Based on April and May data.
Source. Moody's Investors Service.

1992

1994

1996

1998

2000

2002

*Source. Call Report
"Moving averages, from Moody's Investors Service.

Expected Year-Ahead Defaults

Percent
of liabilities

Monthly

I
1990

I
1991

1992

I
1993

I
1994

I
1995

I
1996

1997

I
1998

I
1999

I
2000

I
2001

2002

Note. Fim-level estimates of default weighted by firm liabilities as a percent of total liabilities.
Source. KMV Corp.

Corporate Earnings

1990
1991
e Staff estimate.
Source. VBIE/S.

Percent

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

III-7
Commercial Real Estate
Growth of Commercial Mortgage Debt
Percent
-20
Quarterly, s.a.a.r.

Total CMBS Gross Issuance
Billions of dollars
- 25
r
Quarterly
15

S010

-5
,

SI i
1991

1994
e Staff estimate.

-10

1997

2000

1996
1998
2000
' Period to date.
Source. Commercial Mortgage Alert.

2002

BB CMBS Spread over Swap

Investment-Grade CMBS
Spreads over Swaps

Basis points
- 300
AAA

Weekly

BBB

Basis points
- 600

Weekly

-250

500
Jun 12
J1

- 200

- 400
150

1996

I -

I - I

1998

2000

4Jun 12

Jun

- 200

I
I
1998

2002

300

1000

1996

I
2000

Note. Yield indexes were rebalanced on Feb. 1,2002.
Source. Morgan Stanley.

Note. Yield indexes were rebalanced on Feb. 1, 2002.
Source. Morgan Stanley.

Delinquency Rates on Commercial
Mortgages and CMBS

~Commercial

100

2002

Percent

banks
May

01
Life insurance
companies
1997

1998

Source. Call Report, ACLI, Morgan Stanley.

1999

1996

2000

.Q....

....

2001

2002

- 0

III-8
Commercial Real Estate Finance
Growth in commercial mortgage debt slowed sharply in the first quarter, to an
annual rate of 5 percent, and is expected to edge down further in the second
quarter. Issuance of commercial-mortgage-backed securities (CMBS), a key
source of commercial real estate financing over the past several years, remained
weak in April and May but was a bit more active than in the first quarter.
Despite the currently weak fundamentals in commercial property markets,
CMBS risk spreads have remained relatively stable, and delinquency rates on
CMBS and commercial real estate loans at commercial banks have leveled off
recently.
Two rating agencies (Moody's and Fitch) recently placed certain CMBS on
watch for possible downgrade because of insufficient terrorism insurance.
However, the affected securities are backed by high-profile properties and
represent only a small share of total CMBS outstanding. Although the effects of
difficulties in the market for terrorism insurance apparently have been limited,
Congress continues to consider providing coverage against large terrorism
losses for insurers. The Senate put aside a House bill passed last winter that
would provide long-term loans to insurers after they had paid $1 billion in
claims as a result of terrorist attack and passed a bill that would provide
substantial direct federal assistance to insurers based on the overall cost of the
attack and the insurers' market shares.
Household Finance
The limited data now in hand for the second quarter suggest that household
borrowing has continued at a brisk pace. Consumer debt grew 6-1/4 percent in
April, a pickup from the first quarter but below the auto-related spurt in the
fourth quarter of last year. Long-term mortgage rates have remained relatively
low, supporting new purchases of homes and mortgage refinancing activity.
Judging from preliminary data on MBS issuance in April and May, and from
data on mortgage lending at banks, mortgage debt growth continues to be quite
strong.
The household debt-service burden is expected to edge up in the second quarter,
after a first-quarter decrease that mainly reflected a boost to disposable personal
income when additional provisions of last year's federal tax cut took effect.
Household credit quality, however, has remained reasonably strong, on balance,
though there are some pockets of stress. Most measures of delinquency rates on
standard consumer and mortgage debt were little changed early this year (latest
data available), but delinquencies on pools of nonprime automobile loans rose
sharply in March from an already high level and the delinquency rate on
subprime mortgages remained very elevated in the first quarter. On the asset
side, the decline in equity values has pulled the ratio of household assets to
disposable income lower in the second quarter.

III-9

Household Liabilities
(All series seasonally adjusted, unless noted otherwise)
Freddie Mac Mortgage Rates

Household Debt Growth

Percent

Percent
Weekly, nsa

1996

1990
1993
p Projection.

2002

1999

MBA Mortgage Indexes

1992

1994

1996

1998

2000

2002

1990

1992

1994

1996

1998

2000

2002

Household Debt Service Burden
Percent

Index

Index
500

1990

Weekly
Purchase (left scale)*
Refinancing (right scale)

400

1990
1993
1996
1999
2002
Note. March 16, 1990 = 100 before seasonal adj.
* 4-week moving average.

Delinquency Rates on
Consumer Debt
FMonthly

Percent
Nonprime
auto loans*

I It

I I I I I

I II

I I I I

Delinquency Rates on
Residential Mortgages
Quarterly

Percent

nT1

Subp rime Ioa

Lns*

11I

1985
1989
1993
1997
2001
Note. Required debt payments relative to disposable
personal income.

--/

"Credit card pools"

Auto loans
at finance companies
I

1990 1992 1994 1996 1998 2000
Staff calculations using Moody's data.
" Securitized receivables (Moody's).

Call Report
I

2002

1990

1992

1994

1996

1998

* Loan Performance Corporation, nsa.

2000

2002

III-10

Household Assets
Relative to Disposable Income

Quarterly, seasonally adjusted

Total assets

Total assets excluding equities
p.a2

1982

1984

1986

1988

1992

1990

.... "....'..

...........
°..............."

1994

1996

1998

2000

2002

p Staff projection.

Net Flows into Long-Term Mutual Funds
(Billions of dollars, monthly rate)
H1

2000
H2

2001
H2

2002
Apr.

Total long-term funds

24.0

13.0

15.1

6.5

30.3

Equity funds
Domestic
Capital appreciation
Total return
International

34.5
26.8
34.4
-7.6
7.7

15.8
15.7
16.6
-0.9
0.1

8.2
9.1
5.2
3.9
-0.9

-2.7
-0.0
-2.2
2.2
-2.7

Hybrid funds

-4.0

-1.3

1.0

Bond funds
International
High-yield
Other taxable
Municipals

-6.6
-0.2
-1.1
-2.8
-2.5

-1.5
-0.2
-0.9
-0.3
-0.0

5.9
0.0
0.9
4.2
0.8

Note. Excludes reinvested dividends.
e Staff estimates based on confidential ICI weekly data.
Source. Investment Company Institute (ICI).

Maye

Assets
Apr.

22.7

13.3

4,704

18.4
17.1
9.4
7.7
1.3

11.8
11.1
3.9
7.2
0.7

-0.0
0.3
-1.5
1.8
-0.3

3,369
2,929
1,739
1,190
440

0.5

2.6

3.2

1.0

354

8.7
-0.2
0.3
7.4
1.1

9.3
-0.0
1.8
6.3
1.2

7.8
0.0
1.5
5.5
0.8

12.4
0.0
-0.0
10.3
2.1

980
19
103
554
304

III-11
Government and Agency Finance
The Secretary of the Treasury declared a debt ceiling emergency on May 16 and
identified about $80 billion worth of accounting devices that could be employed
to create financing room within the existing $5.95 trillion debt limit. Since then,
the Treasury has been using one of these devices-disinvesting securities from
government funds (as it had in April).' After factoring in corporate and
individual non-withheld tax payments through mid-June, current projections
indicate that further disinvestments from the trust funds will allow the Treasury
to operate until late June. On June 28, however, it appears very likely that either
an increase in the debt ceiling or additional accounting measures beyond the
ones that the Treasury has already identified will be required in order for it to
meet its interest payments to the trust funds
The Secretary's announcement and subsequent actions generally have had little
effect on Treasury yields, as market participants still seem confident that the
debt ceiling will be raised in time to avoid a default. The Treasury substantially
reduced the size of its weekly four-week bill offering on June 18 and issued a
press release stating that it was postponing its announcement for the June
two-year note auction until ".. .Treasury is assured that it has sufficient
borrowing authority." The Treasury could still conduct the auction on the
regular schedule (June 26) with an abbreviated advance notice period if the debt
ceiling is raised. However, at this point, the status of the debt ceiling legislation
in Congress is uncertain. On June 11, the Senate passed a standalone bill to
increase the debt ceiling, but House Republican leadership would still prefer to
attach the measure to another bill. Congressional sources predict that the ceiling
will be increased on June 27, the day before the ceiling becomes unavoidably
binding and Congress begins its July 4 holiday recess.
Gross offerings of long-term debt by state and local governments jumped in
May from the already strong April pace. Both new capital and refunding
issuance were robust, boosted in part by the decline in municipal bond yields
over the past few weeks in May. Refundings were also lifted by the first tranche
($3 billion) of a $14 billion program by the New York Metro Transit Authority,
with special permission from Congress to advance-refund for a second time its
municipal bonds, to help defray costs of reconstruction. So far this year,
municipal credit quality has held about steady, on balance, with upgrades no
longer outnumbering downgrades.

1. The Treasury has the authority to disinvest from some government trust funds to meet
emergency funding needs. In effect, the disinvestment involves substituting Treasury "IOUs" for
Treasury securities that are held as assets by the trust funds. Such IOUs are not counted as part
of the debt subject to the ceiling, and hence the operation opens up some leeway for the Treasury
to increase debt that is subject to the ceiling.

III-12
Treasury Financing
(Billions of dollars)
2001

Item

2002
May

June e

Apr.

Total surplus, deficit (-)

-41.9

-37.1

-96.6

67.2

na.

n.a.

Means of financing deficit
Net borrowing
Nonmarketable
Marketable
Bills
Coupons 1
Debt buybacks
Decrease in cash balance

68.6

59.5

50.8

-41.5

57.3

-15.0

6.2
74.4
114.8
-32.6
-7.7
-.5

10.5
49.0
73.3
-15.8
-8.5
-8.1

-.7
51.5
23.1
28.4
.0
38.3

1.3
-42.8
-40.9
2.1
-4.0
-24.7

5.7
51.6
22.6
28.9
.0
30.5

-3.9
-11.1
-11.1
.0
.0
-16.9

-26.2

-14.3

7.5

-1.0

n.a.

52.4

14.1

38.8

8.3

25.2

Othe
MEMO
MEMO

,44.2
Cash balance, end of period

NOTE. Components may not sum to totals because of rounding.
1.Does not include Treasury debt buybacks.
2. Direct loan financing, accrued items, checks issued less checks paid, and other transactions.
e Estimated.
n.a. Not available.
Farmer Mac
Stock Price

Dollars

5-Year Credit Default Swap Spread
Basis points
- 190
170
150
130
110
90
70
50

I
Mar.

I
Apr.

May

I
Jun.

Mar.
Apr.
Source: JP Morgan

May

Jun.

III-13
State and Local Government Finance
Gross Offerings of Municipal Securities
(Billions of dollars; monthly rate, not seasonally adjusted)
2002

2001

1999

2000

Apr.

May

Long-term'
Refundings 2
New capital
Short-term

18.0
4.5
13.5
2.7

15.0
2.2
12.9
2.8

21.4
6.4
15.0
3.7

23.7
6.7
17.1
5.0

21.5
6.6
14.9
1.9

23.3
6.1
17.1
2.6

32.9
12.2
20.7
2.7

Total tax-exempt

20.6

17.9

25.0

28.7

23.4

25.8

35.5

1.1

0.7

1.2

1.0

1.2

Total taxable

1.1

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

Bond Rating Changes
Number of ratings actions

1990 1991

1992 1993 1994

1995

1996

1997 1998

1999 2000 2001 2002

* Data through June 12 at an annual rate.
Source. S&P's Credit Week Municipal and Ratings Direct

Municipal Bond Yields

Percent

Monthly

.*,

Ratio of 30-Year Revenue Bond Yield
Ratio
to 20-Year Treasury Yield
Monthly

Revenue ;

June 13

June 13
General obligation

1996

1998

2000

2002

Note. Average of weekly data through May 31.
+ Last observation is through June 13.

1996

1998

2000

2002

Note. Average of weekly data through May 31.
+ Last observation is through June 13.

III-14
Monetary Aggregates
(Based on seasonally adjusted data)
Level
(bil. $)
May. 02
Aggregate
1. M22
2. M3
Selected components
3. Currency
4. Liquid deposits
5. Small time deposits
6. Retail money market funds
7. M3 minus M2 4
8. Large time deposits, net'
9. Institution-only money
market mutual funds
10. RPs
11. Eurodollars
Memo
12. MI
13. Sweep-adjusted M l6
14. Demand deposits
15. Other checkable deposits
16. Savings deposits
17. Monetary base

10.5
12.8

9.7
12.4

9.9

50.7
.6
8.5

Percent change (annual rate)'
-4.1
5.3
-1.4
4.5
-1.0
-2.7

13.9
10.8

5,544.0
8,113.7

17.9
-11.8
9.4
18.2
-7.6

10.8
17.4
-15.3
-11.9
2.7
4.1

7.5
8.4
-10.6
-27.6
.0
.9

8.9
1.4
-8.6
-24.9
.4
15.3

49.2
-1.4
-3.8

-.5
8.0
6.3

-.2
-8.0
11.7

-2.0
-22.2
-1.7

10.1
-3.3
2.2

1,185.1
364.9
218.0

-11.4
4.3
-54.1
-5.1
9.5
7.9

6.2
8.3
-14.0
18.0
22.4
6.7

1,182.1
1,678.8
305.8
263.3
2,482.5
657.5

5.8
7.7
-3.4
6.7
21.6
9.1

605.2
3,051.6
930.4
948.9
2,569.8
801.7

7
Average monthly change (billions of dollars)

Selected managed liabilities
at commercial banks
3.3
8.0
9.6
4.1
18.2
18. Large time deposits, gross
6.0 1,030.8
19. Net due to related foreign
-6.5
-9.0
-16.6
2.3
-6.4
-12.5
institutions
87.9
20. U.S. government deposits
at commercial banks
1.5
.1
1.1
-5.2
-29.9
-1.5
6.9
1. For the years shown, Q4 to Q4 precent change. For the quarters shown, based on quarterly averages.
2. Sum of MI, retail money market funds, saving deposits, and small time deposits.
3. Sum of demand deposits, other checkable deposits, and saving deposits.
4. Sum of large time deposits, institutional money funds, RP liabilities of depository institutions, and eurodollars held by U.S.
addressees.
5. Net of holdings of depository institutions, money market mutual funds, U.S. government and foreign banks and official
institutions.
6. Sweep figures used to adjust these series are the estimated national total of transaction account balances initially swept into
MMDAs owing to the introduction of new sweep programs on the basis of monthly averages of daily data.
7. For the years shown, "average monthly change" is the Q4 to Q4 dollar change divided by 12. For the quarters shown, it is
the quarter-to-quarter dollar change divided by 3.
p Preliminary.

III-15
Net borrowing by Fannie Mae and Freddie Mac has moderated significantly in
recent months, in concert with slower growth in their mortgage portfolios.
Market participants attribute the slower expansion of their balance sheets to the
reduced profitability of MBS investments relative to agency funding costs.
Farmer Mac (the Federal Agricultural Mortgage Corporation) has come under
increased market scrutiny since late April, when an article in a major newspaper
raised questions about the overall soundness of the institution and pointed out
that a large share of its assets were not related to agricultural mortgages. 2 Since
then, Farmer Mac's stock price has declined by about a fourth and credit default
swap spreads for the institution's debt have soared from about 40 basis points to
184 basis points. However, market participants report that the difficulties
encountered by Farmer Mac do not seem to have affected the funding costs for
other agencies.
Monetary Aggregates and Bank Credit
Money growth picked up in May, largely because of tax-related effects.
Households typically build up M2 balances in April in anticipation of making
tax payments; the balances then fall off in May as tax payments clear. This
year, non-withheld tax collections were well below the normal seasonal patterns,
and as a result, seasonally adjusted M2 was weak in April and strong in May.
However, even abstracting from the effects of tax-related flows, money growth
appears to have accelerated somewhat in May relative to recent months. As
stock prices fell during the latter part of the month, households may have
favored the safety of M2 assets over stock market investments, as indicated by
the near cessation of net inflows to equity mutual funds.
Bank credit grew briskly in May, but the strength was caused almost entirely by
a large thrift institution's conversion to a bank charter, which mainly boosted
real estate loans and securities holdings. Excluding the effects of that
conversion, bank credit growth fell back last month, and total loan growth
remained anemic. One exception was revolving home equity loans, which
continued to advance at a rapid clip, likely fueled in part by the combination of
relatively low interest rates and recent strong gains in home values.
Data from the May Survey of Terms of Business Lending showed a narrowing
of the spread charged on new loans compared with the February survey.
Spreads on loans not made under previous commitment, however, rose. More

2. Farmer Mac is a government-sponsored enterprise charged with enhancing the availability
of farm mortgage credit. Farmer Mac has only about $6 billion in total assets compared with
total assets of Fannie Mae and Freddie Mac of $800 billion and $650 billion respectively.

III-16

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

Type of credit
Total
1. Adjusted1
2. Reported
3.
4.
5.
6.

2001

Q1
2002

Q2
2002

Mar.
2002

Apr.
2002

May
2002

4.2
5.1

1.4
-1.1

5.5
5.4

2.2
-1.0

53
4.8

9.5
12.8

9.0
-1.0
1.0
-3.5

14.4
13.1
25.9
-2.7

11.5
-1.1
24.3
-31.7

19.5
16.5
32.6
-3.9

16.1
27.5
31.3
22.5

-1.1
-5.7
3.6
25.8
1.5

2.4
-4.6
5.0
37.0
1.7

-1.0
-3.5
-.1
39.9
-4.2

.4
-15.5
1.7
30.7
-1.3

7.2
-2.0
12.6
48.8
8.7

4.2
4.4
-11.8

3.6
3.4
6.2

-4.7
-1.6
4.6

9.0
2.8
16.1

5.7
12.3
8.3

Securities
Adjusted1
Reported
Treasury & Agency
2
Other

Loans3
7. Total
Business
8.
9.
Real estate
Home equity
10.
11.
Other
12.
13.
14.

Consumer
4
Adjusted
5
Othe

Level,
May 2002
(Sbillions)
5,372
5,511

Note. All data are adjusted for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday)
levels. Quarterly levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth
quarter. Growth rates are percentage changes in consecutive levels, annualized but not compounded. The conversion from a thrift
to a commercial bank charter added approximately $37 billion to the assets and liabilities of domestically chartered commercial
banks in the week ending May 8, 2002.
1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FIN 115).
2. 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, including revaluation gains on derivative contracts.
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes
lease financing receivables.

Survey of Terms of Business Lending
(Domestic Banking Institutions)
Weighted Average C&I Loan Rate Spread
Basis points
Quarterly

Distribution of C&I Loan Spreads
Density
20

-0.010
0.008

2001

0.008

16
MI0.002

0.000
1997

1998

1999

2000

2001

2002

Note. The spread is over the market interest rate on
an instrument of comparable maturity and is adjusted for
changes in nonprice loan characteristics of originations.

100

200

300

400

Spread (basis points)

500

III-17
broadly, the distribution of loan spreads has shifted down, but it widened in the
first half of 2002 relative to last year. This move suggests that lenders remain
concerned about lower-quality borrowers, consistent with the selectivity evident
in the bond and syndicated loan markets.

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit in goods and services was $31.6 billion in
March, down very slightly from February (revised), as both exports and imports
increased a small amount. For the first quarter on average, the trade deficit was
$366 billion at an annual rate, $35 billion larger than in the fourth quarter of

2001.1
Net Trade in Goods and Services
(Billions of dollars, seasonally adjusted)
2001
Real NIPA1
Net exports of G&S

Annual rate
2001
2002
01
03 I 04

-408.7 -411.0

-412.7

-443.7

Monthly rate
2002
Mar.
Feb.
Jan.
...

...

Nominal BOP
-31.8
-28.2
-347.5 -313.8 -331.4 -366.5
Net exports of G&S
-33.8
-36.9
-426.3 -422.2 -401.3 -431.2
Goods, net
5.2
5.5
69.9
64.7
108.4
78.8
Services, net
1. Billions of chained (1996) dollars.
Source: U.S. Department of Commerce, Bureaus of Economic Analysis and Census.

-31.6
-37.1
5.5

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

The value of exported goods and services rose 0.6 percent in March, with small
increases in both the goods and services categories. For goods, a decline in
agricultural exports was offset mainly by gains in aircraft and automotive
products. The increase in service exports was in travel and passenger fares,

more than offsetting a drop in other private services related to funding provided
in February by the International Olympic Committee for the 2002 Winter
Olympic Games. For the first quarter as a whole, total exports were up 3.6
percent at an annual rate, the first increase since the third quarter of 2000. BEA
estimates that total real exports of goods and services were up 5.3 percent at an
annual rate in the first quarter.

The value of imported goods and services rose 0.3 percent in March following
sizable gains in the two preceding months. Most of the March increase was in

the value of imported oil, which was up sharply as a result of higher prices.
Imports of goods excluding oil and gold fell 0.7 percent in March. Declines

1. Trade data for April will be released on June 20 and will be discussed in the
Greenbook supplement.

IV-2

U.S. International Trade in Goods and Services
Net Exports

Bil$, s.a.ar.

Contribution of Net Exports to Real GDP Growth
Percentage points, s.a.ar.

1994

1996

1998

2000

2002

Bil$, s.a.a.r.
Net trade in computers
and semiconductors

Net automotive trade
with Canada and Mexico
I

1994

1996

1998

0 I2..

2000

Selected Exports

1. Excludes agriculture and gold.
2. Excludes computers and semiconductors.

994
1996
1998
2000
1. Excludes oil and gold.
2. Excludes computers and semiconductors.
3. Excludes Canada and Mexico.

2..

2002

IV-3
U.S. Exports and Imports of Goods and Services
(Billions of dollars, s.a.a.r., BOP basis)

Exports of G&S

Amount Change 1
Levels
2001 2002
2002
2001 2002
2002
Feb. Mar.
Q1
Q4
Mar.
Feb.
Q1
Q4
8.5
5.8
5.6
936.1 944.6 944.6 950.2 -36.5
669.7
2.9
666.8

659.8
2.5
657.3

658.8
2.4
656.4

660.7
2.7
658.0

-24.0
0.5
-24.4

-9.9
-0.3
-9.5

-1.2
-0.0
-1.2

1.9
0.3
1.6

47.8
41.9
37.9
160.4

49.5
38.9
41.2
156.9

46.0
38.8
40.3
157.8

53.3
39.9
40.6
156.0

-5.0
-2.4
-0.7
-7.4

1.7
-3.1
3.3
-3.5

-3.3
0.9
-2.5
1.1

7.4
1.1
0.3
-1.8

73.0
38.5
16.6
17.9

73.0
41.1
14.4
17.4

73.1
41.9
13.8
17.3

74.9
42.2
15.6
17.1

-4.3
-1.8
1.0
-3.5

-0.1
2.5
-2.2
-0.4

2.1
2.9
-0.1
-0.7

1.8
0.3
1.7
-0.2

56.4
136.4
85.3
27.7

54.9
135.1
82.4
25.5

56.5
134.8
82.6
26.4

52.0
135.1
82.1
24.0

1.4
-3.9
-0.5
-1.6

-1.5
-1.2
-3.0
-2.2

0.3
-0.6
0.2
0.5

-4.5
0.3
-0.6
-2.4

266.4

284.7

285.8

289.5

-12.5

18.4

7.0

3.7

Imports of G&S

1267.5 1311.1 1325.7 1329.8

-18.9

43.6

47.8

Goods imports
Petroleum
Gold
Other goods

1071.0 1091.1 1101.9 1105.8
80.9
76.5
70.9
82.1
2.4
2.4
2.0
2.0
987.7 1012.5 1029.0 1021.4

-44.8
-21.6
0.2
-23.4

20.0
-4.4
-0.4
24.8

36.6
-5.6
0.4
41.8

3.9
11.1
0.3
-7.6

Goods exports
Gold
Other goods
Aircraft & parts
Computers
Semiconductors
Other capital gds
Automotive
to Canada
to Mexico
to ROW
Agricultural
Ind supplies (ex. ag)
Consumer goods
All other goods
Services exports

Aircraft & parts
Computers
Semiconductors
Other capital gds

32.3
67.6
22.9
148.4

29.0
77.8
26.5
150.0

27.3
77.0
27.8
152.4

29.9
75.6
28.7
151.5

1.6
-0.0
-1.5
-5.3

-3.4
10.3
3.6
1.5

-2.4
-4.0
4.8
6.4

2.6
-1.4
0.9
-0.9

Automotive
from Canada
from Mexico
from ROW

188.4
55.6
40.2
92.6

188.8
56.6
39.4
92.8

197.2
61.0
38.6
97.5

189.5
57.2
42.4
89.9

-3.5
-3.3
-0.1
-0.1

0.3
0.9
-0.8
0.2

17.6
9.5
1.6
6.5

-7.6
-3.8
3.8
-7.6

Ind supplies
Consumer goods
Foods, feeds, bev.
All other goods

153.2
276.0
47.2
51.7

153.2
287.9
47.4
52.1

156.3
292.6
48.3
50.1

153.8
290.6
47.4
54.4

-11.3
-4.0
-0.8
1.3

-0.0
11.8
0.2
0.4

6.9
12.2
1.8
-1.6

-2.4
-2.0
-1.0
4.3

196.5

220.0

223.7

224.0

25.9

23.6

11.3

0.3

12.06
18.33

11.44
18.40

11.10
17.49

11.00
20.42

0.10
-5.16

-0.61
0.06

-1.09
0.30

-0.10
2.93

Services imports
Memo:
Oil quantity (mb/d)
Oil import price ($/bbl)

1. Change from previous quarter or month.
Source: U.S. Department of Commerce, Bureaus of Economic Analysis and Census.

IV-4
Prices of U.S. Imports and Exports
(Percentage change from previous period)
Annual rates
Monthly rates
2001
2002
2002
Q4
Q1
Q2e
Mar.
Apr.
May
- --- BLS prices (2000 weights)
-13.9
-2.0
10.4
1.3
1.6
0.0
-65.6
18.4 160.9
17.0
12.7
0.9
-4.0
-2.9
1.8
0.0
0.6
-0.1

Merchandise imports
Oil
Non-oil
Core goods*
Cap. goods ex comp & semi
Automotive products
Consumer goods
Foods, feeds, beverages
Industrial supplies ex oil

-3.7
-0.4
1.2
-1.5
0.6
-15.6

-2.6
-5.4
-0.4
-1.5
0.1
-4.7

1.7
-1.8
0.1
-1.3
6.9
13.0

Computers
Semiconductors

-12.5
-2.1

-2.9
-2.7

-1.3
3.1

-4.1

-1.8

Core goods*
Cap. goods ex comp & semi
Automotive products
Consumer goods
Agricultural products
Industrial supples ex ag

-3.4
-1.2
0.0
0.9
-8.8
-10.6

-1.3
0.9
1.3
-2.3
-2.8
-3.6

Computers
Semiconductors

-5.6
-15.2

-4.5
-8.1

Merchandise exports

Chain price index
Imports of goods & services
Non-oil merchandise
Core goods*
Exports of goods & services
Total merchandise
Core goods*

0.6
0.0
0.2
-0.1
0.9
2.8

-0.1
-0.1
-0.3
0.0
1.3
-0.1

-0.2
0.1

0.2
0.3

-0.6
0.6

0.3

0.4

-0.1

2.5
0.5
0.2
-2.1
0.7
9.3

0.5
0.0
-0.1
-0.4
0.9
1.9

0.0
0.0
0.1
0.0
-0.4
0.2

-2.7
1.4

-0.6
0.2

-1.1
-0.2

-- Prices
2.4
-4.1
-3.4

in the NIPA a :counts (1996 weights)...
...
...
-1.3
n.a.
-2.3
n.a.
-2.3
n.a.

-3.0
-3.5
-3.4

-0.6
-1.0
-1.2

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

*/ Excludes computers and semiconductors.
el Average of two months.

n.a. Not available.

... Not applicable.

Oil Prices
Dollars per barrel

Spot West Texas Intermediate

Import unit value
I

I
1992

1993

I
1994

I
1995

I
1996

1997

I
1998

I
1999

I .
2000

. I 2

2001

2002

IV-5
were widespread across categories, with the notable exception of aircraft.
Service imports were little changed in March, as an increase in travel and
passenger fares was offset by a large decrease in royalties and license fees,
which had been boosted in February by payments for Winter Olympic broadcast
rights. For the first quarter as a whole, total imports of goods and services were
up 14-1/2 percent at an annual rate. Total real imports of goods and services are
estimated by BEA to have risen almost 13 percent at an annual rate in the first
quarter.
Prices of Internationally Traded Goods
Oil. The BLS price of imported oil rose about 1 percent in May, following
double-digit increases in the two preceding months. The spot price of West
Texas intermediate (WTI) crude oil has also risen on average since the beginning
of the year, and has recently traded around $25.50 per barrel, up from its average
value near $19 per barrel in December. After rising to about $29 per barrel in
mid-May, the price eased in response to comfortable stock levels, recent
indications that Venezuela is producing above its OPEC quota, and Russia's
publicly stated intention to increase oil exports. The market also appears to have
discounted the possibility of U.S. military intervention in Iraq in the near future.
Nevertheless, the expectation of world economic recovery and tensions in the
Middle East continue to put some upward pressure on prices.
Non-oil imports. The price of imported non-oil (and core) goods was down
0.1 percent in May following an upwardly-revised increase of 0.6 percent in
April. Food prices were up a little, while prices in all other major categories
were unchanged or down slightly. For April and May on average the core goods
price index was 1.7 percent at an annual rate above the first-quarter average,
following a decline of 2.6 percent in the first quarter. If sustained, this would be
the first quarterly increase in this index since the first quarter of 2001. The
turnaround is most noticeable in the price of industrial supplies, which was up
13 percent at an annual rate on average in April and May relative to the first
quarter following three quarters of double-digit declines.
Exports. Prices of total U.S. goods exports fell slightly in May and the price of
core goods was unchanged following an increase of 0.5 percent in April. A
small increase in the price of industrial supplies in May was largely offset by
declines in prices of agricultural products and capital goods. On average, the
price of core goods was 2.5 percent at an annual rate above the first-quarter
average, following a 1.3 percent decline in the first quarter.

IV-6

U.S. International Financial Transactions
Net purchases of U.S. securities by private foreigners (line 4 of the Summary
table of U.S. International Transactions) rebounded strongly in March from the
low levels recorded for the first two months of the year. Despite this pickup in
March, foreign purchases were relatively weak for the first quarter as a whole,
continuing a trend toward slower purchases that started in the second half of
last year. Purchases in April were roughly in line with the first-quarter average.
March's pickup was concentrated in foreign purchases of U.S. debt. For
corporate debt (line 4c), the strong March figure coincided with a surge in new
corporate debt issuance, including an uptick in new eurobond issuance. For
Treasuries (line 4a), purchases in March just balanced sales earlier in the year
and were followed by significant sales in April. Agency bonds (line 4b) also
bounced back in March but rose further in April to offset the Treasury sales.
Net private foreign purchases of U.S. equities (line 4d) have remained
relatively steady this year through April, but are running somewhat below the
pace of last year.
U.S. residents made substantial net sales of foreign securities in March (line 5)
that offset small net purchases in the first two months. Net sales in the first
quarter outpaced those in the second half of last year and were in sharp contrast
to large purchases in the first half. In April, U.S. investors bought on net $3
billion of foreign securities. These net purchases were entirely in foreign
stocks (line 5b).
Foreign official reserves held in the United States rose $4 billion in April
following a small decrease in March and an increase of $10 billion for the first
quarter (line 1). For April, declines in reserves of G-10 countries (line la) were
more than offset by increases in the reserves of developing countries in Asia.
These data do not reflect Japanese intervention activity undertaken in early
May. Partial data from the Federal Reserve Bank of New York indicate that
total foreign official reserves increased by $23 billion in May, a large portion of
which is attributable to Japan.
In the U.S. banking sector, net outflows of $12 billion were recorded in April.
These outflows are primarily due to inter-office funding transactions of banks
in the United States with related offices in the Caribbean, Europe and Asia.
Balance of payments data for 2002:Q1, including direct investment capital
flows, will be released on June 20 and will be discussed in the Greenbook
supplement.

IV-7
Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)
2000
Official financial flows
1. Change in foreign official assets
in the U.S. (increase, +)
a. G-10 countries
b. OPEC countries
c. All other countries
2. Change in U.S. official reserve
assets (decrease, +)
Private financial flows
Banks
3. Change in net foreign positions
of banking offices in the U.S.'
Securities 2
4. Foreign net purchases of U.S.
securities (+)
a. Treasury securities
b. Agency bonds
c. Corporate and municipal bonds
d. Corporate stocks 3
5. U.S. net acquisitions (-) of
foreign securities
a. Bonds
b. Stock purchases
c. Stock swaps 3
Other flows (quarterly data, s.a.)
6. U.S. direct investment (-) abroad
7. Foreign direct investment in U.S.
8. Foreign holdings of U.S. currency
9. Other (inflow, + )
U.S. current account balance (s.a.)
Capital account balance (s.a.)
Statistical discrepancy (s.a.)

2001

2001
2001
Q3
Q2

2002

Mar.

Apr.

39.3

2.0

-21.3

13.4

5.4

10.2

-1.0

39.6
12.3
10.7
16.6

6.9
-7.9
-1.9
16.8

-20.0
-6.1
-2.1
-11.8

16.9
-5.6
-4.8
27.3

5.6
9.2
4.2
-7.8

9.8
5.7
-6.4
10.5

-1.1
.4
-.9
-.7

3.6
-7.8
.4
11.0

-.3
404.0

-4.9
453.9

-1.3
175.9

-3.6
26.9

-.2
152.0

.4
n.a.

1.1

-6.7

-19.0

23.7

-3.0

34.8

23.2

8.6

-12.3

435.7
-52.4
111.9
182.1
194.0

500.4
16.5
144.2
218.1
121.6

125.0
-8.5
29.4
69.6
34.5

73.9
-9.3
33.2
37.2
12.9

152.3
33.5
42.8
42.4
33.5

93.7
.9
22.8
46.6
23.4

63.1
13.2
16.2
24.5
9.3

36.9
-11.4
23.3
16.6
8.3

-101.1
-4.1
-13.1
-84.0

-62.9
30.4
-50.1
-43.2

-44.1
8.8
-18.7
-34.2

20.4
26.5
-6.1
.0

-18.6
-2.9
-9.3
-6.4

8.9
4.0
6.7
-1.8

12.9
7.3
5.6
.0

-2.8
.6
-3.4
.0

-152.4 -156.0
287.7 157.9
1.1
23.8
9.7
-60.2

-41.2
65.6
2.8
44.2

-43.2
22.6
8.2
-51.9

-30.4
17.0
10.5
-13.5

-444.7 -417.4 -107.9

-98.5

-98.8

n.a.

-39.2

-46.8

58.1

-58.7

n.a.

...

NOTE: The sum of official and private financial flows, the current account balance, the capital account balance, and the statistical
discrepancy is zero. Details may not sum to totals because of rounding.
1. Changes in dollar-denominated positions of all depository institutions and bank holding companies plus certain transactions
between broker-dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements). Includes
changes in custody liabilities other than U.S. Treasury bills.
2. Includes commissions on securities transactions and excludes adjustments BEA makes to account for incomplete coverage;
therefore does not match exactly the data on U.S. international transactions published by the Department of Commerce.
3. Includes (4d) or represents (5c) stocks acquired through mergers.
4. Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere plus amounts resulting

from adjustments made by the Department of Commerce and revisions in lines I through 5 since publication of the quarterly data in
the Survey of Current Business.
5. Consists of transactions in nonproduced nonfinancial assets and capital transfers.
n.a. Not available. ... Not applicable.

IV-8

Foreign Exchange Markets
On balance, the trade-weighted value of the dollar against the major foreign
currencies has declined 2-3/4
percent since the last FOMC meeting. The dollar's
move lower was broad-based, led by a 4 percent decline against the euro. The
U.S. dollar depreciated 1-3/4percent against the Canadian dollar and 2% percent
against the yen.
Sentiment toward the dollar generally deteriorated over the period. Market
participants tempered their outlook for near-term U.S. economic growth and
further pushed back expectations of monetary tightening. Expectations for
monetary tightening in the euro area were also scaled back, but to a lesser extent
than in the United States. A number of other factors may have weighed on the
dollar. Market commentary focused increasingly on the size of the U.S. current
account deficit, suggesting that the dollar may be poised for a large adjustment.
In addition, recent legislation allowing for farm subsidies, following earlier
impositions of steel and lumber tariffs, was interpreted by some investors as a
further signal that the Administration may be dissatisfied with the competitive
position of the dollar.
Exchange Value of the Dollar
Index, May 6,2002 = 100

105

Daily

May

FOMC

- 104

103
S

Major Currencies

- 102

Broad

'" *-- -"*'**
'
Bro ad
-

.Other

--^

S"101
.

Important
Trading Partners

- 98

March

April

May

June

Early in the period, the yen appreciated sharply, prompting official intervention
to stem its rise. Japanese monetary authorities publicly confirmed that they
intervened in foreign exchange markets on four separate occasions, purchasing
dollars and selling yen.

IV-9
Monetary policy tightening and indications of strong domestic demand in
Canada, Australia, and New Zealand appeared to support their respective
currencies, which appreciated 1-3/4,4-3/4,and 8-1/2
percent against the U.S. dollar,
respectively. In Canada, stronger-than-expected first quarter GDP and
employment data showed a faster pace of economic recovery, prompting the
Bank of Canada to raise its target for the overnight rate 25 basis points on June 4
and to signal the potential for further monetary tightening. The Reserve Bank of
Australia and the Reserve Bank of New Zealand tightened 50 and 25 basis
points, respectively, over the intermeeting period. In contrast, the Swiss
National Bank lowered its target range for 3-month Swiss franc LIBOR 50 basis
points to between 0.75 and 1.75 percent to counter strength in its currency. The
Swiss franc appreciated 3 percent against the dollar.
Financial Indicators in Major Industrial Countries

Country
Canada

Three-month rate
Percentage
Jun. 19
Point
(Percent)
Change

Ten-year yield
Percentage
Jun. 19
Point
(Percent)
Change

Equities
Percent
Change

2.85

.32

5.35

-.19

-3.69

.02

-.02

1.38

.01

-6.84

Euro area

3.47

.05

4.96

-.16

-9.88

United Kingdom

4.09

.06

4.99

-.22

-10.61

Switzerland

1.19

-.02

3.36

-.12

-8.58

Australia

5.10

.38

5.93

-.17

-1.91

United States

1.80

-.01

4.79

-.31

-2.03

2.33

.12

4.58

-.13

n.a.

Japan

Memo:

Weighted-average
foreign

NOTE. Change is from May 6 to June 19 (10 a.m. EDT).
n.a. Not available.

Foreign equity indices declined substantially during the intermeeting period, as
concerns about profits and corporate governance weighed on world share prices.
Euro-area equities fell nearly 10 percent, underperforming U.S. shares over the
intermeeting period. Declines in Asian stock indexes also outpaced declines in
U.S. stock indexes, with shares in Singapore and Hong Kong falling 8 and 9
percent, respectively. Japanese equities fell 6-3/4percent. Sovereign bond yields
of foreign industrialized countries declined, but to a lesser extent than U.S.
Treasury yields. Against the backdrop of broad dollar weakness and heightened

IV-10
global political tensions, the dollar price of gold rose to its highest level in about

2-1/2 years before moderating somewhat toward the end of the period.
Financial Indicators in Latin America, Asia, and Russia
Currency/
US dollar

Short-term
Interest rates 1
Percentage
Jun.18/19
Point
(Percent)
Change

Dollar-denominated
bond spread 2
Percentage
Jun.18/19
Point
(Percent)
Change

Equity
prices

Jun. 19

Percent
Change

Mexico

9.70

3.11

6.94

.46

2.91

.23

-10.53

Brazil

2.71

11.37

18.65

.35

13.07

3.98

-5.44

Argentina

3.51

12.14

80.00

n.a.

59.95

10.13

-29.22

Chile

672.50

2.39

4.16

-.50

2.66

.36

-2.04

China

8.28

.00

n.a.

1.71

.12

-9.60

Korea

1225.30

-4.36

4.60

.45

.94

.01

-6.11

34.02

-1.59

2.44

-. 02

...

-4.31

Singapore

1.79

-.84

.81

.06

...

-8.07

Hong Kong

7.80

.01

1.71

-. 11

...

-9.06

Malaysia

3.80

.01

2.86

-.02

1.93

-.07

-6.44

Thailand

42.10

-2.07

2.13

.00

8620.00

-7.09

15.79

-1.03

Philippines

50.13

.87

4.00

Russia

31.45

.68

n.a.

Economy

Taiwan

Indonesia

Percent
Change

8.67

4.04

.61

-.98

-1.69

4.10

.26

-10.11

n.a.

4.94

-.10

-4.85

NOTE. Change is from May 6 to June 18/19.
1. One month interbank interest rate, except Chile: 30-day deposit rate; Korea: 1-week call rate.
No reliable short-term interest rates exist for China or Russia.
2. Spread over similar maturity U.S. Treasury security yield. Mexico, Brazil, Argentina, Korea,
the Philippines and Russia: EMBI+ yield. Chile and China: Global bond yield. Malaysia: Eurobond
yield. Thailand and Indonesia: Yankee bond yield. Taiwan, Singapore, and Hong Kong do not have
outstanding sovereign bonds denominated in dollars.
n.a. Not available.

... Not applicable.

The dollar's value against the currencies of our other important trading partners
rose about percent, largely reflecting the depreciation of the Mexican peso and
the Brazilian real. In Mexico, the peso declined 3 percent against the dollar, and

share prices fell 102 percent. Scaled-back market expectations for U.S. growth
contributed to the peso's decline. In Brazil, ongoing concerns about the
upcoming presidential election, given the strong lead of the Workers' Party
candidate, placed further downward pressure on the real and prompted an
increase of about 400 basis points in the spread of sovereign bond yields over
comparable Treasuries. The Argentine peso depreciated more than 10 percent
against the dollar, as progress on measures to stabilize the Argentine economy
remain stalled.

IV-11
In contrast, in emerging Asian economies, the currencies of Indonesia, South
Korea, and Taiwan appreciated 7, 4-1/2, and 1-1/2 percent, respectively, against the
dollar, amid signs that recovery is continuing. On May 7, the Bank of Korea
raised its target overnight rate 25 basis points to 4.25 percent. The rise in the
yen also helped to support regional Asian currencies relative to the dollar.

The Desk did not intervene
during the period for the accounts of the System or the Treasury.

IV-12

Developments in Foreign Industrial Countries
Estimates of first-quarter real GDP for major foreign industrial countries
indicate that activity has picked up, but the pace and sources of growth varied
across countries. Domestic demand contributed significantly to growth in
Canada and the United Kingdom, while net exports provided a major boost to
growth in the euro area and Japan. Data for the second quarter suggest that the
foreign industrial economies are continuing to recover, with the United Kingdom
bouncing up to a growth rate above potential, Canada slowing somewhat from
the rapid growth seen in the first quarter, the euro area showing a modest
increase in growth, and Japan firming slightly.
Higher food and energy prices boosted rates of twelve-month headline consumer
price inflation in Europe and Canada earlier this year. Data for May, however,
indicate that these rates of inflation came down. Consumer price inflation fell to
1 percent in Canada, and in the euro-area, inflation fell to the European Central
Bank's (ECB's) 2 percent target ceiling. Core rates of inflation, however,
continued to rise in Canada and the euro area. In Japan, deflation continued, at
about a 1 percent rate.
Robust recovery and concerns about emerging price pressures led several foreign
central banks, notably those of Australia, New Zealand and Canada, to raise
official interest rates since the last FOMC meeting.
In Japan, real GDP rose 5.7 percent (s.a.a.r.) during the first quarter, marking
the first quarter of positive growth in a year. Growth was likely exaggerated,
however, by statistical quirks that overstated the strength of private consumption
and will most likely be revised down. Private consumption was reported to have
risen 6.6 percent, a much stronger increase than suggested by other indicators of
consumption. External demand added 2.7 percentage points to growth, with
exports surging about 28 percent after five consecutive quarterly declines and
with imports roughly flat. Residential investment declined about 9 percent.
Business fixed investment fell steeply for the second consecutive quarter,
plunging 12 percent. Public investment expanded roughly 17 percent, as
spending from last fiscal year's second supplementary budget kicked in,
contributing about 1 percentage point to growth. Inventories made a slight
negative contribution to growth.
Indicators suggest that a mild cyclical recovery continues in the second quarter.
Industrial production edged up 0.2 percent in April, the third consecutive
monthly gain. Household expenditures were flat in April compared with their
average first-quarter level, while new passenger car registrations expanded
briskly in April and May. Core machinery orders rose 8.4 percent in April and

IV-13
were up about 6 percent from their average first-quarter level. Residential and
nonresidential building starts rose in April, although they were still down from
their average first-quarter pace. The trade surplus narrowed in April, with rising
imports outpacing a small gain in exports.
Japanese Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
2001
Component

20001

20011

2002

GDP

2.3

-2.0

-4.9

-2.2

-4.9

5.7

Total domestic demand

2.2

-1.5

-3.7

-2.5

-4.6

3.1
6.6

Consumption

-4.3

-6.7

7.9

Private investment

11.0

-10.5

3.8

6.3

-34.5

-11.6

Public investment

-11.3

-2.3

-36.3

11.8

-9.2

17.2

4.1

2.8

6.4

-1.1

1.5

4.7

-.1

-.0

-.5

-.2

Government consumption
Inventories 2
Exports

9.7

-11.7

-18.4

-11.3

-9.8

28.3

Imports

10.7

-9.0

-10.0

-15.9

-7.9

-.0

-.5

-1.2

-.4

2.7

Net exports2

1.Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

Labor market conditions generally remain unfavorable, although recent data
show some improvement. The unemployment rate remained at 5.2 percent in
April, down from a record-high 5.5 percent in December. The job-offers-toapplicants ratio, considered a key leading indicator of employment conditions,
edged up in April to 0.52, still well below its recent peak of 0.66 in December
2000. Core consumer goods prices in the Tokyo area (which exclude fresh food
but include energy) were down 1.1 percent from a year earlier in May.
Wholesale prices for domestic goods were roughly flat on a month-to-month
basis between February and May, but continued to be down on a twelve-month
basis. The GDP deflator in the first quarter was roughly 0.9 percent (n.s.a.)
below its year-earlier level.
In late May, Moody's downgraded Japan's domestic sovereign bond rating two
notches to A2, citing government indebtedness approaching "levels
unprecedented in the postwar era in the developed world." The gross debt-to-

IV-14
GDP ratio is expected to reach 140 percent this year. The rating had been under
review for possible downgrade since February. Moody's also raised the rating
outlook for Japan to Stable, noting that the A2 rating incorporates an expectation
of further fiscal deterioration over the next few years.
Japanese Economic Indicators
(Percent change from previous period, except as noted, s.a.)
2001
Indicator

2002
Q4

Feb.

Mar.

Apr.

May

Industrial production 1

-4.4

-3.4

1.2

n.a.

All-industry index

-1.8

-.9

1.2

n.a.

Housing starts

4.4

-2.5

-4.9

-6.1

2.5

n.a.

Machinery orders 2

-6.4

-7.5

-7.4

6.3

-6.2

8.4

n.a.

Machinery shipments

-5.9

-4.7

3.6

1.9

2.0

-.1

n.a.

New car registrations

1.6

-5.5

1.9

-2.4

-5.3

10.8

4.9

Unemployment rate3

5.1

5.4

5.3

5.2

n.a.

Job offers ratio 4

.58

.52

.51

.50

.51

.52

n.a.

Business sentiment 5

-36

-40

-41

...

CPI (Core, Tokyo area) 6

-1.2

-1.0

-.9

-.7

-1.1

Wholesale prices6

-1.1

-1.4

-1.3

-1.2

1. Mining and manufacturing.
2. Private sector, excluding ships and electric power.
3. Percent.
4. Level of indicator.
5. Tankan survey, diffusion index.
6. Percent change from year earlier, n.s.a.
n.a. Not available. ... Not applicable.

On June 17, the ruling coalition agreed on a package of tax cuts, including tax
incentives to promote spending on R&D and lower taxes on inheritances and
gifts to encourage parents to transfer property to their children. The cuts are due
to take effect in January 2003. Other tax reform measures, such as lowering the
corporate tax rate and broadening the tax base, are reportedly under
consideration. The government has said that tax changes should be "revenue
neutral" or offset by reductions in government spending.

IV-15
Euro-area real GDP data confirm that a modest recovery in exports helped the
economy grow 0.9 percent (s.a.a.r.) in the first quarter, but domestic demand
continued to decline. Consumption spending fell 0.7 percent, the second
consecutive quarterly fall, and investment spending fell 2.6 percent, the fifth
consecutive decline. A further draw-down in inventories also subtracted from
growth. Among the three largest euro-area countries, French growth was the
strongest at 1.4 percent, and only France registered an increase in final domestic
demand.
Euro-Area Real GDP1
(Percent change from previous period, except as noted, s.a.a.r.)
2001
Component

20002

20012

2002

GDP

2.9

-1.2

Total domestic demand

2.4

1.6

-1.0

-1.1

-2.0

Consumption

1.8

1.5

1.7

-.3

-.7

Investment

3.5

-2.2

-2.8

-2.5

-1.9

-2.6

Government consumption

1.8

1.9

1.8

2.0

1.0

-1.1

-.8

-.9

-1.2

Exports

11.6

-2.8

-3.0

-1.9

-5.2

3.7

Imports

10.6

-4.8

-1.0

-5.7

-5.3

-4.2

Net exports 3

-.8

1.4

-.1

2.9

Memo:
France
Germany
Italy

3.8
2.5
2.6

.3
.0
.6

-.3
.2
.4

1.9
-.7
.1

-1.8
-1.0
-.9

1.4
.7
.8

Inventories 3

1. Includes Greece as of 2001 Q1.
2. Q4/Q4.
3. Percentage point contribution to GDP growth, s.a.a.r.

Incoming data suggest that while growth is likely picking up a bit in the second
quarter, the recovery remains somewhat tentative and mixed across countries.
Euro-area industrial production declined 0.5 percent in April; gains in France
and Germany were offset by a sizable fall in Italy that in part reflected the oneday general strike. The euro-area purchasing managers' index (PMI) for
manufacturing moved up again in May to reach its highest level in over a year.
However, the services PMI edged down in May after showing little improvement

IV-16
in April, suggesting that although activity continued to expand in the sector, it
likely stopped accelerating. After improving notably in the first quarter, euroarea business sentiment also was little changed in April and May. Survey
indicators including PMIs and business sentiment have improved less for
Germany than for Italy and especially France. However, German industrial
orders surged in April to a level 1.8 percent above the average level in the first
quarter. Domestic orders were especially strong and reversed much of their
decline over the three previous months. Euro-area consumer sentiment has
picked up less than business sentiment; consumer sentiment in Italy has moved
lower in recent months and German consumer sentiment has been about flat.
Labor market data for the euro area as a whole show limited deterioration, as the
harmonized unemployment rate has edged up from a low of 8.0 percent last fall
to 8.3 percent in April, still well below the average rates of over 10 percent in
the late 1990s. The twelve-month rate of euro-area consumer price inflation
moved down to 2 percent in May, meeting the ECB's 2 percent target ceiling for
the first time in two years, but core inflation rose. Excluding food and energy
prices, the twelve-month inflation rate was 2.6 percent in May. Producer prices
remain below year-earlier levels.
In the second round of French parliamentary elections on June 16, the
center-right coalition headed by interim Prime Minister Jean-Francois Raffarin
won an absolute majority capturing 354 of the 577 seats in the National
Assembly. Raffarin was appointed Prime Minister after Lionel Jospin resigned
from politics following a poor showing by the left in the first round of the
French presidential election last month.
In its staff economic projections released on June 13, the ECB indicated that
euro-area real GDP growth is expected to pick up over the course of this year,
and next year annual growth is expected to be between 2.1 and 3.1 percent.
Domestic demand growth is also projected to gradually strengthen over the year.
Compared with the ECB's last published projections from December, the
outlook for GDP growth this year and next is little changed, but the ECB now
projects a somewhat weaker contribution from domestic demand. The ECB's
projections for inflation are about 3/4 percentage point higher for 2002 and about
1/2 percentage point higher for 2003 than in December. Based on an assumption
that bilateral euro exchange rates remain at their mid-May levels, annual
consumer price inflation is now projected to be a bit above 2 percent this year, in
large part reflecting the rise in oil prices earlier this year. In 2003, annual
inflation is expected to be between 1.3 and 2.5 percent.

IV-17

Euro-Area Economic Indicators
(Percent change from previous period except as noted, s.a.)
2002

2001
Indicator

India

Feb.

Mar.

Apr.

May

-.4

-1.8

-.5

n.a.

Retail sales volume

n.a.

Unemployment rate 2

8.0

8.1

8.2

8.3

n.a.

Consumer confidence3

-7.7

-10.7

-9.7

-9.0

-10.0

-8.0

Industrial confidence 4

-10.0

-17.0

-13.0

-14.0

-11.0

-9.0

Mfg. orders, Germany

-2.4

-1.0

-1.3

2.2

n.a.

CPI5

2.4

2.1

2.6

2.5

2.4

2.0

Producer prices 5

1.6

-.8

-.9

-1.1

-.8

n.a.

M3 5

6.8

8.2

7.3

7.4

7.3

7.5

n.a.

Industrial production'

1. Excludes construction.
2. Percent. Euro-area standardized to ILO definition. Includes Eurostat estimates in some
cases.
3. Diffusion index based on European Commission surveys in individual countries;
Averages of responses to questions on financial situation, general economic situation,
and purchasing attitudes.
4. Diffusion index based on European Commission surveys in individual countries;
Averages of responses to questions on production expectations, orders, and stocks.
5. Eurostat harmonized definition, Percent change from year earlier.
n.a. Not available.

In the first quarter of 2002, real GDP in the United Kingdom remained
essentially unchanged for the second consecutive quarter, although recent
upward revisions to industrial production and trade data suggest that real GDP
growth could be revised up to near 0.5 percent (s.a.a.r.). In the current estimate,
service sector growth slowed, particularly in finance and business services,
which contracted 0.2 percent, the first fall in ten years. The manufacturing sector
continued to be very weak, with a decline of 6 percent. Total domestic demand
grew 3.5 percent with slowing but firm consumption growth, strong government
consumption, and a significant positive contribution from inventories more than
offsetting a steep decline in investment. Net exports subtracted 3.6 percentage
points from growth, with a surge in imports and continued decline in exports.

IV-18

U.K. Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
2001
Component

2000'

2001'

2002

GDP

2.6

1.6

2.0

1.7

-.0

Total domestic demand

3.2

2.1

3.1

2.0

3.5

Consumption

3.7

4.0

4.1

4.2

3.7

2.9

Investment

6.9

-4.0

1.8

-4.9

2.9

-5.1

Government consumption

2.7

3.0

-.5

-3.4

5.9

4.9

Inventories 2

-.9

-.3

-2.0

1.8

Exports

10.4

-4.9

-10.6

-9.3

-4.6

-2.5

Imports

11.0

-2.6

-5.8

-9.3

7.1

-.7

-.6

-1.5

-1.9

-3.6

Net exports 2
1.Q4/Q4.

2. Percentage point contribution to GDP growth, s.a.a.r.

Indicators for the second quarter suggest a pick-up in growth, although we note
that indicators for the first quarter had suggested stronger growth than reported in
the GDP release. Industrial production climbed 1.1 percent and manufacturing
rose 0.8 percent in April, following months of sustained decline. The
manufacturing sector's four-month-ahead output expectations fell somewhat in
May, though they still remained well above fourth-quarter lows. The
manufacturing PMI continued to indicate expansion, with the overall index, as
well as the indexes for output and new orders, remaining above 50 in May. Both
the total trade deficit and the trade deficit with the rest of the European Union
narrowed in April.
Retail sales in April surged 1.7 percent, though May's retail sales survey
suggested some slowing of growth for that month. The services PMI rose again
in May, showing continued expansion. Consumer confidence ticked down only
slightly in May, remaining around its pre-September level. Housing prices
accelerated in May, bringing the twelve-month growth rate to around 18 percent,
and household borrowing rose to record levels in May.
Notwithstanding the recent slow GDP growth, labor market conditions remain
tight. The official claims-based unemployment rate fell to 3.1 percent in May,
and the labor force survey measure of the unemployment rate edged up to 5.2

IV-19
percent for the three months centered in March. Both unemployment rates are
near record lows.
U.K. Economic Indicators
(Percent change from previous period except as noted, s.a.)
2001
Indicator

2002
Q4

Feb.

Mar.

Apr.

May

Industrial production

-1.1

-2.2

-1.3

-.1

1.1

n.a.

Retail sales volume

1.6

1.3

1.0

1.2

1.7

n.a.

3.2

3.1

3.2

3.1

5.1

5.2

n.a.

Business confidence 3

-6.0

-24.0

-3.3

1.0

2.0

14.0

4.0

Retail prices 4

2.4

2.0

2.4

2.2

2.3

1.8

-2.7
4.4

-8.2
3.3

-5.6
2.9

-7.4
2.5

-3.3
3.4

-4.3
4.0

-6.2
n.a.

Unemployment rate'
Claims-based
Labor force

survey2

input prices5

Producer
Average earnings 5

1. Percent.
2. Three-month average centered on month shown.

3.Percentage of firms expecting output to increase inthe next four months less percentage
expecting output to decrease.
4. Excluding mortgage interest payments. Percent change from year earlier.

5. Percent change from year earlier.

n.a. Not available.
The twelve-month rate of retail price inflation (excluding mortgage interest
payments) dropped in May to 1.8 percent, the lowest inflation rate since the series
began in 1975. Moderation in inflation partly reflected the oil price increases that
led to a sharp rise in consumer prices in April and May of last year. The twelvemonth growth rate of average earnings rose to 4 percent in April.
In Canada, real GDP increased 6 percent (s.a.a.r.) in the first quarter, following
an upward revision of the fourth quarter to 2.9 percent. A decrease in the rate of
inventory reduction provided a strong contribution to growth, and final domestic
demand also increased briskly. Consumption growth was most prevalent in
interest-sensitive sectors such as automobiles and home furnishings. Residential
construction was at an all-time high in the first quarter. Non-residential
investment continued to decrease, largely reflecting a decline in business
construction. Business investment in machinery and equipment posted a small
gain following the fourth quarter's 10 percent drop. Both imports and exports
grew, after posting declines over the past year.

IV-20

Canadian Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
2002

2001
Component

20001

2001'

GDP

3.5

-.5

2.9

6.0

Total domestic demand

2.6

-.3

2.8

-.7

-3.8

6.2

Consumption

3.4

2.2

1.6

-.3

4.1

2.5

Investment

3.6

-1.6

-.0

8.7

-13.9

8.8

Government consumption

3.4

2.1

5.7

1.9

2.0

Inventories2

-.8

-1.6

-2.4

-3.4

2.3

Exports

4.7

-6.1

-6.6

-7.0

-.6

5.9

Imports

2.2

-9.2

-1.0

-7.0

-16.9

5.2

Net exports 2

1.2

-2.5

-.3

6.6

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

The overall capacity utilization rate increased in the first quarter for the first time
in six quarters. The increase was led by a rebound in the manufacturing sector,
with particularly strong contributions coming from the motor vehicle and
automotive parts industries. Corporate profits grew 67.6 percent (s.a.a.r.) in the
first quarter, reversing part of their steep drop over the previous three quarters.
May's all-industry PMI ticked up to 56.6 (n.s.a.), up from 55.9 in April.
Indicators suggest that Canada's interest-sensitive spending continued into the
second quarter. Housing starts fell in April, but then defied predictions of further
decline in May by returning to near January's twelve-year-high level. Motor
vehicle sales in April remained near December's record level, and preliminary
readings suggest that strong sales continued through May.
The unemployment rate rose in May to 7.7 percent. An increase in employment
was masked by strong labor force growth. Employment has expanded 1
percent since the start of the year, the largest five-month gain since 1994.
The twelve-month rate of consumer price inflation in May fell to 1 percent from
1.7 percent in April. The dramatic drop in the inflation rate largely reflected a
sharp energy-led increase in the level of the CPI index a year earlier. Twelve-

IV-21

month core inflation, excluding food and energy prices, increased to 2.4 percent
from 2.3 percent in April.
The Bank of Canada increased its target for the overnight rate, its key policy rate,
25 basis points on June 4, following a similar 25 basis point increase on April 16.
The Bank cited stronger-than-expected Canadian growth in motivating both rate
hikes.
Canadian Economic Indicators
(Percent change from previous period except as noted, s.a.)
2002

2001
Indicator

Feb.

Mar.

Apr.

May

GDP at basic prices

-.3

1.3

n.a.

Industrial production

-2.1

-1.5

2.3

1.6

-.1

n.a.

New mfg. orders

-3.6

-4.8

4.8

3.5

-.8

4.5

n.a.

Retail sales

-.7

2.6

-.1

-.2

n.a.

Employment

-.1

Unemployment rate'

7.2

7.7

7.8

7.9

7.7

7.6

7.7

Consumer prices2

2.7

1.1

1.5

1.8

1.7

1.0

Consumer attitudes 3

107.9

114.1

125.9

...

Business confidence 3

93.0

117.6

141.5

...

......

1. Percent.
2. Percent change from year earlier, n.s.a.
3. Level of index, 1991 = 100.
n.a. Not available. ... Not applicable.

IV-22

External Balances
(Billions of U.S. dollars, s.a.a.r.)
Country
and balance

2002

2001
Q3

Jan.

Feb.

Mar.

Apr.

Japan
Trade
Current account

54.7
89.7

45.9
98.5

72.4
118.1

59.8
113.0

60.6
101.2

96.8
141.7

71.2
106.3

Euro area
Trade'
Current account'

65.1
26.8

89.4
53.6

56.8
15.1

17.3
-15.5

57.6
21.9

95.5
38.9

n.a.
n.a.

Germany
Trade
Current account

94.9
3.7

91.3
25.5

113.0
36.9

121.9
5.4

99.3
31.4

117.8
73.8

n.a.
35.8

France
Trade
Current account

1.4
4.3

1.3
4.1

.9
3.2

1.8
5.6

.5
1.9

3.1
.3

Italy
Trade
Current account'

2.1
5.9

14.5
7.5

4.1
-7.6

3.1
-26.6

3.4
4.2

n.a.
n.a.

-46.6

-48.5

-45.2

-45.0

-43.2

-47.2

-42.1

-13.7

-43.7

n.a.

...

31.1
11.4

32.0
11.2

35.1
14.8

36.1
...

35.9
...

33.2
...

United Kingdom
Trade
Current Account
Canada
Trade
Current Account

1. Not seasonally adjusted.
n.a. Not available. ... Not applicable.

n.a.
...

IV-23
Consumer Price Inflation in Select ed Industrial Countries
(12-month chang,e)
Germany

Japan
Percent

Percent
- 6

1
0

IL1

I -1

,,v

111111

,, I,, l

-2

1995 1996 1997 1998 1999 2000 2001 2002

-1

-2

1995 1996 1997 1998 1999 2000 2001 2002
United Kingdom

France

Percent
S6

Percent

5
4
3

-2

2
-

-1

-1
i iI

i,,
i

1995 1996 1997 1998 1999 2000 2001

,, -2
2002

1995 1996 1997 1998 1999 2000 2001 2002
Canada

Italy
Percent

5
4
3
2

S-1
1995

, , ,,

1996 1997

1998

1999 2000 2001 2002

-2

-1

-2

IV-24
Industrial Production in Selected Industrial Countries
1995=100

Japan

-,130

130

AA/

1995
1995

1995=100

Germany

1996
1996

France

1997 1998 1999 2000 2001 2
90
1997 1998 1999 2000 2001 2002
-,

-t

1995

1996

130

1995

1996 1997

1998 1999 2000 2001

2002

United Kingdom

1997 1998 1999 2000 2001 2002

1995 1996
1995
1996

1997
1997 1998
1998

1999
2002
1999 22000 2001
2001 000
2002

Canada

Italy

130

12(

11(

10(

1997 1998 1999 2000 2001 2002
1995 1996
li I
1995

1996 1997 1998 1999 2000 2001 2002

Iil, ,I , , I, ,,
,

1995 1996

1997 1998

,l
, ,l

1999 2000 2001

,, 90

2002

IV-25

Economic Situation in Other Countries
Since the last Greenbook, economic recovery has continued in emerging Asia,
with all countries recording positive growth in the first quarter, and indicators
for the second quarter signaling further expansion. In Latin America, Mexico's
recession has shown further signs of bottoming out. In Brazil, while recent data
releases have been mixed, the country's financial markets have experienced
intense downward pressures in recent weeks. Argentina and Venezuela are still
experiencing severe economic difficulties. Inflation has remained under control
in most countries, with the most notable exception being Argentina.
Argentina continued to experience financial and economic turmoil over the
intermeeting period. Deposits continued to decline, albeit at a much slower rate
than in April. In early June, the government unveiled a plan to convert bank
deposits into long-term peso- and dollar-denominated bonds on a voluntary
basis. The plan would also allow deposits to be used to purchase newly-issued
stocks and bonds, new cars, and real estate. However, critics of the plan, such as
the central bank (BCRA), believe that the plan will fail to stem the outflow of
deposits and could lead to more bank failures and to higher inflation.
Argentine Economic Indicators
change
from previous period, s.a., except as noted)
(Percent
Indicator

2000

2001

2002
2
Mar. Apr.

Real GDP'

-1.9

-9.9

-18.5

n.a

Industrial production

-1.8

-5.3

-5.8

-4.1

-.8

-1.4

n.a.

Unemployment rate2

15.1

17.4

18.3

...

n.a.

-.7

-1.5

-1.6

4.2

7.9

2.6

7.5

11.2

16.6

17.3

18.3
16.3

23.0
n.a.

-8.9

-4.4

1.5

Consumer prices3
Trade

balance4

Current accounts

...

May

...

n.a....

...

1.Annual rate. Annual figures are Q4/Q4.
2. Percent, n.s.a. Data are released for May and October only. Figures for Q4 reflect data

for October.
3. Percent change from year-earlier period, except annual figures, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available.

... Not applicable.

IV-26
Prospects for an IMF program in the near future remain uncertain. Although the
Argentine Congress recently altered the bankruptcy law and the "Economic
Subversion Law"-both pre-conditions for negotiations to advance-it is unclear
whether these actions have fully satisfied Fund expectations. The federal
government has also made some limited progress in restricting spending at the
provincial level, which is another precondition for a Fund program. While
relations between the IMF and the Argentine government remain strained, an
advance team from the IMF arrived in Argentina in mid-June to begin the
process of negotiations.
In response to the sustained depreciation of the peso, the BCRA tightened capital
controls in early June by further limiting sales of dollars by banks and requiring
exporters to sell their foreign exchange directly to the BCRA. The BCRA's
international reserves stood at about $10 billion as of mid-June, down from
$12 billion at the end of April. Twelve-month CPI inflation rose from
18 percent in April to 23 percent in May, driven by the sharp depreciation of the
peso since January. The federal government's fiscal balance registered an
improvement in May reflecting, in large part, temporary factors boosting tax
revenues. The trade balance continued to improve, as imports slumped.
In Mexico, recent indicators suggest that an economic recovery is underway.
Even though the decline in first-quarter real GDP of 1 percent (s.a.a.r.) marked
the sixth consecutive quarter of decline, this weakness is partly attributable to
difficulties in seasonally adjusting the data for this year's early Easter. Recent
monthly indicators are consistent with a bounce back in activity: after falling in
March, industrial production rebounded sharply in April. Furthermore, exports
rose about 4 percent (s.a.) in April, and automobile production was up nearly
19 percent from a year earlier, after several months of decline. Consistent with a
recovery in demand, imports have also increased in April. In May, the inflation
rate remained only a little above the Bank of Mexico's year-end twelve-month
target of 4-1/2 percent. However, there are some concerns about inflation
expectations, arising from pass-through effects due to the recent depreciation of
the Mexican currency; since mid-April, when the Bank of Mexico eased policy a
bit, the peso has depreciated by more than 6 percent, on net, against the dollar.

IV-27
Mexican Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2000

2001

2001
Q

Ma.

2002
A.
Apr.

Mar.

-2.4

-1.0

...

May

Real GDP 1

4.9

Overall economic activity

6.5

-.1

-.4

-.3

n.a.

Industrial production

6.0

-3.4

-1.0

-. 8

3.3

n.a.

rate 2

2.2

2.5

2.8

2.7

n.a.

9.0

4.4

5.2

4.7

-8.0

-10.0

-11.3

-9.0

-8.1

-7.8

n.a.

Imports 4

174.5

168.4

163.1

164.4

166.0

172.1

n.a.

Exports 4

166.5

158.4

151.9

155.4

157.9

164.3

n.a.

Current accounts

-18.1

-17.8

-24.1

-15.7

Unemployment

Consumer prices 3
Trade balance4

-1.5

.......

1. Annual rate. Annual figures are Q4/Q4.
2. Percent; counts as unemployed those working one hour a week or less.

3.Percent change from year-earlier period, except annual figures, which are DecJDec.
4. Billions of U.S. dollars, annual rate.

5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. ... Not applicable.

In Brazil, real GDP jumped 5.4 percent (s.a.a.r.) in the first quarter. However,
there were sizeable differences in growth across sectors. Agriculture and
services output rose briskly, while industrial output declined nearly 6 percent.
Indicators for the second quarter paint a mixed picture. Industrial production
rebounded more than 4 percent in April, but was boosted by residual seasonal
effects related to Easter falling in March. Other recent indicators, such as rising
unemployment, have pointed to a weakening in domestic demand. Twelvemonth inflation in May edged down to 7.8 percent. The trade surplus narrowed
in May, due in part to a sharp drop in shipments to Argentina.
Sharp declines in Brazilian asset prices in recent weeks have put the country
back into the spotlight. Since the end of April, the EMBI+ spread over U.S.
Treasuries has risen from 850 basis points to 1325 basis points, and the real has
depreciated 15 percent against the dollar. These financial pressures have been
attributed to increased market anxieties about the outcome of October's
presidential election and the prospective policies of the next president. These
developments have reinforced concerns about the economy's underlying
vulnerabilities, particularly the heavy public sector debt burden. In early June,
investors' increasing reluctance to hold debt that matures after early 2003
induced the Brazilian government to shorten the maturity profile of its debt. On

IV-28
June 12, Brazil's government announced that it will draw on a $10 billion IMF
credit available to it under its existing program and increase its 2002 target for
the primary fiscal surplus from 3.5 percent to 3.75 percent of GDP.
Brazilian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2000

2001

2002

Mar.

Apr

May

Real GDP 1

3.9

-.6

5.4

Industrial production

6.6

1.5

-.4

3.0

-.5

4.1

n.a.

Unemployment rate 2

7.1

6.2

7.5

7.3

7.0

7.7

n.a.

6.0

7.7

7.5

7.6

7.7

8.0

7.8

-.7

2.6

9.2

4.6

7.8

2.8

-24.6

-23.2

-23.0

-12.9

-12.0

-23.8

n.a.

Consumer

prices3

Trade balance 4
Current

account 5

......

1. Annual rate. Annual figures are Q4/Q4.
2. Percent. "Open" unemployment rate.
3. Percent change from year-earlier period, except annual figures, which are DecJDec. Price
index is IPC-A.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available.

... Not applicable.

The economic news from Venezuela since the last Greenbook has been
worrisome, and political tensions have remained high. Output plunged over
15-1/2 percent (s.a.a.r.) in the first quarter following a decline of almost 4 percent
in the final quarter of last year. Since being floated in mid-February, the bolivar
has depreciated almost one-third. To date, however, weak demand conditions
have muted the depreciation's pass-through into consumer prices, which rose
18.3 percent over the twelve months ending in May. The net decline in oil
prices since mid-2001 has caused Venezuela's current account to move from a
comfortable surplus in the first half of last year to balance in the first quarter of
this year. Weak tax receipts and lower oil revenues have generated a growing
fiscal deficit and, despite some increases in tax rates, a budget deficit of
3-to-4 percent of GDP is projected for this year. Continued political instability
and rumors of another coup are helping to keep spreads elevated, making deficit
financing through bond issuance extremely costly.

IV-29

Venezuelan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2000

2001

2002

2001
Q4

Mar.

Apr.

May

5.7

-3.9

-15.6

Unemployment rate2

13.4

13.3

11.8

n.a.

Consumer prices3

13.4

12.3

12.4

14.6

17.6

18.7

-10.3

-12.2

-11.1

n.a.

Trade balance4

17.5

9.4

3.6

7.3

n.a.

Current account s

13.4

4.1

-2.5

Real GDP'

Non-oil trade

balance 4

...

n.a.
18.3

...

1.Annual rate. Annual figures are Q4/Q4.
2. Percent, n.s.a.
3. Percent change from year-earlier period, except annual figures, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.

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

Korean economic indicators over the intermeeting period have shown further
strong performance. GDP jumped 7.6 percent at an annual rate in the first
quarter, reflecting solid consumer and construction demand, as well as large
increases in exports and in machinery and equipment investment. Government
spending also rose briskly, likely related to preparations for the World Cup
soccer championship. Industrial production was up 1.8 percent in April. A
sharp pickup in exports in the first quarter boosted the trade surplus and led to a
sizable current account surplus. In April, a pickup in imports resulted in a more
moderate trade surplus and a flat current account. The unemployment rate so far
in the second quarter was about even with the first-quarter average. Consumer
price inflation ticked up to 3 percent in May, but remains well within the central
bank's 2 to 4 percent target range. On May 7, the central bank raised its target
interest rate 25 basis points to 4.25 percent.

IV-30
Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP 1

2000

2001

2001
Q4
Q4

2002
Mar. I
Apr.
Mar.

May

......

5.1

4.4

6.4

7.6

Industrial production

16.9

1.7

2.2

1.5

3.8

1.8

n.a.

Unemployment rate 2

4.1

3.7

3.4

3.0

2.9

3.1

Consumer prices3

2.8

3.2

3.3

2.5

2.3

2.5

3.0

16.9

13.4

7.8

19.2

22.5

13.4

n.a.

12.2

8.6

4.2

7.0

12.5

n.a.

Trade

balance 4

Current account 5

1. Annual rate. Annual figures are Q4/Q4.
2. Percent.
3. Percent change from year earlier, except annual changes, which are Dec.Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. ... Not applicable.
Recent data for the ASEAN region confirm that the strong recovery, which
began in the fourth quarter, has continued. Thailand led the pack in the first
quarter with real GDP growth of almost 10 percent (s.a.a.r.), and robust growth
was also reported in Singapore (7.6 percent), Indonesia (5.1 percent), and to a
lesser extent in Malaysia (3.7 percent). The Philippines, after growing almost
4 percent last year, posted growth of just 0.8 percent in the first quarter, largely
due to weakness in the agricultural sector. The April industrial production
figures that have been reported for the region have all shown faster growth than
in the first quarter, with production in Singapore rising 11 percent in April,
primarily due to growth in high-tech production.
Most countries in the region have continued to report strong trade surpluses
since the last Greenbook, although the most recent numbers suggest variation
across countries. Trade surpluses in Indonesia and Singapore have increased on
average in the second quarter, reflecting strong export growth, while a surge in
imports to Malaysia and Thailand caused the trade balances of those countries to
drop sharply. In recent months, inflation in the region has decreased, and
deflationary pressures in Singapore appear to have intensified.

IV-31

ASEAN Economic Indicators: Growth
(Percent change from previous period, s.a., except as noted)
2001
Indicator and country

2000

2001

[

Real GDP 1
Indonesia
Malaysia
Philippines
Singapore
Thailand

7.3
6.4
3.7
11.4
3.5

1.2
-.8
3.9
-6.4
2.0

3.4
6.2
3.7
5.6
8.5

5.1
3.7
.8
7.6
9.8

Industrialproduction2
Indonesia 3
Malaysia
Philippines
Singapore
Thailand

11.6
19.1
2.4
15.3
3.3

.7
-4.1
-6.5
-11.6
1.3

.3
-.5
1.9
4.5
3.3

.1
2.5
4.6
7.3
.6

Feb.

2002
Mar. IApr.

Feb.

7.3
4.1
-1.1
-5.6
.4

Mar.

-7.2
-5.5
-1.3
2.2
4.0

Apr.

1.4
4.5
n.a.
11.0
.9

1. Annual rate. Annual figures are Q4/Q4.
2. Annual figures are annual averages.
3. Staff estimate.
n.a. Not available.

... Not applicable.

ASEAN Economic Indicators: Trade Balance
(Billions of U.S. dollars, s.a.a.r.)
2002

2001
Country

2000

2001
Q4

Mar.

Apr.

May

Indonesia

28.6

25.4

26.3

26.6

24.6

28.2

n.a.

Malaysia

16.1

14.3

13.0

15.7

14.6

7.7

n.a.

Philippines

6.7

2.6

5.9

5.1

1.0

-1.0

n.a.

Singapore

3.3

5.8

6.5

6.3

1.6

8.6

5.1

Thailand

5.5

2.5

2.7

2.9

4.9

-1.4

n.a.

n.a. Not available.

IV-32
ASEAN Economic Indicators: CPI Inflation
(Percent change from year earlier, except as noted)
2001
Country

2000'

2002

2001'
Q4

Mar.

Apr.

May

Indonesia

9.3

12.5

12.6

14.5

14.1

13.3

12.9

Malaysia

1.3

1.2

1.4

2.1

1.9

Philippines

6.7

4.1

4.7

3.6

Singapore

2.1

-.6

-.2

-.8

-.9

-1.1

n.a.

Thailand

1.4

1.1

1. December/December.
n.a. Not available.
In China, signs point to a continuation of strong growth. Industrial production
rose more than 12 percent in April and May on a twelve-month basis, well above
the 8 percent first-quarter pace. Foreign direct investment and investment by
state-owned enterprises are both significantly above their levels at this time last
year. On the consumer side, retail sales are up 8 percent over a year ago. The

trade surplus was smaller in April and May than in the first quarter, as imports
have picked up considerably while exports have held steady. The rate of
deflation in April increased to more than 1 percent. Many domestic firms are
cutting prices to match declines in import prices, which have moved down as a
result of tariff cuts that China is making as part of WTO accession.
Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP'
Industrial

production 2

Consumer prices2
Trade

balance3

2000

2001

2001
Q
Q4

2002

Mar.

Apr.

8.0

7.5

7.1

8.5

...

11.4

8.9

8.5

8.2

10.9

12.1

1.5

-.3

-. 1

-.6

-.8

-1.3

24.1

23.1

34.2

40.3

22.9

May

12.9
n.a.
21.4

1. Annual rate. Quarterly data estimated by staff from reported four-quarter growth rates.
Annual figures are Q4/Q4.
2. Percent change from year earlier. Annual figures are year over year.
3. Billions of U.S. dollars, annual rate. Imports are c.i.f.
... Not applicable.

IV-33

Hong Kong's real GDP rose 1.2 percent (s.a.a.r.) in the first quarter, as a large
positive contribution from net exports offset a steep decline in private
investment. The unemployment rate moved above 7 percent in April; the
difficult conditions in the labor market, while not confined to any particular
sector of the economy, have been especially acute in the construction industry.
Recent indicators suggest that the property market may be bottoming out.
Property price declines appeared to moderate in the first quarter, and the number
of transactions has stabilized. Consumer prices declined 3 percent for the year
ending in April, as the appreciated real exchange rate and sluggish domestic
economy have continued to drag down prices. The trade deficit narrowed
somewhat in April.
Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)

Indicator

2000

2001

2001
Q4
Q4

2002

Feb. IM
Q1

Feb.

Mar.

Apr.

......

Real GDP'

6.9

-1.7

-.4

1.2

Unemployment rate2

5.1

4.9

6.1

7.0

6.8

7.0

7.1

Consumer prices3

-2.1

-3.5

-2.1

-2.6

-2.3

-2.1

-3.0

-11.0

-11.4

-7.6

-4.5

5.4

-3.4

-2.1

Trade balance'

1. Annual rate. Annual figures are Q4/Q4.
2. Percent. Monthly numbers are averages of the current and previous two months.
3. Percent change from year-earlier period, except annual figures, which are Dec./Dec.

4. Billions of U.S. dollars, annual rate. Imports are c.i.f.
... Not applicable.

Taiwan grew more than 7 percent at an annual rate in the first quarter. Net
exports were the driving force behind the growth, but fixed investment also
expanded for the first time in over a year. A further sign of continued recovery
is a decline in the unemployment rate to 5 percent in April. Industrial
production has continued to rise, and the growth has been particularly strong for
Taiwan's high-tech industries. Both exports and imports have moved up on
average in April and May, although the increase in imports has been more rapid
and has resulted in the trade surplus shrinking from its first-quarter level.
Consumer prices have been roughly flat this year after falling most of last year.

IV-34
Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
2002

2001
Indicator

2000

2001
Q4

Mar.

Apr.

May

Real GDP'

3.9

-1.8

10.3

7.5

Unemployment rate 2

3.0

4.6

5.3

5.1

5.2

5.0

n.a.

Industrial production

7.4

-7.3

1.4

3.8

2.9

3.1

n.a.

Consumer prices 3

1.7

-1.7

-.6

-.1

-.3

8.3

15.6

21.0

22.9

14.0

15.5

16.4

8.9

18.9

28.0

28.6

Trade

balance 4

Current account 5

......

1. Annual rate. Annual figures are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual figures, which are DecJDec.
4. Billions of U.S. dollars, annual rate. Imports are c.i.f.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available.

... Not applicable.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, June 25-26, 2002 : Greenbook Part 2

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