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Class III FOMC - Internal (FR)

Part 2

June 20, 2007

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

June 20, 2007

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
The incoming data suggest that economic activity is expanding at a moderate rate. In the
labor market, payrolls continue to grow at a solid pace, and the unemployment rate
remains relatively low. Equipment spending, which had faltered around the turn of the
year, picked up in March and April, and nonresidential construction has stayed robust so
far this quarter. In addition, the drag from the inventory correction that held down
activity late last year and early this year appears to have about run its course in most
industries. Consumer outlays, which rose rapidly in the first quarter, have slowed
recently, but income gains have remained solid. In the housing sector, construction
remains weak as builders respond to high inventories of unsold new homes. Top-line
inflation has been boosted by rising energy prices in the past few months, but core
inflation has been subdued of late.
Labor Market Developments
Labor demand has been expanding at a moderate pace recently. Private payroll
employment, after having increased at an average rate of about 165,000 per month during
the second half of 2006, has decelerated to an average increase of 108,000 jobs per month
so far this year. The recent job gains have been propelled by strong hiring in the service
sector, while employment in goods-producing industries has continued to decline. In
May, the rise in payroll employment, combined with a slightly longer workweek, boosted
aggregate hours of private production or nonsupervisory workers to a level 0.7 percent
(not at an annual rate) above the first-quarter average.
In the household survey, the unemployment rate held steady at 4.5 percent in May and
has been largely unchanged for eight months. The number of job losers unemployed less
than five weeks as a percentage of employment—a proxy for the layoff rate—also has
moved little, on net, so far this year; in May, the three-month moving average was about
equal to the level in the fourth quarter of last year. However, the number of unemployed
job losers has edged up since the fourth quarter, an indication, perhaps, that transitions
out of unemployment have slowed. Meanwhile, the labor force participation rate
remained at 66.0 percent in May after having fallen 0.2 percentage point in April.
Other indicators of labor demand have been mixed. The four-week moving average of
initial claims for unemployment insurance stood at 311,000 in the week ending June 9, a
level consistent with solid employment gains. As noted above, the current pace of
layoffs, as measured by the CPS, appears to have held about steady so far this year. In
addition, hiring plans, as measured by Manpower and the National Federation of
Independent Business (NFIB), remain elevated. In contrast, job openings and hires, as
II-1

II-2

Changes in Employment
(Thousands of employees; seasonally adjusted)
2006
Measure and sector

2006

2007
Q4

Mar.

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

Apr.

May

Monthly change

189
169
5
-7
11
11
-3
9
2
16
42
-1
83
20
262

202
166
3
-11
11
9
-2
8
1
20
32
-4
94
36
173

177
164
4
-25
-14
12
11
11
7
10
52
6
96
13
340

142
115
3
-14
3
2
27
2
4
2
14
-7
71
28
109

175
152
4
-23
51
1
39
2
2
-1
-6
-8
82
23
335

80
59
2
-20
-21
15
-25
3
9
-7
21
-3
81
21
-468

157
135
0
-19
0
9
-5
6
5
2
32
-9
105
22
157

2.5
33.8
41.1

1.4
33.8
41.3

2.0
33.9
41.1

1.1
33.8
41.0

.8
33.9
41.2

-.3
33.8
41.1

.5
33.9
41.0

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

Changes in Private
Payroll Employment

Aggregate Hours and Workweek of
Production or Nonsupervisory Workers
Thousands
400

400

Hours
35.0

2002 = 100
108

3-month moving average
300

300

200
100

200
May

0
-100

34.5

100
0

106

Aggregate
hours
(right scale)

104

May
34.0

100

-100

-200

-300

98
33.5

Workweek
(left scale)

-300

-400

1999 2000 2001 2002 2003 2004 2005 2006 2007

-400

102

96
94

33.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

II-3
Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2006
Rate and group

2007

2006

Mar.

Apr.

May

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

4.6
15.4
8.2
3.5
3.7

4.7
16.1
8.3
3.5
3.8

4.5
15.1
8.3
3.3
3.5

4.5
14.8
7.7
3.6
3.5

4.4
14.5
7.6
3.5
3.4

4.5
15.3
7.8
3.5
3.5

4.5
15.7
7.3
3.5
3.6

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

66.2
43.6
74.6
75.5
59.6

66.2
43.5
74.9
75.4
59.9

66.3
43.4
75.0
75.7
59.8

66.2
42.2
75.1
75.7
59.6

66.2
41.6
75.3
75.7
59.6

66.0
41.6
74.3
75.6
59.4

66.0
41.0
73.8
75.6
59.6

Labor Force Participation Rate
and Unemployment Rate

Percent
67.6
67.4

Percent
7.0
6.5

Participation rate (left scale)

67.2

6.0

67.0
66.8

5.5

Unemployment rate (right scale)

66.6

5.0

66.4

4.5

66.2

May

66.0

4.0
3.5

65.8
65.6

2000

2001

2002

Job Losers Unemployed
Less Than 5 Weeks

2003

2004

2005

2006

2007

3.0

Unemployed Due to Job Loss
Percent
1.4

(as a percent of the labor force)

Percent
4.0
3.5

3.0

(as a percent of household employment)

4.0
3.5

1.4

3.0

3-month moving average (thick line)
1.2

1.2

1.0

2.5

2.5
May

May

0.6

2.0

1.5

0.8

1.5

0.8

2000

2001

2002

2003

2004

2005

2006

2007

0.6

1.0

2000

2001

2002

2003

2004

2005

2006

2007

1.0

II-4

Labor Market Indicators
Layoffs
Unemployment Insurance
Millions
4.0
4-week moving average

Layoff Announcements

200

500

3.2

200

150

450

2.8

Thousands
250

150

Insured unemployment
(left scale)

3.6

250

Thousands
550

400
June 2

2.4
2.0
1.6

100

Initial claims
(right scale)

May

100

350
50

300

June 9
1999 2000 2001 2002 2003 2004 2005 2006 2007

250

1999 2000 2001 2002 2003 2004 2005 2006 2007

Note. Seasonally adjusted by FRB staff.
Source. Challenger, Gray, and Christmas, Inc.

Hiring
Job Openings and Hires
Net Hiring Plans
Percent
30

4.5

4.0

3.5

3.0

2.5

Percent of private employment
4.5

2.0

1.5

Manpower, Inc.
25
20
Q3

4.0

Hires
Apr.

3.5

May
10
5
0

Job openings

National Federation of
Independent Business*
(3-month moving average)
1999 2000 2001 2002 2003 2004 2005 2006 2007
Note. Percent planning an increase in employment
minus percent planning a reduction.
* Seasonally adjusted by FRB staff.

2.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

1.5

Source. Job Openings and Labor Turnover Survey.

Labor Market Tightness
Job Availability
150

Hard-to-Fill Positions
Index
150

Percent
40

40
3-month moving average
35

120

May
90

25
May

1999 2000 2001 2002 2003 2004 2005 2006 2007

Note. Proportion of households believing jobs are plentiful, minus
the proportion believing jobs are hard to get, plus 100.
Source. Conference Board

15
60

1999 2000 2001 2002 2003 2004 2005 2006 2007
Note. Percent of small businesses surveyed with at least
one "hard-to-fill" job opening. Seasonally adjusted
by FRB staff.
Source. National Federation of Independent Business.

II-5

reported by the Bureau of Labor Statistics in its JOLTS survey, have moderated a bit so
far in 2007. And layoff announcements, which are measured by Challenger, Gray, and
Christmas, and capture future downsizing plans during the next six to twelve months,
have increased lately.
Measures of labor market tightness suggest that little has changed in the balance of
supply and demand since the middle of last year. The percentage of firms reporting to
the NFIB that they had a hard-to-fill position was about unchanged in May and on par
with the average level in 2006. In addition, according to the Conference Board,
households’ assessments of job availability have continued to be relatively positive.
The staff estimates that productivity in the nonfarm business sector rose at an annual rate
of 1.4 percent in the first quarter after increasing at a rate of 2.1 percent in the fourth
quarter of 2006. Over the four quarters ending in the first quarter of 2007, productivity
growth averaged only 1.1 percent, 0.9 percentage point less than the pace recorded during
the preceding four quarters.
Output per Hour
(Percent change from preceding period at an annual rate;
seasonally adjusted)

Sector
Nonfarm business
All persons
All employees2
Nonfinancial corporations3

2005:Q1 2006:Q1
to
to
2006:Q1 2007:Q1
2.0
1.8
3.3

1.11
.91
.3

2006

2007

1.2
.9
-4.4

-.5
-.2
4.1

2.1
1.9
1.3

1.41
1.01
.6

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

Industrial Production
Industrial production (IP) has increased only modestly so far in the second quarter after
having been little changed, on balance, in the first quarter, when some manufacturers
were restraining production to deal with a buildup of inventories. More recently, output
has been partly held back by softness in the high-tech sector. However, forward-looking
indicators—such as new orders and business surveys—point to some improvement in
overall production in coming months. In addition, the staff’s flow-of-goods inventory

II-6

Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2006

Component

(percent)

2006

2007

20061

2007

Mar.

Annual rate
Total
Previous

Apr.

May

Monthly rate

100.0
100.0

3.5
3.5

-1.5
-1.5

.8
.9

-.3
-.3

.4
.7

.0
...

81.9
76.3
71.5

3.4
3.9
2.5

-1.7
-1.5
-3.2

.7
1.4
.8

.6
.6
.6

.2
.1
.1

.1
.1
.1

Mining
Utilities

8.6
9.6

8.0
.3

3.0
-3.6

-3.9
6.1

.9
-8.3

-.6
3.4

.5
-1.3

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.8
1.2
1.1
2.6

24.6
12.1
14.8
34.8

24.7
24.4
9.6
31.1

9.1
32.8
27.7
-7.0

1.2
1.9
2.2
.5

.8
1.0
-.1
1.2

.3
1.4
.4
-.3

Motor vehicles and parts

5.5

-3.8

-4.0

-7.7

1.4

-.5

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

20.9
4.0
16.9

1.8
-1.9
2.7

2.0
-7.6
4.4

.9
-3.8
2.0

.2
.1
.3

.4
.7
.3

-.1
.2
-.2

Business equipment
Defense and space equipment

7.8
1.7

10.2
2.0

4.0
-3.5

-3.4
-2.1

1.1
-3.0

.1
1.2

-.1
1.7

Construction supplies
Business supplies

4.5
7.9

-2.2
1.0

-9.1
-1.8

-3.1
.1

1.0
.8

.0
-.2

.5
-.3

26.1
14.5
11.6

2.3
2.0
2.6

-7.0
-9.3
-4.2

1.3
1.6
.9

.8
1.0
.6

.2
.4
.0

.0
.3
-.3

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

Materials
Durables
Nondurables

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

Capacity Utilization
(Percent of capacity)
19722006
average

199495
high

200102
low

Apr.

May

Total industry

81.0

85.1

73.6

82.3

81.5

81.3

81.5

81.3

Manufacturing
Ex. motor veh. and parts
Mining
Utilities

79.8
79.9
87.4
86.7

84.6
84.3
88.9
93.7

71.6
71.4
84.8
83.8

80.9
81.4
90.9
86.4

80.1
80.5
91.3
85.0

79.8
80.3
90.2
85.8

80.0
80.3
90.0
85.8

79.9
80.2
90.5
84.7

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.5
82.2
77.8

89.5
88.2
80.5

82.0
74.6
70.0

89.4
84.1
77.9

89.1
82.3
78.2

88.9
82.1
78.0

88.9
82.0
78.5

88.7
81.8
78.4

Sector

2006

2007

II-7

Indicators of Industrial Activity

Utilities Output

Motor Vehicle Assemblies
Millions of units

2002 = 100
116

116

112

June

Electricity

108
104

112
108
104

100

Millions of units
14

0.6
Medium and heavy trucks
(left scale)

0.5

0.4

100
May

June

12
0.3

Natural gas

11
0.2

Autos and light trucks
(right scale)

2002
2003
2004
2005
2006
2007
Note. June value for electricity generation is based on
weekly data.

0.1
0.0

Business Equipment IP
Excluding High Tech and Motor Vehicles

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

Construction Supplies

130

2002 = 100
130

125

120

May

120
115

115

110

Days

2002 = 100
115
Days’ supply (left scale)

111
107

110
Excluding aircraft

May
103

105

100
95

100

Including aircraft
2002

2003

2004

2005

2006

2007

ISM New Orders Diffusion Index
and Manufacturing IP Diffusion Index

50
IP index (right scale)
48

2002
2003
2004
2005
2006
2007
Note. Days’ supply is from the staff’s flow-of-goods system.

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

Diffusion index

Diffusion index
80

ISM
70
May

80
Regional average

70
June
May

50
Empire
State

2002
2003
2004
2005
2006
2007
Note. IP is a diffusion index of 3-month changes.

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

II-8
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2006

2007

Item

Mar.

Apr.

May

June

U.S. production1
Autos
Light trucks

10.5
4.4
6.1

10.2
4.0
6.3

10.9
3.9
7.0

11.3
4.0
7.3

10.4
3.8
6.6

10.8
3.8
6.9

10.6
3.7
6.9

11.3
4.3
7.1

Days’ supply2
Autos
Light trucks

70
60
77

66
61
69

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

67
62
71

65
61
68

65
53
74

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

Inventories3
Autos
Light trucks

2.84
1.03
1.81

2.70
1.03
1.67

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

2.70
1.03
1.67

2.65
1.01
1.65

2.59
.95
1.64

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

Memo: U.S. production,
total motor vehicles4

11.0

10.6

11.2

11.6

10.7

11.0

11.6

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

Inventories of Light Vehicles
Millions of units
3.4
3.2
3.0
2.8
May

2.6
2.4

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2.2

Days’ Supply of Light Vehicles
Days
90
80
70
May
60
50
40
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

II-9

system and industry anecdotes suggest that inventories should not be an impediment to
future production gains in most industries.1
Manufacturing production edged up 0.1 percent in May after having risen 0.2 percent in
April. The factory operating rate in May, at 79.9 percent, was only slightly above its
1972–2006 average of 79.8 percent and 0.4 percentage point below its year-earlier level.2
The production of motor vehicles and parts decreased 0.5 percent in May after a gain of
1.4 percent in April. Light motor vehicle assemblies in the second quarter are on track to
increase 700,000 units, to an annual rate of 10.9 million units, after sinking to a fourteenyear low of 10.2 million units in the first quarter. Days’ supply of light vehicles in May
remained at automakers’ desired levels, and schedules for the third quarter call for light
vehicle production to rise further to 11.3 million units. Meanwhile, production of
medium and heavy trucks has continued to move lower, on balance, in response to the
falloff in demand after the Environmental Protection Agency’s new regulations that went
into effect earlier this year.
The output of high-tech industries rose at a relatively sluggish pace of about ½ percent
per month, on average, in April and May, and near-term indicators—such as those in
surveys of business plans for future spending on high-tech equipment—point toward
continued softness for a while. In April and May, computer production posted relatively
moderate gains after a jump in the first quarter when manufacturers rolled out machines
capable of handling the new Microsoft Vista operating system. In line with this
deceleration in production, Gartner expects unit shipments of personal computers to only
edge up this quarter after having increased sharply in the first quarter; unit shipments of
servers are also projected to rise at a more modest pace. Communications equipment
production has also softened of late after a strong showing in the first quarter. The output
of semiconductors has risen only tepidly in the past few months, and likely reflects softer
demand from downstream industries—like computers and communications equipment—
as well as the attempt by manufacturers to pare elevated stocks of chips.
1

Semiconductor inventories are a possible exception. The Semiconductor Industry Association’s data
on semiconductor shipments in April indicated that average selling prices continued to fall more rapidly
than normal, particularly for memory chips. The trend may indicate that excess inventories of chips
remained more of a problem at the start of the second quarter than earlier news had suggested.
2
The IP release for May included updated estimates of industrial capacity for 2007. The estimated rate
of increase in manufacturing capacity from the fourth quarter of 2006 to the fourth quarter of 2007 is
2.1 percent, a downward revision of 0.3 percentage point from the initial estimate published in
mid-February. The lower estimate primarily reflects a weaker outlook for capital spending by
manufacturers, as suggested by the recent reading on the diffusion index of manufacturers’ capital spending
plans reported in the Institute for Supply Management’s Semiannual Economic Forecast.

II-10

Indicators of High-Tech Manufacturing Activity

Survey of High-Tech Spending Plans

IP: Computers
Diffusion index

2002 = 100, ratio scale

190

May
170
75

NABE

150
70

130

65
CIO

2002

2003

2004

2005

2006

2007

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

110

2000

2001

2002

2003

2004

2005

2006

2007

IP: Communications Equipment

Millions of units, ratio scale

1.0
0.9

2002 = 100, ratio scale

17
16
Q2

May

0.8

200
180
160

14
0.7

140

PCs (right scale)

0.6

120

11
0.5

100
10

Servers (left scale)
0.4

2000 2001 2002 2003 2004 2005 2006 2007
Note. FRB seasonals. Q2 values are Gartner forecasts.
Source. Gartner.

Rate of Change in Semiconductor
Industrial Production

2001

2002

2003

2004

2005

2006

2007

FRB Chip Inventory Index
Percent

2000

1995 = 100
8

3-month moving average

130
Q1

6
4

120

110
100
90

May
0

-2

-4

1996

1998

2000

2002

2004

2006

-4

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

II-11

Excluding energy, motor vehicles and parts, and high-tech products, output increased 0.2
percent per month, on balance, in April and May. The production of durable consumer
goods rose in both months after having declined in the fourth and first quarters, while the
output of nondurable consumer goods continued to be little changed. The output of
business equipment continued to be boosted by solid gains in the production of civilian
aircraft, while other categories have continued to move lower on balance. The
production of construction supplies increased in May but remained about 2½ percent
below its year-earlier level. Days’ supply of construction supplies appears to have
reversed the run-up that occurred in the second half of 2006, an indication that inventory
overhangs of these products are unlikely to further restrain output in the next few months.
The production of industrial materials such as steel, plastic products, and nonmetallic
mineral products also firmed in recent months after having been held down since late last
year by weak downstream demand and excessive stocks.
Near-term indicators of production have generally strengthened and are consistent with
moderate production gains in the next few months. The new orders diffusion index
published by the Institute for Supply Management (ISM) increased further in May, and
the various regional surveys also moved higher on balance. The June reading of the
Empire State Manufacturing Survey moved up for a third consecutive month and
remained at a level associated with continued production gains. In June, available
weekly data show gains in industrial production for light motor vehicles, appliances,
steel, and gasoline.
Light Motor Vehicles
In April and May, total sales of light vehicles averaged an annual rate of 16.1 million
units, compared with a rate of 16.5 million units in the first quarter. Lower sales at
Chrysler and Ford caused the Big Three’s domestic market share to slip in May to 51.6
percent, about 2 percentage points below its average level in 2006.
.3
.
Consumer demand for light vehicles has held up despite relatively pessimistic views of
car-buying conditions, heightened concern over gas prices, and the generally low level of

.
.

II-12
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2006
Category

2006

Total

2007
Q4

2007

Mar.

Apr.

May

16.5

16.6

16.3

16.5

16.3

16.2

16.1

7.8
8.7

7.9
8.7

7.6
8.7

7.6
8.9

7.6
8.7

7.3
8.9

8.0
8.1

North American1
Autos
Light trucks

12.8
5.4
7.4

12.4
5.2
7.2

12.6
5.1
7.5

12.3
5.1
7.2

12.5
5.0
7.5

12.3
5.5
6.8

Foreign-produced
Autos
Light trucks

3.7
2.3
1.3

3.7
2.5
1.3

3.8
2.4
1.5

3.9
2.4
1.5

3.9
2.5
1.4

3.7
2.3
1.4

3.8
2.5
1.3

53.7

52.8

52.3

52.1

51.7

53.7

51.6

Autos
Light trucks

Memo:
Big Three domestic
market share (percent)2

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

Car-Buying Attitudes
Index

Percent
80

200

Content redacted.

72
64

180
Appraisal of car-buying conditions (right scale)

160

140

40
32
24
16
8

June

100
Bad time to buy:
Gas prices and shortages
(left scale)

June

80
60

0
-8

120

1996

1998

2000

2002

2004

2006

2008

Source. Reuters/University of Michigan Survey.

Average Value of Incentives on Light Vehicles

New Light Vehicle Fuel Economy

Current dollars per vehicle, ratio scale

Miles per gallon
21.5

3800
3400

6-month moving average
May

2500

21.0

20.5
1600
20.0
June
19.5

2002

2004

2006

Note. Weighted average of customer cash rebate and
interest rate reduction. Data are seasonally adjusted.
Source. J.D. Power and Associates.

700

1996

1998

2000

2002

2004

2006

Source. Staff estimate based on a monthly salesweighted average of city mileage ratings for all new
models of light vehicles. Data are seasonally adjusted.

2008

19.0

II-13

manufacturers’ price incentives. Consumers are apparently responding to higher fuel
prices, however, as the mix of sales in May involved uncharacteristically large shifts,
both away from light trucks toward autos and, within autos, toward more fuel-efficient
vehicles.4 As a result, the average fuel economy of new vehicles sold shot up for the
month.
Consumer Spending
Real consumer spending appears on track to post a modest gain in the second quarter
after much larger increases late last year and early this year. The deceleration primarily
reflects sluggish outlays for goods in recent months. Expenditures on services have
fluctuated considerably so far this year, as unusual weather patterns have led to wide
swings in spending on energy services. But cutting through the fluctuations, spending on
services has been increasing at a solid clip.5
After sizable gains around the turn of the year, real spending on goods other than motor
vehicles has been nearly flat since then. Although nominal expenditures at the retail
control group of stores posted a strong advance in May, after factoring in our projection
for consumer prices, we estimate that real PCE control rose only 0.2 percent last month.
The May reading was held down by an estimated decline of 2 percent in real purchases of
gasoline, perhaps a response to the run-up in pump prices over the past few months.
Indicators of near-term spending—such as weekly chain store sales and consumer
sentiment—point to only modest increases in spending on goods other than motor
vehicles this month and next.
Consumer spending continues to be supported by the current and past performance of
most fundamentals. Regarding the latest numbers, the wealth-income ratio ticked down
in the first quarter, as the stock market rose only a little and house prices remained soft,
but much of the lost ground has probably been recovered as a result of the increase, on
balance, in stock prices this quarter. For income, real disposable personal income (DPI)
expanded at a moderate pace, on average, in the first four months of this year, although

An additional factor temporarily damping recent light truck sales may be the impending introduction
of Chrysler’s new line of minivans (classified as light trucks). Although sales of light trucks declined for
every major manufacturer in May, roughly half of the overall decrease occurred at Chrysler.
5
Note, however, that many categories of services are based on judgmental trends because of a lack of
hard data in the initial estimates.

II-14

Retail and Food Services Sales
(Percent change from preceding period; seasonally adjusted current dollars)
2006
Q4
Q1
Annual rate

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

Feb.

2007
Mar.
Apr.
Monthly rate

May

.9
.1
5.1

6.3
7.7
5.5

.6
.6
.5

1.0
1.0
.7

-.1
.3
.1

1.4
1.2
.8

7.0

3.9

-.1

-.3

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

Change in Real PCE Goods

Percent
2.0

2.0
6-month
1.5

1.5

Change in Real PCE Services
1.0

Percent
1.0

6-month

0.8

0.6
1.0
0.5

0.5

0.6

1.0
0.4
May

0.0

0.4
Apr.

0.2

0.0

-0.0

-0.5

-0.2

-1.0

0.2

-1.0

-0.0
-0.2

1-month

-0.4

-2.0

2004
2005
2006
2007
Note. The values for March, April, and Q1 are staff
estimates. The value for May is a staff forecast.

-0.6

-1.5

1-month

-1.5

-0.4

-0.6
-0.8

-0.8

-2.0

-1.0

2004

2005

2006

2007

-1.0

Personal Saving Rate
6

Percent
6

0
Apr.

-2
-4
-6

-2
-4

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-6

II-15

Fundamentals of Household Spending

Changes in Nominal Wages and Salaries, Real Personal Income, and Real DPI
Nominal wage and salary disbursements (white)
Real personal income (black)
Real DPI (striped)

2006

2006:Q3

2006:Q4

2007:Q1

Change in Real DPI

February

March

Percent, annual rate
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
April

Household Net Worth and Wilshire 5000
Index

4-quarter percent change
7

Ratio
7.0

16200
May

6.0

5.5
8200

6200

4200

1998

2000

2002

2004

2006

6.5

12200

Wilshire 5000
(left scale)

10200

14200

2008

Note. Values for 2004:Q4 and 2005:Q4 exclude the effect
on income of the one-time Microsoft dividend in December 2004.

Consumer Confidence

Ratio of household
net worth to DPI*
(right scale)
1998

2000

5.0

2002

2004

4.5

2006

* The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.
** Value for 2007:Q1 is a staff estimate.
Q1**

Federal Funds Rate and 10-Year Treasury Yield

1985 = 100
180

1966 = 100
140

Percent
7

130

160
Conference Board
(left scale)

140

6
Treasury
yield

120

June 18

110
120

4
May

100
80

Reuters/
Michigan
(right scale)

Junep

60
40

100

Federal
funds
rate

3
2

70
1998
2000
p Preliminary.

2002

2004

2006

2008

1998

2000

2002

2004

2006

2008

II-16

Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2006
2007
Sector

2006

Mar.

Apr.

May

1.80
1.84

1.70
1.72

1.56
1.57

1.46
1.56

1.49
1.57

1.51
1.46

1.47
1.50

1.47
1.38
1.41
.133

1.39
1.27
1.31
.137

1.23
1.17
1.19
.133

1.17
1.12
1.14
.133

1.21
1.13
1.17
.133

1.21
1.08
1.10
.125

1.17
1.06
1.07
.126

1.05
6.36

.99
6.85

.99
6.62

.86
7.54

.84
7.76

.98
6.58

n.a.
n.a.

5.68
6.36

5.50
6.98

5.50
6.90

5.63
7.07

5.35
7.53

5.22
8.08

n.a.
n.a.

.336
.461
.062

.311
.447
.067

.323
.404
.062

.288
.440
.076

.286
.438
.076

.295
.382
.074

.117

.107

.097

.094

.095

.096

n.a.

.801

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

.789

.759

.790

.800

.770

n.a.

.304
.445
.078

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

Private Housing Starts and Permits
(Seasonally adjusted annual rate)

Millions of units
2.0

2.0
1.8

1.8
Single-family starts

1.6

1.4

1.2

1.2
May

Single-family adjusted permits
1.0

1.0

.6
Multifamily starts

.4
May

.2
.0

.2
1999

2000

2001

2002

2003

2004

2005

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

2006

2007

II-17

income growth in May likely was eroded by the sharp increase in consumer prices.6
Moreover, data from unemployment insurance tax records indicate that nominal wages
and salaries were stronger in the fourth quarter than previously estimated. However, the
rise in short-term interest rates since mid-2004 may have been a restraining influence on
consumer behavior.
Housing
Residential construction activity continues to decline as builders attempt to work off an
elevated inventory of unsold new homes. On balance, recent readings for sales of both
new and existing homes have been lower than the relatively steady pace of sales posted in
the second half of 2006. Some, though not all, of this further weakening is likely related
to the tightening of lending standards for nonprime borrowers that began in February.
Single-family housing starts decreased 3 percent in May to an annual rate of 1.17 million
units. Adjusted permit issuance in this sector also slipped a bit further. Starts generally
have been running above adjusted permits since early last year. The gap between these
two series is typically closed by movements in starts toward permits, a sign that starts
may fall further in the near term.
After an upswing in February, sales of existing single-family homes dropped back in
March and declined modestly in April. Sales of new homes in this sector, which
plummeted early this year, jumped in April. Smoothing through the monthly volatility,
the average pace of existing home sales in March and April was 4 percent below the
average in the second half of 2006, and the corresponding contraction in new home sales
was 8 percent.
For the most part, indicators of housing demand point to some further near-term
softening. The index of pending home sales fell 3 percent in April, a sign that sales of
existing homes likely will move down in the coming months. Mortgage rates have also
moved up noticeably since the end of April. Nonetheless, the index of mortgage
purchase applications has risen 4 percent since the end of April, somewhat offsetting the
weak tone of the other indicators.
The inventory of new homes for sale remains at historically high levels. Relative to the
three-month average pace of sales, the months’ supply in April was more than 60 percent

Real DPI declined in April after a robust gain in the first quarter. The readings for January through
March were boosted by the BEA’s treatment of unusually large bonus payments and stock option exercises
in the first quarter.

II-18

Indicators of Single-Family Housing
Homebuying Indicators

Home Sales
Thousands of units
1500
Existing home sales (right scale)
1400
New home sales (left scale)

Thousands of units
7500
7000

1300

6500

1200

Index
550

Index
160
MBA purchase index (right scale)

6000

1100

5500
Apr.

1000

June 15

120

4500

800

350

Apr.

100

2002

2004

2006

2008

3500

250

Pending home sales index (left scale)

4000
2000

450

5000

900

700

140

2000

2002

2004

2006

2008

150

Note. Purchase index is a 4-week moving average and
is seasonally adjusted by FRB staff.
Source. For pending home sales, National Association
of Realtors; for purchase index, Mortgage Bankers Assoc.

Source. For existing homes, National Association of
Realtors; for new homes, Census Bureau.

Content partially redacted.

New Home Sales
Months’ Supply

Mortgage Rates
Months
8
Apr.

Percent
9

9
30-year FRM
8

6
Months’ supply (right scale)

5
4
3

June

6
5

2
1
2000

2002

2004

2006

2008

4
3

Prices of Existing Homes

20
15

2000

2002

2004

2006

2008

2006

Percent change from year earlier
25
Constant quality index
Average price of homes sold
20

Apr.
Mar.

-5
-10

2002

Prices of New Homes

Percent change from year earlier
30
Repeat transactions, purchase-only index
Average price of homes sold
25
Case-Shiller price index
20

2000

Note. The June readings are based on data
through June 13, 2007.
Source. Freddie Mac.

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

1-year ARM

-5
2008

Note. The Case-Shiller price index is the 10-city index.
Source. For repeat transactions, OFHEO; for average
price, National Association of Realtors; for Case-Shiller,
Chicago Mercantile Exchange.

-10

0
Apr.

-5

2000

2002

2004

2006

2008

Note. Average price values have been adjusted by
Board staff to take into account new sampling procedures
adopted in 2005.
Source. Census Bureau.

-5

II-19

above the high end of the relatively narrow range it occupied from 1997 to 2005.

.
High inventories and low sales in April suggest that homebuilders may have to reduce
construction even further to work off their excess inventories of unsold new homes.
House-price appreciation continues to slow. The purchase-only price index for existing
homes calculated by the Office of Federal Housing Enterprise Oversight was 3 percent
higher in the first quarter than its year-earlier value, a significant deceleration compared
with the 10 percent appreciation in the previous four-quarter period. Meanwhile, the
average price of existing homes sold—which does not adjust for changes in the quality of
homes—was flat in April. Prices of new homes have also decelerated, although to a
lesser extent than existing home prices. However, these figures may understate the actual
deceleration in the cost to purchasers of new homes because homebuilders reportedly
have stepped up their use of non-price measures—such as granting more-favorable
mortgage terms, paying closing costs, and including optional upgrades at no cost—to
bolster sales and unload inventory.
Equipment and Software
The level of real spending on equipment and software (E&S) appears to be about
unchanged in the current quarter. Although spending for heavy trucks continues to
decline, outlays for E&S other than transportation look healthier this quarter than in the
previous few quarters, as shipments moved up markedly in April and May. Moreover,
orders for nondefense capital goods (excluding transportation) have improved recently, as
have the ISM’s monthly indexes of business conditions and several regional indexes.
That said, the fundamental determinants of business spending remain mixed. Business
output has been expanding more slowly since early last year. In addition, although the
cost of capital continued to decline through the first quarter, the downtrend has likely
been curtailed to some extent by the backup in corporate bond rates in recent weeks.
However, firms retain ample cash in reserve to finance investment, and the latest
semiannual survey of manufacturers’ capital spending plans conducted by the ISM
indicates that firms plan to increase their nominal expenditures at a solid pace in 2007.
Expenditure increases in the high-tech sector supported the rise in overall E&S spending
in the first quarter, but recent data point toward a smaller increase in tech spending in the
second quarter. The growth in high-tech spending in the first quarter was possibly

II-20
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2006
Category

2007

Feb.

Mar.

Annual rate

Apr.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

-3.7
-3.2
-29.5
-12.5
1.0

-8.8
-11.1
16.2
2.4
-14.7

-.5
.6
5.4
5.0
-.4

1.7
1.6
-7.2
-1.5
2.9

1.2
1.0
-.6
2.5
1.0

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

-.4
-5.8
-25.2
-40.9
.8

-18.5
-16.2
13.2
-13.0
-19.0

6.1
-2.4
5.0
4.6
-3.8

13.8
4.6
-2.0
-12.1
7.0

-.1
2.1
-7.6
16.4
1.9

Memo:
Shipments of complete aircraft1

33.2

46.2

42.1

38.2

37.3

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

Non-High-Tech,
Nontransportation Equipment

Communications Equipment
20
17
14

Billions of chained (2000) dollars, ratio scale
Shipments
Orders

20
17
14

Billions of chained (2000) dollars, ratio scale
Shipments
Orders

58
52

47
Apr.

Apr.

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

Computers and Peripherals
220
190

2000 = 100

Medium and Heavy Trucks

Billions of chained (2000) dollars

Industrial production (left scale)
Real M3 shipments (right scale)

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

May

170

22
19
17

Thousands of units, ratio scale

1100
920
800

Sales of class 4-8 trucks
Net new orders of class 5-8 trucks

1100
920
800

130

440

560

110

680

440

680
560

Apr.

150

May

320

2000

2002

2004

2006

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

200

2000

2002

2004

2006

Note. Annual rate, FRB seasonals.
Source. For class 4-8 trucks, Ward’s Communications;
for class 5-8 trucks, ACT Research.

320

200

II-21

boosted by the introduction of Microsoft’s Vista operating system. Real computer
spending in the NIPAs rose at an annual rate of nearly 50 percent last quarter, and the
latest Quarterly Services Survey suggests that software spending increased at a solid pace
in the early part of the year. More recently, however, high-tech spending appears to have
decelerated. The industrial production index for computers, which is one of the
indicators used by the BEA to estimate spending in this category, increased less rapidly
in April and May than in previous months, and the Census Bureau reported that nominal
shipments of computers and peripheral equipment declined in April for a second
consecutive month. Some surveys tracking business spending plans for high-tech
equipment, such as those conducted recently by the NABE and by CIO magazine, also
point to a moderation. Similarly, the guidance offered by telecommunications service
providers for their capital expenditures in 2007 is consistent with a modest increase for
the year as a whole.
Business outlays on transportation equipment appear set for another decline this quarter.
Sales of medium and heavy trucks tumbled again in May from already low levels in
April. The recent drop in truck demand primarily reflects the payback from sales that
were pulled forward into 2005 and 2006 in anticipation of the tightening of emissions
standards that took effect in January 2007. Looking ahead, new orders for medium and
heavy trucks increased in May but remained at very low levels, suggesting that sales will
remain depressed in coming months. Meanwhile, aircraft spending surged in the first
quarter after three consecutive quarters of declines, but data on April shipments and on
deliveries from Boeing in May suggest that spending may be dropping back to morenormal levels this quarter.
Real spending in the category of equipment other than high-tech and transportation is
apparently on the mend after sizable declines over the previous two quarters. In
particular, shipments of industrial machinery have surged since their recent low in
January. Moreover, shipments of mining, oil field, and gas field equipment as well as
shipments of ventilation, heating, air conditioning, and refrigeration equipment have also
improved.
Nonresidential Construction
Construction activity in the nonresidential sector has resumed expanding at a brisk rate
this year after a brief lull in the fourth quarter of 2006. In addition, the fundamentals in
this sector generally point to further gains in the near term. Vacancy rates in the
industrial and office sectors have moved down over the past few years, and the vacancy
rate in the retail sector, although up a bit over the past year, is still below the average for

II-22

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change
8

4
Q1

-2

-4

1990 1991 1992 1993 1994 1995
Source. Bureau of Economic Analysis.

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-4

User Cost of Capital
High-Tech

Non-High-Tech
4-quarter percent change

4-quarter percent change

-3

-6

-9

-12

-15

-3
-6

1990
1990

1995
1994

1998 2000 2002

2005
2006

Source. Staff calculation.

1990
1990

1995
1994

1998 2000 2002

2005
2006

-15

Source. Staff calculation.

Real Corporate Cash Flow

Business Conditions
Index

4-quarter percent change
25

80
ISM (left scale)
Philadelphia Fed (right scale)

Index

40
20
May

50
5

5
-20
Q1

-5
-10

-10

-40

-5
1990
1990

1995
1994

1998 2000 2002

Source. Bureau of Economic Analysis.

2005
2006

-60
30

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

2007

-80

II-23

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

Total Structures

Office, Commercial, and Other

290

Billions of chained (2000) dollars
290

270

250

230

210

250

Billions of chained (2000) dollars
80
Apr.
70

Other

Apr.

Apr.
50

Commercial

40
Apr.

Office
190
170

190

2000

2002

2004

170

2006

30
20

2000

2002

2004

2006

Note. Other includes religious, educational, lodging, amusement and recreation, transportation, and health-care facilities.

Manufacturing
and Power & Communication
Billions of chained (2000) dollars
70

70
60

Architectural Billings and
Nonresidential Construction Employment
Percent
3.0

Diffusion index
60

2.5

Power & communication

60
2.0

Billings (right scale)

May

1.5

1.0
0.5

Apr.
30

Manufacturing

-0.5
20

2000

2002

2004

2006

-1.5

Change in
employment (left scale)

20
-1.0

May

0.0

2000

2002

2004

2006

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

Vacancy Rates

Drilling Rigs in Operation
Percent
18

18
15

Office

15
12
Q1
Q1

June

1400
1200

Industrial

Number
1600

1600

Retail
6

1200
Natural gas

1000

800

600

400

2000

2002

2004

2006

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

1400

400
Petroleum

June

200
0

2000

2002

2004

2006

Note. The June readings are based on data
through June 15, 2007.
Source. DOE/Baker Hughes.

200
0

II-24

Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2006
Measure and sector

2007

53.3
-.8
54.2

20.0
-19.7
39.7

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

45.2
10.1
25.7
9.4

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

88.0
38.2
36.6
13.1

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

Feb.

Mar.

Apr.

-4.8 e
-19.0 e
14.2 e

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

24.6
8.4
6.5
9.7

4.5 e
-3.2 e
6.2 e
1.6 e

41.6 e
-2.7 e
18.6 e
25.7 e

-33.8 e
-8.0 e
-5.9 e
-19.9 e

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

39.4
7.3
17.5
14.6

33.9
4.8
22.0
7.2

61.5
3.6
29.5
28.4

17.1
11.0
17.5
-11.3

73.7
28.8
29.2
15.7

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

ISM Customer Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.8

1.9

Index

1.9

1.8

Staff flow-of-goods system

1.7

1.6

May

50
May

1.5

1.4

1.3
Census book-value data
Apr.

1.2
1.1

1.3

1999 2000 2001 2002 2003 2004 2005 2006 2007
Note. Flow-of-goods system covers total industry ex.
motor vehicles and parts, and inventories are relative
to consumption. Census data cover manufacturing and
trade ex. motor vehicles and parts, and inventories are
relative to sales.

1.2
1.1

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

II-25

the series (1992 to date). Moreover, recent readings on architectural billings point to
additional construction increases going forward, albeit at a pace well below that seen
since this sector began to rebound in late 2005.7
Real investment in drilling and mining structures, which expanded rapidly during much
of 2005 and 2006, dropped at an annual rate of 13 percent in the first quarter. Moreover,
the total number of drilling rigs in operation was little changed during the second quarter,
suggesting that activity in this sector remained subdued. Rising materials costs and
shortages of skilled labor may be contributing to the recent decline in investment activity.
Business Inventories
In the past few months, firms in most industries appear to have made considerable
progress in addressing the inventory overhangs that developed last year. After
subtracting nearly 1 percentage point from the annualized growth rate of real GDP in the
first quarter, investment in real nonfarm inventories excluding motor vehicles seems
likely to impose little, if any, additional drag in the second quarter. The book value of
manufacturing and trade inventories excluding motor vehicles increased at an annual rate
of $74 billion in April; however, rising energy prices likely accounted for a sizable part
of this increase. The ratio of manufacturing and trade book-value inventories (excluding
motor vehicles) to sales ticked down again in April after a decline in March. Meanwhile,
the staff’s flow-of-goods inventory system suggests that in May, the months’ supply of
inventories excluding motor vehicles reversed its April uptick and remained at the lower
level that has prevailed since February. In addition, the underlying industry detail
indicates that most inventory ratios are not particularly elevated by historical standards.
Finally, the number of purchasing managers who viewed their customers’ inventories as
“too low” exceeded the number who saw them as “too high” for the third month in a row
in May.
Federal Government Sector
The federal budget deficit continued to narrow in April and May. More generally, the
deficit (adjusted for payment-timing shifts and financial transactions) for the twelve
months ending in May 2007 was $184 billion, less than 1½ percent of nominal GDP and
$90 billion lower than the deficit for the twelve months ending in May 2006.8 The
7

About 88 percent of the construction projects covered by the architectural billings index are
nonresidential.
8
For the twelve months ending in May, the primary budget balance—which is equal to receipts minus
non-interest outlays—showed a surplus of about $50 billion. A primary budget surplus typically implies a
decrease in the ratio of federal debt to nominal GDP.

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

Surplus or Deficit (-)

Billions of dollars

300

300
12-month moving sum

200

100

-100

-100
May

-200

-300

-400

-500

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Outlays and Receipts

2005

2006

-500

2007

Percent change from year earlier

20
12-month moving sum

Outlays
May

5
0

-5

-5
Receipts

-10
-15

-10
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-15

2007

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

April-May

12 months ending in May

2006

2007

Percent
change

Outlays
Net interest
National defense
Major transfers1
Other

446.4
38.8
86.6
236.9
84.1

457.0
44.7
90.7
257.9
63.7

2.4
15.2
4.7
8.9
-24.3

2,604.6
207.7
514.4
1,397.1
485.3

2,720.2
235.3
549.9
1,495.5
439.5

4.4
13.3
6.9
7.0
-9.5

Receipts
Individual income and payroll taxes
Corporate
Other

507.7
400.4
53.7
53.7

547.9
439.7
57.0
51.2

7.9
9.8
6.1
-4.7

2,329.4
1,790.7
320.9
217.8

2,536.1
1,944.7
380.9
210.5

8.9
8.6
18.7
-3.4

61.3

90.9

...

-275.2

-184.1

...

Function or source

Surplus or deficit (-)

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

2006

2007

Percent
change

II-27

smaller deficit reflects a combination of still rapid increases in receipts as well as some
deceleration in the growth of outlays.
Although receipts have continued to rise briskly, their rate of increase has slowed from
the exceptionally strong pace in the past couple of years. In particular, total corporate
revenues for April and May rose only 6 percent relative to their level in the comparable
period of 2006. Moreover, corporate tax payments from the daily Treasury statements
for June were running just 4 percent above their year-ago level. Individual income and
payroll tax payments in April and May—which included most of the final payments on
individual tax liabilities for 2006—were about 10 percent above their year-earlier level, a
somewhat lower rate of increase than in the previous couple of years.
Federal outlays during the twelve months ending this May were up 4½ percent, compared
with those in the twelve months ending in May 2006. Mostly because of higher interest
rates, net interest payments posted another brisk increase relative to their year-earlier
level; nevertheless, the rise was smaller than a year ago. Growth in non-interest outlays
has slowed since last year, primarily because of diminished spending for “other”
outlays—in particular, federal spending for disaster relief and flood insurance, outlays for
the implicit subsidy costs of student loans, and spending for agricultural commodity
programs. The most recent figures from monthly Treasury statements suggest that real
defense purchases as measured in the NIPAs will bounce back in the second quarter after
having fallen in the first quarter. Finally, the Congress enacted a $120 billion
supplemental appropriations bill on May 25; this bill included about $100 billion in
budget authority for defense spending, most of which is expected to be spent over the
next two years.9
State and Local Government Sector
Incoming data for state and local governments suggest that real purchases for this sector
in the NIPAs are rising briskly in the second quarter. The sector averaged about 21,000
net new hires per month in April and May, similar to the moderately strong pace of
employment gains in 2006. Real construction expenditures appear to have posted another
sizable increase in April, continuing the ramping up in investment spending that began at
the start of 2006.

The supplemental appropriations bill also included legislation to increase the federal minimum wage
over the next two years. The current federal minimum wage of $5.15 per hour is scheduled to increase to
$5.85 on July 24, 2007, and then rise to $6.55 on July 24, 2008, and to $7.25 on July 24, 2009.

II-28

State and Local Indicators

Real Spending on Consumption & Investment

Net Change in Employment

Percent change, annual rate
12
10

Thousands of jobs, monthly average
12

Spending
4-quarter moving average

Q1
4

-2

-4

1998

2000

2002

2004

-4

2006

0
-10

May
2000

2002

2004

0
-10

2006

Note. 2007:Q1 is a staff estimate.

Real Construction

Net Saving

Billions of chained (2000) dollars
200

Percent of nominal GDP
200

1.0

180

0.5

160

0.0

140

-0.5

120

-1.0

120

Annual rate

1998

Apr.

2000

2002

2004

2006

1990

1995

2000

2005

-0.5

-1.0

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

State Revenues

Local Revenues

Percent change from year earlier
20

Percent change from year earlier
20
15

15
10

4-quarter moving average

Q4
5

-10
-15

Individual and
corporate income
taxes
1998

2000

2002

Source. Census Bureau.

2004

2006

-15

10
Property taxes

-10

-5

Total revenues

4-quarter moving average

8
Q4

6
4
2

Total revenues
1998

2000

2002

Source. Census Bureau.

2004

2006

II-29

State government finances have been strong and stable in the current fiscal year, which
ends on June 30 for most states, according to a recent report from the National
Association of State Budget Officers (NASBO). Although the average year-end balance
across states is expected to be less than the historic high of last fiscal year, most states
continue to hold ample reserves. States anticipate that they will end the fiscal year with
balances, on average, equal to 8 percent of expenditures, well above the 5 percent level
generally considered to constitute adequate fiscal reserves.10 Reflecting the fiscal health
of the sector, NASBO also reports that many states are looking to increase their spending
next year. For example, governors in thirty-four states have made proposals for the
upcoming fiscal year aimed at reducing the number of individuals without health
insurance. Proposed costs for these programs are significant—in total equal to around
$18 billion annually.
Prices
Headline consumer price inflation has picked up in recent months, boosted by substantial
increases in energy prices. The overall CPI rose 0.7 percent in May after a 0.4 percent
increase in April. These readings boosted the annual rate of increase in headline CPI
inflation to 7.0 percent over the past three months—well above the 4 percent of the
previous three months and the 2½ percent increase in 2006. However, core inflation has
slowed; in May the CPI excluding food and energy rose 0.1 percent, and the increase
over the most recent twelve months, at 2.2 percent, is a little lower than over the
preceding twelve months. Resource utilization remains relatively tight, but long-run
inflation expectations continue to stay within the range they have occupied for much of
the past few years.
On the basis of the CPI data, we estimate that core PCE prices rose 0.1 percent in May
after an increase of 0.1 percent in April and no change in March. Over these past three
months, we estimate that these prices rose at an annual rate of 1.0 percent; they were held
down, in part, by declines in volatile categories such as apparel and tobacco products that
are likely transitory and that followed appreciable price increases in the preceding three
months. The rent components have also decelerated recently. Owners’ equivalent rent
increased just 0.1 percent in May and at a 2.1 percent annual rate over the past three
months, down from a 3.2 percent annual rate of increase over the preceding three months.
A portion of the slowdown reflects technical adjustments to strip out the cost of utilities
10

Despite the current healthy fiscal position of the sector, many states are expressing concern about
potential structural deficits over the longer term. These concerns are driven by the expectation of continued
strong demand for state spending—particularly for benefits for retiring state employees and for healthrelated programs—along with an anticipated slowing of revenue gains in future fiscal years.

II-30

Price Measures
(Percent change)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

May
2006

May
2007

Feb.
2007

May
2007

Apr.
2007

May
2007

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

4.2
1.9
23.6
2.4
.3
3.3
3.3
3.3
3.5
2.4

2.7
3.9
4.7
2.2
-.7
3.4
3.8
2.9
2.3
1.9

4.0
6.1
14.9
2.6
.7
3.5
3.8
3.1
...
...

7.0
4.2
71.0
1.6
-1.3
2.7
2.6
2.8
...
...

.4
.4
2.4
.2
-.1
.3
.3
.2
...
...

.7
.3
5.4
.1
-.1
.3
.3
.3
...
...

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

3.3
2.0
24.2
2.2
-.2
3.2
3.4
3.1
1.8
3.8

2.3
3.6
4.8
1.9
-.8
3.0
3.7
2.8
1.7
2.9

3.7
5.3
15.2
2.7
.8
3.5
3.7
3.5
2.7
2.6

5.0
4.2
75.8
1.0
-2.1
2.3
2.6
2.2
.7
2.6

.3
.3
2.6
.1
-.1
.2
.3
.2
.1
.3

.5
.3
5.8
.1
-.2
.2
.2
.2
.1
.2

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

4.5
-1.6
21.0
1.5
1.6
1.4
9.2
6.6
9.6
31.8

4.1
8.5
7.2
1.6
1.4
1.7
3.7
2.9
11.5
9.2

6.1
18.1
4.3
2.8
3.1
2.4
5.0
1.7
32.5
26.0

11.0
6.5
54.4
.7
1.0
.3
12.9
5.9
15.9
37.1

.7
.4
3.4
.0
-.1
.1
.9
.8
-1.5
.4

.9
-.2
4.1
.2
.3
.1
1.1
.4
2.0
.1

Measures

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
2. PCE prices in May 2007 are staff estimates.
... Not applicable.

II-31

when translating tenants’ rents to owners’ equivalent rents and is likely to be transitory.11
That said, tenants’ rents have also decelerated over the past few months.
Over the twelve months ending in May, we estimate that core PCE prices rose
1.9 percent, a smaller increase than over the preceding twelve-month period. However,
the step-down in the twelve-month change was due almost entirely to a slowing in the
nonmarket component. Market-based core PCE prices likely rose 1.7 percent over the
twelve months ending in May, about the same as over the previous twelve months.
Consumer food prices have decelerated in the past few months after sizable increases in
January and February. However, even the recent increases were noticeably above the
rate of core price inflation. Although the brisk pace of food price increases has been
widespread, price increases for meats have been particularly large because of strong
demand and higher costs for feed, most notably corn; corn prices have increased more
than 80 percent over the past year, driven by rising demand for ethanol. Over the twelve
months ending in May, the CPI for food and beverages rose 3.9 percent, compared with a
1.9 percent increase in the previous twelve months.
The CPI for energy jumped 5.4 percent in May, extending the pattern of exceptionally
steep increases seen in the preceding couple of months. Almost all of the recent increase
in energy prices reflects higher prices of refined petroleum products, as widespread
refinery glitches have held domestic production below typical seasonal levels. In
addition, although gasoline inventories have risen considerably in recent weeks, they
remain at the low end of their historical range for this point in the year. With supply
quite tight, gasoline margins are quite high by historical standards, though they have
fallen somewhat in the past couple of weeks. The substantial jump in consumer energy
prices over the March-to-May period has roughly reversed the price declines in
September and October of last year, leaving the most recent twelve-month change in the
CPI for energy at 4.7 percent.
Broader measures of inflation, which are available only through the first quarter of this
year, have slowed relative to the pace of the past couple of years. The latest four-quarter
rise in the price index for GDP less food and energy was 2.6 percent, down ¼ percentage

Some residential rent contracts include utilities, but owners’ equivalent rent (OER) is intended to be
measured on a “pure rent” basis (with homeowner utilities already covered in the energy portion of
consumer prices). Thus, when translating the rent data into OER, the BLS makes an adjustment for
changes in utilities prices for the affected rental units, assuming that, in the current situation, higher utilities
costs imply lower pure rent for any given contract rent.

II-32

Consumer Prices
(12-month change except as noted)

PCE Prices

CPI and PCE ex. Food and Energy
Percent

Percent
4

Total PCE

CPI

May*
2

May*

PCE
Core PCE

2000

2001

2002

2003

2004

2005

2006

2007

* Staff estimate.

CPI
chained

2000

2001

2002

2003

2004

2005

2006

2007

PCE Goods and Services
Percent

Percent
3

4
May*

3
2

May*

Services ex. energy

2
1

1
Market-based components

2001

2002

2003

2004

2005

2006

2007

0
May*

-1
-2
-3

* Staff estimate.

Goods ex.
food and energy

2000

2001

-1
-2

2002

2003

2004

2005

2006

2007

-3

* Staff estimate.

PCE excluding Food and Energy

CPI excluding Food and Energy
Percent

Percent
5

3-month change, annual rate

3
2

0
1

2000

* PCE for May is a staff estimate.

PCE excluding Food and Energy

4
3-month change, annual rate

-1

3
May

May*

-1

2000

2001

2002

* Staff estimate.

2003

2004

2005

2006

2007

2000

2001

2002

2003

2004

2005

2006

2007

-1

II-33

Energy Prices and Inventories
(Data from Energy Information Administration except as noted)

Total Gasoline Margin

Gasoline Price Decomposition

200

Cents per gallon
200
Retail price less average spot crude price*

350

180

Cents per gallon

300

Rack price

350
300

Retail price*
160

160

250

250
June 18

140

200

120

150

100

June 18

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

Gasoline Inventories

Average spot crude price**

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

Ethanol Prices
Millions of barrels

245
235

100

245
Excluding ethanol
Adjusted for ethanol use*

235

Cents per gallon

500
450

Near-futures price, daily
Monthly futures, June 19

500
450

400
225

215

June 15

215

205

195

185

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

185

400

350

300

250

200

225

200

150

100

Natural Gas Prices

2005
2006
Source. Chicago Board of Trade.

100

2007

Natural Gas Inventories
Dollars per million BTU

4000

Billions of cubic feet
4000

3500

3000

June 19

2500

June 8

2500

2000

1500

1000

500

2
0

2001
2002
2003
2004
2005
Note. National average spot price.
Source. Bloomberg.

2006

2007

2005
2006
2007
Note. Shaded region is defined as 5-year average plus
seasonal factors +/- 1 standard deviation. Monthly data
through February 2007, weekly data thereafter, as indicated
by line weights.

II-34

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

2004

2005

2006

2007

Product prices
GDP price index
Less food and energy

2.3
2.1

3.1
3.1

3.1
2.9

2.7
2.6

Nonfarm business chain price index

1.6

3.1

3.0

2.0

Expenditure prices
Gross domestic purchases price index
Less food and energy

2.2
2.1

3.4
3.0

3.5
2.7

2.5
2.6

PCE price index
Less food and energy

2.0
1.8

2.7
2.2

3.0
2.0

2.2
2.2

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

1.7
1.3

2.5
1.8

2.9
1.6

2.0
2.1

CPI
Less food and energy

1.8
1.3

3.0
2.3

3.7
2.1

2.4
2.6

Chained CPI
Less food and energy

1.7
1.2

2.6
2.1

3.2
1.9

2.2
2.3

Median CPI
Trimmed mean CPI

2.0
1.7

2.4
2.3

2.5
2.6

3.6
2.7

Trimmed mean PCE

1.9

2.4

Surveys of Inflation Expectations
(Percent)
Reuters/Michigan Survey
1 year 2

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10 years) 4

2005:Q3
Q4

3.8
3.7

4.3
4.6

3.5
3.7

3.5
3.5

2.9
3.1

2.5
2.5

2006:Q1
Q2
Q3
Q4

3.6
4.0
3.3
1.9

3.7
4.5
4.0
3.5

3.0
3.5
3.4
3.0

3.3
3.6
3.3
3.5

2.9
3.1
3.0
3.0

2.5
2.5
2.5
2.5

2007:Q1
Q2

2.4
n.a.

3.6
4.1

3.0
3.4

3.4
3.5

2.9
3.1

2.4
2.4

2.4
2.8
2.6
2.7
n.a.

3.6
3.6
4.0
4.3
4.1

3.0
3.0
3.3
3.3
3.5

3.3
3.3
3.6
3.7
3.3

2.9
2.9
3.1
3.1
3.0

2.4
...
...
2.4
...

Period

Feb.
Mar.
Apr.
May
June

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

II-35

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

Percent

Percent
12

Quarterly

Monthly

4
June

8
3

Median, 5 to 10 years ahead

4
Q2

Median, 12 months ahead

0
1971

1975
1976

1985
1986

1990
1991

1995
1996

2000
2001

Inputs to Models of Inflation
12

2005
2006

1980
1981

2005

Percent

Quarterly

2006

2007

Percent

Quarterly

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

6
Q2

2
4

4
Distributed lag of
core PCE inflation**

0
0
0
0
1975
1980
1985
1990
1995
2000
2005
2005
2006
2007
1971
1976
1981
1986
1991
1996
2001
2006
*For 2007 forward, the median projection for PCE inflation over the next 10 years from the Survey of Professional Forecasters (SPF);
for 1991 to 2006, the equivalent SPF projection for the CPI; for 1981 to 1991, a related survey for the CPI conducted by Richard Hoey;
and for the period preceding 1981, a model-based estimate constructed by Board staff. The survey data before 2007 are adjusted down
0.5 percentage point to put the CPI projections approximately on a PCE basis.
**Derived from one of the reduced-form Phillips curves used by Board staff.

Inflation Compensation from TIPS
5

Percent

Percent
5

Quarterly

Weekly

4
3

5 to 10 years ahead

June 19

3
Q1

Next 5 years

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

II-36

Commodity Price Indexes
Journal of Commerce
1996 = 100
220

220

200

180

160

June 19

160

Metals
140

140

120

120
Industrials

100

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. The Journal of Commerce (JOC) industrial price index is based almost entirely on industrial commodities, with a small
weight given to energy commodities. Copyright forJournal of Commerce data is held by CIBCR, 1994.

Commodity Research Bureau
1967 = 100
500

500

450

June 19

400

450
400

Spot industrials
350

350

300

250

250
Futures

200
150

200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Note. The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial commodities, excluding energy.
The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly equally among
energy commodities, industrial commodities, and precious metals.

Selected Commodity Price Indexes
(Percent change)

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

2006 1

12/19/06
to
5/1/07 2

5/1/07 2
to
6/19/07

52-week
change to
6/19/07

11.0
38.9
26.9
13.0
15.0

6.8
11.5
6.4
13.2
2.1

1.7
-.8
4.2
6.1
2.4

13.2
36.1
24.6
27.0
12.2

1. From the last week of the preceding year to the last week of the year indicated.
2. May 1, 2007, is the Tuesday preceding publication of the May Greenbook.

150

II-37

point from the preceding four-quarter period. Although core PCE inflation picked up
slightly through the first quarter, price increases for other components of final demand,
especially construction, decelerated.
As measured by the Reuters/Michigan survey, the median expectation for year-ahead
inflation increased further, to 3.5 percent in early June after having risen to 3.3 percent in
April and May. These increases are consistent with the energy-driven acceleration in
overall consumer prices in recent months. Median five- to ten-year expectations ticked
up to 3.1 percent in April and May but fell back in early June to 3.0 percent. This figure
is within the narrow range that has prevailed over the past two years, although it is
slightly above the range typical in 2003 and 2004. Inflation compensation from TIPS
five to ten years ahead have changed little over the intermeeting period and remains
within the range seen in recent years.
At earlier stages of processing, the producer price index (PPI) for core intermediate goods
increased 0.4 percent in May after a jump of 0.8 percent in April. Despite an acceleration
in intermediate prices in the past six months, the most recent twelve-month change, at
about 3 percent, is well below the 6¾ percent increase in the previous 12-month period.
This pattern partially reflects price movements in energy-intensive goods, such as
industrial chemicals.
Commodity prices continue to move up. The Journal of Commerce index of industrial
materials has risen 1¾ percent since the time of the May Greenbook, and the Commodity
Research Bureau’s index of spot industrials is up 4¼ percent. Although metals prices,
which have been pushing up commodity prices over the past couple of years, have in
many cases turned down in recent weeks, this small dip has been more than offset by
increases in a variety of other commodities, such as cotton, lumber, and foodstuffs.
Labor Costs
Compensation per hour in the nonfarm business sector is now reported to have increased
at an annual rate of 11.2 percent in the fourth quarter, compared with the 8.5 percent
estimate reported in the previous BLS release.12 The staff estimates that the increase in
nonfarm business compensation per hour slowed to an annual rate of 2.7 percent in the
first quarter. The outsized increase in compensation per hour in the fourth quarter of
2006, as well as the deceleration between the fourth quarter and the first quarter of 2007,
12

As noted earlier, this upward revision reflected the incorporation of new information on wages and
salaries from unemployment insurance records.

II-38

Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2005:Q1 2006:Q1
to
to
2006:Q1 2007:Q1e

Category

2006

2007

Q1 e

Compensation per hour
Nonfarm business

5.7

3.2

-1.4

11.2

2.7

Unit labor costs
Nonfarm business

3.6

2.1

-2.5

1.1

8.9

1.3

e Staff estimate.

Compensation per Hour

Unit Labor Costs

(Percent change from year-earlier period)

(Percent change from year-earlier period)
Percent

Percent
8

Productivity and costs*

3
Q1

-1

-2

ECI

1996

1998

2000

2002

2004

2006

* Value for 2007:Q1 is a staff estimate.

2
1

1996

1998

2000

2002

2004

-2

2006

Note. Value for 2007:Q1 is a staff estimate.

Average Hourly Earnings

Markup, Nonfarm Business

(Percent change from year-earlier period)
Percent
4.5

4.5

4.0

Ratio

1.66
1.64

May

3.5

3.5
3.0

1.60

2.5

1.58

2.0

1.56

1.5

1.54

1.0

1.52

1.64

1.62

3.0

1996

1998

2000

2002

2004

2006

2008

1.66

1.62
1.60
1.58

Average,
1968-present

1.56
1.54

1996

1998

2000

2002

2004

2006

Note. The markup is the ratio of output price to unit
labor costs. Value for 2007:Q1 is a staff estimate.

1.52

II-39

reflected $50 billion in one-time bonus payments and stock options, which the BEA
assumed accrued in the fourth quarter, and the subsequent unwinding of these payments
in the first quarter.13 The sizable run-up in the level of compensation per hour over the
past couple of quarters has caused the markup of prices over unit labor costs to turn
down, although it remains above its long-term average.
More-timely data point to some leveling off of compensation inflation recently. After
accelerating from early 2004 to late 2006, the twelve-month change in average hourly
earnings of production or nonsupervisory workers has decelerated in recent months.
Over the first five months of this year, average hourly earnings have increased at an
annual rate of 3.3 percent rate, a bit below last year’s pace.

Last Page of Domestic Nonfinancial Developments

As noted in the Consumer Spending section, the bonuses were paid—and showed up as wage and
salary disbursements—in the first quarter of 2007. However, the BEA assumed that the bonuses
represented remuneration for productive activity in the fourth quarter of 2006 and thus imputed them to that
period’s compensation bill. The BEA will not have actual source data for wage and salary disbursements
in the first quarter until August.

Domestic Financial
Developments

III-T-1

Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2004

2006

Change to June 19 from
selected dates (percentage points)

2007

Instrument
June 28

June 29

May 8

June 19

2004
June 28

2006
June 29

2007
May 8

1.00

5.25

4.25

.00

1.36
1.74

4.88
5.06

4.76
4.82

4.52
4.71

3.16
2.97

-.36
-.35

-.24
-.11

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

1.28
1.45

5.27
5.37

5.25
5.21

5.25
5.24

3.97
3.79

-.02
-.13

.00
.03

Large negotiable CDs1
3-month
6-month

1.53
1.82

5.47
5.59

5.31
5.31

5.32
5.36

3.79
3.54

-.15
-.23

.01
.05

Eurodollar deposits3
1-month
3-month

1.29
1.51

5.33
5.49

5.32
5.35

5.32
5.36

4.03
3.85

-.01
-.13

.00
.01

Bank prime rate

4.00

8.25

4.25

.00

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

2.88
3.97
4.90

5.26
5.15
5.28

4.71
4.51
4.70

4.98
4.98
5.16

2.10
1.01
.26

-.28
-.17
-.12

.27
.47
.46

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

1.56
2.25

2.49
2.61

2.12
2.28

2.65
2.69

1.09
.44

.16
.08

.53
.41

Municipal general obligations (Bond Buyer)5

5.01

4.71

4.25

4.64

-.37

-.07

.39

Private instruments
10-year swap
10-year FNMA6
10-year AA7
10-year BBB7
10-year high yield7

5.21
5.38
5.60
6.25
8.41

5.81
5.59
6.20
6.74
8.74

5.17
4.99
5.60
6.07
7.94

5.70
5.51
6.09
6.54
8.22

.49
.13
.49
.29
-.19

-.11
-.08
-.11
-.20
-.52

.53
.52
.49
.47
.28

Home mortgages (FHLMC survey rate)8
30-year fixed
1-year adjustable

6.21
4.19

6.78
5.82

6.15
5.48

6.74
5.75

.53
1.56

-.04
-.07

.59
.27

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

Record high

2006

Change to June 19
from selected dates (percent)

2007

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

Date

June 29

May 8

June 19

Record
high

2006
June 29

2007
May 8

13,676
1,539
5,049
855
15,569

6-4-07
6-4-07
3-10-00
6-4-07
6-4-07

11,191
1,273
2,174
714
12,846

13,309
1,508
2,572
831
15,203

13,635
1,534
2,627
848
15,490

-.30
-.36
-47.97
-.79
-.51

21.84
2.49
2.81
18.76
2.59

2.45
1.72
2.14
2.10
1.89

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Most recent Thursday quote.
6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
8. Home mortgage rates for June 19, 2007, are for the week ending June 14, 2007.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the most recent policy tightening began.
June 29, 2006, is the day the most recent policy tightening ended.
May 8, 2007, is the day before the most recent FOMC announcement.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Futures Contract Rates

Percent

May April April Initial
FOMC PPI CPI claims

5.7

May FOMC May employment
minutes report

5.5

May
retail
sales

May
CPI

5.7
5.5

December 2007 Eurodollar

5.3

5.1

4.9

December 2008 Eurodollar

4.7

4.7
May 8

May 11

May 16

May 21

May 24

May 29

June 1

June 6

June 11

June 14

June 19

Note. 5-minute intervals.

Expected Federal Funds Rate

Percent
5.50

Implied Distribution of Federal Funds Rate
6 Months Ahead
Percent
45

June 19, 2007 (bars)
May 8, 2007 (dashed line)

5.25

35
30

5.00

June 19, 2007

4.75

May 8, 2007

4.50

5
0

4.25
June

Oct.
2007

Feb.

June Oct.
2008

Feb.

3.25

June
2009

3.75

4.25

4.75

5.25

5.75

Target rate

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

Note. Based on the distribution of the 3-month Eurodollar
rate 6 months ahead (adjusted for a term premium) as implied
by options on Eurodollar futures contracts.

Policy Uncertainty

Inflation Compensation

Basis points
300

Daily

May
FOMC

12 months ahead

Daily

250

Percent
3.0
May
FOMC

5 to 10
years ahead

2.8

200
2.6
150
2.4
100

5-year

2.2

6 months ahead

0
June

Oct.
2005

Feb.

June
2006

Oct.

Feb.
June
2007

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

2.0
June

Oct.
2005

Feb.

June
2006

Oct.

Feb.
June
2007

Note. Estimates based on smoothed nominal and inflationindexed Treasury yield curves and adjusted for the
indexation-lag effect.

Domestic Financial Developments
Overview
Market expectations for the path of monetary policy beyond the very near term shifted
sharply upward over the intermeeting period, as investors eliminated most of the policy
easing that had been anticipated over the next two years. Treasury yields moved up
across the term structure, reflecting the higher expected path for policy and an apparent
rise in term premiums. Stock prices were up slightly, on balance, as gains spurred by
favorable economic news and merger and acquisition announcements outweighed the
effects of higher interest rates. Strong profits continued to support corporate credit
quality, and corporate bond spreads remained low. Delinquency rates and new
foreclosures on subprime variable-rate mortgages have continued to rise, but broader
measures of household credit quality show few signs of stress.
Policy Expectations and Interest Rates
Market participants largely anticipated the FOMC’s policy decision at the May meeting
to keep the target federal funds rate unchanged. Nevertheless, the Committee’s retention
of the language that “core inflation remains somewhat elevated” reportedly led investors
to mark up a bit their expected policy path beyond the August meeting. The release of
the minutes from the May meeting and other FOMC communications elicited little
response in financial markets. However, economic data releases generally came in on the
strong side of investors’ expectations, and several primary dealers abandoned forecasts
for cuts in the federal funds rate this year. In accordance with that reassessment of the
outlook, Eurodollar futures rates now imply an expected federal funds rate of 5 percent
by the end of 2008, up a little more than 50 basis points since the May FOMC meeting.
The implied distributions of the federal funds rate six months and twelve months ahead
became considerably less skewed toward policy easing over the intermeeting period, and
near-term uncertainty about the future path of policy, derived from options on Eurodollar
futures contracts, declined notably over the intermeeting period.
Broadly in line with the revision in policy expectations, the two-year nominal Treasury
yield rose roughly 30 basis points over the intermeeting period. The ten-year nominal
Treasury yield moved up close to 50 basis points, as one-year forward rates increased
across the term structure, particularly at intermediate maturities. Real yields rose in line
with nominal yields at the five-year maturity and rose slightly less at the ten-year
maturity. Consequently, inflation compensation over the next five years changed little,
but inflation compensation five to ten years ahead increased nearly 20 basis points. The
staff’s term structure models attribute most of the substantial increase in longer-maturity

III-1

III-2

Corporate Yields, Risk Spreads, and Stock Prices
Wilshire 5000

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

May 8, 2007 = 100
105

Daily

June
19

Monthly

100
10
95
(Trend earnings) / P*

85
80
May
FOMC

June
19

Long-run real Treasury yield

65
2005

2006

2004

2007

1986 1989 1992 1995 1998 2001 2004 2007
+ Denotes the latest observation using daily interest rates and
stock prices and latest earnings data from I/B/E/S.
* Trend earnings are estimated using analysts’ forecasts of
year-ahead earnings from I/B/E/S.

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Percent
50

Daily

Percent
12.5

Daily
May
FOMC

May
FOMC

11.5

10.5
9.5
10-year high-yield
(left scale)

30
9

8.5

June
19

7
June
19

10-year BBB
(right scale)

2003

2004

2005

2006

2007

6.5
5.5

5
2002

7.5

4.5
2002

2003

2004

2005

2006

2007

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

Corporate Bond Spreads

Commercial Paper Quality Spread

Basis points
1000

Basis points

Basis points
375

Daily

Weekly average

May
FOMC

800

May
FOMC

10-year high-yield
(left scale)

300

600
225

400

200

June
19

10-year BBB
(right scale)

June
19

150

0
75

2002

2003

2004

2005

2006

2007

Note. Measured relative to comparable-maturity Treasuries.

2002

2003

2004

2005

2006

2007

Note. Measured by the difference between yields on 30-day A2/P2
paper and A1/P1 paper.

III-3

real yields to a rise in the real term premium and much of the smaller rise in inflation
compensation to higher expected inflation. Anecdotal reports pointed to mortgage
hedging activity as possibly contributing to the volatility in yields at longer maturities.
Stock Prices and Corporate Interest Rates
Broad stock price indexes were up 2 percent to 3 percent, on net, over the intermeeting
period, as the boost from largely favorable macroeconomic news and the steady stream of
merger and acquisition announcements more than offset the effects of higher interest
rates. As evidence of the damping effect of interest rates, shares of REITs and utilities,
which are quite sensitive to bond yields, fell about 4 percent over the intermeeting period.
The spread between the twelve-month forward trend earnings-price ratio for S&P 500
firms and a real long-run Treasury yield—a rough gauge of the equity risk premium—
narrowed a fair bit but remained near its average over the past two decades. Implied
volatility on the S&P 500 index spiked on a few days, when rising interest rates seemed
to cause sharp declines in stock prices, but this measure of near-term expected stock
market volatility has since dropped back to levels that are low by historical standards.
Yields on investment-grade corporate bonds rose about in line with those on comparablematurity Treasuries, leaving their spreads little changed at fairly low levels. In contrast,
spreads on speculative-grade bonds narrowed about 20 basis points over the intermeeting
period and now stand at the bottom of their historical range. Near-term spreads on
speculative-grade bonds are particularly narrow, a sign that investors expect corporate
credit quality to remain strong over the next few years, whereas forward spreads further
out the term structure are only a shade below their long-term average. In the commercial
paper market, the thirty-day quality spread remained low.
Corporate Earnings and Credit Quality
In the first quarter of 2007, earnings per share for firms in the S&P 500 were up 9 percent
from four quarters earlier, the smallest gain since 2003. Investors had anticipated an even
sharper deceleration in corporate profits, and revisions to analysts’ forecasts of yearahead earnings for S&P 500 firms have been positive in May and June. Currently,
analysts’ forecasts imply four-quarter growth of about 5 percent in the second quarter, but
such forecasts are typically biased downward in the weeks leading up to the release of
quarterly earnings reports.
Corporate credit quality remained strong overall. Although the balance-sheet liquidity of
public nonfinancial corporations has come down from the peak reached a couple of years

III-4

Corporate Earnings and Credit Quality
Corporate Earnings Growth

S&P 500 EPS Revisions Index
Percent

Percent
40

Change from 4 quarters earlier

Monthly

MidJunee

-1

-10

-2

-20

-3

Q1 Q2 e

S&P 500 EPS
NIPA, economic
profits before tax

-30
1989

1992

1995

1998

2001

2004

2007

e Bottom-up forecast by equity analysts.
Source. I/B/E/S for S&P 500 earnings per share.

2003

2004

Ratio

2006

2007

Bond Ratings Changes of Nonfinancial Companies
Percent of outstandings

Ratio
Liquid assets over
total assets
(left scale)

Annual*

2005

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

Financial Ratios for Nonfinancial Corporations
0.12

-4
2002

0.35

Annual rate
Upgrades

0.09

0.30

20
Apr.

0
0.06

Debt over
total assets
(right scale)

0.25

20
40
Downgrades

0.03

0.20
1989

1992

1995

1998

2001

2004

2007

2001

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

2003

2005

2007

Source. Calculated with data from Moody’s Investors Service.

Selected Default and Delinquency Rates

Expected Year-Ahead Defaults

Percent of outstandings

Percent of liabilities
7

2.0

Monthly

6
1.5

5
C&I loan delinquency rate
(Call Report)

1.0

3
2
Q1

Bond default rate*

May

1991

1995

1999

2003

2007

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

0.5
May

0.0

0
1993 1995 1997 1999 2001 2003 2005 2007
Note. Firm-level estimates of default weighted by firm liabilities as
a percent of total liabilities, excluding defaulted firms.
Source. Moody’s KMV.

III-5

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2006
Type of security

4.6
1.7
2.8

5.2
1.9
3.3

4.1
1.7
2.4

22.7
8.2
9.7
4.9

19.1
8.4
6.4
4.3

30.3
14.4
8.4
7.6

1.5

-.4

-7.7

3.2

6.6
111.1

Financial corporations
Stocks1
Bonds2

5.4
1.6
3.8

-3.4

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

2005

31.6
15.9
11.3
4.3

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

2004

3.7
.4
3.3

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

2007

2003

6.9
139.3

Apr.

May

5.9
1.3
4.6

3.1
1.8
1.3

7.1
2.7
4.4

29.5
11.6
7.6
10.4

31.9
13.0
13.0
5.9

26.8
9.9
10.7
6.3

47.5
15.7
22.9
8.8

3.4

4.4

-.1

-6.9

-1.5

10.0

14.5

11.4

8.7

12.7

11.1

5.0
176.3

4.4
190.2

6.2
185.3

8.7
208.6

8.2
148.4

9.3
198.9

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

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

60
Monthly rate, nonfinancial firms
Commercial paper*
C&I loans*
Bonds

60
Monthly rate, nonfinancial firms

May

Total

Public issuance
Private issuance
Repurchases
Cash mergers

Q1 Apr.

40
30
Q1

Total

20
10

-10
-20

-30
-10

-40

-20

-50
-60

-30

-70

-40
2003

2004

2005

2006

* Seasonally adjusted, period-end basis.

2007

-80
2003

2004

2005

2006

2007

III-6

Commercial Real Estate
Commercial Mortgage Debt

Gross Issuance of CMBS

Percent change from year earlier

Billions of dollars
18

Quarterly

100

Quarterly

16
Q1

12
60

6
4

2
0
1996

1998

2000

2002

2004

2006

1996

1998

2000

2002

2004

2006

* As of June 15, 2007.
** Staff estimate for Q2.
Source. Commercial Mortgage Alert.

Investment-Grade CMBS Spreads

Leverage on Newly Securitized Mortgages
Basis points

Percent
300

Weekly

250

Percent

12
10

40
BBB subordination rate
(left scale)

8
200

BBB

Properties with
loan-to-value ratios
greater than 0.8
(right scale)*

Apr.

30
25

150
June
13

AAA

50
2000

2002

2004

4
100

0
2001

2002

2003

2004

2005

2006

2007

* 3-month moving average.
Source. Real Capital Analytics, Commercial Mortgage Alert.

Note. Measured relative to the 10-year Treasury yield.
Source. Morgan Stanley.

Rents and Vacancy Rates on Commercial
Properties

Delinquency Rates on Commercial Mortgages
Percent

Percent
4

At commercial
banks

Percent change from year earlier
8

Quarterly
Rents
(right scale)

6
4
2

12
Q1

CMBS
Q1

Mar.
Q1

-4

Vacancy rates
(left scale)

8
0

-6

6
1996

1998

2000

2002

2004

Source. Citigroup, Call Report, ACLI.

2006

0
-2

At life
insurance
companies

10
5

2006

-8
1992

1995

1998

2001

2004

2007

Note. Average of series for office, industrial, and retail
properties.
Source. Torto Wheaton.

III-7

ago, its level in the first quarter was still high by historical standards. In addition, the
aggregate leverage of such firms stayed near its lowest level in two decades. The realized
six-month trailing bond default rate remained close to zero in May, and downgrades of
ratings on corporate bonds were again modest in April. In the first quarter, the
delinquency rate on C&I loans at commercial banks continued to be close to its lowest
level over the past two decades. The near-term outlook for corporate credit quality also
remained strong, as KMV’s aggregate year-ahead expected bond default rate stayed at a
historically low level in May.
Business Finance
Gross bond issuance by nonfinancial corporations surged in May from the already robust
pace seen earlier this year. While acquisition-related financing continued to support
corporate bond issuance, the proceeds from a significant share of recent issues reportedly
were for capital expenditures. Commercial paper outstanding was unchanged in May,
and growth in C&I loans maintained a strong pace. Overall, net debt financing increased
sharply in May to a near-record level, and despite the recent backup in interest rates,
declined only slightly in early June.
Gross public equity issuance by nonfinancial corporations rebounded in May from a
somewhat sluggish pace in April. So far this year, the pace of public equity issuance has
been slightly above that in each of the past few years. Because of the rapid pace of
leveraged buyout activity, private equity issuance is estimated to have increased further
in the first quarter to a level about double that of public issuance. Even so, net equity
issuance continued to be deeply negative in the first quarter, as equity retired from
estimated share repurchases and cash-financed mergers and acquisitions remained near
record levels.
Commercial Real Estate
Commercial mortgage debt expanded briskly again in the first quarter, and the issuance
calendar for commercial mortgage-backed securities (CMBS) suggests continued strength
in the second quarter. The spread on lower-rated CMBS over Treasuries has narrowed in
recent weeks but remains elevated by historical standards. The spread initially jumped in
response to the difficulties in the subprime residential mortgage market, concerns about
the adequacy of credit support for CMBS, and high leverage on recently securitized
commercial mortgages. The recent narrowing has been attributed to rating agencies’
clarifications of their new credit support requirements, which may have reduced
investors’ uncertainty about the adequacy of existing standards.

III-8

Household Liabilities
Mortgage Rates

Mortgage Debt and Consumer Credit
Percent

Percent change from year earlier
9

Weekly

16
Mortgage

12
30-year
FRM

7
June
13

1-year
ARM

Apr.

Consumer
4

3
1996

1998

2000

2002

2004

2006

2008

1996

1998

2000

2002

2004

2006

2008

Source. Freddie Mac.

Delinquencies on Consumer Loans

Delinquencies on Mortgages
Percent

Percent of loans
6

Monthly

Credit card loans
at commercial banks

Fixed rate
Variable rate

Apr.

12
10

Nonrevolving
consumer loans at
commercial banks

8
Subprime

Apr.

Apr.
Q1

4
2

Auto loans at captive
finance companies

Prime
Apr.
1

1996

1998

2000

2002

2004

2006

2001

2003

2005

2007

Source. For credit cards and nonrevolving, Call Report;
for auto loans, Federal Reserve.

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

Number of Foreclosures Started

Spreads on New Subprime RMBS Issues

Thousands, quarterly rate

Basis points
350

Other*
Prime
Subprime

1000

Weekly

300

800

BBBA
AAA

250

600

200

400

150
June
15

100

200

50
2004

2005

2006

Q1
2007

* Primarily FHA/VA but includes loans not elsewhere classified.
Source. Staff estimates based on data from the Mortgage
Bankers Association.

Sept.

Nov.
2006

Jan.

Mar.
May
2007

Note. Measured relative to libor.
Source. Trader estimates provided by Merrill Lynch.

III-9

Delinquency rates on commercial mortgages held by life insurance companies and on
those backing CMBS remained low through the first quarter, whereas the delinquency
rate on commercial mortgages held at commercial banks rose a bit because of a
deterioration in the performance of loans for multifamily properties and for construction
and land development. In the first quarter, rents for commercial properties continued to
rise, though rather slowly, and vacancy rates remained at the low end of their range of the
past couple of years.
Household Finance
Over the intermeeting period, interest rates available to prime borrowers on both thirtyyear fixed-rate and one-year adjustable-rate mortgages increased along with other market
interest rates. Mortgage debt decelerated in the first quarter, likely reflecting the
slowdown in home-price appreciation over the past year and the lower pace of home
sales. Growth of consumer credit through April remained moderate by historical
standards.
Delinquency rates on consumer loans and prime mortgages—which account for the vast
majority of total household debt—have continued to be low. However, the delinquency
rate on subprime variable-rate mortgages increased again in April, reaching nearly
12 percent, about double its recent low in mid-2005. The sharp rise in delinquencies over
the past year is showing through to new foreclosures, which we estimate rose 14,000, to
nearly 325,000, in the first quarter. Properties purchased with subprime variable-rate
mortgages account for much of the rise in foreclosures.
Spreads on new subprime residential-mortgage-backed securities (RMBS) have reversed
most of their jump earlier this year, likely because of tighter underwriting standards on
newer loans. The issuance of subprime RMBS has slowed somewhat, suggesting that
subprime mortgage borrowing has declined from the frenzied pace of late 2005 and the
first half of 2006 but remains at a solid level.
The OFHEO purchase-only index of home prices advanced at an annual rate of
2.2 percent in the first quarter, about the same as in the fourth quarter. The downward
trajectory of expected home prices in ten of the largest metropolitan markets over the
next few quarters, derived from futures quotes on the S&P/Case-Shiller house price
index, was little changed over the intermeeting period. With home prices and stock
prices posting only small increases, the ratio of household net worth to income ticked
down in the first quarter. Given the substantial rise in stock prices since the end of the

III-10

Household Assets
House Prices

S&P/Case-Shiller House Price Futures
Percent change, annual rate

Mar. 2007 = 100
14

Quarterly, s.a.

120

June 19, 2007
May 9, 2007

Mar.
2007
110

10
8

100
6
OFHEO purchase-only index

0
1996

1998

2000

2002

2004

2006

Jan.

Source. Office of Federal Housing Enterprise Oversight.

July
2005

Jan.

July
2006

Jan.

July
2007

Jan.
2008

Source. S&P/Case-Shiller, Chicago Mercantile Exchange.

Stock Prices

Net Worth
Percent change, annual rate

Ratio to disposable income
150

Quarterly, end of period

6.5

Quarterly, end of period, s.a.

100

Wilshire 5000

6.0

Q1
5.5

5.0

-50
-100
1996

1998

2000

2002

2004

2006

4.5
1996

1998

2000

2002

2004

2006

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

Q3
Total long-term funds
Equity funds
Domestic
International
Hybrid funds
Bond funds
High-yield
Other taxable
Municipals

2005

16.0
11.3
2.5
8.7
2.1
2.6
-1.3
3.5
0.4

2006

18.9
13.3
0.9
12.4
0.6
5.0
-0.2
4.0
1.3

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

2006
Q4

2007
Q1

Apr.

2007
Maye

Assets
Apr.

9.2
4.1
-3.6
7.7
0.3
4.8
0.4
3.3
1.0

21.6
11.2
-0.9
12.1
1.8
8.6
0.5
6.3
1.8

39.5
21.2
6.5
14.7
3.3
15.0
0.7
11.4
2.9

34.6
18.3
1.7
16.6
2.7
13.6
0.6
11.6
1.3

25.2
-0.1
-12.1
12.0
1.2
24.1
1.7
18.7
3.7

8,640
6,368
4,887
1,482
688
1,584
165
1,042
377

III-11
Treasury and Agency Finance
Indications of Foreign Participation in
Treasury Auctions

Percent of
total issue

Foreign Custody Holdings

Billions of dollars
1400

40
Weekly average

Indirect
bids
June
12

1200

Treasury
June
13

1000

25
Apr.
26

Foreign
allotment

800

600
Agency

400

10
2000

2001

2002

2003

2004

2005

2006

2003

Note. Six-month rolling averages for all 2-, 5-, and 10-year nominal
Treasury auctions.

Average Trading Volume

200

2007

2004

2005

2006

2007

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

Cents per
$100 face value

Bid-Ask Spread

Billions of dollars
400

0.88
Monthly average

350
300

0.86

250
200

0.84

2-year on-the-run
Treasury notes

150
100

0.82

50
0
Jan.

May
Sept.
2005

Jan.

May
Sept.
2006

Jan.

May
2007

July
Oct.
Jan.
2006
Source. BrokerTec Interdealer Market Data.

Note. Five-day moving average of daily trading volume in 2-, 5-,
and 10-year on-the-run coupon securities in interdealer market.
Source. BrokerTec Interdealer Market Data.

GSE Stock Prices
Daily

May
FOMC

140

June
19

Apr.

10-Year GSE Yield Spreads

Jan. 3, 2006 = 100

Fannie Mae
Freddie Mac

0.80
Jan.

Daily

Apr.
2007

Basis points
45

May
FOMC

Fannie Mae
Freddie Mac

June
19

130

120

June
19

110

100

90
20
May

July

Sept.
2006

Nov.

Jan.

Mar.
2007

May

July

Sept.
2006

Nov.

Jan.

Mar.
2007

May

Note. GSE yields based on senior unsecured debt relative to
the off-the run Treasury yield.

III-12

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

2006
Type of security

2003

2004

2005

37.9
32.0
10.0
22.1
5.8

34.7
29.8
10.8
19.0
4.9

3.5

2.0

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

2007

Apr.

May

38.4
34.1
15.5
18.7
4.2

32.9
30.0
9.7
20.3
2.8

39.4
34.9
11.4
23.4
4.5

37.6
35.7
17.7
18.0
1.9

33.0
31.9
16.3
15.7
1.1

43.1
42.1
17.5
24.6
1.0

2.1

2.8

2.3

1.2

2.2

1.7

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

Ratings Changes
Number of ratings changes
4000

Annual rate

Upgrades

3000
H1

2000

H2
Apr.

1000

May

0
1000
2000
3000

Downgrades

4000
1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

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

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
8

Weekly

Ratio

Weekly

1.0

20-year

6
June
14
June
19

1-year

5
0.9
4

June
14

0.8

2
1
0

1995

1998

2001

2004

Source. Municipal Market Advisors and Bond Buyer.

2007

0.7
1995

1998

Source. Bond Buyer.

2001

2004

2007

III-13

first quarter, the ratio of net worth to income has likely moved back up more recently.
Supported by substantial inflows to bond funds and international equity funds, net flows
to long-term mutual funds were robust again in May.
Treasury and Agency Finance
The Treasury completed its May refunding with auctions of several coupon issues,
including a reopening of the thirty-year bond. Bid-to-cover ratios suggest that most
issues were well received. There is little evidence to date of any substantial abatement in
demand for Treasury securities among foreign investors. The six-month trailing averages
of indirect bidding ratios and foreign allotments ticked lower but remained robust, and
foreign custody holdings at the Federal Reserve Bank of New York stayed high.
Treasury market liquidity has remained ample despite the sharp increase in interest rates.
Although trading volume in Treasury securities increased dramatically on June 7, when
yields jumped about 15 basis points across the coupon curve, bid-ask spreads held at
normal levels, and markets functioned smoothly.
Fannie Mae’s stock price climbed about 10 percent during the intermeeting period,
supported by an announcement that it will return to timely financial reporting by next
February. The price of Freddie Mac shares declined about 5 percent over the same
period. Yields on agency debt increased relative to those on comparable-maturity
Treasury securities, although spreads relative to swap rates were little changed.
State and Local Government Finance
Gross issuance of long-term municipal bonds surged in May to a level above the robust
first-quarter pace. Spending on education and housing boosted new capital issuance, and
advance refundings continued to be substantial. Issuance of short-term debt remained
negligible in May, consistent with healthy state and local budgets. A sizable amount of
Michigan’s debt was downgraded in May, but the credit quality of municipal bonds
elsewhere remained solid. The ratio of a representative municipal bond yield to a
comparable-maturity Treasury yield stayed near the low end of its range of the past
decade.
Money and Bank Credit
Smoothing through the influence of outsized tax-related flows into and out of liquid
deposits, growth in M2 moderated in April and May after particularly rapid growth in the

III-14

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)1

M2
Components2
Currency
Liquid deposits3
Small time deposits
Retail money market funds
Memo:
Institutional money market funds
Monetary base
1.
2.
3.
p

2005

2006

4.1

Aggregate and components

2006
Q4

2007
Apr.

5.0

6.9

8.0

3.6
2.0
18.8
-.2

3.6
.8
19.3
12.9

3.0
3.2
16.6
17.1

4.9
3.5

15.8
3.2

21.1
2.6

Level
(billions
of dollars),

May
(p)

8.2

3.9

7,242

1.7
7.1
8.6
18.1

3.5
9.5
6.7
7.3

2.1
3.3
3.1
9.3

755
4,436
1,191
854

11.0
1.6

33.6
3.4

33.3
2.7

1,449
818

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

III-15

first quarter. The slowdown was registered across most components of M2, while growth
in currency maintained its tepid pace, largely because of soft foreign demand.
Loans at commercial banks expanded briskly in April and May, supported by lending to
businesses through C&I and commercial real estate loans. Information on pricing in the
syndicated loan market suggests that banks continued to offer very accommodative
lending terms. On the household side, banks’ holdings of loans backed by residential real
estate expanded at a fairly strong pace, on balance, in April and May, while consumerloan originations edged up only slightly.
According to the latest Call Report data, the profitability of the commercial banking
industry declined a bit but remained solid in the first quarter. The delinquency rate on all
loans and leases ticked higher for the third straight quarter, in part because of a further
rise in delinquencies on both residential and commercial real estate loans. Meanwhile,
provisioning for loan losses edged up for the second straight quarter. However,
delinquency and loan-loss provisioning rates stayed low by historical standards,
suggesting that the credit quality of banks’ portfolios generally remained strong.

III-16

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

Level,1
May 2007p

2005

Q4
2006

Q1
2007

Apr.
2007

May
2007p

10.5

Total

2006

9.6

4.4

8.7

11.8

7.7

8,226

Loans2
Total
To businesses
Commercial and industrial
Commercial real estate

11.6

10.7

7.5

9.9

13.7

9.0

6,189

13.5
17.1

16.4
13.6

10.6
7.6

8.2
10.3

8.9
14.6

15.2
7.9

1,221
1,506

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

11.9
13.3
11.4
3.1
.7
8.6

7.2
1.5
9.4
5.2
6.4
10.9

5.4
1.8
6.8
.2
4.8
14.2

9.5
3.5
11.6
7.4
8.0
14.9

14.9
-3.4
21.3
9.7
1.2
19.5

.1
.0
.0
5.5
.6
23.9

1,821
455
1,366
750
1,130
891

7.5
.0
13.5

6.3
5.5
12.8

-4.7
-.9
7.5

4.9
-2.0
10.4

6.2
-23.6
45.8

3.8
-12.3
28.3

2,038
1,177
1,069

Securities
Total
Treasury and agency
Other5

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

Delinquency Rates on Loans

Loan-Loss Provisioning

Percent, annual rate

Percent of average assets
7

1.4
Quarterly

Quarterly
6
5

1.0

Total loans
and leases

1.2

0.8

0.6
Q1

2
Residential
real estate

0.2

0
1991

1994

1997

Source. Call Report.

2000

2003

2006

0.4

0.0
1991

1994

1997

Source. Call Report.

Last Page of Domestic Financial Developments

2000

2003

2006

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit narrowed to $58.5 billion in April after widening to
$62.4 billion in March. The narrowing of the deficit reflected a relatively steep decline in
imports of core goods, following a March surge, and a modest increase in exports of both
core goods and services.

Trade in Goods and Services
2006
Nominal BOP
Exports
Imports
Real NIPA
Exports
Imports
Nominal BOP
Net exports
Goods, net
Services, net

Annual rate
Monthly rate
2006
2007
2007
Q3
Q4
Q1
Feb.
Mar.
Apr.
Percent change

13.3
4.7

10.8
12.2

9.4
3.3

6.8
5.6

-758.5
-838.3
79.7

-797.2
-875.6
78.4

13.5
-7.3

-1.4
-.6

2.6
4.4

.2
-1.9

10.6
-.6
...
-2.6
5.7
...
Billions of dollars

...
...

-62.4
-70.7
8.4

-58.5
-67.1
8.6

-707.7
-801.4
93.6

5.7
3.8

-707.2
-803.5
96.3

-57.6
-65.5
7.9

Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census.
n.a. Not available. ... Not applicable.

In April, the value of exported goods and services increased 0.2 percent, following a
2.6 percent increase in March. For exports of goods, the largest increase was in exports
of agricultural products, which more than rebounded from a March decline; exports of
soybeans were particularly strong. The strength in agricultural exports was largely offset
by widespread declines in exports of capital goods, which erased their March gains.
Notably, exports of both aircraft and computers fell for the third straight month, and
exports of semiconductors fell sharply.
The value of imported goods and services fell 1.9 percent in April, following an outsized
4.4 percent increase in March. Imports of natural gas moved up sharply and have risen
strongly in the past three months. Imports of petroleum were flat after surging in March.
Among non-fuel categories, imports of autos fell sharply after a big gain in March.
Imports of consumer goods more than retraced their March increases, as pharmaceutical

IV-1

IV-2

U.S. International Trade in Goods and Services
(Quarterly)
Trade Balance

Contribution of Net Exports to Real GDP Growth
Billions of dollars, a.r.

Percentage points, a.r.

0
-100

2.0
1.5

-200

1.0

-300

0.5

-400
0.0
-500
-0.5

-600

Apr

-1.0

-700

-1.5

-800

2000

2002

2004

2006

-900

Selected Exports

2000

2002

2004

2006

-2.0

Selected Imports
Billions of dollars, a.r.

Billions of dollars, a.r.

450

500

450

400

400
Capital goods
ex. aircraft

350
Capital goods
350
300
300
250

200
Industrial
supplies

250

Industrial
supplies

Consumer
goods

200
150
150

Consumer
goods

100
100
Oil
50

Aircraft

2000

2002

2004

2006

2000

2002

2004

2006

IV-3

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

Exports of G&S
Goods exports
Gold
Other goods

Levels
Change1
2006 2007
2007
2006 2007
2007
Q4
Q1
Mar. Apr.
Q4
Q1
Mar. Apr.
1510.5 1531.7 1550.9 1553.8
47.0
21.2
39.9
3.0
1065.9 1080.5 1092.7 1093.3
9.0
10.6
17.0
17.8
1056.9 1069.9 1075.6 1075.5

24.8
-.6
25.4

14.5
1.6
13.0

29.8
9.7
20.2

.6
.8
-.2

Capital goods
Aircraft & parts
Computers & accessories
Semiconductors
Other capital goods

431.7
83.7
47.9
50.8
249.3

428.1
80.4
45.3
50.2
252.2

423.0
73.0
41.5
50.4
258.1

415.1
71.8
40.5
47.9
254.9

16.0
10.4
.7
-2.0
6.9

-3.6
-3.3
-2.6
-.6
2.9

5.1
-6.3
-5.0
1.3
15.0

-7.9
-1.2
-.9
-2.5
-3.2

Automotive
Ind. supplies (ex. ag., gold)
Consumer goods
Agricultural
All other goods

109.5
267.0
136.0
75.4
37.4

111.5
266.7
140.9
79.3
43.4

118.7
268.5
142.0
78.1
45.4

117.8
270.2
143.6
88.1
40.6

-.7
5.0
3.9
.6
.5

2.0
-.3
4.9
3.9
6.0

9.7
3.4
3.8
-4.1
5.6

-.8
1.7
1.7
10.0
-4.8

444.5

451.2

458.2

460.5

22.2

6.7

10.0

2.3

Imports of G&S

2218.2 2238.8 2299.5 2255.8

-42.5

20.6

97.4

-43.8

Goods imports
Oil
Gold
Other goods

1867.3 1883.9 1941.6 1898.2
270.3 283.4 299.5 298.9
5.1
7.8
15.2
12.7
1591.8 1592.7 1626.9 1586.7

-49.4
-60.7
-.4
11.7

16.6
13.1
2.7
.9

92.7
46.4
11.4
34.9

-43.3
-.5
-2.5
-40.3

Services exports

Capital goods
Aircraft & parts
Computers & accessories
Semiconductors
Other capital goods

427.7
30.6
101.9
27.2
268.0

437.4
32.8
108.5
27.0
269.2

434.3
33.7
103.3
26.2
271.1

427.2
32.5
101.8
26.3
266.7

.9
3.3
-1.5
-1.2
.2

9.7
2.2
6.6
-.2
1.2

-6.2
1.9
-6.0
-1.0
-1.0

-7.1
-1.2
-1.5
.0
-4.4

Automotive
Ind. supplies (ex. oil, gold)
Consumer goods
Foods, feeds, bev.
All other goods

260.6
292.3
464.8
76.9
69.5

253.4
281.2
473.0
80.1
67.5

265.5
292.1
484.9
82.1
68.1

253.4
296.5
466.4
79.0
64.1

6.2
-14.1
15.7
1.0
1.9

-7.2
-11.1
8.2
3.2
-2.0

15.5
14.4
8.8
2.9
-.5

-12.1
4.4
-18.4
-3.1
-4.0

350.9

354.9

358.0

357.5

6.9

4.0

4.6

-.4

13.32
55.62

14.32
54.33

14.54
56.38

13.35
-.24
61.32 -11.26

1.01
-1.29

1.47
3.38

-1.19
4.94

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

imports fell back from an elevated March level and imports of artwork and antiques,
another volatile category, plunged. Imports of services were flat after robust growth in
March.
Along with the April data, previously published data were revised beginning in 1997.
The trade deficit in 2007:Q1 is now $707 billion at an annual rate, about $15 billion
narrower than previously reported. This largely reflects a significant upward revision to
exports of services. The 2006:Q4 deficit narrowed by $7 billion, as the upward revision
to services was partially offset by higher imports of goods.
Prices of Internationally Traded Goods
Non-oil imports. In May, import prices for core goods rose 0.6 percent, 0.2 percentage
point faster than in April. Almost all of the reported price increase reflected a 1.6 percent
increase for material-intensive goods. Having risen 1.1 percent in April, non-fuel
industrial supplies prices increased 1.8 percent in May, reflecting higher prices for
imported metals. Prices for foods rose 0.9 percent, a step-down from the 1.3 percent
increase recorded in April. In contrast to these sharp price increases for materialintensive goods, prices for imported finished goods were little changed in April and May.
The exception was the price index for capital goods excluding computers and
semiconductors, which moved up 0.3 percent in both months. Outside of core imports,
prices for imported natural gas rose 2.6 percent in May, and prices for imported
computers and semiconductors fell 0.5 and 1.4 percent, respectively.
The average level of core import prices in April and May was 3½ percent at an annual
rate (a.r.) above the first-quarter average. Prices for material-intensive goods were up
10 percent, whereas prices for finished goods increased only 1 percent. Nearly all of the
price increase for imported finished goods reflected a 2¼ percent increase in prices for
capital goods excluding computers and semiconductors.
Oil. The BLS price index of imported oil rose 2.7 percent in May. The index has risen
each of the past four months and stands 21 percent above its level in January. Thus far in
June, oil prices have edged higher, with spot prices of most grades showing an increase
over their May averages. The rise in oil prices in May and thus far in June appears to
reflect ongoing concerns about oil supply, particularly from Iran, Iraq, and Nigeria.

IV-5

Prices of U.S. Imports and Exports
Merchandise Imports

Categories of Core Imports
12-month percent change

12-month percent change

8
6

Core goods

20
15

Material-intensive
goods

4
2

10
Finished goods

0
-2

2000

2002

2004

2006

-5

-4

Non-oil goods

-10

-6

2000

Oil

2002

2004

2006

-15

Natural Gas
Dollars per barrel

85
75

300

2000=100
Import price
index
(left scale)

250

65
55
45
Spot WTI

15
2002

2004

30
25

200

150

100

Import unit value

2000

Dollars per million BTU

2006

Merchandise Exports

50
0

Spot Henry Hub
(right scale)
2000

2002

2004

2006

5
0

Categories of Core Exports
12-month percent change

12-month percent change

8
6
4

Core goods

20
15

Material-intensive
goods

10
Finished goods

-2

-5

-4

-10

Total goods

2000

2002

2004

2006

-6

2000

2002

2004

2006

-15

IV-6

Prices of U.S. Imports and Exports
(Percentage change from previous period)
2006
Q4
Merchandise imports
Oil
Non-oil
Core goods1

Annual rate
2007
Q1
Q2e

Monthly rate
2007
Mar.
Apr.
May

----------------------- BLS prices ---------------------11.9
1.8
12.5
1.6
1.4
.9
-51.9
-3.0
73.4
8.7
6.6
2.7
1.8
2.6
2.9
.3
.3
.5
1.9

3.4

3.6

Finished goods
Cap. goods ex. comp. & semi.
Automotive products
Consumer goods

1.2
1.2
.8
1.5

1.8
3.1
.3
1.9

.9
2.3
.5
.3

.1
.2
.0
.1

.1
.3
.0
.0

.1
.3
.2
.0

Material-intensive goods
Foods, feeds, beverages
Industrial supplies ex. fuels

3.6
6.5
1.8

6.4
9.9
3.8

10.0
7.2
10.6

.7
-.1
1.0

1.2
1.3
1.1

1.6
.9
1.8

-2.5
2.2
7.6

-9.5
-6.8
33.1

-7.8
-20.8
12.8

-1.0
-.7
4.6

-.7
-4.3
-2.7

-.5
-1.4
2.6

7.2

4.6

9.3

6.4

1.9
3.0
.9
.3

3.6
4.4
1.7
3.4

2.1
2.3
.8
2.9

.2
.3
.1
.0

.3
.3
.1
.6

.2
.2
.0
.3

-.7
20.9
-5.7

17.0
27.8
14.1

11.9
3.4
14.1

1.9
2.1
1.8

.8
-1.4
1.3

.2
.0
.3

-3.4
-3.3

-13.0
-1.6

-13.2
-.8

-1.2
-.6

-2.2
.0

-.4
.0

Computers
Semiconductors
Natural gas
Merchandise exports
Core goods2
Finished goods
Cap. goods ex. comp. & semi.
Automotive products
Consumer goods
Material-intensive goods
Agricultural products
Industrial supples ex. ag.
Computers
Semiconductors

--------------------- NIPA prices --------------------Chain price index
Imports of goods & services
Non-oil merchandise
Core goods1

-8.6
1.0
1.2

1.0
2.2
2.8

...
...
...

Exports of goods & services
Total merchandise
Core goods2

-.9
.0
.3

3.5
3.9
5.9

...
...
...

1. Excludes computers, semiconductors, and natural gas.
2. Excludes computers and semiconductors.
e/ Average of two months.
n.a. Not available. ... Not applicable.

IV-7

Continued OPEC production restraint and strong oil demand have also helped keep oil
prices at historically elevated levels.
The spot price of WTI closed at $69.11 per barrel on June 19, up from an average of
$63.50 per barrel in May. Spot WTI continues to be uncharacteristically weak relative to
the prices of other grades of crude because of high oil inventories in the Midwest. The
high inventories are the result of heavy refinery maintenance and several unplanned
outages that have reduced demand for crude oil in the region. An increased flow of oil
from the Canadian oil sands has also helped push up inventories. Currently, the pipeline
infrastructure does not exist to move oil from the Midwest to the Gulf Coast to take
advantage of regional price differentials. Since March, the spot price of Brent crude has
risen about $3 per barrel more than WTI and closed at $72.31 per barrel on June 19.
Exports. Prices of exported core goods rose 0.2 percent in May, a step-down from the
0.5 percent increase in April, which itself was a step-down from March. The deceleration
of core export prices was concentrated in prices of nonagricultural industrial supplies,
which, after increasing 1.3 percent in April, rose just 0.3 percent in May. After falling
1.4 percent in April, prices of agricultural exports were unchanged in May. Prices for
exported finished goods rose 0.2 percent in May, with noticeable gains in consumer
goods and capital goods excluding computers and semiconductors. Prices of exported
computers fell 0.4 percent in May, whereas prices for semiconductors were unchanged.
The average level of core export prices in April and May was 6½ percent at an annual
rate above the first-quarter average. Much of the rise can be attributed to the 14 percent
increase in prices of nonagricultural industrial supplies. Agricultural prices, having
increased 28 percent in the first quarter, were up only 3½ percent in the April-May
period.
U.S. Current Account
The U.S. current account deficit was $770 billion (a.r.) in the first quarter of 2007,
$19 billion wider than in the fourth quarter of 2006 (revised). The widening was due to
increased net unilateral transfers to foreigners, primarily increases in U.S. Government
grants and private remittances and other transfers. On net there was little movement in
the balances on goods or services, leaving the trade deficit virtually unchanged.
The investment income balance was positive $48 billion (a.r.) in the first quarter, and
there were net positive revisions back to 2001. These upward revisions were the result of

IV-8

two factors: (1) a change in estimated direct investment income, especially receipts, as
BEA incorporated new ownership information from their benchmark surveys in the
calculations, and (2) a change in estimated portfolio income resulting from new
methodologies for recording interest on U.S. holdings of foreign bonds and foreign
holdings of U.S. bonds. In the first quarter of this year, net investment income was only
slightly higher than its (revised) fourth-quarter level. Interest, dividend, and direct
investment income receipts each increased in the first quarter, but total income payments
also rose, as increases in interest and dividend payments were only partially offset by a
decline in direct investment payments.
U.S. Current Account
(Billions of dollars, seasonally adjusted annual rate)
Goods and Investment
Other
Current
Period
services,
income, income and
account
net
net
transfers, net balance
Annual
2005
-714.4
54.5
-94.9
-754.8
2006
-758.5
43.2
-96.1
-811.5
Quarterly
2006:Q2
Q3
Q4
2007:Q1
Change
Q2-Q1
Q3-Q2
Q4-Q3
Q1-Q4

-770.3
-797.2
-707.7
-707.2

49.2
30.0
45.3
48.1

-101.2
-102.1
-89.4
-111.3

-822.4
-869.3
-751.8
-770.3

-11.5
-26.9
89.5
0.6

0.9
-19.2
15.3
2.8

-9.4
-0.8
12.7
-21.9

-19.9
-47.0
117.6
-18.6

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

U.S. International Financial Transactions
Financial flows for the first quarter of 2007 show continued strong net purchases of U.S.
securities by private foreign investors (line 4 of the Summary of U.S. International
Financial Transactions table). U.S. acquisitions of foreign securities (line 5) also
remained very strong. Flows of U.S. direct investment abroad (line 6) increased slightly
in the first quarter, as reinvested earnings remained strong and equity investment picked
up. There was a more significant decline in foreign direct investment into the United

IV-9

States (line 7), as a bounce-back in retained earnings was more than offset by slower
capital inflows and a big decline in intercompany debt flows. Taken together, total
private financial inflows were somewhat smaller in the first quarter than in the fourth
quarter of 2006. However, foreign official inflows (line 1) picked up notably. The
statistical discrepancy in the first quarter was negative $10 billion, indicating some
combination of under-reporting of the current account deficit or over-reporting of net
financial inflows.
The most recent data on securities transactions show that foreign private purchases of
U.S. securities slowed in April from the robust pace recorded in the first quarter. Foreign
private investors on net sold Treasury securities (line 4a) and made more moderate
purchases of U.S. corporate bonds (line 4c), but returned to making net purchases of
agency bonds (line 4b). Foreign demand for equities (line 4d) picked up smartly, in part
reflecting a $7 billion merger-related stock swap. As is typically the case, most
transactions were recorded against the United Kingdom and financial centers in the
Caribbean.
Foreign official flows into the United States (line 1) remained strong in April. Inflows
from China eased a bit and accounted for less than half the official inflows recorded for
April.
. OPEC countries recorded a
small net outflow in April, but these data have been volatile on a monthly basis and most
likely understate actual inflows from these countries.
.
U.S. residents’ acquisitions of foreign securities (line 5) fell back in April from the very
strong pace recorded in the first quarter. U.S. acquisitions of foreign bonds slowed, as
new issuance of bonds by foreign firms returned to a more normal level. Demand for
foreign equities (line 5b), primarily from Asia, remained strong.
The volatile banking sector (line 3) posted a large net inflow in April, primarily reflecting
sizable inflows from affiliated banking offices located in the Caribbean.
The balance of payments data released in June also showed significant revisions for 2005
and 2006 to foreign official inflows and foreign private net purchases of U.S. securities,
based on newly-released results of the survey of foreign holdings of U.S. securities as of
June 2006. The survey indicated considerably larger official holdings than previously

IV-10

available data had suggested, especially of Treasury securities and U.S. government
agency bonds. These data revisions primarily affected estimated official inflows from
Japan, Russia, and Middle-East oil exporters. Foreign official inflows were revised up by
about $60 billion in 2005 and $140 billion in 2006, with largely offsetting reductions in
inflows attributed to foreign private investors.
The balance of payments data also show for the first time data on net U.S. cross-border
flows of financial derivatives through year-end 2006 (line 8). These data show
previously unrecorded foreign inflows of $29 billion in 2006. The bulk of derivatives
flows were vis-a-vis the United Kingdom, as derivatives flows exhibit the same financial
center bias as other data collected by the TIC system. Data on derivatives lag those of the
other TIC portfolio flows, and thus there are no reported transactions for the first quarter
of 2007.
The new data on derivatives inflows, significant revisions to the underlying securities
transactions data for 2006, and revisions that reduced the size of the 2006 current account
deficit contributed to a notable reduction in the statistical discrepancy for 2006. The
discrepancy is now estimated to have been a negative $18 billion, compared with positive
$141 billion prior to the revisions.

IV-11
Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)
2005

2006

2006
Q3
110.5

Q4
86.0

Q1
147.7

2007
Mar
43.5

Apr
39.0

273.8

443.0

Q2
123.7

259.7
12.8
14.0
232.8

440.6
21.3
45.2
374.1

124.2
-2.5
21.6
105.2

109.5
6.6
13.1
89.8

84.6
10.0
-6.8
81.4

147.8
9.1
12.0
126.7

43.5
8.0
5.0
30.4

38.8
8.8
-0.9
30.9

14.1

2.4

-0.6

1.0

1.4

-0.1

-0.0

0.2

503.6

390.2

33.5

144.5

139.2

55.0

...

15.4

107.6

-3.6

55.0

6.2

-3.8

-26.1

52.2

576.8
133.7
38.1
313.0
92.0

551.1
-33.0
22.6
412.9
148.7

130.0
-14.3
18.4
105.9
20.0

121.5
-15.9
1.7
99.8
35.9

153.1
22.2
-10.1
112.4
28.7

163.0
46.0
-31.7
104.9
43.8

65.5
31.3
-11.2
37.1
8.4

34.8
-29.3
6.1
22.7
35.2

5. U.S. net acquisitions (-) of foreign
securities
a. Bonds
b. Stock purchases
c. Stock swaps 3

-197.0
-53.1
-139.9
-4.0

-286.6
-147.8
-120.0
-18.8

-58.5
-35.3
-20.9
-2.4

-53.8
-44.4
-9.3
0.0

-117.0
-53.6
-50.9
-12.4

-94.9
-50.5
-40.3
-4.2

-51.6
-40.3
-8.8
-2.5

-15.0
-6.5
-8.5
0.0

Other flows (quarterly data, s.a.)
6. U.S. direct investment (-) abroad
7. Foreign direct investment in the U.S.
8. Net derivatives (inflow, +)
9. Foreign acquisitions of U.S. currency
10. Other (inflow, +) 4

7.7
109.0
n.a.
19.0
-27.3

-235.4
180.6
28.8
12.6
31.5

-53.7
49.1
14.0
1.1
-44.8

-49.0
43.0
14.9
1.1
11.7

-66.1
45.6
-1.8
8.4
110.7

-75.5
23.5
n.a.
-1.6
44.4

...
...
...
...
...

-754.8
-4.1
-18.5

-811.5
-3.9
-17.8

-205.6
-1.0
49.4

-217.3
-0.5
-37.1

-187.9
-0.6
-36.6

-192.6
-0.6
-9.6

...
...
...

Official financial flows
1. Change in foreign official assets
in the U.S. (increase, +)
a. G-10 countries + ECB
b. OPEC
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. 1
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

U.S. current account balance (s.a.)
Capital account balance (s.a.) 5
Statistical discrepancy (s.a.)

Note. Data in lines 1 through 5 differ in timing and coverage from the balance of payments data published by the
Department of Commerce. 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 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 non-market means such as mergers and reincorporations.
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 1 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-12
Foreign Official Financial Flows Through April 2007 (increase, +)
($ Billions, monthly, not seasonally adjusted)
Total

G-10 + ECB
60

-10

6-month moving average

2003

2004

2005

2006

-20

OPEC

2003

2004

2005

2006

-20

All other countries
60

-10

2006

2005

2004

2003

-10

-20

2003

2004

2005

2006

-20

IV-13
Private Securities Flows Through April 2007
($ Billions, monthly, not seasonally adjusted)

Foreign Net Purchases (+) of U.S. Securities
Total
6-month moving average

120

Treasury Securities

120

Agency Bonds

120

100

-20

Corporate and Municipal Bonds

100

2003 2004 2005 2006

100

-20

-40

120

2003 2004 2005 2006

Corporate Stocks

-40

120

100

-20
2003 2004 2005 2006

2003 2004 2005 2006

-20

-40

2003 2004 2005 2006

-40

U.S. Net Acquisitions (-) of Foreign Securities
Total

Bonds

Stock Purchases & Swaps

-20

-40

-60

-80

2003 2004 2005 2006

-80

-100

2003 2004 2005 2006

-100

2003 2004 2005 2006

-100

IV-14

Foreign Financial Markets
Over the intermeeting period, the major currencies index of the dollar’s exchange value
was little changed on net. On a bilateral basis, the dollar appreciated 3.1 percent against
the yen and about 1 percent versus the euro, whereas it depreciated 3.5 percent against
the Canadian dollar. In early June the dollar depreciated against the Canadian dollar to
its lowest level since 1977, following the release of several better than expected Canadian
data and a hawkish statement from the Bank of Canada on May 29, warning of risks of
rising inflation. The option-implied volatilities of the euro-dollar and dollar-yen
exchange rate pairs increased slightly in early June as bond yields rose globally, but
settled back later in the intermeeting period.
Headline equity indexes rose 2 to 3 percent on balance in the euro area, the United
Kingdom, and Japan. Share prices in several markets rose early in the intermeeting
period to multiyear highs or, in some cases, even all-time highs, but they fell back in
early June as benchmark bond yields soared globally. Most recently, however, they have
either largely or fully retraced those declines. Over the intermeeting period, realized
volatilities on headline equity indexes declined on net from the elevated levels at which
they had remained since the February-March episode of global risk reduction.
On May 10, the Bank of England raised its policy rate 25 basis points, to 5.5 percent, and
on June 6, the European Central Bank increased its policy rate 25 basis points, to
4.0 percent. Both moves were fully anticipated. The Bank of Japan and the Bank of
Canada kept their respective policy rates unchanged, also in line with market
expectations. Three-month spot interest rates increased 8 to 22 basis points in Germany,
the United Kingdom, Japan, and Canada, while ten-year nominal sovereign yields rose
between 22 and 44 basis points in the same countries. Increases in foreign yields
generally tracked rises in dollar-based yields, as market participants seemed to scale back
expectations of a prospective slowdown in the U.S. economy and policy easing. Yields
on inflation-indexed sovereign bonds rose almost as much as nominal yields did during
the intermeeting period, except in the United Kingdom where inflation breakeven rates
rose 16 basis points. Although the realized volatility of the ten-year U.S. Treasury picked
up in the intermeeting period, realized volatility changed little on balance in Germany
and Japan.
The dollar’s trade-weighted exchange value against the currencies of our other important
trading partners declined 0.7 percent over the intermeeting period. The dollar depreciated

IV-15

6 percent against the Brazilian real, with much of the move occurring following news
that Standard & Poor’s had raised Brazil’s long-term sovereign credit rating from BB to
BB+, only one notch below investment grade. The Brazilian Bovespa index and the
Mexican Bolsa index rose about 8 and 9 percent, respectively. In emerging Asia, Korea’s
main equity index rose 12 percent on balance, and the main indexes of Taiwan,
Singapore, and Thailand stock exchanges increased between 4 and 10 percent. On May
30, China’s Shanghai Composite equity index plunged on news of an increase in the
securities trading tax, but it has since retraced those losses. On balance, the Shanghai
Composite index rose 4 percent over the intermeeting period. Emerging market bond
spreads were little changed over the period.
On May 18, the People’s Bank of China (PBoC) widened the width of the renminbi’s
intraday trading band against the U.S. dollar from +/-0.3 percent to +/-0.5 percent.
Market participants viewed this announcement as a signal that the Chinese authorities
may permit slightly more intraday volatility in the exchange rate. Additionally, the PBoC
increased its benchmark one-year lending and deposit rate floors, and it also raised the
reserve requirement ratio. The renminbi appreciated on net 1 percent versus the dollar
over the intermeeting period. On June 13, the Treasury Department released its
semiannual report on the currency policies of U.S. trading partners, in which it did not
designate China a manipulator of its currency.
The Reserve Bank of New Zealand issued a communiqué on June 11 confirming that it
had intervened in the foreign exchange market for the first time since 1985. The New
Zealand dollar, which had appreciated about 3½ percent since early May, depreciated
almost 2 percent against the U.S. dollar on the day of the intervention. However, it
largely retraced that move over the following few days.
The Desk did not intervene during the period for the accounts of the System or the
Treasury.

IV-16

Exchange Value of the Dollar and Stock Market Indexes

Percent change since
May FOMC

Latest
Exchange rates*
Euro ($/euro)
Yen (¥/$)
Sterling ($/£)
Canadian dollar (C$/$)

1.3430
123.5
1.9934
1.0674

0.9
3.1
0.1
-3.5

Nominal dollar indexes*
Broad index
Major currencies index
OITP index

104.0
79.0
129.7

-0.4
-0.2
-0.7

441.4
1783.7
6681.5
1534.9

2.8
2.2
2.0
1.8

Stock market indexes
DJ Euro Stoxx
TOPIX
FTSE 100
S&P 500

* Positive percent change denotes appreciation of U.S. dollar.

Exchange Value of the Dollar
Weekly

January 5, 2004 = 100
Major Currencies Index
Euro
Yen

120

Daily

May 9, 2007 = 100
106
FOMC
104

110

102
100

100

98
2004

2005

2006

Feb

Mar

Apr

May

Jun

Stock Market Indexes
Weekly

January 5, 2004 = 100

DJ Euro Stoxx
TOPIX
S&P 500

180

Daily

May 9, 2007 = 100
105
FOMC

160

100

140
95
120
90

100
2004

2005

2006

Feb

Mar

Apr

May

Jun

IV-17

Industrial Countries: Nominal and Real Interest Rates

Percent

3-month LIBOR
Latest
Change since
May FOMC

10-year nominal
Latest
Change since
May FOMC

10-year indexed
Latest
Change since
May FOMC

Germany

4.16

0.11

4.64

0.43

2.49

0.40

Japan

0.74

0.08

1.88

0.22

1.26

0.13

United Kingdom

5.89

0.12

5.50

0.42

2.23

0.26

Canada

4.50

0.22

4.63

0.44

...

United States

5.36

0.00

5.09

0.46

2.69

0.41

Nominal 10-Year Government Bond Yields
3

Weekly
Germany
Japan (left axis)
United States

Percent

Daily

2004

2005

2006

FOMC

Feb

Mar

Apr

May

Jun

Inflation-Indexed 10-Year Government Bond Yields
Weekly
France
Japan*
United States

Percent

Daily

FOMC

2004

2005

*Japan first issued inflation-indexed debt in March 2004.

2006

Feb

Mar

Apr

May

Jun

IV-18

Measures of Market Volatility
Dollar-Euro Options-Implied Volatility*
Weekly

Percent

1-month
3-month

Daily

FOMC

12
6

10
8

6
2004

2005

2006

Feb

Mar

Apr

May

Jun

*Derived from at-the-money options.

Yen-Dollar Options-Implied Volatility*
Weekly

Percent

1-month
3-month

Daily

FOMC

10
12
9
10

8
7

8
6
2004

2005

2006

Feb

Mar

Apr

May

Jun

*Derived from at-the-money options.

Realized Stock Market Volatility*
Weekly

Percent
DJ Euro Stoxx
TOPIX
S&P 500

Daily

FOMC

30
15
20
10
10

2004

2005

2006

Feb

Mar

Apr

May

Jun

*Annualized standard deviation of 60-day window of daily returns.

Realized 10-Year Bond Volatility*
Weekly

Percent
Germany
Japan
U.S.

Daily

FOMC

5
10
4
5
3

2004

2005

2006

*Annualized standard deviation of 60-day window of daily returns.

Feb

Mar

Apr

May

Jun

IV-19

Emerging Markets: Exchange Rates and Stock Market Indexes

Exchange value of the dollar
Latest
Percent change since
May FOMC*
Mexico
Brazil
Venezuela
China
Hong Kong
Korea
Taiwan
Singapore
Thailand

10.7395
1.9010
2144.60
7.6170
7.8137
926.9
33.02
1.5340
32.25

Stock market index
Latest
Percent change since
May FOMC

-0.8
-6.0
0.0
-1.0
-0.1
0.4
-0.8
1.2
-1.2

32065
54978
39050
4181
21685
1784
8756
998
777

8.4
9.3
-12.5
4.2
4.0
11.9
8.7
6.8
10.0

* Positive percent change denotes appreciation of U.S. dollar.

Exchange Value of the Dollar
Weekly

Mexico
Brazil
Korea
China

January 5, 2004 = 100

120

Daily

May 9, 2007 = 100
FOMC

108

104
100
100
80
96

2004

2005

2006

Feb

Mar

Apr

May

Jun

Stock Market Indexes
Weekly

January 5, 2004 = 100
Mexico
Brazil
Korea
Hong Kong

400

Daily

May 9, 2007 = 100
FOMC

115

100

200

150

100
2006

105

250

2005

110

300

2004

350

Feb

Mar

Apr

May

Jun

IV-20
Emerging Markets: Short-Term Interest Rates and Dollar-Denominated Bond Spreads

Percent

Short-term
interest rates*
Change since
May FOMC

Latest
Mexico
Brazil
Argentina
China
Korea
Taiwan
Singapore
Hong Kong

7.25
11.75
9.13
...
4.75
2.84
3.50
4.58

Dollar-denominated
bond spreads**
Latest
Change since
May FOMC

-0.06
1.65
-0.06
...
-0.10
0.90
0.00
0.15

0.82
1.41
2.72
0.54
...
...
...
...

0.01
-0.14
-0.14
0.01
...
...
...
...

*One month interest rate except 1-week rate for Korea. No reliable short-term interest rate exists for China.
**EMBI+ or EMBI Global Spreads over similar-maturity U.S. Treasuries.
... Korea, Taiwan, Singapore, and Hong Kong have no outstanding dollar-denominated sovereign bonds.

EMBI+ Spreads
Weekly

Percent

Daily

FOMC

Overall
Mexico
Brazil
6

2
4
1
2

2004

2005

2006

Feb

Mar

Apr

May

Jun

EMBI Global Spreads
Weekly

Percent
China
Malaysia
Indonesia*

Daily

FOMC

4
2
3

2
1
1

2004
*Begins May 2004.

2005

2006

Feb

Mar

Apr

May

Jun

IV-21

Developments in Advanced Foreign Economies
The major advanced foreign economies posted solid growth in the first quarter. Real
GDP growth rebounded sharply in Canada from a disappointing fourth quarter, and
growth picked up in the United Kingdom as well. In both Japan and the euro area,
growth slowed from a robust fourth quarter, but remained above potential rates. On
average, real GDP in the advanced foreign economies advanced at an annual rate of
3.3 percent in the first quarter.
Current-quarter indicators remain upbeat, including unemployment rates, which have
edged down or remain quite low. Coupled with firm consumer and business sentiment in
the euro area, the United Kingdom, and Canada, total foreign industrial GDP is not
expected to decelerate much in the current quarter.
Elevated inflation in both the United Kingdom and Canada continues to concern their
respective central banks, while euro-area inflation continues to hover close to, but below,
2 percent. In Japan, headline inflation returned to zero after dipping back into negative
territory earlier in the year. The European Central Bank and the Bank of England each
raised their policy interest rates over the past month, with indications of some further
tightening to come. Recent hawkish statements by the Bank of Canada have led market
participants to price in policy tightening in the near future.
Japanese GDP rose 3.3 percent (a.r.) in the first quarter. As anticipated, growth was led
by household and external demand. This marked the second consecutive quarter of
strong consumption growth, perhaps signaling that households have shaken off the
tentativeness shown for much of last year. However, just as consumption appears to have
recovered, private investment decelerated sharply from strong growth in 2006, at odds
with the optimistic investment plans reported in the March Tankan survey.

IV-22

Advanced Foreign Economies
Average Real GDP*
Seasonally adjusted annualized percent change

Quarterly
5
4
3
2
1
0
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-1

*Chain weighted by moving bilateral shares in U.S. merchandise exports.

CPI Inflation
12-month percent change
Monthly

Japan
Euro Area
Canada
United Kingdom

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-2

Official or Targeted Interest Rates
Percent

8
7

Japan
Euro Area
Canada
United Kingdom

6
5
4
3
2
1
0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-1

IV-23

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

2006

20051 20061

2007

GDP

2.8

2.4

1.8

0.3

5.4

3.3

Total domestic demand

2.0

2.2

-1.2

4.9

1.4

Consumption

2.7

0.5

2.4

-4.1

4.3

3.1

Private investment

3.3

9.1

8.2

3.4

10.9

0.5

Public investment

-0.1

-9.2

-22.5

-17.4

15.6

-4.6

0.7

1.4

2.7

2.6

0.3

-0.4

-0.3

0.1

-0.2

0.8

-0.4

-0.1

10.1

6.3

3.3

9.6

3.4

13.8

4.2

2.7

5.4

-1.5

-0.7

1.7

0.9

0.6

-0.1

1.5

0.6

1.8

Government consumption
Inventories

Exports
Imports
2

Net Exports

1. Q4/Q4
2. Percentage point contribution to GDP growth.

Shipments of investment goods and private machinery orders both rose in April, perhaps
pointing to a rebound in investment in the second quarter. Industrial production fell in
April even as shipments rose, leading to a reduction in inventories and a slight
diminishment of the inventories-to-sales ratio. However, the inventories-to-sales ratio for
information and communications equipment has risen sharply in recent months and may
pose a risk. Indicators of consumption have been positive; household expenditures and
new car registrations have both advanced. Public works orders fell 13 percent in April
and real exports fell 3 percent, suggesting that public spending will remain weak and that
the contribution from the external sector may decelerate from the first quarter’s rapid
pace.
Consumer prices rose in April, thanks in part to a jump in fresh food prices, and the
twelve-month rate of headline inflation returned to zero after two months of deflation.
However, the twelve-month rate of core inflation remained slightly negative, and May
figures for Tokyo were flat, indicating little inflationary pressure in the short term.
Nominal wages continued to decline, falling 1.7 percent over the year to April, despite a
fall in the unemployment rate to 3.8 percent, the lowest rate in nearly ten years.

IV-24

Japan
Economic Activity

Real Trade
2000 = 100

2000 = 100

115

160

110
105

Tertiary services

130

100

Real imports

100
Real exports

Industrial production

1998

2000

2002

2004

2006

1998

Labor Market

2000

2002

2004

2006

Consumer Price Inflation

Ratio

Percent

Percent, 12-month basis

1.6
1.4

Unemployment rate
(right scale)

CPI
5

1.2
Core*

1.0

0
4

Job openings
to applications
(left scale)

0.8

-1

0.6
0.4

1998

2000

2002

2004

2006

1998

2000

2002

2004

*Excludes fresh food.

Economic Indicators

(Percent change from previous period except as noted, s.a.)

2006
Q3
Q4

Indicator

2007
Q1

Feb.

2007
Mar. Apr.

May

Housing starts

-2.5

3.4

-4.6

-4.3

8.8

-1.0

n.a.

Machinery orders1

-7.8

0.3

-0.7

-4.9

-4.5

2.2

n.a.

Household expenditures

-2.0

1.6

1.0

0.2

-0.8

0.6

n.a.

New car registrations

-3.8

-1.7

-1.2

1.5

-4.0

0.4

0.5

6.0

8.0

...

3.5

2.6

1.9

1.7

2.0

2.3

2.2

Business sentiment
3

Wholesale prices

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

2006

-2

IV-25

Euro-area GDP growth slowed to a 2.4 percent (a.r.) pace in the first quarter from
3.5 percent in the previous quarter. Fixed investment and inventory accumulation each
contributed about 2 percentage points to growth. However, net exports subtracted a
similar amount, as export growth slowed significantly and imports continued to grow at a
robust pace. Private consumption was a small drag on growth, mostly as a result of
Germany’s VAT-related drop in consumer spending. At the country level, German and
Italian GDP growth slowed substantially, whereas French GDP continued to expand at
about a 2 percent pace.
Euro-Area Real GDP
(Percent change from previous period except as noted, s.a.a.r.)
Component

2006

20051 20061

2007

GDP

1.9

3.3

3.8

2.4

3.5

2.4

Total domestic demand

2.1

2.4

3.4

3.5

0.4

4.8

Consumption

1.3

1.9

1.3

2.7

1.5

-0.5

Investment

3.5

5.9

8.8

3.9

6.2

10.2

1.5

2.2

0.5

2.6

1.4

3.3

0.3

-0.4

0.7

0.4

-1.9

2.1

4.9

9.8

4.0

5.8

14.6

1.1

5.4

7.5

3.1

8.6

7.1

6.5

-0.2

1.0

0.4

-1.0

3.1

-2.2

France

1.4

2.2

3.8

0.3

1.9

2.0

Germany

1.7

3.9

5.0

3.3

4.0

2.1

Italy

0.7

2.8

2.4

1.2

4.7

1.1

Government consumption
Inventories

Exports
Imports
2

Net Exports

Memo:
GDP of selected countries

1. Q4/Q4
2. Percentage point contribution to GDP growth.

Euro-area economic growth appears to have quickened in the current quarter, with
household spending showing signs of strength. In April, German retail sales rebounded
back to their fourth-quarter level, and euro-area retail sales rose for the third straight
month. Sentiment in the euro-area retail trade sector picked up sharply in May, as
retailers reported a sizable drop in the volume of stocks on hand. Euro-area consumer
sentiment in May posted its greatest one-month increase in nine years. Consumers
reported a substantial improvement in their employment expectations, consistent with the
further decline in the unemployment rate registered in April. Consumers also

IV-26

Euro Area
Nominal Exports and Imports

Economic Sentiment
Billions of U.S. $

Percent balance

180

10
160

140

Industrial confidence

-5

120

-10

Exports

100
-15
80

Imports
1998

2000

2002

2004

Consumer confidence
60

2006

1998

Unemployment Rate

2000

2002

2004

2006

-20
-25

Consumer Price Inflation
Percent

Percent, 12-month basis

2
CPI

1
Core*

1998

2000

2002

2004

2006

1998

2000

2002

2004

*Excludes energy and unprocessed food.

Economic Indicators

(Percent change from previous period except as noted, s.a.)

2006
Q3
Q4

Indicator
1

2007
Q1

Jan.

2007
Feb. Mar.

Apr.

Industrial production

0.8

0.5

0.8

-0.5

0.5

-0.8

Retail sales volume2

0.7

0.4

-0.1

-1.1

0.5

0.1

New car registrations

-2.2

3.4

-2.3

-4.8

-0.7

4.4

-5.5

0.3

n.a.

...

5.4

4.1

3.0

3.1

3.0

2.8

2.4

8.4

9.8

10.9

9.8

9.9

10.9

10.4

Employment
3

Producer prices
3

1. Excludes construction.
2. Excludes motor vehicles.
3. Eurostat harmonized definition. Percent change from year earlier, s.a.
n.a. Not available. ... Not applicable.

2006

IV-27

reported a rosier view of future economic prospects, but also a dramatic increase in their
savings at present.
Industrial confidence pulled back a bit in May from April’s record high but remained
above the first-quarter level. Germany’s IFO business climate index was steady in May
at a level just below its post-reunification high last December. In contrast to the strong
confidence readings, euro-area industrial production (excluding construction) declined in
April, after moderate gains in February and March. The April decline was widespread
across sectors and countries, with German output falling the most.
Euro-area consumer prices rose 1.9 percent in May on a twelve-month basis. Core
inflation (excluding energy and unprocessed food) also stood at 1.9 percent in May,
continuing its upward trend since last summer. Liquidity growth in the euro area has
remained high. In April, the twelve-month change in euro-area M3 was 10.4 percent,
down just a bit from the seventeen-year high registered in March. Loans to the private
sector also rose more than 10 percent (on a twelve-month basis) in April, but this was
down 1 percentage point from last fall’s pace.
The European Central Bank raised its key policy interest rate ¼ percentage point to
4 percent on June 6 in a move widely expected by financial markets. President Trichet
said after the meeting that ECB monetary policy is “still on the accommodative side,
given the favorable economic conditions.” He added that the ECB will “monitor
conditions closely,” instead of “very closely,” which has been interpreted to mean that
the policy stance is now close to neutral.
In the United Kingdom, real GDP rose 2.9 percent (a.r.) in the first quarter, a pace
similar to its 2006 average. Fixed investment and private consumption both remained
firm, although both decelerated from the previous quarter. A drawdown of inventories
subtracted from growth, but was much less of a drag than in the previous two quarters.
Exports and imports both declined, with net exports making a zero contribution to GDP
growth. The service sector remains the main driver of growth, with output in the first
quarter up 3.5 percent from a year earlier; activity in financial services boomed
10 percent over that period.

IV-28

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

2006

20051 20061

2007

GDP

1.9

3.0

3.1

2.7

2.9

Total domestic demand

1.2

3.3

5.0

0.9

2.8

Consumption

1.2

2.7

4.6

1.3

4.3

2.3

Investment

4.7

8.2

4.8

8.6

10.6

7.0

3.0

2.4

2.6

2.5

2.8

1.7

-0.9

-0.3

0.3

-1.5

-2.3

-0.3

13.1

-1.0

9.6

-37.6

-1.7

-2.6

9.4

0.6

15.0

-37.6

-0.9

-2.3

0.6

-0.5

-2.1

1.7

-0.2

0.0

Government consumption
Inventories

Exports
Imports
2

Net Exports

1. Q4/Q4
2. Percentage point contribution to GDP growth.

Indicators for the second quarter suggest continued strong growth. Retail sales on
average in April and May rose about 1 percent from the first-quarter level, somewhat
faster than the ½ percent pace in the first quarter. Consumer confidence improved in
May as households were more optimistic about their personal financial situation as well
as the general economic outlook over the next twelve months. Investment intentions in
both the service and manufacturing sectors were at decade-high levels in May according
to the Bank of England Agents’ Summary of Business Conditions, a survey of U.K.
private businesses.
Headline inflation slid to 2.5 percent in May, still well above the Bank of England’s
target. Prices for gasoline and electricity fell 2 percent between April and May,
following a 1.6 percent decline the previous month; these declines were the primary
reason for the moderation in the headline rate. House price inflation (on a twelve-month
basis) remained elevated at around 10 percent in May. However, the number of mortgage
loans approved for house purchases fell nearly 10 percent in the three months to April.
Wage inflation remains contained. Measures of average earnings, both including and
excluding bonuses, were 3.3 percent higher than a year earlier in April. Both the
employment rate and the participation rate fell slightly in the first quarter. The Labor
Force Survey measure of the unemployment rate was 5.5 percent in March, unchanged
since last September. The claimant count ticked down to 2.7 percent in May.

IV-29

United Kingdom
Retail Sales and Industrial Production
106

Jan. 2003=100

Consumer Price Inflation

12-month percent change

Percent, 12-month basis

Industrial production
(left scale)
104

102
6

100

CPI
4

98
96
94

1998

2000

Core*

Retail sales
(right scale)
2002

2004

2006

1998

2000

2002

2004

2006

-1

*Excludes energy and unprocessed food.

Unemployment Rates

Investment Intentions
Percent

Producer Price Index
Score*

8
Services

Percent, 12-month basis

4
3

20
15

Input
2

5
Output

Labor force
survey

Claimant
count
2

1998 2000 2002 2004 2006

-5

-2

Manufacturing

-1

-10

-3

1998 2000 2002 2004 2006

*Scores range from -5 (rapidly falling) to
+5 (rapid growth). BOE Agents’ Survey.

Economic Indicators

(Percent change from previous period except as noted, s.a.)

Indicator

2006
Q3
Q4

2007
Q1

Feb.

Producer input prices1

7.9

3.6

-0.9

-1.2

0.7

-0.8

1.2

4.0

4.5

5.3

3.6

3.3

n.a.

13.0

8.3

20.3

28.0

21.0

18.0

-6.0

-4.9

-6.2

-5.1

-6.6

-3.2

Trade balance

-24.0

-23.1

-24.8

-8.3

-8.7

-7.2

n.a.

Current account3

-19.7

-24.3

n.a.

...

Average earnings

Business confidence

Consumer confidence
3

1. Percent change from year earlier.
2. Percent balance. 3. Level in billions of US Dollars.
n.a. Not available. ... Not applicable.

2007
Mar. Apr.

May

-15

IV-30

The Monetary Policy Committee raised the Bank Rate to 5.5 percent on May 10. It
noted, however, that “the margin of spare capacity in firms appears limited and there are
signs that businesses are more able to push through price increases,” and that relative to
the 2 percent target, “the risks to the outlook for inflation in the medium term
consequently remain tilted to the upside.”
In Canada, real GDP grew 3.7 percent (a.r.) in the first quarter, up sharply from the
1.5 percent advance in the previous quarter. A resumption of positive inventory
accumulation, following virtually zero inventory build in the fourth quarter, was a
primary reason for the turn-around in headline growth. Consumer spending maintained
its strength, but investment in non-residential structures and equipment softened for the
second consecutive quarter, after outsized gains the past several years. Residential
investment, in contrast, grew a healthy 7.5 percent, its fastest pace in a year, after
declining each of the previous three quarters. Exports and imports each expanded; taken
together, net exports made a small negative contribution to growth.

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

2006

20051 20061

2007

GDP

3.2

1.9

1.5

1.3

1.5

3.7

Total domestic demand

4.1

3.3

5.8

2.5

-0.2

4.3

Consumption

3.8

4.5

3.8

5.1

3.7

3.9

Investment

9.8

4.9

3.0

3.3

4.3

1.8

2.6

3.1

3.2

1.5

3.0

2.7

-0.7

-1.0

2.3

-1.5

-4.0

1.1

4.5

-0.9

-1.8

2.6

2.7

2.1

7.1

3.0

9.8

6.2

-0.9

2.6

-1.1

-1.6

-4.7

-1.6

1.4

-0.3

Government consumption
Inventories

Exports
Imports
2

Net Exports

1. Q4/Q4
2. Percentage point contribution to GDP growth.

The few available indicators for the second quarter point to slower, though still firm,
growth. The Ivey Purchasing Managers Index rose in May. The nominal merchandise
trade surplus expanded in April; nominal imports fell, but nominal exports were little
changed from the previous month. In April, real manufacturing shipments continued to
edge up from last October’s low, though new orders slipped from their level in the first
quarter. The composite index of leading indicators rose again in May. The average level

IV-31

of housing starts through April and May was virtually unchanged from the first-quarter
average and has moved little over the past year. Nonetheless, housing starts still remain
high compared with demographic fundamentals.
After total employment expanded 1 percent in the first quarter, the largest quarterly gain
in nearly five years, employment growth through April and May was essentially zero.
However, full-time employment, which has been especially strong the past two years,
surged again in May. The unemployment rate in May held steady at 6.1 percent, a
thirty-three-year low, but twelve-month wage inflation remained tame at 2.8 percent.
In April and May, the twelve-month rate of consumer price inflation was 2.2 percent,
above the mid-point of the Bank of Canada’s target range of 1 to 3 percent. Gasoline
prices at the pump rose 5.5 percent between April and May, accounting for most of the
increase in the all-items index. The twelve-month rate of core inflation, which excludes
the eight most volatile components and the effects of changes in indirect taxes, moderated
to 2.2 percent in May from 2.5 percent in April. Continuing to exert upward pressure on
the core index is homeowners’ replacement costs (which are estimated using, among
other data, prices for new homes); although replacements costs decelerated in May, they
continued to show strong growth. The twelve-month rate of change of new home prices
edged below 9 percent in April, continuing its moderation since last summer.

IV-32

Canada
Real GDP by Industry*

Real Trade
Percent change from year earlier

1997 = 100

175

6
150

5
Real exports
4

125
3
Real imports
2

100

1
1998

2000

2002

2004

2006

1998

2000

2002

2004

2006

*Constructed from various Statistics Canada surveys and supplements
the quarterly income and expenditure-based estimates.

Unemployment Rate

Consumer Price Inflation
Percent

Percent, 12-month basis

6
5

4
8

CPI
3

7
2
6

Core*
1998

2000

2002

2004

2006

1998

2000

2002

2004

2006

*Excludes 8 most volatile components and the effects of changes
in indirect taxes.

Economic Indicators

(Percent change from previous period except as noted, s.a.)

2006
Q3
Q4

Indicator

Industrial production

2007
Q1

Feb.

2007
Mar. Apr.

May

-0.2

-1.0

0.7

1.2

-0.2

n.a.

New manufacturing orders

0.8

1.1

1.7

-0.4

0.8

n.a.

Retail sales

0.9

0.3

1.1

-0.7

1.4

n.a.

0.1

0.6

1.0

0.1

0.3

-0.0

0.1

98.8

99.7

98.3

...

135.6 148.1 139.9

...

Employment
1

Consumer attitudes

Business confidence

1. 1991=100.
n.a. Not available. ... Not applicable.

IV-33

Economic Situation in Other Countries
Recent data indicate that economic activity remains strong in emerging market
economies. Although growth in China and India appears to be moderating from the very
high rates in the first quarter, the pace of expansion in Asia generally remains robust. In
Latin America, indicators for Mexico suggest some recovery from a marked slowdown in
the first quarter. Inflation has picked up in China and has continued to rise in Venezuela,
but on average, has remained little changed elsewhere in the emerging world.
In China, second-quarter indicators point to further strong GDP growth. The combined
trade surplus for April and May was about $265 billion (s.a.a.r.), up from $250 billion in
the first quarter as a result of strong exports. In April and May, twelve-month growth in
nominal fixed investment continued to exceed 25 percent, and retail sales were up more
than 15 percent. However, industrial production in April and May was little changed
from its value in previous months, suggesting some moderation of growth from its
blistering pace in the first quarter.
After moderating a touch in April, twelve-month consumer price inflation rose to
3.5 percent in May, due mostly to increases in food prices. Food prices, which account
for about one-third of the consumption basket, soared 8.3 percent in May from a year ago
as rising grain prices and an outbreak of disease among hogs contributed to an increase in
the price of meat, particularly pork. Although non-food price inflation remained stable at
around 1 percent in May, concerns are beginning to emerge among policymakers that
food price increases will put pressure on wages and fuel broader inflationary pressures.
Chinese authorities tightened monetary policy again in mid-May, raising benchmark
lending rates and the banks’ reserve requirements. They also increased bank deposit
rates, which in real terms, had turned negative recently. The authorities also announced,
effective May 21, a widening of the renminbi’s intra-daily trading band against the dollar
from +/- 0.3 percent to +/- 0.5 percent. (This band represents the range of the deviation
that the renminbi can make in a particular day against the dollar from the central banks’
daily morning fixing.) However, it is questionable how much more appreciation this will
bring in practice, since the previous limit of 0.3 percent was hardly ever reached. So far
this year, the Shanghai stock market index is up more than 60 percent, following an
increase of 130 percent last year, reinforcing concerns about an asset bubble.

IV-34

Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Real GDP1
Industrial production
Consumer prices2
Merch. trade balance3

10.0
17.2
1.5
102.0

10.4
14.3
2.7
177.5

Mar.

Apr.

May

10.5
2.2
2.1
219.8

13.7
4.1
2.8
249.8

...
11.2
3.2
119.3

...
-.1
3.0
237.3

...
.1
3.5
295.6

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

In Hong Kong, real GDP growth fell in the first quarter, reflecting an apparent slowdown
in investment spending. In addition, the value of both exports and imports was about flat.
In April, separate data on the quantity of trade shows that exports rose, while imports
edged down, suggesting a mild pickup in activity in this entrepôt economy. The
unemployment rate remained steady near its lowest level in a decade. Twelve-month
inflation fell to under 2 percent in April as a result of a rent concession on public housing,
which is scheduled to expire in six months.

Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Real GDP1
Unemployment rate2
Consumer prices3
Merch. trade balance4

7.8
5.7
1.4
-10.5

7.2
4.8
2.3
-17.9

Feb.

Mar.

Apr.

6.1
4.4
2.1
-19.5

2.0
4.3
1.7
-17.6

...
4.3
.3
-.8

...
4.3
2.4
-37.5

...
4.3
1.4
-12.0

1. Annual rate. Annual data are Q4/Q4.
2. Percent. Monthly data are averages of the current and previous two months.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate. Imports are c.i.f.
. . . Not applicable.

IV-35

In Taiwan, first-quarter output decelerated noticeably as a result of weaker domestic
demand. For the current quarter, indicators are mixed. The combined merchandise trade
surplus for April and May narrowed, and export orders for electronic products edged
down in April from a high March reading. On the other hand, April industrial production
was up from the first-quarter level, suggesting a recovery going forward. In May,
twelve-month consumer price inflation fell to zero, held down by reductions in energy
and food (mainly vegetables) prices.

Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Real GDP1
Unemployment rate2
Industrial production
Consumer prices3
Merch. trade balance4
Current account5

6.5
4.1
4.6
2.2
7.8
16.0

4.0
3.9
5.0
.7
11.6
24.7

Mar.

Apr.

May

4.1
3.9
-1.3
-.1
18.8
33.8

1.6
3.9
-1.0
1.0
16.3
35.1

...
3.9
4.9
.8
17.0
...

...
4.0
1.9
.7
2.5
...

...
n.a.
n.a.
.0
11.2
...

1. Annual rate. Annual data are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
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.

IV-36

China, Hong Kong, and Taiwan
Industrial Production

Consumer Prices
Jan. 2000 = 100

Percent change from year earlier

300

275

China
Hong Kong
Taiwan

250
225

200
175

150
-2

125
100

-4

75
2001

2002

2003

2004

2005

2006

2007

Merchandise Trade Balances

2001

2002

2003

2004

2005

2006

2007

-6

Benchmark Interest Rates
Billions of dollars

Percent

3-mo. moving ave. (n.s.a.)
25
8
20
6

15
10

5
2
0

2001

2002

2003

2004

2005

2006

2007

-5

Gross External Debt

2001

2002

2003

2004

2005

2006

2007

Short-Term External Debt
Percent of GDP

Percent of reserves

40
15
30

20
10
10

2001

2002

2003

2004

2005

2006

2007

2001

2002

2003

2004

2005

2006

2007

IV-37

In Korea, indicators are pointing to some improvement in performance. April industrial
production rebounded from its first-quarter weakness, with notable gains in electronic
and other high-tech sectors. Services output rose slightly, and measures of consumer and
business confidence for April and May also turned up. The merchandise trade surplus,
though still sizable, narrowed in April, as gains in imports surpassed those in exports.
The smaller merchandise trade balance and a rising deficit in services contributed to a
widening in the current account deficit. Recent twelve-month consumer price inflation
has fluctuated around the lower end of the Bank of Korea’s 2.5 percent to 3.5 percent
target range. The Bank of Korea left policy rates unchanged at its early-June meeting,
but signaled a tightening bias, in part reflecting concern over rising bank lending,
especially to small- and medium-size enterprises.
The soaring stock market got an additional boost in mid-June as a key parliamentary
committee approved the Capital Market Integration act. The act, scheduled for a full vote
soon, will simplify regulations across institutions, allow for a wider range of financial
products, and remove barriers separating brokering, futures trading, and asset
management.
Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Merch. trade balance4
Current account5

5.7
5.8
3.7
2.6
32.7
15.0

4.0
10.8
3.4
2.1
29.2
6.1

Mar.

Apr.

May

3.8
2.7
3.4
2.1
37.9
24.6

3.6
-.6
3.2
2.0
29.5
-6.6

...
-.3
3.2
2.2
32.0
-19.6

...
3.1
3.3
2.5
23.6
-23.2

...
n.a.
3.4
2.4
n.a.
n.a.

IV-38

Indian real GDP soared 13.1 percent in the first quarter, with strength widespread.
Growth in construction and services was particularly robust, and even agriculture, a
traditionally slow-growing sector, posted double-digit gains. More recently, industrial
production was flat in April, after surging in March. Inflation continued to decelerate,
likely reflecting the effect of government policies in late spring that lowered domestic
prices for a number of products including fuel, as well as previous tightening of monetary
policy and recent exchange rate appreciation. The trade balance worsened considerably
in April as imports jumped more than exports.

Indian Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

Q4
Real GDP1
Industrial production
Consumer prices2
Wholesale prices2
Merch. trade balance3
Current account4

9.3
7.9
5.6
4.4
-40.3
-7.8

2007

2006
8.7
10.5
6.5
5.7
-51.6
-9.1

4.9
2.1
6.5
5.6
-66.6
-12.2

Mar.

Apr.

May

13.1 . . .
3.6
6.5
6.7
5.8
6.4
6.6
-53.5 -56.6
n.a. . . .

...
.1
5.7
6.1
-81.9
...

...
n.a.
n.a.
5.2
n.a.
...

1. Annual rate. Annual data are Q4/Q4.
2. Percent change from year-earlier period, except annual data, which are Dec./Dec.
3. Billions of U.S. dollars, annual rate.
4. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

IV-39

India, Korea, and Singapore
Industrial Production

Consumer Prices
Jan. 2000 = 100

Percent change from year earlier
170

India
Korea
Singapore

8
7
6

150

5
4

130

3
2

110

1
0

-1
2001

2002

2003

2004

2005

2006

2007

Merchandise Trade Balances

2001

2002

2003

2004

2005

2006

2007

-2

Benchmark Interest Rates
Billions of dollars

Percent

3-mo. moving ave. (n.s.a.)
3
1

2004

2005

2006

2007

-5

2003

-3

2002

-1

2001

-7

Gross External Debt

2001

2002

2003

2004

2005

2006

2007

Short-Term External Debt
Percent of GDP

Percent of reserves

35
30

2004

2005

2006

2007

2003

2002

2001

2002

2003

2004

2005

2006

2007

IV-40

Overall, economic activity in the ASEAN region continued to expand at a robust pace in
the first quarter. Real GDP rose over 10 percent in the Philippines, 7½ percent in
Singapore, and about 5 percent in Malaysia and Thailand. Growth was generally
supported by strong domestic demand and, in some cases, gains in net exports. In
Indonesia, however, a contraction in agriculture contributed to a moderation of activity.
Recent data have been mixed, but on balance suggest a continued expansion of activity
going forward. Trade balances generally fell so far in the second quarter, and April
industrial production was down in Thailand, but up in Indonesia, Malaysia, and
Singapore.
Twelve-month consumer price inflation across the region continued to be subdued, owing
to a lower contribution from energy prices, and in some countries, the unwinding of
previous food prices increases and appreciation of exchange rates. Citing the moderation
in inflation and the need to stimulate domestic demand, the Bank of Thailand lowered its
interest rate 50 basis points in May, and Bank Indonesia lowered rates by 25 basis points
in May and again in June.
On May 30, the constitutional court of Thailand ruled that the Thai Rak Thai party of
former Prime Minister Thaksin violated election laws during last year’s general elections.
It ordered the dissolution of the party and banned 111 members of its executive
committee, including Prime Minister Thaksin, from political activities for five years. The
ruling was viewed as politically motivated and is expected to heighten and prolong the
political tension in the country.

IV-41

ASEAN Economic Indicators: Growth
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Feb.

Mar.

Apr.
...
...
...
...
...

Real GDP1
Indonesia
Malaysia
Philippines
Singapore
Thailand

4.9
5.7
5.6
8.2
4.3

6.0
5.8
5.5
6.5
4.2

7.1
4.9
7.0
7.9
2.5

3.0
5.1
10.3
7.6
4.9

...
...
...
...
...

Industrial
production2
Indonesia3
Malaysia
Philippines
Singapore
Thailand

1.3
4.0
2.2
9.5
9.1

-1.6
5.2
-9.9
11.9
7.4

4.5
.0
.0
2.3
.2

-.3
-2.4
-7.5
-2.1
1.7

-1.4
-1.9
-12.4
10.8
.0

1.6
-.1
10.0
-9.1
-.1

3.0
.9
n.a.
7.9
-.3

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

ASEAN Economic Indicators: Merchandise Trade Balance
(Billions of U.S. dollars, s.a.a.r.)
2006
Indicator

2005

2007

2006
Q4

Indonesia
Malaysia
Philippines
Singapore
Thailand
n.a. Not available.

28.0
26.4
-6.2
29.6
-8.5

39.7
29.5
-4.5
33.1
2.2

Mar.

44.4
31.5
-8.2
32.7
5.4

44.4
24.4
.9
42.9
18.3

51.2
19.2
-1.1
46.6
27.9

Apr.
42.9
20.8
n.a.
45.3
8.8

May
n.a.
n.a.
n.a.
31.8
n.a.

IV-42

ASEAN Economic Indicators: CPI Inflation
(Percent change from year earlier, except as noted)
2006
Indicator

20051

Q4
Indonesia
Malaysia
Philippines
Singapore
Thailand
1. Dec./Dec.
n.a. Not available.

17.0
3.3
6.7
1.3
5.8

2007

20061
6.7
3.1
4.3
.8
3.5

6.1
3.0
4.8
.6
3.3

Q1
6.3
2.6
2.9
.5
2.5

Mar.

Apr.

6.4
1.5
2.2
.7
2.0

6.3
1.5
2.3
.6
1.8

May
6.1
1.4
2.4
n.a.
1.9

IV-43

ASEAN-4
Industrial Production

Consumer Prices
Jan. 2000 = 100

Indonesia
Malaysia
Philippines
Thailand

Percent change from year earlier

215

195
15
175
10

155
135

115
0
95

2001

2002

2003

2004

2005

2006

2007

Merchandise Trade Balances

2001

2002

2003

2004

2005

2006

2007

-5

Benchmark Interest Rates
Billions of dollars

3-mo. moving ave. (n.s.a.)

Percent

4.0

3.5
3.0

2.5
2.0
1.5

1.0
0.5
0.0

-0.5
-1.0
-1.5

2001

2002

2003

2004

2005

2006

2007

2001

Gross External Debt

2002

2003

2004

2005

2006

2007

Short-Term External Debt
Percent of GDP

Percent of reserves

90
80

75
70
60

60
50

45
40
30

30
20

15
10
2001

2002

2003

2004

2005

2006

2007

2001

2002

2003

2004

2005

2006

2007

IV-44

In Mexico, economic activity continued to decelerate in the first quarter. Real GDP
growth fell to 0.6 percent, owing mainly to continuing weakness in manufacturing output,
particularly in the automobile sector, and moderation in construction activity, which had
been a main source of growth in previous quarters. Activity in the services sector
remained solid. More recently, industrial production rebounded somewhat in April from
its first-quarter level, suggesting some recovery in activity.
Twelve-month headline inflation was 4 percent in May, slightly lower than expected, as
prices of tortillas and other corn products continued to decline from their January peaks,
partially reflecting price-restraint agreements that the government brokered with retailers
and producers. These agreements, which were initially negotiated in January, were
renewed in late April and will last until mid-August. May marks the ninth consecutive
month with twelve-month inflation at or slightly above the upper limit of the Bank of
Mexico's 2-to-4 percent inflation target range. Nonetheless, the central bank decided
during its late-May meeting not to tighten monetary policy, as it expects inflation to fall
back well within the target range soon. It signaled a further tightening of policy might
occur if inflation does not recede as expected.

Mexican Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

Q4
Real GDP1
Overall economic
activity
Industrial production
Unemployment rate2
Consumer prices3
Merch. trade balance4
Merchandise imports4
Merchandise exports4
Current account5

2007

2006
Q1

2.5

4.3

1.5

3.1
2.1
3.6
3.3
-7.6
221.8
214.2
-4.9

4.9
5.0
3.6
4.1
-6.1
256.1
250.0
-1.8

.5
.3
3.9
4.1
-8.8
260.6
251.8
-9.0

.1
-.9
3.9
4.1
-13.6
265.1
251.5
-11.0

Mar.

Apr.

May

...

.0
.0
3.9
4.2
-11.2
264.4
253.2
...

n.a.
1.2
3.7
4.0
-16.8
276.3
259.5
...

n.a.
n.a.
n.a.
4.0
n.a.
n.a.
n.a.
...

1. Annual rate. Annual data 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 data, 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-45

Brazilian real GDP growth moderated to 3.1 percent in the first quarter from 4.3 percent
in the fourth as the appreciation of the real weighed on the external sector. The weaker
external sector tempered the effect on GDP of strong growth in government expenditures,
domestic investment, and services. More recently, indicators have been mixed, but on
balance, suggest a pickup in activity. In April, industrial production was little changed,
but trade balances for April and May rose considerably from the first-quarter level,
supported by high prices for exported commodities. Indicators for consumer and
business confidence were also positive in May. Twelve-month consumer price inflation
remained subdued as the appreciation of the real helped contain inflationary pressures.
On June 6, the central bank reduced its policy rate, the Selic Rate, ½ percentage point to
12 percent. On June 11, the central bank enacted several measures to limit short dollar
positions in the banking system in an effort to curb capital inflows and stem the
appreciation of the real. International reserves are estimated to have risen sharply from
$85 billion at end-2006 to $150 billion in early June as the central bank intervened in the
foreign exchange market.
Brazilian Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Merch. trade balance4
Current account5

3.1
3.1
9.8
5.7
44.8
14.0

4.7
2.8
10.0
3.3
46.1
13.3

Mar.

Apr.

May

4.3
.9
9.6
3.2
50.8
13.0

3.1
1.2
9.7
3.1
40.8
6.8

...
1.3
9.5
3.1
33.5
9.8

...
-.1
9.4
3.1
56.8
n.a.

...
n.a.
n.a.
3.3
47.1
n.a.

1. Annual rate. Annual data are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
Price index is IPCA.
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-46

First-quarter growth in Argentina moderated to 4 percent from nearly 7 percent in the
previous quarter, largely reflecting a contraction in exports. Indicators for the second
quarter have been positive. Industrial production and the trade balance both rose in April
from their levels in the first quarter. Twelve-month inflation remained steady in April
and May.
Argentine Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

Q4
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Merch. trade balance4
Current account5

8.8
8.0
11.6
12.1
11.7
5.6

2007

2006
8.7
8.4
10.2
9.7
12.3
8.1

6.8
2.7
8.7
10.1
13.1
10.2

Q1
3.9
.3
9.8
9.4
7.4
n.a.

Mar.

Apr.

May

...
.2
...
9.1
9.4
...

...
.6
...
8.9
8.6
...

...
n.a.
...
8.9
n.a.
...

1. Annual rate. Annual data are Q4/Q4.
2. Percent; n.s.a.
3. Percent change from year-earlier period, except annual data, 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.

In Venezuela, real GDP contracted 2.3 percent in the first quarter following three years
of double-digit growth fueled by high petroleum revenues and expansionary fiscal and
monetary policies. Pretroleum output, which accounts for about 20 percent of GDP,
declined 5.3 percent. Twelve-month consumer price inflation continued to rise, reaching
nearly 20 percent in May despite various measures to contain it. Inflation has been fueled
by a 30 percent depreciation of the bolivar in the parallel market since late 2006. In late
May, in an attempt to support the bolivar, the government signaled that it would issue
more dollar-denominated bonds and sell dollar-denominated Argentine and Bolivian
sovereign bonds to local investors. The dollar-denominated bonds are attractive because
the government allows investors to purchase them using bolivares at the official exchange
rate, which in mid-June, was considerably higher than the exchange rate in the parallel
market.
In mid-June, officials asserted and then later denied that the government is studying
whether to buy back all of its sovereign bonds that have clauses requiring IMF
membership as part of the government’s strategy of exiting the IMF. Venezuela has an
estimated $20 billion in global bonds, and the IMF clauses, which give bondholders the

IV-47

option to redeem the bond at face value in case of an IMF exit, are standard in global
bond issues.
Social tensions increased in late May when the Chavez government closed the nation’s
largest television station (RCTV), confiscated the company’s equipment, and opened a
state-supported television channel. The moves generated widespread criticism and
massive street protests, particularly by university students.
Venezuelan Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Real GDP1
Unemployment rate2
Consumer prices3
Non-oil trade balance4
Merch. trade balance4
Current account5

10.9
12.2
14.4
-14.3
31.8
25.5

11.8
10.0
17.0
-22.7
33.0
27.2

Mar.

Apr.

May

16.0
9.7
16.1
-26.8
22.8
17.0

-2.3
9.8
19.1
-30.6
18.1
14.6

...
9.5
18.5
...
...
...

...
8.6
19.4
...
...
...

...
n.a.
19.6
...
...
...

1. Annual rate. Annual data are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual data, 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-48

Latin America
Industrial Production

Consumer Prices
Jan. 2000 = 100

Argentina
Brazil
Mexico

Percent change from year earlier

140

130
35
120
25

110
100

90
5
80

2001

2002

2003

2004

2005

2006

2007

2001

Merchandise Trade Balances

2002

2003

2004

2005

2006

2007

-5

Benchmark Interest Rates
Billions of dollars

Percent

3-mo. moving ave. (n.s.a.)
4

2
15
1
10

-1

2001

2002

2003

2004

2005

2006

2007

-2

2001

Gross External Debt

2002

2003

2004

2005

2006

2007

Short-Term External Debt
Percent of GDP

Percent of reserves

200

150

100

25
2007

120

2006

250

100

2005

300

125

2004

350

150

2003

400

175

2002

450

200

2001

225

210
180

Argentina
(left scale)

150

60
30

2001

2002

2003

2004

2005

2006

2007

IV-49

In Turkey, indicators suggest that activity continued to slow in the first quarter. Average
industrial production grew just 0.6 percent in the first quarter, considerably lower than its
fourth-quarter pace, and the trade deficit widened. The weakness appears to have
persisted so far in the second quarter. Industrial production for April was down, and the
trade deficit remained large.
Twelve-month consumer price inflation edged down in May but remains well above the
central bank’s 2007 target of 4 percent. The political situation has stabilized somewhat,
although tensions will likely increase as the July 22 general election nears. EU accession
remains stalled, and further progress will likely depend on the outcome of the election.
The IMF remains critical of the expansionary fiscal policy and wage increases that are
occurring in the run-up to the election.
Turkey Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2005

2006

2007

Q4
Real GDP1
Industrial production
Consumer prices2
Merch. Trade balance3
Current account4
Unemployment rate
P

7.4
5.4
7.7
-43.3
-22.6
10.2

6.1
5.9
9.7
-52.7
-31.6
9.8

Mar.

Apr.

May

5.2
3.0
9.8
-48.5
-27.5
9.5

n.a.
.6
10.3
-54.0
-31.6
9.7

…
-3.4
10.9
-46.7
-24.4
…

…
-1.9
10.7
-52.8
-25.8
…

…
n.a.
9.2
n.a.
n.a.
…

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

IV-50

In South Africa, real GDP rose nearly 5 percent in the first quarter. The most recent
indicators for the second quarter have been somewhat mixed. Mining production was up
in April and the trade deficit narrowed, but manufacturing production was down. The
targeted CPIX twelve-month inflation rate rose to 6.3 percent in April, due mostly to
higher energy and corn prices. The April inflation rate breached the central bank’s
3 to 6 percent target range, prompting the South African Reserve Bank to raise its
benchmark interest rate ½ percentage point.
Since June 1, a public sector wage dispute has erupted into massive strikes throughout the
country, raising concerns about their effect on economic activity. The Congress of
South African Trade Unions (COSATU), the organization leading the protests, originally
demanded a 12 percent cost-of-living pay increase, double the increase proposed by the
government. Of late, COSATU has lowered its demand to 10 percent and the
government has raised its offer to 7.25 percent, but prospects for an agreement remain
uncertain.
South African Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2005

2006

2006
Q4

Real GDP1
Manuf. Production
Mining Production
Consumer Prices2
Merch. trade Balance3
Current Account4
P

4.9
3.6
1.3
3.9
-2.9
-9.1

5.2
4.8
-1.6
4.6
-9.4
-16.3

5.6
1.9
3.6
5.0
-13.2
-19.3

2007
Q1

Feb.

Mar.

Apr.

4.7
1.2
-3.0
5.2
-9.9
n.a.

…

…
-.2
-3.8
5.5
-6.8
…

…
-1.9
.6
6.3
-4.9
…

.2
3.9
4.9
-7.2
…

1. Annual Rate. Annual data are Q4/Q4.
2. Percent change from year-earlier period for the CPIX, except annual data, which are
Dec./Dec. CPIX excludes interest rates on mortgage bonds.
3. Billions of U.S. dollars, s.a.a.r.
4. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

Last Page of Part 2

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, June 27-28, 2007 : Greenbook Part 2

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