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The attached document represents the most complete and accurate version available
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Please note that some material may have been redacted from this document if that
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Content last modified 03/31/2011.

Class III FOMC - Internal (FR)

Part 2

June 22, 2005

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 22, 2005

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
Overview
Although the data have been uneven, the economy appears to have been expanding at a
moderate pace in recent months. Manufacturing production posted a solid gain in May.
Consumer spending is on track for another moderate gain in the current quarter, and the
housing market remains strong: Home sales have been brisk, and residential construction
activity remained at a high level in May. Labor demand continued to expand, albeit
erratically, in April and May, and the unemployment rate edged down further. Core CPI
inflation slowed in April and May.
Labor Market Developments
Labor demand has increased at a moderate pace, on balance, in recent months. Private
nonfarm payrolls rose 73,000 in May following an increase of 261,000 in April; the
average monthly gain of 153,000 jobs over the past three months is on par with the
average for the six months before that. Among major industries, construction,
transportation and utilities, and nonbusiness services have been expanding payrolls in line
with their recent trends, while hiring in financial activities and professional and business
services has slowed a bit. The manufacturing sector has posted further small job losses.
The average workweek of production or nonsupervisory workers moved up 0.1 hour in
April to 33.8 hours and remained at that higher level in May. After having surged
0.6 percent in April, aggregate hours of production or nonsupervisory workers rose just
0.1 percent in May to reach its highest level since March 2001.
The unemployment rate dipped to 5.1 percent in May and now stands ¼ percentage point
below its average in the fourth quarter of 2004. Meanwhile, the labor force participation
rate moved up, to 66.1 percent. The increase in participation between March and May
suggests that the labor market has strengthened enough to attract some individuals back
into the workforce. Indeed, the percentage of household employment made up of
individuals unemployed less than five weeks who are new entrants and reentrants to the
labor market has moved up noticeably over the past several months.
Other indicators of labor market activity also imply that slack is diminishing gradually.
The share of individuals working part-time for economic reasons has drifted lower since
the fourth quarter of 2004. The four-week moving average of new claims for
unemployment insurance, at 335,000 in the week ending June 11, remains in the narrow
range that has prevailed since the start of the year. The exhaustion rate—the proportion
of workers leaving the unemployment insurance rolls after using their entire period of

II-2

Changes in Employment
(Thousands of employees; seasonally adjusted)
2004
Measure and sector

2004

2005
Q4

Mar.

Average monthly change
Nonfarm payroll employment
(establishment survey)
Private
Previous
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

183
171
171
3
23
7
13
9
-2
12
45
15
59
12
146

134
98
98
3
14
6
-8
8
-8
11
33
18
37
35
123

190
182
182
-6
29
4
13
5
0
15
53
14
67
8
210

182
172
179
-6
24
6
17
18
2
13
41
9
51
10
115

122
124
147
-6
26
14
3
12
7
2
21
-2
38
-2
357

274
261
256
-9
48
7
27
17
15
14
33
11
107
13
598

78
73
...
-7
20
10
11
9
-8
4
-1
-4
33
5
376

2.4
33.7
40.8

2.4
33.7
40.6

2.3
33.7
40.6

.1
33.7
40.4

.6
33.8
40.5

.1
33.8
40.4

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.
... Not applicable.

Changes in Private
Payroll Employment
500

Thousands
500

Aggregate Hours of Production or
Nonsupervisory Workers
106

2002 = 100
106

3-month moving average
400

400

300

104
May
200

200

100

102

100

-100

-200

-300

-400

104
May

1997 1998 1999 2000 2001 2002 2003 2004 2005

-400

1997 1998 1999 2000 2001 2002 2003 2004 2005

II-3
Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2004
Rate and group

2004

2005
Q4

Mar.

Apr.

May

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

5.5
17.0
9.4
4.4
4.4

5.5
17.1
9.3
4.4
4.3

5.4
17.1
9.3
4.3
4.2

5.3
16.9
9.5
4.1
4.1

5.2
16.9
9.0
4.0
4.0

5.2
17.7
8.9
3.8
4.2

5.1
17.9
8.8
3.8
4.1

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

66.0
43.8
75.0
75.3
59.3

66.0
43.9
74.9
75.4
59.3

66.0
44.1
75.3
75.3
59.2

65.8
43.5
74.4
75.2
59.1

65.8
44.0
74.2
75.3
58.9

66.0
43.8
74.0
75.5
59.3

66.1
44.0
74.3
75.6
59.3

Labor Force Participation Rate
and Unemployment Rate

Percent
67.4

Percent
7.0

67.2

6.5

67.0
6.0

Participation rate (left scale)

66.8

5.5

66.6
66.4
May
66.2

5.0
4.5

66.0
Unemployment rate (right scale)

4.0

65.8
65.6

1994

Percent
0.20

1995

1996

1997

1998

Unemployed New Entrants
and Reentrants
(Percent of household employment)

3-month moving average

1999

2001

2002

2003

2004

4.0

0.8

3.5

Reentrants
(right scale)

0.05

0.00

1994

1996

1998

2000

2002

2004

Percent
4.0

(Percent of household employment)

3.5
May

May
0.10

3.5

2005

Persons Working Part-Time
for Economic Reasons

Percent
1.0

New entrants
(left scale)

0.15

2000

0.6

3.0

0.4

2.5

0.2

2.0

1994

1996

1998

2000

2002

2004

2.0

II-4

Labor Market Indicators

Unemployment Insurance

Exhaustion Rate

Millions
4.5
4-week moving average

Thousands
550

Percent
50

500

450

400

4.0
June 4
Insured unemployment
(left scale)

3.5
3.0

35
May

2.5
2.0
1.5

Initial claims
(right scale)
1996

1998

June 11

2000

2002

2004

350

300

250

1996

1998

2000

2002

2004

Note. Seasonally adjusted by FRB staff. Exhaustion
rate is number of individuals who exhausted benefits
without finding a job, expressed as a share of
individuals who began receiving benefits six months earlier.

Labor Market Tightness

Job Openings and Help Wanted Index

Percent
40

Index
150

3.4

Job availability*
(right scale)

1999 = 100
110

Percent of private employment
3.6

100

130
3.2

110

90
Job openings
(left scale)

3.0

2.8
25

90
2.6

May

Hard to fill**
(left scale)

Apr.
70

2.2

Help wanted index
(right scale)

2.0
10

1996

1998

2000

2002

2004

1.8

2001

*Proportion of households believing jobs are plentiful,
minus the proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one
"hard to fill" job opening.
Source. For job availability, Conference Board; for hard to fill,
National Federation of Independent Businesses.

2002

2003

2004

Source. For job openings, Job Openings and
Labor Turnover Survey; for help wanted index,
Conference Board.

Net Hiring Plans

Expected Labor Market Conditions
Percent
30

Index
140

25
Q3

Index
120

Michigan SRC
(right scale)

Manpower, Inc.
25

June(p)

120

100

20
100

May
15

80
National Federation of
Independent Businesses

5
0

2.4

1996

1998

2000

2002

2004

Note. Percent planning an increase in employment
minus percent planning a reduction.

80
May

Conference Board
(left scale)

1996

1998

2000

2002

2004

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

II-5

eligibility—edged down in May and has fallen by approximately ½ percentage point over
the past year. In May, 23 percent of firms reporting to the National Federation of
Independent Businesses said that they had a hard-to-fill position, down 1 percentage
point from February and March, but 1 percentage point above the average reading in the
second half of last year. Households’ assessments of job availability rose gradually
through the first quarter and have remained near their recent high since then. Similarly,
job openings as a percent of private employment, as measured by the JOLTS, rose from
2.5 percent last summer to 2.8 percent in February, and the reading has remained steady
in recent months. At the same time, the help wanted index is currently above the level
posted at the end of last year, although it receded a bit in April and May from February’s
recent high.
Looking ahead, hiring plans of small businesses popped up in May from their depressed
levels in March and April. Meanwhile, the third-quarter net hiring plans of participants
in the Manpower survey are unchanged at the relatively high level that has prevailed
during the first half of the year. Coinciding with the relatively positive hiring indicators,
households’ views of the future have brightened a touch in recent weeks. Household
expectations of the labor market, as measured by the Michigan survey, bounced back to
first-quarter levels in June following weak readings in April and May. The Conference
Board measure of expected labor market conditions also improved a bit in the most recent
reading for May but has moved little on balance in recent months.

Labor Output per Hour
(Percent change from preceding period at an annual rate;
seasonally adjusted)
2004
Sector
Nonfarm business
All persons
All employees1
Nonfinancial corporations2

2005

2003

2004

Q1e

5.4
6.0
5.4

2.8
2.7
4.5

.9
2.2
4.9

2.3
1.9
9.0

3.5
3.9
3.0

2003:Q1 2004:Q1
to
to
2004:Q1 2005:Q1e
5.5
5.5
5.1

Note. Annual changes are from fourth quarter of preceding year to fourth quarter of year shown.
1. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of
employees.
2. 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.
e Staff estimate.

2.7
2.9
5.0

II-6

Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2004

Component

20041

(percent)

2004

2005

2005
Mar.

Annual rate
Total
Previous

Apr.

May

Monthly rate

100.0
100.0

4.3
4.3

4.5
4.5

3.5
3.6

.2
.1

-.3
-.2

.4
...

81.9
74.7
70.2

5.1
5.3
4.4

4.6
3.5
2.8

3.9
4.0
2.4

-.2
.1
.1

-.1
.1
.0

.6
.6
.5

Mining
Utilities

8.3
9.8

-2.0
2.7

-3.6
10.4

8.4
-3.2

-.1
3.6

.1
-2.4

.1
-.7

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.5
1.0
1.2
2.3

18.7
6.9
9.6
29.9

14.5
13.8
13.2
15.4

29.8
14.7
23.6
40.0

.8
1.0
-1.2
1.7

1.3
.9
.1
2.1

2.3
.9
3.6
2.3

Motor vehicles and parts

7.2

2.9

16.3

2.7

-3.1

-2.0

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

22.0
4.3
17.7

3.7
1.3
4.3

3.4
-1.0
4.5

2.3
.4
2.7

.0
-.2
.0

-.3
-.9
-.2

.5
.6
.5

Business equipment
Defense and space equipment

7.7
1.9

9.3
6.1

1.9
5.0

6.6
9.3

.7
.8

1.5
2.1

.7
1.1

Construction supplies
Business supplies

4.3
8.1

3.8
3.2

.1
.9

4.4
4.7

-.1
.3

.4
.2

.2
.5

25.2
13.9
11.3

3.9
4.6
2.9

3.0
4.2
1.5

.2
.1
.2

.0
.2
-.3

-.5
-.6
-.3

.5
.6
.4

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)
19722004
average

1982
low

19901991
low

Apr.

May

Total industry

81.0

70.8

78.6

78.2

78.8

79.3

79.1

79.4

Manufacturing
High-tech industries
Excluding high-tech industries

79.8
78.3
79.9

68.5
74.1
68.2

77.2
74.3
77.3

77.0
69.9
77.8

77.6
69.8
78.5

78.1
71.9
79.0

77.9
72.0
78.7

78.2
72.9
79.1

Mining
Utilities

87.1
86.8

78.6
77.7

83.5
84.2

86.3
83.7

85.6
85.4

87.5
84.4

88.3
84.1

88.5
83.4

Sector

2004

2005

II-7

We now estimate that productivity in the nonfarm business sector rose at an annual rate
of 3.5 percent in the first quarter, following an increase of 2.3 percent in the fourth
quarter. Over the four quarters ending in 2005:Q1, productivity increased 2.7 percent by
our estimate—half the blistering pace recorded during the preceding four quarters but
close to the average rate of increase since 1995. We also estimate that output per hour in
the nonfinancial corporate sector rose 3 percent in the first quarter to a level 5 percent
higher than a year earlier—the latter rate is only a shade below the 5.1 percent increase
recorded over the four quarters ending in 2004:Q1.1
Industrial Production
Industrial production increased 0.4 percent in May after having declined 0.3 percent in
April. The increase in May was led by a gain of 0.6 percent in manufacturing output.
Production in mining edged up 0.1 percent last month, while the output of utilities fell
0.7 percent. Excluding motor vehicles and parts, manufacturing production expanded
0.6 percent in May after having advanced little during the preceding three months.
The production of motor vehicles and parts was unchanged in May after a cumulative
decline of 5.1 percent in March and April. Manufacturers continued their efforts to work
off inventories of light trucks by holding down light vehicle assemblies in May to an
annual rate of 11.0 million units, the slowest pace since October 2001. However, despite
the lower assembly rates recently, days’ supply edged down to only 71 days in May from
an average of 74 days in the first quarter. The pace of assemblies of medium and heavy
trucks has also come down in recent months, but this decline is from a level in January
that was the highest since February 1980.2 For June, total motor vehicle assemblies are
set at an 11.9 million unit pace reflecting a sizable step-up in light truck production.
Third-quarter schedules currently point to a pace of 11.8 million units.

Output for the nonfinancial corporate sector, used in construction of the output per hour measure
shown in the table, is measured on the income side of the national accounts, while output in the nonfarm
business sector is measured on the product side of the accounts.
2
Moreover, at a recent symposium, an industry expert from the Americas Commercial Transportation
Research Company suggested that the recent slackening in production reflected, at least in part, delayed
delivery of selected parts and that replacement demand for heavy trucks was still strong.

II-8

Indicators of Manufacturing Activity

Boeing Commercial Aircraft Completions
Millions of units
14

0.6

Medium and heavy trucks
(left scale)

0.5

160

1997 = 100
160

3-month moving average

140

120

100

40
1998
2000
2002
2004
2006
Note. 1998 price-weighted index. Actual completions equal
deliveries plus the change in the stock of finished aircraft.
Data through May are actual completions; the remainder
are Boeing scheduled assembly rates.

13
0.4

+June
12

0.3
+June

0.2

11
Autos and light trucks
(right scale)

0.1
0.0

1999

2000

2001

2002

2003

2004

2005

2006

Note. June value is based on latest industry schedules.

New Orders: FRB New York and
FRB Philadelphia Surveys

IP: Equipment and Consumer Goods
2002 = 100
May

Diffusion index
115

113

111
109

Business equipment and
defense and space
equipment

70
FRB Philadelphia survey

107
May

105

55
June

103
101

Consumer goods

FRB New York survey

97
2002
2003
2004
2005
Note. Data exclude energy, motor vehicles and parts,
and high-tech industries.

35
2001
2002
2003
2004
2005
Note. The diffusion index equals the percentage of
respondents reporting greater levels of new orders plus
one-half the percentage of respondents reporting that
new orders were unchanged.

ISM Supplier Deliveries Index and Manufacturing Capacity Utilization
80
70

Diffusion Index

Percent
ISM supplier deliveries index (left scale)

95
90

85
May

80
May

40
30
20

75
Manufacturing capacity utilization (right scale)

1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Note. The diffusion index equals the percentage of respondents reporting slower supplier deliveries plus one-half the percentage
of respondents reporting that supplier deliveries were unchanged.

70
65

Content partially redacted.

Motor Vehicle Assemblies
Millions of units

II-9

Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted; FRB seasonals)
2005
Item

2004

U.S. production
Autos
Light trucks

Q21

2005
Q31

Apr.

May

June1

11.7
4.3
7.4

11.6
4.4
7.2

11.2
4.1
7.1

11.4
4.1
7.3

11.1
4.1
6.9

11.0
4.1
6.9

11.5
4.1
7.3

Days’ supply2
Autos
Light trucks

74
59
83

74
57
86

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

70
51
84

71
53
83

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

Inventories3
Autos
Light trucks

3.22
1.02
2.20

3.15
.99
2.15

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

3.14
.96
2.18

3.05
.92
2.12

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

Memo: U.S. production,
total motor vehicles4

12.0

12.1

11.6

11.8

11.5

11.4

11.9

Note. Components may not sum to totals because of rounding.
1. Production rates for June and the second and third quarters reflect the latest schedules from Ward’s Communications.
2. Quarterly and semiannual 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.

Elsewhere in the transportation sector, production has been buoyant. The IP index for
commercial aircraft jumped at an annual rate of 25 percent in the first quarter, and robust
output gains in April and May have put the industry on track for another significant
increase in the second quarter.
.
In the high-tech sector, recent news about semiconductor production has been mostly
positive. Shipments of semiconductors in the first four months of the year exceeded
industry expectations, and the Semiconductor Industry Association (SIA) raised its
forecast of worldwide nominal shipments for 2005 from no change to an increase of
6 percent.3 Nonetheless, this forecast, coming on the heels of the solid output gains early
in the year, actually implies some decline in the rate of increase in the near-term.
Similarly, although Intel upgraded its revenue guidance for the second quarter, that
guidance still shows some slowing in the seasonally adjusted rate of increase relative to
the first quarter. Orders for semiconductor manufacturing equipment, which are heavily
influenced by the introduction of each new generation of semiconductor chips, have been
3

Other outside forecasts of semiconductor shipments have been revised up similarly in recent weeks.

II-10
Indicators of High-Tech Manufacturing Activity

Microprocessor Unit (MPU) Shipments
and Intel Revenue

Semiconductor Manufacturing
Equipment Orders and Shipments
Billions of dollars, ratio scale

Billions of dollars, ratio scale
10

+ Q2

3.5
3.0

2.5

Intel revenue

Shipments

2.0
1.5

Orders

May
1.0
6
Worldwide MPU shipments
5
1999
2000
2001
2002
2003
2004
2005
Note. Q2 is the midpoint of Intel’s guidance as of June 9, 2005.
FRB seasonals.
Source. Intel and Semiconductor Industry Association.

1999
2000
2001
2002
2003
2004
2005
Source. Semiconductor Equipment and Materials
International.

IP: Computers and Semiconductors
1997 = 100, ratio scale
1200
1050
900
750

U.S. Personal Computer and Server Sales

1997 = 100, ratio scale

Semiconductors (left scale)

Millions of units, ratio scale

May

350
325

May

300

450

Millions of units, ratio scale

0.9

0.8
0.7

275

600

250

0.6

225

0.5

14
13
12
11

0.4

Computers (right scale)
175

1999

2000

2001

2002

2003

2004

2005

150

CIO Magazine Future Spending
Diffusion Indexes

Servers (left scale)
0.3

1999
2000
2001
Note. FRB seasonals.
Source. Gartner.

2002

2003

2004

2005

IP: Communications Equipment
Index

70
Apr.

16
15

PCs (right scale)

200

300

150

0.5

1997 = 100, ratio scale

220
200

May

180
160

60
140

Data networking equipment
55

55
120

50
45

Computer hardware

45
2001
2002
2003
2004
2005
Note. The diffusion index equals the percentage of respondents planning to increase future spending plus one-half the
percentage of respondents planning to leave future spending
unchanged.
Source. CIO Magazine.

1999

2000

2001

2002

2003

2004

2005

100

II-11

about flat in recent months; moreover, industry observers have suggested that orders will
fall a bit further in 2005 and 2006 before picking up again in 2007 and 2008.
Elsewhere in the tech sector, computer production has been increasing roughly 1 percent
per month, a pace that is well below the average gain in the latter half of the 1990s. Unit
sales of personal computers (PCs) moved down in the first quarter, while the latest
outlook from Gartner suggests that unit sales may edge up in the second quarter. Within
total PC sales, the increase in desktop sales continues to lag the more rapid sales pace for
mobile PCs, of which fewer are domestically produced. Unit sales of computer servers
continue to trend up steadily, but some industry reports suggest these gains may start
slowing. Indeed, diffusion indexes of future business spending plans for computers and
data networking equipment, though volatile, have edged down over the past year. In
contrast, the production of communications equipment, which has trended up since its
trough in late 2002, may receive some added impetus from the continued rollout of new
products designed for telecommunications service providers and other enterprises.4
Excluding energy, motor vehicles and parts, and high-tech products, production gains
were widespread in May. The output of equipment—both for business and for defense
and space—has continued to trend upward, and the production of consumer goods, which
had been moving sideways of late, increased ½ percent in May. Among upstream market
groups, the combined output of business and construction supplies increased at an annual
rate of 4.6 percent in the first quarter and has been rising in the second quarter. In
contrast, the output of materials designated for further processing in the industrial sector
increased in May but has been little changed, on balance, since October 2004. Within
this grouping, the production of iron and steel was curtailed sharply in April, as
inventories at steel service centers continued to rise in response to relatively flat
shipments.
Overall, the manufacturing utilization rate in May, at 78.2 percent, was 1.6 percentage
points below its 1972-2004 average.5 Although the factory operating rate changed little

Examples include equipment that better handles the complex routing requirements of voice traffic
over the Internet and products that bundle functions such as data, security, and voice handling into a single
piece of equipment.
5
Industries whose utilization rates remain below their long-run averages include, among others,
textiles and apparel; converted paper product; printing and related support activities; fabricated metal
product; furniture and related product; and communications equipment. Industries with above-average
rates of utilization include motor vehicles and parts as well as several upstream industries such as

II-12
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2004
Category

2004

Total

2005
Q4

Mar.

Apr.

May

16.9

17.1

17.2

16.4

16.8

17.4

16.6

7.5
9.4

7.3
9.7

7.7
9.5

7.5
8.9

7.7
9.1

8.2
9.2

7.6
9.1

North American1
Autos
Light trucks

13.5
5.4
8.1

13.8
5.3
8.5

13.6
5.4
8.2

13.1
5.4
7.7

13.4
5.5
7.9

13.8
5.8
8.0

13.2
5.3
7.8

Foreign-produced
Autos
Light trucks

3.4
2.1
1.2

3.3
2.0
1.2

3.6
2.3
1.3

3.3
2.1
1.2

3.4
2.2
1.2

3.6
2.3
1.3

3.4
2.2
1.2

58.7

59.9

56.9

57.7

57.8

56.4

57.4

Autos
Light trucks

Memo:
Big Three market share (percent)

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

Average Value of Cash and Financing
Incentives for Vehicles with Incentives

Average Value of Incentives on Light Vehicles
Ratio scale, current dollars per vehicle
3400
3000

Quarterly averages

2600
2200

Ratio scale, current dollars per vehicle
6000
5200
4400
3600
2800

4400

Customer cash rebate (right scale)
Present value of interest rate reduction (left scale)

3600
2800

2000
1800
June 12

1200

June 12

2000

1400

2003

2004

1000

2005

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

400

2003

2004

2005

1200

Source. J.D. Power and Associates.

Days’ Supply of Light Trucks

Domestic Market Share

Days

Period

Total

Other1

2003

80.6

28.3

52.3

2004

80.7

27.3

53.4

2004: May

80.8

26.8

54.0

110

Light Trucks
60-month moving average

95
May
80
May

2005: Q1

80.6

25.4

55.2

April

80.1

25.0

55.1

May

80.3

25.3

55.0

Note. Percent share of total light vehicle sales.
1. Includes domestic manufacturers except GM.

2003

2004

2005

II-13

between February and May, it has risen fairly steadily over the past two years. In
contrast, the Institute for Supply Management (ISM) supplier deliveries diffusion index
has fallen sharply; this index had jumped in 2004 in response to tight conditions in the
freight transportation sector. The recent behavior of these two series resembles the
experience of the early 1980s.
Recent indicators of industrial activity have been mixed but are generally consistent with
modest near-term gains. Thus far in June, the available weekly indicators of production
have been positive: The pace of motor vehicle assemblies has picked up; electricity
generation has risen because of unseasonably warm weather in June (following a coolerthan-usual May); and other weekly physical product data, with the exception of that for
steel, have risen, on balance, relative to May. Looking ahead, indicators of new orders
activity have been less upbeat. Although the new orders diffusion index from the New
York Fed’s Empire State Survey in June partly reversed its recent string of declines, the
Philadelphia Fed’s Business Outlook Survey posted a sizable drop after having edged
down in May; that said, both series were above 50 in June. In addition, the three-month
moving average of the staff’s series on real adjusted durable goods orders was unchanged
in March and April.
Motor Vehicles
Light vehicle sales fell 800,000 units in May to an annual rate of 16.6 million units.
Nonetheless, the average pace of sales in April and May still exceeded the first-quarter
average, despite the fact that incentives were a little less rich, on average, over the period
than they were in the first quarter. Confidential reports from vehicle manufacturers
suggest that sales are rebounding in June primarily in response to temporary price cuts by
General Motors (GM).
To clear out inventories of its 2005 model-year vehicles, GM made its generous
employee discount on new vehicle purchases available to the general public through
July 5.6 The price cut, which may be combined with other incentives, shaves 17 percent
petroleum and coal products; pulp, paper, and paperboard; and cement and concrete product.
In addition, the publication of industrial production for May included updated estimates of industrial
capacity for 2005. The increase in total industrial capacity from the fourth quarter of 2004 to the fourth
quarter of 2005 was revised down 0.1 percentage point, to 1.2 percent; manufacturing was revised down
similarly, to 1.4 percent.
6
The offer applies to all 2005 model-year cars (except the Corvette) and to most light trucks. The
price cut is not included in J.D. Power’s estimate of incentives, which includes only cash rebates and
interest subvention.

II-14

Retail and Food Services Sales
(Percent change from preceding period, unless otherwise noted; seasonally adjusted current dollars)
2004

2005
Apr.
May
Monthly rate

Category

Q4
Annual rate

Mar.

Total sales
Retail control1
Previous estimate
Ex. sales at gasoline stations
GAF
Memo: Real PCE goods ex.
autos and trucks2

6.7
6.6
6.6
6.1
4.7

10.2
10.6
10.6
8.3
7.2

6.0
7.3
7.3
7.0
7.3

.3
.0
.0
-.3
-.8

1.5
1.4
1.1
1.3
1.3

-.5
-.3
...
-.1
-.1

5.4

6.7

6.5

-.7

1. Total sales less outlays at building material and supply stores and automobile and other motor
vehicle dealers.
2. Q1, March, and April are staff estimates. May is a staff forecast.
... Not applicable.

Real PCE Goods Excl. Autos and Trucks
3030

Quarterly average

Real PCE Services

Billions of chained (2000) dollars
3030
May

2975

2920

2865

2810

2755

2700

2003

Quarterly average
Apr.

4440

2700

2004

Billions of chained (2000) dollars
4500

4500

4440

4380

4320

4260

4200

2003

4200

2004

Note. March, April, and 2005:Q1 are staff estimates;
May is a staff forecast.

Change in Real DPI and Real Wages and Salaries
Percent, annual rate
10

10
8

Real DPI*
Real wage and salary disbursements

-2

-4

-4
H1

2003
2004
* 2004:H2 and 2005:Q1 values exclude the effect on income of the one-time Microsoft dividend payment in December.

Mar. Apr.
2005

II-15

from GM’s suggested retail prices of the targeted vehicles.7 Information from J.D. Power
and Associates through June 12 suggests that the program appears to have significantly
boosted sales of GM’s sport utility vehicles and pickups. Perhaps because other
manufacturers expect GM’s unusually large price cut to be short-lived, they have not yet
moved aggressively to compete by enriching their own incentives.
After an abrupt drop in April, the market share of domestically produced vehicles edged
up to 80.3 percent in May but remained below its level a year earlier. That modest
slippage masks a more serious erosion of market share for the Big Three nameplates,
particularly GM, whose market share has tumbled 1.5 percentage points since May 2004.8
The winners have been the domestic transplant firms and Chrysler.9
Consumer Spending
Real personal consumption expenditures are on track to increase at a moderate pace in the
current quarter, albeit at a bit less than the 3½ percent (annual rate) rate posted in the first
quarter. Purchases of motor vehicles have more than recovered from their decline in the
first quarter. At the same time, however, real outlays for goods excluding cars and trucks
seem to have decelerated this quarter against a backdrop of somewhat lackluster
fundamentals.
Nominal retail sales at the control group of stores, which excludes automotive dealers and
building materials and supply stores, fell last month, as did spending at most categories of
retail outlets. However, with prices of non-auto consumer goods having fallen in May,
we estimate that real spending on goods excluding cars and trucks was unchanged after a
jump of 0.6 percent in the previous month. Real spending on services was flat in April,
the most recent month for which data are available. Expenditures on energy services
dropped because of cooler-than-normal temperatures; outlays for non-energy services
were also tepid.
As a result of rising energy prices and only moderate improvements in the labor market,
the rate of increase in real disposable income slowed this spring after strong gains (even
abstracting from the extraordinarily large dividend payment by Microsoft) in late 2004
7

Because vehicle prices tend to drop over a model-year’s selling season, the impact of GM’s program
on the actual transactions price of GM vehicles is less than the employee discount.
8
Domestic market share excludes foreign-produced vehicles (such as Saab, which is sold by GM).
9
The manufacturers other than the Big Three with light vehicle production capacity in the U.S. are
BMW, Honda, Hyundai, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Subaru, and Toyota.

II-16

Household Indicators

Household Net Worth and Wilshire 5000
Index
15000

Ratio
7.0

13000

6.5
May
Wilshire 5000
(left scale)

11000

6.0

9000

5.5

7000

5.0
Ratio of household net worth to DPI*
(right scale)

5000
3000

4.5

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

4.0

* December 2004 value excludes the effect on income of the one-time Microsoft dividend payment in that month.

Personal Saving Rate
7

Percent
7

1
Apr.

0
-1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

0
-1

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

Consumer Confidence
1985 = 100
160

1966 = 100
120
Michigan SRC*
(right scale)

140
120

110

June
May

100
80

90
80

60
40

100

Conference Board (left scale)
1994

1995

1996

* June 2005 value is preliminary.

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-17

and early this year. With spending outpacing income thus far this year, the personal
saving rate has moved down, to only ½ percent in April (its most recent reading). The
stock market has been about flat, on net, since the start of the year, but house prices have
continued to appreciate rapidly; we estimate that overall household net worth has
increased roughly in line with income over the course of the first two quarters.
The Michigan Survey Research Center (SRC) index of consumer sentiment rebounded in
early June after having declined noticeably in April and May. The Conference Board
index of consumer confidence moved up in May (the most recent reading). Both indexes
appear to have been held down in April by the jump in energy prices but have moved
back up recently as gasoline prices fell for a time.
Housing
Activity in the housing sector remains strong. Single-family starts were at an annual rate
of 1.70 million units in May, in line with their first-quarter average and about 5 percent
above the average pace last year. Permits for single-family homes—after adjusting for
activity in areas where permits are not required—were issued at an annual rate of
1.65 million units in May, a little above the first-quarter pace, and the backlog of unused
permits edged down. Starts of multifamily dwellings fell to an annual pace of
305,000 units in May, a rate well below the average pace over the past year. Altogether,
the permits data suggest that total starts may decline slightly in June but remain at a
robust level.
Sales of both new and existing homes climbed to record highs in April. Sales of singlefamily existing homes were at an annual rate of 6.28 million units in April, while new
homes sold at a 1.32 million unit pace. Housing demand is undoubtedly receiving
considerable support from favorable financing conditions. The thirty-year fixed
mortgage rate has declined in recent weeks, and the mid-June level of 5.6 percent is at the
low end of the range observed since the spring of 2004. In addition, the one-year
adjustable mortgage rate has risen only about 35 basis points during the past year. The
four-week moving average of mortgage applications to purchase homes has been at an
elevated level in recent weeks, suggesting that home sales will remain strong in June and
July.
Prices of existing homes continue to increase rapidly, while prices of new homes appear
to have decelerated. In the market for existing homes, the OFHEO purchase-only repeatsales index—which measures changes in the sale price of the same house over time and

II-18

Private Housing Activity
(Millions of units; seasonally adjusted annual rate except where noted)
2004
2005
Sector
All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
Permit backlog2
New home sales
Existing home sales
Multifamily units
Starts
Permits
Permit backlog2
Mobile homes
Shipments
Condos and Co-ops
Existing home sales

2004

Mar.

Apr.

May

1.96
2.05

1.97
2.09

2.08
2.08

1.83
2.02

2.01
2.15

2.01
2.05

1.61
1.60
1.64
.150
1.20
5.96

1.62
1.60
1.64
.150
1.24
6.05

1.71
1.60
1.63
.150
1.25
5.98

1.55
1.55
1.58
.150
1.31
6.01

1.63
1.64
1.67
.154
1.32
6.28

1.70
1.62
1.65
.152
n.a.
n.a.

.35
.46
.075

.35
.49
.075

.37
.48
.068

.28
.47
.068

.38
.51
.063

.31
.43
.062

.131

.138

.124

n.a.

.82

.83

.85

.86

.90

n.a.

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
2. Number outstanding at end of period. Seasonally adjusted by Board staff. Excludes permits that have
been canceled, abandoned, expired, or revoked. Not at an annual rate.
n.a. Not available.

Private Housing Starts

(Seasonally adjusted annual rate)

Millions of units

2.4

2.2

2.2
May

2.0
1.8

Total

May

1.6

1.4

1.2

1.2
Single-family

1.0

Multifamily

.4
May

.2
.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-19

Indicators of Single-Family Housing
Existing Home Sales

New Home Sales

6500

Thousands of units
6500
Apr.

6000

5500

5000

4500

4000

Thousands of units
1500

1500

Apr.

1300

3500

1999

2000

2001

2002

2003

2004

2005

3500

1100

900

700

1999

2000

2001

2002

2003

2004

2005

Mortgage Rates

Homebuying Indicators
Percent
9

9
Fixed rate

Index
Diffusion index
550
100
MBA purchase index (right scale)
Builders’ ratings of current new home sales
500
80
(left scale)
June 17 450
60

-20

June
June
5
One-year ARM

June

1999

2000

2001

2002

2003

2004

2005

300
250
1999

2000

2001

2002

2003

2004

2005

2006

Prices of New Homes

Percent change from year earlier
20

Repeat transactions, purchase-only index
Average price of homes sold

Constant quality
Average price of homes sold

-5

Apr.

1999

2000

2001

2002

2003

200

Note. MBA index is a 4-week moving average. Builders’
ratings data are seasonally adjusted by Board staff.
Source. Mortgage Bankers Association and National
Association of Home Builders.

Prices of Existing Homes

-5

400
350

Note. The June readings are based on data
through June 15.
Source. Freddie Mac.

700

Source. Census Bureau.

Source. National Association of Realtors.

1300

2004

Source. For repeat transactions, OFHEO; for
average price, National Association of Realtors.

2005

1999

2000

2001

2002

2003

2004

2005

Note. Average price of homes sold is a 3-month
moving average.
Source. Census Bureau.

-5

II-20

Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2004
Indicators

2005

Feb.

Annual rate

Mar.

Apr.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

9.7
9.6
40.3
-17.1
8.6

12.8
14.0
33.9
16.2
10.0

-2.7
-2.6
-1.6
-2.2
-2.8

1.1
-.1
2.3
3.4
-1.0

2.0
1.0
5.8
-10.7
1.6

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

4.7
6.3
34.6
-23.0
5.9

7.6
21.8
18.0
99.3
14.9

-.4
-2.1
.4
-.4
-2.9

-3.2
-1.6
-5.4
-8.2
.1

4.1
1.7
15.7
-3.5
-.3

Memo:
Shipments of complete aircraft1

27.1

23.9

18.4

27.9

34.7

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

Computers and Peripherals

Communications Equipment

Billions of dollars, ratio scale

13
12

Shipments
Orders

Apr.

13
12
11

Billions of dollars, ratio scale

21
Shipments
Orders

17
15
13
11

7
Apr.

1999

2000

2001

2002

2003

2004

2005

1999

2000

Medium and Heavy Trucks
890
740

Thousands of units, ratio scale
Sales of class 4-8 trucks
Net new orders of class 5-8 trucks

890

2002

2003

2004

2005

Billions of dollars, ratio scale

560

560
May

470

380

290

1999 2000 2001 2002 2003 2004 2005
Note. Annual rate, FRB seasonals.
Source. For class 4-8 trucks, Ward’s Communications;
for class 5-8 trucks, ACT Research.

200

Shipments
Orders

740
650

200

2001

Other Equipment

650

470

Apr.

1999

2000

2001

2002

2003

2004

2005

II-21

excludes appraisals from refinancings—was 10¼ percent higher in the first quarter than a
year earlier, continuing the steep climb that has prevailed since late 2003. The average
sales price of existing homes has shown a similar pattern. In contrast, in the market for
new homes, the constant-quality price index—which controls for changes in the
geographic composition of sales, home size, and a few other readily measurable
attributes—was up about 4½ percent in the first quarter from a year earlier, noticeably
slower than the gain of more than 7½ percent during the previous four-quarter period.
Average sales prices of new homes have also decelerated.
Equipment and Software
After having climbed at a heady annual rate of 18 percent in the second half of last year,
real outlays for equipment and software increased at a more-moderate 7 percent pace in
the first quarter. Although business purchases of high-tech goods surged last quarter,
spending on transportation equipment and other equipment fell back following large
gains in 2004. Available data for the current quarter suggest that equipment and software
expenditures will likely register another moderate increase. More broadly, the
fundamentals remain supportive of business investment: The user cost of capital is low,
business output is rising briskly, and corporate balance sheets are healthy. In addition,
surveys of business leaders indicate that capital spending sentiment remains relatively
favorable.
Real business spending on transportation equipment stumbled in the first quarter.
Although we expect a rebound in deliveries of aircraft to domestic purchasers in the
current quarter, investment in motor vehicles appears set for another quarterly decline.
Business purchases of light vehicles are estimated to have edged down in May, and sales
of medium and heavy trucks also declined. Net new orders for medium and heavy trucks
ticked up in May but have moved lower, on balance, since the turn of the year—signaling
that demand may ease a bit further in coming months, albeit from an elevated level.
Order backlogs are still at high levels, and industry reports point to rising prices as
evidence that overall demand (particularly for class-8 heavy trucks) remains strong.10
Real outlays for high-tech equipment and software increased at a robust annual rate of
28 percent in the first quarter, but the recent orders and shipments data paint a mixed
picture of spending in this category in the current quarter. Nominal shipments of
computers rose 6 percent in April, and orders leaped 16 percent. Coupled with ongoing
10

Freightliner has reported that it expects its revenue to increase this year to a record level.
Freightliner, a unit of DaimlerChrysler, is the largest heavy-truck maker in North America.

II-22

Equipment and Software Investment Fundamentals

Real Business Output
4-quarter percent change
8

6
Q1

-2

-4

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-4

User Cost of Capital
3

High-Tech

4-quarter percent change

-3

-6

-6
Q1

-9

-12

-15

-15
1990 1992 1994 1996 1998 2000 2002 2004 2006

Non-High-Tech

4-quarter percent change

0
Q1

-5

-10

4-quarter percent change

Index

10
Q1

48
36
Q1

-5

-10

-10
1990 1992 1994 1996 1998 2000 2002 2004 2006

NABE Capital Spending Diffusion Index

Real Corporate Cash Flow

-5

-10
1990 1992 1994 1996 1998 2000 2002 2004 2006

-12

-24

-24
1990 1992 1994 1996 1998 2000 2002 2004 2006
Note. The diffusion index equals the percentage of
repondents planning to increase spending minus the percentage
of respondents planning to reduce spending.
Source. NABE Industry Survey.

II-23

Nonresidential Construction and Indicators
Real Construction
(Seasonally adjusted, annual rate; nominal CPIP deflated by
BEA prices through Q4 and by staff projection thereafter)

Total Structures

Office and Commercial

290

Billions of chained (2000) dollars
290

270

250

230

210

Billions of chained (2000) dollars
70

Commercial
60

60
Apr.

190
170

Apr.
1999

2000

2001

2002

2003

2004

2005

Power & communication

Office

190
170

Manufacturing and Power &
Communication
60

Apr.

1999

2000

2001

2002

2003

2004

2005

Other

Billions of chained (2000) dollars
60

Billions of chained (2000) dollars
75

Apr.
30
20

30
Manufacturing

20
Apr.

10
0

Apr.

1999

2000

2001

2002

2003

2004

2005

1999

2000

2001

2002

2003

2004

2005

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

Indicators
Vacancy Rates

Drilling Rigs in Operation

18
Office

Industrial

Percent
18

1400

1200

June

1000
800

Number
1400

1000
Natural gas

800

9
600

6
Q1

600

400

Retail
3

1200

Petroleum
200

200
June

1999

2000

2001

2002

2003

2004

2005

Source. Office and industrial, CoStar Property Professional;
retail, National Council of Real Estate Investment Fiduciaries.

1999

2000

2001

2002

2003

2004

2005

Note. June values are averages through June 17.
Source. DOE/Baker Hughes.

II-24

Changes in Manufacturing and Trade Inventories
(Billions of dollars; seasonally adjusted book value; annual rate)
2004
Sector

2005

Feb.

Mar.

Apr.

86.5

84.6

98.8

81.2

75.4

49.4

77.6

101.8

102.2

83.6

80.2

40.8

Manufacturing
Ex. aircraft

32.3
33.9

35.9
33.2

52.8
46.4

35.2
26.8

39.2
34.7

7.3
15.3

Wholesale trade
Motor vehicles and parts
Ex. motor vehicles and parts

38.3
3.8
34.5

36.7
-2.4
39.1

30.5
-1.1
31.6

26.0
-2.8
28.8

23.8
-8.6
32.4

32.2
5.7
26.5

Retail trade
Motor vehicles and parts
Ex. motor vehicles and parts

15.8
5.0
10.8

12.0
-14.8
26.8

15.5
-2.3
17.7

20.0
.4
19.5

12.4
3.8
8.6

9.9
2.9
7.0

Manufacturing and trade
Ex. wholesale and retail
motor vehicles and parts

Book-Value Inventories Relative to Shipments and Sales
Ratio
1.8

1.8

Retail trade ex. motor vehicles and parts

1.6

Manufacturing

1.4

Apr.
1.2

1.2
Wholesale trade ex. motor vehicles and parts

1.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1.0

Inventory-Consumption Ratios, Flow-of-Goods System
Days’ supply
64

62
Total

56
Total ex. motor vehicles and parts

50
Mar.

48
46

48
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-25

rapid price declines, real spending for computers is poised to increase appreciably this
quarter. In contrast, a plunge of 11 percent in shipments of communications equipment
and a drop of 4 percent in orders in April suggest that real outlays in this category
arelikely to fall in the current quarter. Although most large software vendors have not yet
released earnings updates for the second quarter, surveys of CIOs indicate that
replacement purchases of software should continue to support strong gains in real
spending.
Real outlays for non-high-tech, nontransportation equipment declined at an annual rate of
2 percent in the first quarter. The source of this weakness is unclear. Indeed, some of the
softness in the first quarter occurred in subcategories such as construction machinery and
mining and oilfield machinery, in which final users clearly face favorable economic
conditions. The first-quarter decline may have reflected, in part, the expiration of the
partial-expensing allowances at the end of 2004, or it may have represented a pause
following a spurt in spending that was unrelated to partial expensing. In either case, the
downturn appears to have been short lived: Shipments of non-high-tech,
nontransportation equipment rose 1.6 percent in April, and the level of new orders
remained well above the level of shipments.
Nonresidential Construction
Real outlays for construction of nonresidential structures have remained at a low level so
far this year. Although spending on commercial structures has moved up in recent
months, outlays for office buildings have remained at a depressed level despite a small
decline in the elevated vacancy rate for that sector. In addition, spending for
manufacturing structures still is less than half the level seen in 1999 despite some uptrend
over the past year, and other construction has continued to fall. The number of rigs
drilling for natural gas still is moving up, but drilling for petroleum has remained weak.
Business Inventories
The book value of manufacturing and trade inventories excluding motor vehicles
increased at an annual rate of $100 billion in the first quarter. However, the pace of
stockbuilding cooled off some in April—firms added about $41 billion in book value to
their inventories in that month. The large buildup of inventories in the first quarter raised
inventory-sales ratios a little from their very low levels of last year. In the manufacturing
sector, respondents to the ISM survey report that they now view their customers’
inventory positions as roughly appropriate after having seen them as too lean last year.
Data from the staff's flow-of-goods inventory system indicate that inventories declined

II-26

Federal Government Outlays and Receipts
(Unified basis; billions of dollars except as noted)
12 months ending
in May

April-May
Function or source

2004

2005

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

380.4
-.7
.0
381.1

407.9
-.8
.0
408.8

Receipts
Payment timing
Adjusted receipts

335.5
.0
335.5

Surplus or deficit (-)
Selected components
of adjusted outlays
and receipts
Adjusted outlays
Net interest
Non-interest
National defense
Social Security
Medicare
Medicaid
Income security
Agriculture
Other

Percent
change

2004

2005

7.2
...
...
7.3

2240.9
-2.2
-11.9
2255.0

2402.0
-.8
-.1
2402.9

7.2
...
...
6.6

430.3
.0
430.3

28.3
...
28.3

1808.4
.0
1808.4

2063.2
.0
2063.2

14.1
...
14.1

-44.9

22.4

...

-432.5

-338.8

...

381.1
31.4
349.8
75.1
83.9
44.5
29.6
54.3
-1.4
63.8

408.8
36.5
372.3
79.4
87.7
48.9
30.4
57.5
1.4
67.0

7.3
16.4
6.4
5.7
4.6
9.8
2.6
5.8
...
5.1

2255.0
153.2
2101.7
441.2
489.3
259.0
172.9
339.0
19.0
381.4

2402.9
172.9
2230.1
476.0
512.6
286.0
180.3
342.4
26.2
406.5

6.6
12.8
6.1
7.9
4.8
10.5
4.3
1.0
38.0
6.6

Adjusted receipts
Individual income and
payroll taxes
Withheld + FICA
Nonwithheld + SECA
Less: Refunds
Corporate
Gross
Less: Refunds
Other

335.5

430.3

28.3

1808.4

2063.2

14.1

262.7
220.6
119.4
77.3
28.7
35.4
6.7
44.1

340.2
237.9
172.1
69.8
41.6
45.3
3.8
48.6

29.5
7.8
44.2
-9.7
44.7
28.1
-43.3
10.1

1455.8
1373.8
284.0
202.0
162.3
208.0
45.7
190.3

1627.1
1460.0
345.4
180.5
234.7
265.4
30.7
201.5

11.8
6.3
21.6
-10.7
44.6
27.6
-32.7
5.9

Adjusted surplus or deficit (-)

-45.6

21.6

...

-446.6

-339.7

...

Note. Components may not sum to totals because of rounding.
1. Financial transactions consist of deposit insurance, spectrum auctions, and sales of major assets.
2. A shift in payment timing occurs when the first of the month falls on a weekend or holiday, or
when the first three days of a month are nonworking days. Outlays for defense, Social Security,
Medicare, income security, and "other" have been adjusted to account for these shifts.
... Not applicable.

II-27

for a second month in April and that days’ supply edged down. Apart from the high
levels of stocks at motor vehicle dealers and steel service centers noted earlier,
inventories appear elevated relative to consumption only for paper and, to a lesser degree,
for food and chemicals (excluding pharmaceuticals).
Federal Government Sector
According to recent monthly Treasury statements, individual and corporate income tax
receipts have surged over the past few months. In response, the Congressional Budget
Office reduced its projection for the baseline unified deficit (adjusted for spending on
Iraq) in the current fiscal year from around $400 billion as of the beginning of the year to
roughly $350 billion currently.
Receipts during the April-May tax season, which were nearly 30 percent higher than
year-earlier levels, were boosted by a jump in individual nonwithheld income taxes that
mostly reflected final payments on 2004 income tax liability. Roughly one-third to onehalf of the surge in individual nonwithheld taxes (net of refunds) reflected a recovery
from the temporarily depressed level last year associated with the effects of the 2003 tax
bill.11 In addition, individual withheld and FICA taxes increased at a robust pace during
the first five months of this year. On the corporate side, income taxes were up markedly
during the April-May period relative to year-earlier levels because of the strength in
corporate income and, likely to a lesser extent, the expiration of the partial-expensing
provision at the end of last year. Further, daily data for June indicate a substantial
increase in corporate declarations relative to last year’s level.
Outlays, after adjusting for financial transactions and payment timing shifts, have picked
up a bit of late, outpacing their increase of about 6½ percent in the year ending this May.
Net interest and Medicare continued to post sizable gains. In contrast, the pace of
defense spending has cooled off a bit recently.

The 2003 tax act was passed in midyear but was made retroactive to the beginning of 2003.
However, because tax withholding rates were lowered to their new permanent levels in July of that year,
the reduction in liability exceeded the reduction in withheld taxes in 2003. Thus, some of the reduction in
2003 liability showed up as lower final payments and higher refunds during the tax season in 2004. In
addition to the effects of the 2003 tax act, this year’s surge in net final payments likely reflects a host of
other factors that could include faster gains in labor and capital income, higher capital gains realizations,
and a shift in the distribution of taxable income toward the higher end. Given the available data, their
relative contributions are difficult to quantify.

II-28

II-29

State and Local Governments
Recent indicators suggest that the fiscal situation of state and local governments
continues to improve and that real spending is back on a gradual uptrend. Although
nominal construction spending has continued to trend up recently, rapid increases in the
costs of construction have held down real outlays in recent quarters. In April, nominal
construction spending rose 0.2 percent (monthly rate) to a level 1.1 percent above its
first-quarter average, a performance consistent with a modest real gain this quarter.
Much of the April increase was in outlays for public safety and sewer facilities, while
outlays for highways have fallen back from highs reported during the first quarter.
Hiring by state and local governments has been on an upward path for almost a year;
however, the April-May average rise of 12,000 was toward the low end of the range seen
since last summer.
Meanwhile, recent reports corroborate earlier signs of strengthening state government
finances. Tax collections have been quite strong this spring, and personal income tax
collections in April and May appear to have been coming in above expectations in many
states. In addition, most states seem likely to finish the current fiscal year, which ends
June 30 in all but four states, with solid surpluses in their general fund accounts.12 This
would follow a year of rising balances: The National Conference of State Legislatures
recently reported that aggregate general fund year-end balances—which include both
cash on hand and rainy-day funds—rose in fiscal 2004 for the first time since 2000.
However, even with relatively strong collections in hand, some states still have concerns
about Medicaid and about the need to restore funding to programs that were pared back
earlier in the decade.
Prices
As energy prices reversed part of their earlier run-up, consumer prices were about
unchanged in May after having posting large increases in the previous few months.
Excluding food and energy, the rise in inflation in the first part of the year―noted in the
April Greenbook―appears to have moderated a touch in April and May. Despite the
moderation, core PCE prices are still estimated to have increased at an annual rate of
2.5 percent in the three months ending in May; they are up 1.8 percent since May of last
year, a little above the rise of 1.5 percent in the comparable period one year earlier.13
12

Fiscal 2005 ended March 31 in New York, and it will end August 31 in Texas and September 30 in
Alabama and Michigan.
13
This Greenbook was published before the BEA released its initial estimate of PCE prices for May.
As a result, all references in this section to PCE prices including that month represent staff estimates.

II-30

Measures of Inflation
(Percent)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

May
2004

May
2005

Feb.
2005

May
2005

Apr.
2005

May
2005

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

3.1
4.1
15.0
1.7
-1.1
2.9
2.6
1.6

2.8
2.4
9.9
2.2
.6
2.7
2.5
1.8

1.7
.6
-2.0
2.4
1.1
2.8
...
...

4.4
3.9
28.7
2.2
.6
2.9
...
...

.5
.7
4.5
.0
-.1
.2
...
...

-.1
.1
-2.0
.1
.2
.1
...
...

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

2.4
3.5
15.4
1.5
-.7
2.4
1.4
1.6

2.4
2.2
11.8
1.8
.1
2.5
1.8
n.a.

1.5
.5
-2.3
1.9
.8
2.4
1.9
1.9

4.0
3.8
29.2
2.5
.8
3.2
2.2
n.a.

.4
.7
4.5
.1
-.1
.2
.1
.3

.1
.0
-2.2
.3
.2
.3
.3
n.a.

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

4.9
7.5
14.9
1.5
1.6
1.3
7.2
5.2
23.6
21.4

3.5
.8
10.2
2.6
2.6
2.6
6.3
5.4
6.1
9.4

1.1
2.1
-7.9
4.0
4.5
2.8
3.8
6.8
-22.5
-25.4

2.6
.5
7.2
1.6
1.7
2.2
4.4
.8
21.5
-7.5

.6
.1
2.1
.3
.2
.2
.8
.2
2.7
.8

-.6
-.3
-3.5
.1
.1
.1
-.7
-.3
-2.0
-3.6

Measures

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

II-31

The CPI for energy fell 2 percent in May, as a dip in crude oil prices showed through to
the retail level. However, with crude oil prices having rebounded since the end of May,
survey data suggest that retail gasoline prices have risen—even though margins appear to
have fallen back. The high price of crude oil has induced some substitution toward
natural gas by industrial users, which has pushed up the consumer price of natural gas as
well. All told, consumer energy prices rose 10 percent during the twelve months through
May.
Food prices in the CPI edged up 0.1 percent in May after an increase of 0.7 percent in
April that included a pop in the index for fruits and vegetables. Following the drought in
2002 and a supply-restricting rebuilding of beef and dairy herds, food prices have been
increasing faster than core prices. Still, food prices have decelerated over the past year,
rising 2½ percent in the twelve months ending in May compared with a rise of 4 percent
in the previous year.
The CPI excluding food and energy was unchanged in April and increased 0.1 percent in
May after having risen 0.4 percent in March. The recent volatility has resulted mainly
from significant swings in the prices of lodging away from home and apparel—two
regular contributors of month-to-month variability. Over the three-month period, the
core CPI increased at an annual rate of 2.2 percent.
We estimate that core PCE prices rose 0.3 percent in May following an increase of
0.1 percent in April.14 Price inflation for core goods has been steady at a moderate annual
rate of about ¾ percent in the past few months. This leveling-off follows a noticeable
acceleration in core goods prices in 2004 that likely reflected the rise in import, energy,
and core intermediate materials prices. At the same time, PCE prices for core consumer
services have accelerated a bit in the past few months, but the year-over-year increase in
May was about the same in the preceding year.
Inflation expectations appear to have drifted down in the past two months. The Michigan
SRC’s preliminary report for June showed that median year-ahead inflation expectations
fell from 3.3 percent in April to 3.1 percent in early June, a decline that is generally
14

Our expectation for core PCE price inflation in May (0.3 percent) is above the published increase in
the core CPI (0.1 percent). Rounding accounts for nearly half of the difference and weighting accounts for
the remainder—in particular, the PCE index has a lower weight for lodging away from home, which fell
sharply in May, and a higher weight for medical care services, which posted a relatively large increase in
May.

II-32

Consumer Price Inflation
(12-month change except as noted)

CPI and PCE ex. Food and Energy

Percent
3

Percent

PCE excluding Food and Energy

CPI
May*

PCE
1

CPI
chained

May*

1
Market-based components

1999

2000

2001

2002

2003

2004

2005

* PCE for May is a staff estimate.

2000

2001

2002

2003

2004

Percent

3-month change, annual rate

3
May*

4
3
May*

Services ex. energy

-2

-1

-3

1999

2000

2001

2002

May*

2003

2004

2005

-1

* Staff estimate.

Percent

PCE Goods and Services

-1

2005

* Staff estimate.

PCE excluding Food and Energy

1999

0
-1

Goods ex. food and energy

1999

2000

2001

-2

2002

2003

2004

2005

-3

* Staff estimate.

Percent

PCE Energy

220

Gasoline Price Decomposition

Cents per gallon

220

June 20
20

May*

190

Retail price*

160

June 20
130

0
100

-10

-20

130

-10

1999

2000

* Staff estimate.

2001

2002

2003

2004

2005

-20

100

WTI spot price

70
40

2003

2004

2005

* Average of all grades reported by the Department of
Energy, seasonally adjusted by FRB staff.

II-33

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

2002

2003

2004

2005

Product prices
GDP price index
Less food and energy

1.9
2.2

2.0
1.9

1.7
1.4

2.5
2.4

Nonfarm business chain price index

1.2

1.5

2.5

Expenditure prices
Gross domestic purchases price index
Less food and energy

1.3
1.9

2.5
1.8

1.7
1.5

2.8
2.3

PCE price index
Less food and energy

1.1
1.8

2.4
1.6

1.7
1.4

2.3
1.6

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

.8
1.5

2.3
1.4

1.7
1.3

2.5
1.7

CPI
Less food and energy

1.2
2.5

2.9
1.8

1.8
1.3

3.0
2.3

Chained CPI
Less food and energy

.9
2.0

2.5
1.4

1.6
1.1

2.6
1.9

Median CPI
Trimmed mean CPI

3.8
2.3

2.7
2.1

1.9
1.7

2.5
2.3

Surveys of Inflation Expectations
(Percent)
University of Michigan
1 year 2

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10-year) 4

2003:Q3
Q4

2.2
1.9

2.8
3.0

2.3
2.6

3.1
3.1

2.7
2.8

2.5
2.5

2004:Q1
Q2
Q3
Q4

1.8
2.9
2.7
3.3

3.1
4.0
3.3
3.4

2.7
3.3
2.9
3.0

3.4
3.3
3.1
3.1

2.9
2.8
2.8
2.8

2.5
2.5
2.5
2.5

2005:Q1
Q2

3.0
n.a.

3.6
3.9

3.0
3.2

3.2
3.3

2.8
2.9

2.5
2.5

2005:Jan.
Feb.
Mar.
Apr.
May
June

3.0
3.0
3.1
3.5
2.8
n.a.

3.5
3.3
4.0
4.0
3.8
3.9

2.9
2.9
3.2
3.3
3.2
3.1

3.2
3.1
3.3
3.4
3.5
2.9

2.7
2.8
2.9
3.0
2.9
2.7

...
...
2.5
...
...
2.5

Period

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-34

Commodity Price Indexes
Journal of Commerce
1996 = 100
140

140

130

120

120
June 21

110
100

100
Industrials

80
Metals

70
60

110

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

70
2004

2005

2006

Commodity Research Bureau
1967 = 100
400

400
Spot industrials

350

350
June 21

300

250

250
Futures

200
150

1990

1991

1992

1993

1994

1995

200

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Note. The Journal of Commerce industrial price index is based almost entirely on industrial commodities, with a small weight given to
energy commodities. 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. Copyright for Journal of Commerce data is held by CIBCR,
1994.

Selected Commodity Price Indexes
(Percent change)

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

2004 1

12/28/04
to
4/26/05 2

8.7
19.4
5.0
2.7
11.1

2.5
.2
4.6
-.3
9.0

4/26/05 2
to
6/21/05

52-week
change to
6/21/05

-5.0
-10.4
-1.4
1.9
.6

1. From the last week of the preceding year to the last week of the year indicated.
2. April 26, 2005, is the Tuesday preceding publication of the April Greenbook.

-.1
-2.7
10.1
-6.8
16.5

150

II-35

consistent with the energy-induced movements in headline consumer price inflation. In
the June preliminary release, five-to-ten year median inflation expectations moved down
to 2.7 percent, a reading in the lower part of the narrow range observed in the past few
years.
Broader measures of inflation have picked up over the past year. In the four quarters
through the first quarter of 2005, GDP prices increased 2½ percent, ¾ percentage point
more than in the year-earlier period. Excluding food and energy, GDP prices also
increased 2½ percent over the past year, 1 percentage point more than in the previous
year. In broad terms, the cost pressures from higher energy and materials prices, along
with rising demand, have shown through to a pickup in prices of capital goods and
structures as well as in core PCE.
The PPI for capital equipment rose 0.1 percent in May after an advance of 0.2 percent in
April. The increase in these prices over the twelve months ending in May, at 2½ percent,
was noticeably faster than the 1¼ percent rate of the preceding twelve months. Turning
to earlier stages of processing, the PPI for core intermediate materials continues to
decelerate after having posted outsized increases in 2004. The three-month moving
average has tumbled to a ¾ percent rate, well below the 6¾ percent rate over the three
months ending in February. Commodities prices have receded slightly since the April
Greenbook—the CRB spot industrials index is down 1½ percent, and the JOC industrials
index is down 5 percent. However, on balance, commodity prices have remained at an
elevated level since the beginning of 2004.
Labor Costs
We estimate that compensation per hour in the nonfarm business sector increased at an
annual rate of 6¼ percent last quarter after a substantially upward-revised pace of
10¼ percent in the final quarter of 2004. Over the most recent four quarters, this measure
of compensation per hour appears to have increased 7 percent. Unit labor costs in the
nonfarm business sector climbed at an annual rate of 7¾ percent in the fourth quarter and
at an estimated 2¾ percent rate in the first quarter. 15

Unit labor costs for the nonfinancial corporate sector show significantly less revision than do unit
labor costs for the nonfarm business sector. This is in part because output for the nonfinancial corporate
sector, used in construction of the unit labor costs measure shown in the table, is based on income data,
which was revised upward in the fourth quarter; data from the product side of the accounts that are used to
construct GDP and to derive nonfarm business output were not revised.

II-36

Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2003:Q1
to

2004:Q1
to

2004

2004:Q1 2005:Q1e

Category

2005

Q1 e

Compensation per hour
Nonfarm business
Nonfinancial corporations 1

4.4
4.6

7.0
6.8

6.0
5.5

5.5
5.5

10.2
10.2

6.3
6.0

Unit labor costs
Nonfarm business
Nonfinancial corporations 1

-1.1
-.5

4.1
1.7

1.8
2.1

4.5
.6

7.7
1.1

2.7
3.0

1. 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.
e Staff estimate.

Markup, Nonfinancial Corporations

Markup, Nonfarm Business
Ratio

1.66

1.59

1.64

1.57

1.62

1.55

Ratio

1.59
1.57
1.55

Q1
1.60

1.60

1.53

1.58

1.51

1.53
1.51
Average, 1968-present

1.56

Average, 1968-present

1.54
1.52

1990 1992 1994 1996 1998 2000 2002 2004

1.56

1.49

1.54

1.47

1.52

1.45

1990 1992 1994 1996 1998 2000 2002 2004

1.45

Note. Ratio of output price to unit labor costs.

Compensation per Hour
(Percent change from year-earlier period)
Percent
8

8
7

7
6

Productivity and costs
5

4
Q1

ECI
2

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-37

The upward revision to fourth-quarter compensation, which was unusually large, reflects
the benchmarking of private wages and salaries to the newly available fourth-quarter
unemployment insurance tax records. We suspect that the jump in the fourth quarter was
caused, in part, by a one-time burst of stock-option exercises and sizable year-end
bonuses. Confidential industry detail shows that the upward revisions were concentrated
in industries in which stock options and bonuses might be more common; four
industries—finance and insurance, management of companies and enterprises,
information, and professional and technical services—accounted for nearly half of the
revision to wages and salaries. Using data currently available, the staff’s rough and
preliminary estimates of stock-option exercises for 2004 suggest a step-up in exercises
compared with 2003, and, given the pattern of stock price increases during 2004,
exercises were likely concentrated in the fourth quarter. Also, some firms may have
accelerated the vesting date of options to the fourth quarter in response to the December
2004 revision to accounting standards that would have required firms to start expensing
options in 2005.16 In addition, the employment cost index (ECI) of bonuses for
nonproduction workers rose sharply in the first quarter of 2005, which could reflect
bonuses paid in late December after the survey date for the ECI. In any event, an initial
indication as to the persistence of the fourth-quarter bulge will become available at the
end of August when the wage and salary data for the first quarter of 2005 are
benchmarked.
By comparison, gauges of hourly compensation aside from the measures in the
Productivity and Cost release have been subdued; in particular, the ECI, which does not
include stock options, rose only 3½ percent over the four quarters ending in the first
quarter. Similarly, average hourly earnings for production or nonsupervisory workers
have increased at an annual rate of 2.7 percent in the past six months, essentially the same
pace as in the preceding six-month period.

Implementation of this change in standards has since been delayed.

Domestic Financial
Developments

III-T-1

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

Change to June 21 from
selected dates (percentage points)

2005

Instrument
June 28

Dec. 31

May 2

June 21

2004
June 28

2004
Dec. 31

2005
May 2

1.00

2.25

2.75

3.00

2.00

.75

.25

1.36
1.74

2.18
2.52

2.88
3.10

2.96
3.18

1.60
1.44

.78
.66

.08
.08

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

1.28
1.45

2.29
2.28

3.00
3.10

3.21
3.35

1.93
1.90

.92
1.07

.21
.25

Large negotiable CDs1
3-month
6-month

1.53
1.82

2.50
2.72

3.16
3.38

3.41
3.61

1.88
1.79

.91
.89

.25
.23

Eurodollar deposits3
1-month
3-month

1.29
1.51

2.32
2.49

3.03
3.14

3.24
3.39

1.95
1.88

.92
.90

.21
.25

Bank prime rate

4.00

5.25

5.75

6.00

2.00

.75

.25

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

2.88
3.97
4.90

3.08
3.63
4.34

3.63
3.87
4.27

3.71
3.82
4.13

.83
-.15
-.77

.63
.19
-.21

.08
-.05
-.14

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

1.56
2.25

1.03
1.65

1.16
1.61

1.42
1.72

-.14
-.53

.39
.07

.26
.11

Municipal revenue (Bond Buyer)5

5.37

5.04

4.83

-.54

-.21

.00

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

5.21
5.30
5.59
6.18
8.30

4.65
4.61
4.98
5.38
7.34

4.67
4.59
4.98
5.50
8.31

4.46
4.38
4.83
5.36
8.00

-.75
-.92
-.76
-.82
-.30

-.19
-.23
-.15
-.02
.66

-.21
-.21
-.15
-.14
-.31

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

6.21
4.19

5.77
4.10

5.75
4.22

5.63
4.25

-.58
.06

-.14
.15

-.12
.03

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

Record high

2004

Change to June 21
from selected dates (percent)

2005

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

Level

Date

Dec. 31

May 2

June 21

Record
high

2004
Dec. 31

2005
May 2

11,723
1,527
5,049
655
14,752

1-14-00
3-24-00
3-10-00
12-28-04
3-24-00

10,783
1,212
2,175
652
11,971

10,252
1,162
1,929
586
11,422

10,600
1,214
2,091
641
12,045

-9.58
-2.55
-58.58
-2.07
-18.35

-1.70
.14
-3.88
-1.62
.62

3.39
4.43
8.42
9.42
5.45

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 data for June 21, 2005, is from June 16, 2005.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the most recent policy tightening began.
May 2, 2005, is the day before the most recent FOMC announcement.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Futures Contract Rates
May
FOMC

Percent
May nonfarm
May FOMC
payrolls
Minutes Pres. Fisher’s
Chairman’s JEC
comments
testimony

April nonfarm
payrolls

4.6

4.4

4.2
December 2006 Eurodollar
4.0

3.8

December 2005 Eurodollar

3.6
May 2

May 5

May 10

May 16

May 20

May 26

June 2

June 8

June 14

June 20

Note. 5-minute intervals.

Expected Federal Funds Rates

Implied Federal Funds Futures Rate

Percent

3.8
June 21, 2005
May 2, 2005

4.2
June 21, 2005
May 2, 2005

3.67 ●
3.58 ●

4.0

3.6

3.58●

3.8

3.49 ●

3.46 ●

3.4

3.38 ●

3.6
3.4

3.25 ●
3.21 ●

3.2
3.2
3.0

June

July

Aug.
2005

Sept.

Oct.

3.0
June

Oct.
2005

Feb.

June Oct.
2006

Feb. June
2007

Note. Estimates assume a 1.0 basis point per month term
premium and zero probability of intermeeting moves.

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

Treasury Yields

Inflation Compensation

Percent
7

Daily

May
FOMC

10-year

Percent
3.0

Daily

May
FOMC

Next five years

2.9
2.8

5
June
21

2-year

2.7

Five to ten
years ahead

2.6

3
2.5

2
2.4

1
Jan.

Apr.

July
2004

Oct.

Jan.

Apr.
2005

Note. Estimates from smoothed Treasury yield curve
based on off-the-run securities.

Jan.

Feb.

Mar.
Apr.
2005

May

June

Note. Estimates based on nominal and inflation-indexed
Treasury yields.

Domestic Financial Developments
Overview
Developments in financial markets over the intermeeting period suggest that investors
have become more confident that the economy remains on a solid growth track with
subdued inflation. Market participants are virtually certain of a 25 basis point increase in
the target federal funds rate at the upcoming FOMC meeting and have marked up the
expected path for policy through early next year. Beyond that point, policy expectations
have shifted down a bit. Longer-term nominal Treasury yields have declined, on net,
while real yields on TIPS have edged up, leaving inflation compensation lower. Stock
prices have posted solid gains. Investment-grade corporate spreads are largely
unchanged, while speculative-grade spreads are down, on net, as concerns regarding the
effects of the auto-sector downgrades in early May subsequently subsided. The growth
of business debt has been moderate this quarter, while that of households appears to have
remained brisk.
Policy Expectations and Treasury Yields
Investors largely anticipated the FOMC’s decision at its May meeting to increase the
target federal funds rate 25 basis points and to retain the “measured pace” language in the
statement. The effect on financial markets of both the initially released statement and the
corrected version was limited. The minutes of the May meeting reportedly also contained
few surprises for market participants, and subsequent comments by Federal Reserve
officials over the intermeeting period had mixed effects on monetary policy expectations.
Investors evidently read economic data releases as consistent with continued moderate
expansion and subdued inflationary pressures. According to futures quotes, market
participants are virtually certain of a 25 basis point hike in the target federal funds rate at
the upcoming FOMC meeting, and they place very high odds on another such increase at
the August meeting. The expected path of the federal funds rate through the early part of
next year edged a bit higher, but policy expectations beyond that horizon declined
somewhat.
Yields on two-year nominal Treasury securities increased almost 10 basis points. In
contrast, yields on ten-year nominal Treasury securities, which fell for a time to levels
last observed early this year before backing up, ended the period down almost 15 basis
points, on net. With the rise in shorter-term rates and the decrease in longer-dated yields,
the term structure continued to flatten, although it still maintains a moderate positive
slope. Despite the rise in far-dated oil futures prices since the last FOMC meeting,
five-year TIPS inflation compensation adjusted for the lag in indexation dropped about

III-2
Stock Prices, Corporate Yields, and Risk Spreads
S&P 500 and Oil Futures Price 24 Months Ahead
Ratio scale, May 3, 2005=100
115

12-Month Forward Trend Earnings-Price Ratio
for S&P 500 and Long-Run Treasury Yield Percent

Dollars per barrel
60

May
FOMC

Daily

Monthly

110

June
21

105

12-month forward
trend E/P ratio

S&P 500
(left scale)

100

50
8

40
Oil futures price
(right scale)

25
2004

June
21

Long-run real Treasury yield*

2005

1985

1989

1993

1997

2001

6
4
2

2005

* Yield on synthetic Treasury perpetuity minus Philadelphia Fed 10-year
expected inflation.
+ Denotes the latest observation using daily interest rates and stock prices
and latest earnings data from I/B/E/S.

Implied Volatility on Nasdaq 100 (VXN) and
S&P 500 (VIX)
Percent

Yields for BBB and High-Yield Corporate Bonds
Percent
14

Weekly Friday*

May
FOMC

Nasdaq

Percent
9

Daily
May
FOMC

12
10-year BBB
(right scale)

40
10

30
20

S&P 500
June
21

June
21

5-year high yield
(left scale)

10
6

2002

2003

2004

2005

900

2003

2004

2005

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

Corporate Bond Spreads
1100

3
2002

* Latest observation is for most recent business day.

Basis points

Commercial Paper Quality Spread
(30-Day A2/P2 less A1/P1)

Basis points
450

Daily

5-year high yield
(left scale)

Basis points

Weekly Friday*

150

350

120

700

90
250
60

500
June
21

10-year BBB
(right scale)

300

150

June
21

30
0

100

50
1999

2001

2003

Note: Measured relative to comparable-maturity Treasuries.

2005

1999

2001

2003

* Latest observation is for most recent business day.

2005

III-3

20 basis points amid benign readings on core PPI and CPI. Inflation compensation over
the subsequent five years also declined around 20 basis points.
Stock Prices, Corporate Yields, and Risk Spreads
Incoming economic news buoyed stock prices over the intermeeting period, as investors
apparently shrugged off the large rise in oil prices. Broad equity indexes rose about
5 percent, on net, while shares of technology and retail companies, as well as those of
small firms, recorded even larger increases. The gap between the trend-adjusted
twelve-month forward earnings-price ratio and the real long-run perpetuity Treasury
yield—a rough measure of the equity premium—widened further to a level last observed
in early 2003. Actual and implied volatilities on both the Nasdaq 100 and the S&P 500
returned to historical lows after having edged higher earlier this year.
Yields on investment-grade corporate bonds moved about in line with those on
comparable-maturity Treasuries, leaving spreads on these securities little changed. Credit
spreads on speculative-grade bonds widened in the aftermath of Standard and Poor’s
downgrade of General Motors and Ford debt in early May, but credit quality concerns
eased in recent weeks, and junk bond spreads finished the period about 25 basis points
lower, on net. However, these spreads remain substantially above the low levels they
reached in early March as concerns in the auto sector earlier this spring apparently
prompted investors to mark up expectations of default and to demand greater
compensation for bearing risk. The yield spread between thirty-day A2/P2 and A1/P1
commercial paper remained low over the intermeeting period.
Corporate Earnings and Credit Quality
The first-quarter reporting season drew to a close in early May, when retailers’ reports
modestly surpassed investors’ expectations. All told, operating earnings per share for
S&P 500 firms came in about 13 percent above results from four quarters earlier.
Analysts’ estimates of year-ahead earnings for S&P 500 firms were again about
unchanged from mid-May to mid-June, with upward revisions for the energy sector
offsetting slight downward revisions for other firms.
Measures of credit quality for nonfinancial firms outside of the auto sector remained
strong. Aggregate cash positions of nonfinancial corporations are still very large, despite
a downtick in the first quarter associated with continued rapid M&A and share
repurchase activity. The appreciable rise in bond downgrades in April and May primarily
reflected troubles in the auto sector, and corporate bond defaults remained minimal. The

III-4
Corporate Earnings and Credit Quality
Corporate Earnings Growth

S&P 500 Earnings Expectations Revisions Index

Percent

Quarterly*

Percent

Monthly

20
Q1

0
MidJune

0
-10
S&P 500 EPS
NIPA, economic
profits before tax

-2
S&P 500
S&P 500 excluding energy

-20

-3

-30
1990

1993

1996

1999

2002

2005

-4
2002

* Change from four quarters earlier.
Source. I/B/E/S for S&P 500 EPS.

-1

2003

2004

2005

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

Bond Ratings Changes of
Nonfinancial Companies

Liquid Assets Held by Nonfinancial Corporations
Ratio

Ratio

Percent of outstandings
30

0.12
2.5
Q1

Upgrades

20
Apr.
Q1
May

2.0

0.09

10
0

1.5

Over fixed investment
(right scale)

10
20

0.06

1.0
30
Over assets
(left scale)

0.5

Downgrades

0.03

50
1990

1993

1996

1999

2002

2005

1991 1993 1995 1997 1999 2001 2003

Note. Computstat data, annual through 1999 and quarterly thereafter; fixed
investment is at an annual rate.
p Preliminary.

Bond Defaults and
C&I Loan Delinquency Rates

2005

Note. Data are at an annual rate.
Source. Moody’s Investors Service.

Expected Year-Ahead Defaults
Percent of outstandings

Percent of liabilities
7

2.0

Monthly

6
1.5

5
4

C&I loan delinquency rate
(Call Report)

1.0

3
Q1

0.5
May

Bond default rate*

0.0

May

0
1990

1993

1996

1999

2002

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

2005

1993

1996

1999

2002

2005

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

III-5

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2004
Type of security
Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings
Bonds2
Investment grade
Speculative grade
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3,4
Financial corporations
Stocks1
Bonds2

2005

2001

2002

2003

6.5
2.1
4.4

5.2
.7
4.4

3.7
.4
3.2

5.7
.8
4.9

4.9
2.3
2.6

39.8
27.5
8.9
3.4

24.8
15.7
4.8
4.2

31.6
16.0
11.3
4.3

22.8
8.2
10.5
4.1

-8.0

-6.3

-3.8

-5.8

-5.1

4.2
80.2

4.0
87.0

Apr.

May

4.4
2.3
2.1

2.6
.6
2.0

2.7
1.0
1.8

22.7
8.5
8.5
5.7

16.9
6.0
7.7
3.2

11.7
6.2
3.7
1.7

9.0
6.2
2.4
.4

2.8

-.1

4.5

14.2

5.5

-7.9

-.8

7.8

9.9

16.4

13.5

6.9
111.1

8.3
131.1

5.1
147.6

5.4
162.1

2.5
128.8

2.7
141.5

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 for FIN 46 effects.

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

Public issuance
Private issuance
Repurchases
Cash mergers

50
40

Total

Apr.

50
40

Total

May

20
Q1

-10

-20

-30

-40
2001

2002

2003

* Seasonally adjusted, period-end basis.

2004

2005

-40
2001
e Staff estimate.

2002

2003

2004

2005

III-6

Commercial Real Estate
Gross Issuance of CMBS

Growth of Commercial Mortgage Debt

Billions of dollars

Percent
18

Quarterly, s.a.a.r.

Quarterly

14
Q1

12
*

10
8

20
15

6
10
4
5

2
0
1996

1998

2000

2002

2004

0
1996
1998
2000
2002
* Through June 17.
** Staff estimate for Q2.
Source. Commercial Mortgage Alert.

10-Year Commercial Mortgage Rates

2004

Investment-Grade CMBS Yields
Percent

Percent
10

Monthly

Weekly

8
BBB

7
June 15

6
May

6
AAA

3
2000

2001

2002

2003

2004

2005

3
2000

2001

2002

2003

2004

2005

Source. Morgan Stanley.

Source. Barron’s/Levy.

Investment-Grade CMBS Spreads
Basis points
300

Weekly

Delinquency Rates on Commercial
Mortgages and CMBS

Percent
4

250
3

CMBS
200

BBB

At commercial
banks

150
May
June 15

AAA

100
At life
insurance
companies

0
2000

2001

2002

2003

2004

2005

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

1996

1998

2000

2002

2004

Source. Call Report, ACLI, Morgan Stanley.

III-7

aggregate expected year-ahead default rate based on firm-level estimates from KMV
continued to be low in May.
Business Finance
Gross issuance of bonds by nonfinancial corporations was subdued in April and May but
has picked up in recent weeks, albeit to moderate levels, as interest rates have declined
and credit spreads narrowed. C&I lending at banks has remained robust in the
intermeeting period, with demand for bank loans reportedly supported by a few firms that
pulled or downsized their bond offerings in the aftermath of the General Motors and Ford
debt downgrades. Commercial paper outstanding has also continued to expand. On
balance, net borrowing through bank loans, commercial paper, and bonds picked up
during April and May compared with its first-quarter pace.
During the intermeeting period, equity issuance by nonfinancial firms remained at the
muted pace recorded in April, but filings with the SEC regarding future IPOs stayed
plentiful amid some postponed offerings. Equity retirements appear to have accelerated
this quarter from an already rapid pace, as strong profits and liquid balance sheets
continued to bolster cash-financed M&A deals and share repurchases. As a result, net
equity issuance has likely moved further into negative territory.
Commercial Real Estate
Commercial mortgage debt expanded rapidly in the first quarter, and actual and
anticipated CMBS issuance suggest a further strong gain in the second quarter. The
spreads on AAA-rated CMBS over Treasuries held steady over the intermeeting period,
while those on BBB-rated issues rose somewhat further. The widening of spreads since
the beginning of this year appears more related to abundant supply than to increased
credit quality concerns. Delinquency rates on CMBS have continued to recede, and those
on commercial mortgages held by banks and insurance companies remain quite low.
Household Finance
Household debt increased at a robust pace in the first quarter, led by a further rapid gain
in mortgage debt. Brisk increases in prices of existing homes through early spring
suggest that the growth of mortgage debt is likely to have stayed strong in the current
quarter. Rates on both fixed-rate and adjustable-rate mortgages remain low, but the
substantial rise in short-term interest rates has shown through to rates on home equity
lines of credit, damping the growth of borrowing under these lines. Year-over-year

III-8

Household Liabilities
Mortgage Debt Growth

Mortgage Rates
Percent

Percent
18

Quarterly, s.a.a.r.

Weekly
16
Home equity lines
of credit

12
Q1

10
7
8

June 15
30-year
fixed rate

4
5
2
0
1996
1998
e Staff estimate.

2000

2002

2004

4
1996
1998
2000
2002
2004
Source. Freddie Mac, Bank Rate Monitor.

Consumer Credit Growth

Financial Obligations Ratio

Percent change from year earlier

Percent
16

Monthly

19.0

Quarterly, n.s.a.

14
Q1

18.5

10
18.0
8
6
Apr.

17.5

4
2

1996

1998

2000

2002

2004

17.0
1996

Household Bankruptcies

1998

2000

2002

2004

Delinquency Rates

Filings per 100,000 persons

Percent
650

8-week moving average, s.a.a.r.

600

Credit card loans in
securitized pools

5
550

Apr.
4

500
June 18

450

Auto loans at captive
finance companies

400

3
Apr.
2

350
300
1996
1998
2000
2002
2004
Source. Visa Bankruptcy Notification Service.

Residential mortgages
at commercial banks

1996
1998
2000
2002
2004
Source. Moody’s, Federal Reserve, Call Report.

III-9

Household Assets

Asset Prices

1993:Q1 = 100
350

Quarterly, n.s.a.
Stock prices (Wilshire 5000)
Q1

250

150

House prices*

1991

1993

1995

1997

1999

2001

2003

2005

* Source. Office of Federal Housing Enterprise Oversight (OFHEO); repeat-sales purchase-only index.

Net Worth Relative to Disposable Income

Ratio
7

Quarterly, period-end, s.a.

6
Q1

4
1990

1992

1994

1996

1998

2000

2002

2004

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

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

2003

18.0
12.7
10.7
2.0
2.7
2.6
2.2
1.0
-0.6

2004

17.5
14.8
9.3
5.6
3.6
-0.9
-0.8
1.0
-1.1

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

2004
Q4

2005
Apr.

Maye

Assets
Apr.

11.7
6.9
3.8
3.1
2.8
2.0
0.5
2.0
-0.5

18.3
13.0
5.9
7.1
3.2
2.1
0.5
1.9
-0.3

22.3
15.8
5.2
10.6
4.5
2.0
-2.3
3.8
0.4

12.6
8.8
2.5
6.3
2.6
1.2
-2.1
3.9
-0.6

18.6
9.5
3.6
5.9
2.0
7.1
-0.4
6.4
1.1

6,076
4,247
3,535
712
524
1,306
144
830
331

III-10
Treasury Financing
(Billions of dollars)
2004

Item

2005
Q4

Mar.

Apr.

May

Total surplus, deficit (–)

-85.7

-118.1

-176.6

-71.2

57.7

-35.3

Means of financing deficit
Net borrowing
Nonmarketable
Marketable
Bills
Coupons

83.4
-5.2
88.6
14.3
74.3

102.1
2.4
99.7
43.6
56.0

164.7
20.8
143.9
55.7
88.2

65.0
16.1
49.0
28.2
20.8

-21.8
13.0
-34.8
-67.8
33.0

-8.4
14.5
-22.9
-30.1
7.2

8.3
-6.0

11.7
4.3

2.2
9.7

-2.8
9.0

-53.9
18.0

59.8
-16.1

36.3

24.7

22.4

76.4

16.6

Decrease in cash balance
Other1
Memo:
Cash balance, end of period

Note. Components may not sum to totals because of rounding.
1. Direct loan financing, accrued items, checks issued less checks paid, and other transactions.

GSE Market Developments
GSE Stock Prices
85

Daily

Fannie Mae
Freddie Mac

Ten-Year GSE Yield Spreads
to Treasury

Daily

Fannie Mae
Freddie Mac

May
FOMC

Basis points

May
FOMC

75
35
70
30
65
June
21

25
60
June 21

50
Aug.

Oct.
2004

Dec.

Feb.

Apr.
2005

June

15
Aug.

Oct.
Dec.
Feb.
Apr.
June
2004
2005
Note. GSE yields based on senior unsecured debt.

III-11

growth of consumer credit through April remained near the moderate pace registered
since early 2003.
The ratio of financial obligations to disposable income ticked up in the first quarter after
having been held down in the fourth quarter by the surge of income associated with the
special dividend payment by Microsoft. From a slightly longer-term perspective, the
financial obligations ratio has edged up, on net, from its low last summer, as rapid debt
growth has boosted debt service payments faster than income. Bankruptcy filings have
fallen slightly in recent weeks but remain elevated, as individuals rush to file before the
new bankruptcy law takes effect this fall. The latest data on other measures suggest that
household credit quality has improved or held steady—delinquency rates on credit cards,
auto loans, and residential mortgages have remained low or have continued to decline.
Large increases in house prices have continued to support household wealth, as the ratio
of net worth to income was about unchanged in the first quarter despite a decline in stock
prices. The recent rebound in equity prices suggests that net worth will increase in the
current quarter. Compared with April’s relatively sluggish pace, net flows into long-term
mutual funds rebounded some in May, reflecting a slight increase for domestic equity
funds and a large rise for bond funds.
Treasury and Agency Finance
The Treasury announced at its May mid-quarter refunding that it was considering
reintroducing the thirty-year nominal bond in February 2006. This development
reportedly took market participants somewhat by surprise—perhaps especially given the
recent improvement in the federal budget outlook—and the announcement pushed the
yield on the current on-the-run thirty-year bond, which matures in 2031, 14 basis points
higher. Auctions of nominal Treasury coupon securities that took place during the
intermeeting period were reasonably well received. Bid-to-cover ratios were about
average, and foreign demand, as indicated by investor-class allotments, remained at
robust levels. Data from the Treasury International Capital System showed that net
purchases of Treasury securities by foreign official institutions rebounded in April after a
drop the month before, while purchases by private foreign investors moderated from a
record reading in March.
The House Financial Services Committee approved legislation that would create a new
regulator for Fannie Mae and Freddie Mac. The legislation was generally viewed as
favorable for the GSEs, with only modest changes in their regulatory oversight and no

III-12

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

2005
Type of security
Total
Long-term 1
Refundings 2
New capital
Short-term

2002

2003

2004

36.3
30.3
10.1
20.2
6.0

37.9
32.0
10.0
22.1
5.8

1.7

3.5

Memo: Long-term taxable

Apr.

May

34.6
29.8
10.8
19.0
4.9

34.7
32.7
16.0
16.7
2.0

32.7
31.4
15.3
16.1
1.3

37.0
35.9
15.7
20.1
1.2

2.0

1.5

1.8

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

Ratings Changes
Number of ratings actions
3200

Annual rate

Upgrades

2400
Q1 Q2*

1600
800
0
800
1600
2400

Downgrades

1991

1993

1995

1997

1999

2001

2003

3200

2005

* Data through June 15 at an annual rate.
Source. S&P’s Credit Week Municipal and Ratings Direct.

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
7

Weekly

Ratio

Weekly

20-year

1.0
20-year

June
16

5
June
16

0.9

3
June
21

1-year

0.8

1
1996

1999

2002

Source. Bloomberg and Bond Buyer.

2005

1996

1999

Source. Bond Buyer.

2002

2005

0.7

III-13

significant changes in their business operations or in their relationship to the federal
government. Equity prices of Fannie Mae and Freddie Mac moved up over the
intermeeting period, and spreads of GSE senior unsecured debt over comparable Treasury
securities narrowed.
State and Local Government Finance
Gross municipal bond issuance moved up in May and the first half of June, with
education-related projects accounting for the bulk of the new-capital issuance. Advance
refundings also have been elevated, as states and municipalities have continued to take
advantage of low long-term interest rates. With regard to credit quality, Standard and
Poor’s downgraded a large number of municipal issues in Michigan, a rating action
related to the difficulties of Ford and General Motors. However, the dollar amount of the
downgraded debt was small. Apart from these actions, upgrades of municipal bonds
continued to outpace downgrades. Yields on long-term general obligation bonds ticked
down over the intermeeting period, but by less than comparable Treasuries, perhaps
reflecting the recent strong pace of issuance.
Money and Bank Credit
M2 contracted slightly in April and May. The weakness can be attributed to increases in
the opportunity cost of holding M2 assets. M2 velocity—the ratio of nominal GDP to
M2—is somewhat lower than would be expected on the basis of its historical relationship
with opportunity cost, perhaps in part because the lower level of long-term interest rates
does not offer much inducement to move out of M2 assets.
Within M2, small time deposits continued to expand briskly during April and May, while
liquid deposits ran off. The divergent trends reflect in part the more rapid adjustment of
rates paid on small time deposits to rising short-term market yields than rates paid on
liquid assets. Currency growth continued to be weak relative to historical trends.
Bank credit decelerated sharply in April and May from the rapid gains posted in the first
quarter as both securities and loan growth fell. Consumer loans ran off, and the growth
of real estate loans weakened considerably, in part because of securitizations. Business
lending remained strong, and results from the most recent Survey of Terms of Business
Lending, conducted during the week of May 2, indicate that spreads of rates on C&I
loans over banks’ estimated funding costs had edged a bit lower since the February
survey. Meanwhile, spreads on leveraged syndicated loans moved somewhat higher in
May but remained at fairly low levels.

III-14

Monetary Aggregates
(Based on seasonally adjusted data)
2005

Aggregate or component
Aggregate
1. M22
2. M33
Components of M24
3. Currency
4. Liquid deposits5
5. Small time deposits
6. Retail money market funds
Components of M3
7. M3 minus M26
7

8. Large time deposits, net
9. Institutional money
market funds
10. RPs
11. Eurodollars
Memo
12. Monetary base

2003

2004

Apr.

Percent change (annual rate)1
5.7
3.6
-.9
3.8
5.1
5.9

May

Level
($ billions),
May

-.1
3.9

6,464
9,640

2.9

3.4
13.3
-6.1

-6.9
21.3
5.8

-5.1
24.7
-3.6

706
4,167
883
701

-.3

8.4

20.2

12.1

3,175

20.8
-5.7

10.0
-12.0

34.7
-10.2

43.1
16.9

-3.6
-3.4

1,194
1,051

14.1
29.3

.9
27.1

-18.0
34.4

-19.6
26.4

-28.1
22.3

69.8
30.0

508
422

5.9

5.6

4.7

3.6

1.4

1.6

768

5.4
4.8

5.2
5.8

5.9

5.5

5.0

3.7

14.0
-9.4
-11.5

10.1
-.3
-11.8

8.6
5.6
-9.4

3.6

7.1

4.3
-5.6

Average monthly change (billions of dollars)8
Selected managed liabilities
at commercial banks
13. Large time deposits, gross
14. Net due to related foreign
institutions
15. U.S. government deposits
at commercial banks

-1.1

14.8

9.9

26.2

40.7

-5.2

1,308

3.1

-11.0

-5.8

13.7

-31.5

27.5

-.3

1.9

2.0

1.8

1.7

1. For the years shown, Q4-to-Q4 percent change. For the quarters shown, based on quarterly averages.
2. Sum of currency, liquid deposits (demand, other checkable, savings), small time deposits, retail
money market funds, and nonbank traveler's checks.
3. Sum of M2, net large time deposits, institutional money market funds, RP liabilities of depository
institutions, and Eurodollars held by U.S. addressees.
4. Nonbank traveler's checks not listed.
5. Sum of demand deposits, other checkable deposits, and savings deposits.
6. Sum of large time deposits, institutional money market funds, RP liabilities of depository
institutions, and Eurodollars held by U.S. addressees.
7. Net of holdings of depository institutions, money market funds, U.S. government, and foreign
banks and official institutions.
8. For the years shown, "average monthly change" is the Q4-to-Q4 dollar change divided by 12.
For the quarters shown, it is the quarter-to-quarter dollar change divided by 3.
p Preliminary.

III-15

Commercial Bank Credit
(Percent change, annual rate, except as noted; seasonally adjusted)
Type of credit
Total
1. Adjusted1
2. Reported
3.
4.
5.
6.

Securities
Adjusted1
Reported
Treasury and agency
Other2

7.
8.
9.
10.
11.
12.
13.
14.

Loans3
Total
Business
Real estate
Home equity
Other
Consumer
Adjusted4
Other5

Level
($ billions),
May 2005

2003

2004

Q4
2004

Q1
2005

Apr.
2005

May
2005

5.9
5.6

8.9
8.4

6.7
6.9

14.0
12.0

4.7
4.5

6.7
8.4

6,882
7,028

8.6
7.2
8.9
4.9

6.5
5.2
5.0
5.5

1.1
2.4
-10.6
24.1

22.7
14.8
20.7
5.8

-8.5
-8.4
-23.4
15.1

10.3
16.3
5.7
32.4

1,866
2,012
1,202
809

4.9
-9.4
11.1
30.8
8.8
5.4
5.8
6.8

9.8
1.4
13.9
43.4
9.7
8.8
6.0
7.9

8.7
6.8
13.4
37.6
9.3
-1.1
2.9
4.0

10.9
15.9
13.7
18.7
12.8
8.2
5.0
-3.7

9.6
18.0
11.6
12.1
11.5
7.8
.4
-7.6

5.3
14.6
2.3
9.7
.9
-11.6
-8.4
21.7

5,016
957
2,684
424
2,261
687
1,047
688

Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by
reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown)
are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates are
percentage changes in consecutive levels, annualized but not compounded.
1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115).
2. 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.
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified.
Also includes lease financing receivables.

C&I Loan Rate Spreads
Basis points
350
Leveraged syndicated loans*

300
250
June

200
150

STBL**
Q2

100
50

1998

1999

2000

2001

2002

2003

2004

2005

p -- preliminary
* Monthly data are the average spread of selected BB loans over LIBOR. Source. Loan Pricing Corporation.
** Quarterly data are spreads over banks’ estimated cost of funds, adjusted for changes in nonprice loan characteristics.
Source. Survey of Terms of Business Lending.

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
After reaching a record $60.1 billion in February, the U.S. international trade deficit
narrowed to $53.6 billion in March before widening to $57 billion in April.
Net Trade in Goods and Services
(Billions of dollars, seasonally adjusted)
2004

Annual rate
2004
2005
Q3
Q4
Q1

Monthly rate
2005
Feb.
Mar.
Apr.

Real NIPA1
Net exports of G&S

-583.7

-583.2

-621.1

-640.0

...

Nominal BOP
Net exports of G&S
Goods, net
Services, net

-617.6
-665.4
47.8

-629.9
-671.1
41.2

-676.9
-728.7
51.8

-687.0
-745.3
58.3

-60.1
-64.7
4.6

-53.6
-58.9
5.3

-57.0
-62.2
5.3

1. Billions of chained (2000) dollars.
Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census.
n.a. Not available. ... Not applicable.

In April, the value of exports of goods and services increased a robust 3 percent, after
increasing 1.6 percent in March. In both months the increase in exports was widely
dispersed across major product categories. Exports of capital goods were particularly
strong in both April and March, led by robust exports of aircraft. Exports of both
computers and semiconductors also turned up noticeably in April, following slight
increases in March. After declining in March, exports of industrial supplies jumped up in
April. Exports of consumer goods declined in both months, while exports of automotive
products declined a bit in March before moving up in April. Services exports were about
flat in April after increasing strongly in March. Accounting for March data exports of
goods and services in the first quarter climbed over 12 percent at an annual rate.
The value of imported goods and services jumped just over 4 percent in April, more than
offsetting a 3 percent decline in March. In April, imports of capital goods and industrial
supplies snapped back sharply after falling in March, while imports of consumer goods
and automotive products reversed some, but not all, of their steep March declines.
Imports of petroleum, aircraft, and services all increased in both months.
Notwithstanding the March decline, in the first quarter, imports of goods and services
rose 10 percent at an annual rate, with increases in imports of non-oil goods and services
more than offsetting a decrease in the value of oil imports.

IV-2

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

Bil$, s.a.a.r.

Nominal
BOP basis

Contribution of Net Exports to Real GDP Growth
-50

Percentage points, s.a.a.r.

-100
-150
-200
-250
-300

Real
NIPA basis
(2000$)

1997

1999

2001

2003

2005

3
2
1
0
-1
-2
-3
-4

-350
-400

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

-450

20
0

-500

-20

-550

-40
Net automotive trade
with Canada and Mexico
1997
1999
2001

-600
-650

-60
2003

2005

-80

-700

1997

1999

Selected Exports

2001

2003

2005

Bil$, s.a.a.r.

-750

430

Selected Imports

Bil$, s.a.a.r.

310

410

290

220

390

270

200

370

250

180

350

Machinery 2/
230
Consumer goods
160
140

330

210

310

190

290
Industrial
supplies 1/
Consumer goods

120
270

Aircraft

1997
1999
2001
2003
2005
1. Excludes agriculture and gold.
2. Excludes computers and semiconductors.

150
Machinery 2/

100
80

170
Industrial
supplies 1/

250

130

230

110

210

190

170

90
Automotive 3/
(overseas)

1997
1999
2001
2003
2005
1. Excludes oil and gold.
2. Excludes computers and semiconductors.
3. Excludes Canada and Mexico.

70
50

IV-3

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

Exports of G&S
Goods exports
Gold
Other goods

Levels
Change1
2004 2005
2005
2004 2005
2005
Q4
Q1
Mar. Apr.
Q4
Q1
Mar. Apr.
1195.5 1230.8 1240.2 1277.0
34.1
35.2
19.1
36.8
835.5
5.0
830.5

855.4
5.5
849.8

858.4
6.5
851.8

894.4
5.4
889.0

16.3
0.0
16.2

19.9
0.5
19.3

9.8
2.3
7.5

36.0
-1.1
37.1

50.9
43.6
46.0
196.8

53.9
44.0
43.4
200.4

58.2
44.1
43.6
200.6

70.5
46.0
45.8
203.2

-1.3
0.2
-0.8
2.6

2.9
0.4
-2.6
3.7

6.3
0.9
0.3
2.7

12.3
1.9
2.2
2.7

93.7
52.2
16.3
25.3

94.8
51.4
14.8
28.5

92.6
49.1
15.2
28.4

94.7
52.0
15.9
26.8

1.4
-0.1
1.8
-0.3

1.1
-0.7
-1.4
3.2

-0.7
-2.2
-0.0
1.6

2.1
3.0
0.7
-1.6

62.6
200.5
108.2
28.3

62.3
207.0
113.2
30.8

63.4
206.4
113.0
30.0

65.2
219.3
111.4
32.9

0.9
9.1
4.4
-0.2

-0.3
6.5
5.0
2.6

2.1
-2.6
-0.8
-3.3

1.8
12.9
-1.6
3.0

360.1

375.4

381.9

382.7

17.8

15.3

9.3

0.8

Imports of G&S

1872.4 1917.8 1883.0 1960.6

81.1

45.4

-59.6

77.6

Goods imports
Petroleum
Gold
Other goods

1564.2 1600.7 1565.1 1641.0
215.1 211.7 223.3 232.9
4.8
3.8
4.1
3.9
1344.3 1385.1 1337.6 1404.2

73.9
34.6
0.8
38.5

36.5
-3.4
-1.0
40.8

-60.4
10.9
0.3
-71.5

75.9
9.5
-0.2
66.6

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

Aircraft & parts
Computers & accessories
Semiconductors
Other capital goods

27.7
91.2
25.6
213.2

25.6
92.1
25.0
220.3

26.2
90.5
24.5
214.5

28.7
90.7
26.0
237.4

3.7
0.2
-1.8
4.6

-2.1
0.8
-0.6
7.1

3.5
-1.7
0.1
-6.2

2.5
0.3
1.5
22.8

Automotive
from Canada
from Mexico
from ROW

232.5
70.0
44.1
118.5

232.7
69.4
40.6
122.7

221.4
62.9
43.7
114.8

224.0
64.8
45.1
114.1

2.5
1.6
2.0
-1.2

0.2
-0.6
-3.5
4.3

-16.1
-10.8
1.5
-6.9

2.6
1.9
1.4
-0.7

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

248.9
387.4
64.3
53.4

257.7
408.1
66.3
57.4

251.8
385.6
65.6
57.6

263.8
406.7
66.2
60.8

9.8
17.2
2.4
0.0

8.7
20.7
2.0
4.0

-11.4
-40.8
-0.3
1.3

12.0
21.1
0.6
3.2

308.2

317.1

317.9

319.6

7.2

8.9

0.8

1.7

14.39
40.99

14.55
39.89

14.11
43.34

13.63
46.78

1.27
3.32

0.16
-1.10

-0.77
4.24

-0.48
3.44

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

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

IV-4

Prices of Internationally Traded Goods
Non-oil imports. In May, the prices of U.S. imports of non-oil goods and of core goods
both fell 0.3 percent. The main contribution to the price decline came from non-oil
industrial supplies. After increasing 2.1 percent in April, the price index for non-oil
industrial supplies fell 1.5 percent in May, mainly on lower prices for natural gas and
building materials. Food prices rose 0.3 percent in May, which partially offset the
previous month’s 0.4 percent decline. After large price increases earlier in the year, the
finished goods categories had only small price movements in May. Prices for both
consumer goods and capital goods (excluding computers and semiconductors) edged up
0.1 percent. (Within consumer goods, apparel prices fell 0.2 percent.) Prices for
imported automotive products fell 0.1 percent. Prices for computers declined 0.3 percent
in May, and prices for semiconductors were unchanged.
The average level of imported core goods prices in April and May was 2½ percent at an
annual rate above the first-quarter level. The main contributors to the overall price
increase were foods and non-oil industrial supplies, with both categories having price
increases of over 8 percent (a.r.). In April and May, the average price for capital goods
(excluding computers and semiconductors) increased 2¾ percent (a.r.) compared to the
previous quarter, a much slower rate of increase than observed in the first quarter, and
prices for consumer goods increased only slightly.
Oil. The BLS price of imported oil fell 6.5 percent in May. Similarly, the spot price of
West Texas Intermediate crude oil fell 6 percent in May—averaging around $50 per
barrel. The spot price fell in the middle of the month as crude oil inventories in the
United States climbed to above-average levels, but edged back up on renewed concerns
of strong world oil demand and limited spare production capacity. Thus far in June, the
spot price has averaged more than $55 per barrel, closing at $58.90 per barrel on June 21.
The increase in the spot price in June reflects continued strong world oil demand,
amplified concerns about future supplies from Iran, Iraq, Nigeria, Venezuela, and Russia,
and limited spare production capacity in OPEC to offset a significant supply disruption.
Exports. In May, the prices of U.S. exports of total goods and of core goods both fell
0.1 percent. A 2 percent increase in prices for agricultural products only partially offset
the 1.1 percent fall in prices of non-agricultural industrial supplies. Prices for the
finished goods categories were little changed. Exported automotive products saw the
largest price increase at 0.1 percent. Prices of exported computers and semiconductors
declined slightly.

IV-5

Prices of U.S. Imports and Exports
(Percentage change from previous period)
2004
Q4

Annual rate
2005
Q1
Q2e

Monthly rate
2005
Mar.
Apr.
May

----------------------- BLS prices --------------------7.3
3.3
9.5
2.2
1.2
-1.3
35.3
-1.9
59.2
13.2
5.4
-6.5
3.2
4.2
1.9
0.3
0.4
-0.3

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

4.1
2.6
2.4
1.2
10.7
11.1

5.1
5.3
0.4
4.5
9.1
8.6

2.6
2.7
0.6
0.1
8.8
8.3

0.4
0.1
0.0
-0.3
3.2
1.1

0.5
0.5
0.2
0.0
-0.4
2.1

-0.3
0.1
-0.1
0.1
0.3
-1.5

Computers
Semiconductors

-7.3
-4.9

-6.9
-1.1

-9.2
-0.9

-1.3
0.2

-1.2
-0.3

-0.3
0.0

3.6

4.9

4.0

0.7

0.6

-0.1

4.8
3.3
1.2
0.1
-11.5
17.2

6.0
3.9
1.4
2.4
3.6
12.9

5.0
1.8
0.7
1.5
15.6
9.2

0.7
0.2
0.2
0.0
3.8
1.2

0.7
0.3
0.0
0.4
0.3
1.8

-0.1
0.0
0.1
0.0
2.0
-1.1

-9.2
-1.7

-8.1
-1.6

-7.5
-3.0

-1.1
-0.3

-1.1
-0.4

-0.2
-0.1

Merchandise exports
Core goods*
Cap. goods ex comp & semi
Automotive products
Consumer goods
Agricultural products
Industrial supples ex ag
Computers
Semiconductors
Chain price index
Imports of goods & services
Non-oil merchandise
Core goods*

--------------------- NIPA prices --------------------7.7
2.4
n.a.
...
...
...
3.2
3.9
n.a.
...
...
...
4.2
4.8
n.a.
...
...
...

Exports of goods & services
Total merchandise
Core goods*

3.9
3.9
5.1

4.3
4.3
6.0

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

...
...
...

*/ Excludes computers and semiconductors.
e/ Average of two months.
n.a. Not available. ... Not applicable.

Oil Prices
Dollars per barrel

Spot West Texas Intermediate
Import unit value
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

60
55
50
45
40
35
30
25
20
15
10
5

IV-6

The average level of exported core goods prices in April and May was 5 percent at an
annual rate above the first-quarter level. During these months, prices for agricultural
products and non-agricultural industrial supplies were up over 15 percent and 9 percent,
respectively. Prices for capital goods (excluding computers and semiconductors) and
consumer goods were both up about 1½ percent.
Current Account
The U.S. current account deficit was $780 billion (s.a.a.r.) in the first quarter of 2005, up
from $753 billion in the fourth quarter of 2004 (revised). Most of the change owed to an
increase in unilateral transfers, but a wider trade deficit on goods and services also
contributed. The positive balance on net investment income increased slightly.
The negative balance on unilateral transfers widened $19 billion (became more negative)
in the first quarter, mostly as a result of larger government grants. The deficit on goods
and services widened $10 billion, as a $45 billion increase in imports was only partially
offset by a $35 billion increase in exports. A larger deficit in goods was partly offset by a
larger surplus on services. The surplus on net investment income rose $2 billion in the
first quarter, as payments declined a bit more than receipts. For both payments and
receipts, a large decline in the direct investment component was almost offset by a
similarly large increase in interest and dividends.
U.S. Current Account
(Billions of dollars, seasonally adjusted annual rate)
Other
Current
Investment
Goods and
Period
income and
account
income,
services,
transfers, net
balance
net
net
Annual
2003
-494.8
51.8
-76.7
-519.7
2004
-617.6
36.2
-86.7
-668.1
Quarterly
2004:Q2
Q3
Q4
2005:Q1
Change
Q2-Q1
Q3-Q2
Q4-Q3
Q1-Q4

-608.2
-629.9
-676.9
-687.0

29.6
30.8
18.8
20.7

-88.0
-68.8
-95.3
-113.9

-666.5
-667.9
-753.4
-780.2

-52.8
-21.7
-47.0
-10.1

-36.1
1.1
-12.0
2.0

6.7
19.2
-26.5
-18.6

-82.1
-1.4
-85.5
-26.8

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

IV-7

U.S. International Financial Transactions
Private foreign purchases of U.S. securities remained very strong in the first quarter of
2005 but weakened in April (line 4 of the Summary of U.S. International Transactions
table). Most of the slowdown in private inflows from March to April reflects notably
weaker net purchases of Treasury securities (line 4a), which dropped back from their
record monthly high in March. A swing from net purchases to net sales by Caribbean
banking centers more than accounted for this decline. Private purchases of corporate
equities (line 4d) were relatively strong at the beginning of the year, but have been weak
for the past three months, and private foreign investors sold agency bonds (line 4b) for
the third consecutive month. Private inflows into corporate bonds (line 4c) eased a bit in
April from the very strong inflows recorded in recent months; on balance, average net
purchases of corporate bonds this year have been just a bit weaker than in 2004.
Net foreign official flows (line 1) picked up from weak inflows in February and March to
$39 billion in April, the largest monthly official inflow since June 2004. Activity by
Norway, which actively manages its oil fund, has accounted for much of the recent
monthly swings in official flows. Inflows from most Asian countries have been well
below those of the second half of last year, and for the first four months of 2005, foreign
official inflows have amounted to $65 billion, well below the pace of the past two years.
However, inflows from China have remained relatively strong so far this year. Partial
data from the Federal Reserve Bank of New York for May and the first half of June
indicate sizable official inflows, primarily reflecting further increases in holdings for
China.
U.S. investors acquired on net $8 billion in foreign securities in April (line 5), bringing
total acquisitions of foreign securities this year to $47 billion, compared with $32 billion
for the first four months of 2004. U.S. purchases of foreign bonds (line 5a) edged up in
April, but purchases of stocks (line 5b) were notably weaker than in recent months,
consistent with a recent slowdown in inflows to global mutual funds.
The volatile banking sector (line 3) registered a large net outflow in April, in large part
reflecting repurchase activity concentrated in Caribbean banking centers. For the year to
date, the banking sector has recorded a net outflow of $66 billion.
Since the last Greenbook, we have received preliminary Balance of Payments data for the
first quarter. Direct investment flows were roughly offsetting in the quarter. U.S. direct

IV-8

investment abroad (line 6) returned to a more normal outflow of $32 billion, reflecting a
moderate pace of new equity investment and reinvested earnings. This followed a surge
in the fourth quarter that was influenced by both the re-incorporation in the United States
of News Corporation Ltd. (Australia) and anticipation of the partial tax holiday. Inflows
from foreign direct investment in the United States (line 7) continued at their recent trend
rate.
With the first quarter Balance of Payments release, BEA also provided annual revisions
to its estimates of financial transactions. BEA revised upward its estimates of foreign
official inflows in 2003 and 2004 to account for increased official holdings of Treasury
and agency bonds as identified in the June 2003 and June 2004 surveys of foreign
holdings of U.S. securities. These revisions increased estimated foreign official inflows
by roughly $30 billion in each year. There were roughly offsetting downward revisions
to private inflows. BEA also made significant revisions to its estimates of U.S. net
acquisitions of foreign securities in 2002 and 2003. The new estimates incorporate
results from the December 2003 survey of U.S. holdings of foreign securities, which
measured higher than expected holdings especially of foreign bonds. BEA now estimates
that for 2002 and 2003 combined, U.S. investors purchased on net $73 billion in foreign
bonds over the two-year period. This compares with the previous estimate of $49 billion
in net sales—a revision of $122 billion.
The revised international transactions accounts continue to show negative statistical
discrepancies in 2002 and 2003, indicating that net financial inflows exceeded the
reported current account deficit. However, in the new estimates the combined
discrepancy for the two years is smaller. For 2004, the statistical discrepancy was
increased to a positive $85 billion. The statistical discrepancy in the first quarter of 2005
was a positive $34 billion.

IV-9

Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)
2003
Official financial flows
1. Change in foreign official assets
in the U.S. (increase, +)
a. G-10 countries
b. OPEC countries
c. All other countries
2. Change in U.S. official reserve
assets (decrease, +)
Private financial flows
Banks
3. Change in net foreign positions
of banking offices in the U.S.1
Securities2
4. Foreign net purchases of U.S.
securities (+)
a. Treasury securities
b. Agency bonds
c. Corporate and municipal bonds
d. Corporate stocks3
5. U.S. net acquisitions (-) of foreign
securities
a. Bonds
b. Stock purchases
c. Stock swaps3
Other flows (quarterly data, s.a.)
6. U.S. direct investment (-) abroad
7. Foreign direct investment in U.S.
8. Foreign holdings of U.S. currency
9. Other (inflow, + )4
U.S. current account balance (s.a.)
Capital account balance (s.a.)
Statistical discrepancy (s.a.)

2004

2005

276.8 397.5

79.5

75.5

95.3

30.8

2.9

38.9

275.3 394.7
114.7 162.7
6.1 12.1
154.5 219.9

78.3
46.2
-2.3
34.5

75.1
20.3
3.6
51.2

94.6
-.4
7.3
87.8

25.5
4.6
-4.8
25.6

3.1
2.1
-5.9
6.9

39.0
.1
1.9
37.0

2.8

1.1

5.3

-.2

283.8 187.1

91.6

41.2

73.6 134.6

…

33.6

-23.1

-15.7

38.3

-50.6

84.4 174.5 163.8
-.8 16.1 75.7
.9 43.2
.8
82.6 69.5 57.7
1.7 45.7 29.6

52.2
39.8
-7.6
18.4
1.7

23.6
5.4
-1.3
14.4
5.0

-39.1
1.0
-38.0
-2.1

-22.1
-4.5
-15.5
-2.1

-7.9
-5.3
-2.7
.0

-140.6 -252.0 -58.4 -41.2 -100.0 -32.2
67.1 106.8 31.0 35.7 31.6 28.8
16.6 14.8
8.8
2.6
5.3
1.1
96.3 -42.9 -33.9 21.2 -36.2 28.0
-519.7 -668.1 -166.6 -167.0 -188.4 -195.1

…
…
…
…
…

…
…

1.5

64.7

-15.8

335.6 478.4 140.8
105.6 105.8 58.3
-33.1 66.5 24.5
225.0 243.5 48.4
38.1 62.6
9.6
-155.9 -102.3
-41.1 -18.5
-97.4 -96.0
-17.4 12.2

-3.2
-37.8

-1.6
85.1

-30.3
10.1
-27.7
-12.7

-0.4
-4.0

-38.4
-21.5
-16.4
-.6

-0.4
50.7

16.4

-18.1
-8.4
-35.1
25.5

-0.5
19.9

-4.5
34.1

Mar.

Apr.

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-10

Foreign Financial Markets
The trade-weighted index of the nominal exchange value of the dollar against the major
currencies has risen 3 percent on net since the May FOMC meeting, with the dollar
appreciating sharply against most major foreign currencies. The dollar appreciated
6½ percent against the euro, with much of the movement occurring after the clear
rejections of the European Union’s constitution by French and Dutch voters. Several
weaker-than-expected economic data releases in the euro area and comments by some
ECB officials that appeared to signal a willingness to consider an interest rate cut also
weighed on the euro. The dollar appreciated about 3½ against sterling and the yen amid
some weaker-than-expected economic data releases in the United Kingdom and Japan. In
contrast, the dollar depreciated 1½ percent against the Canadian dollar, which was
supported by stronger-than-expected Canadian economic data releases, including
employment and trade data. Market participants also interpreted the increase in Canadian
government’s fiscal spending plans as offering further support to economic growth.

Exchange Value of the Dollar
May 3, 2005 = 100
105
104
May
FOMC

Daily

103
102

Other important
trading partners

101
100
99

Broad

Major currencies

Mar

Apr

May

Jun

Recent differences in economic performance between the United States and several
European countries were reflected in developments in short-term interest rates. Whereas
U.S. dollar three-month deposit rates rose 25 basis points over the intermeeting period,
comparable euro and sterling interest rates declined slightly. As had been widely

IV-11

expected, the European Central Bank, the Bank of Japan (BOJ), the Bank of England, and
the Bank of Canada all left their respective monetary policy stances unchanged during the
intermeeting period. Although the BOJ did not change its official monetary stance at its
meeting on May 20, it stated that it may allow banks’ current accounts held at the BOJ to
fall below its target range of ¥30 to ¥35 trillion in cases of exceptionally weak liquidity
demand. At the June 8-9 meeting of the Bank of England’s Monetary Policy Committee,
two members voted for a rate cut. Yields on ten-year government bonds declined 20 to
25 basis points in the euro area, the United Kingdom, and the United States. Despite
strong economic growth in Canada, the yield on the ten-year Canadian government bond
declined 35 basis points.

Financial Indicators in Major Industrial Countries

Country
Canada

Three-month rate
Percentage
Jun. 22
point
(Percent)
change

Ten-year yield
Percentage
Jun. 22
point
(Percent)
change

Equities
percent
change

2.59

.02

3.79

-.35

5.40

.05

.00

1.26

.03

3.66

Euro area

2.10

-.02

3.15

-.24

7.70

United Kingdom

4.72

-.13

4.26

-.25

5.50

.70

.00

1.97

-.08

6.42

Australia

5.65

-.06

5.22

-.11

7.32

United States

3.41

.25

4.01

-.20

4.43

Memo:
Weighted-average
foreign

1.93

-.02

3.58

-.14

n.a.

Japan

Switzerland

NOTE. Change is from May 2/3 to June 22 (10 a.m. EDT).
n.a. Not available.

Equity price indexes in major industrial countries rose 3½ to 8 percent over the
intermeeting period, in part on declines in nominal interest rates and as well as on several
positive earnings announcements from firms in Europe and the United States. Share
prices in the euro area were also likely supported by the decline in the real effective
exchange value of the euro.

IV-12

Financial Indicators in Latin America, Asia, and Russia
Currency/
US dollar

Short-term
interest rates1
Percentage
Jun.21/22
point
(Percent)
change

Dollar-denominated
bond spread2
Percentage
Jun.21/22
point
(Percent)
change

Equity
prices

Jun. 22

Percent
change

10.75

-2.48

9.60

.10

1.67

-.22

9.04

Brazil

2.37

-5.95

20.58

1.08

4.08

-.48

3.70

Argentina3

2.87

-1.21

n.a.

8.75

-54.37

6.04

Chile

578.40

-.16

3.41

-.25

.73

.02

2.84

China

8.26

-.15

n.a.

.71

.06

-4.93

Korea

1010.00

.80

3.55

-.01

...

9.67

31.33

.22

1.41

.03

...

9.27

Singapore

1.67

2.02

2.00

.00

...

2.78

Hong Kong

7.77

-.34

3.21

1.40

...

1.92

Malaysia

3.80

-.01

2.83

.02

.60

.15

1.27

Thailand

41.14

4.10

2.62

.17

n.a.

2.52

9652.00

1.37

8.11

.43

.57

-.45

9.79

Philippines

55.58

2.72

6.06

2.13

4.23

-.15

5.01

Russia

28.60

2.88

n.a.

1.66

-.19

3.55

Economy
Mexico

Taiwan

Indonesia

Percent
change

NOTE. Change is from May 2/3 to June 21/22.
1. One month interbank interest rate, except Chile: 30-day deposit rate; Korea: 1-week call rate.
No reliable short-term interest rates exist for China or Russia.
2. Spread over similar maturity U.S. Treasury security yield. Mexico, Brazil, Argentina, Korea,
the Philippines and Russia: EMBI+ yield. Chile and China: Global bond yield. Malaysia: Eurobond
yield. Thailand and Indonesia: Yankee bond yield. Taiwan, Singapore, and Hong Kong do not have
outstanding sovereign bonds denominated in dollars.
3. J.P. Morgan re-structured Argentina’s EMBI+ index in reaction to the recent debt exchange,
prompting a drop in the Argentine EMBI+ spread from 66.07 to 9.10 percentage points on June 13.
n.a. Not available. ... Not applicable.

The dollar was little changed on balance on a trade-weighted basis against the currencies
of our other important trading partners. Speculation about how and when China may
abandon the renminbi’s peg to the dollar continued to be a focus of market participants’
discussions. The expected rates of appreciation of the renminbi (RMB) against the dollar
three- and twelve-months ahead remained at relatively elevated levels over the
intermeeting period, at 1½ and 5 percent, respectively. On May 18, the China Foreign
Exchange Trade System began to include eight additional non-RMB foreign currency
pairs. Market participants viewed this step as a precursor to moving toward a more
flexible Chinese exchange rate regime. Also on that day, the Hong Kong Monetary
Authority announced a new trading band of 7.75-7.85 Hong Kong dollars per U.S. dollar,

IV-13

imposing a limit to appreciation of the currency for the first time in many years. (The
Hong Kong dollar’s peg was, before then, one-sided: the Hong Kong dollar was allowed
to appreciate relative to the stated peg, but not to depreciate.) Market participants
reported that the move was likely designed to reduce expectations that Hong Kong’s
currency board arrangement would be affected by any future change in China’s exchange
rate regime.
The Brazilian real appreciated about 6 percent on balance against the dollar, and Brazil’s
EMBI+ spread over Treasuries declined about 50 basis points. The central bank of Brazil
raised the policy rate another 25 basis points in May, to 19.75 percent, but in June it left
the policy rate unchanged in response to signs of falling inflation and weakening
economic activity. Brazilian financial indicators rose early in the intermeeting period, but
declined somewhat in late May and early June following reports of corruption allegations
regarding members of the Lula administration. Financial indicators rebounded in
mid-June as concerns about the corruption allegations were alleviated.

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

IV-14

Developments in Foreign Industrial Countries
GDP growth in most major foreign industrial economies picked up slightly in the first
quarter. Both Germany and Japan posted uncharacteristically large increases; real GDP
grew 4.2 and 4.9 percent, respectively. In the United Kingdom and France, however,
growth slowed, while the Italian economy contracted for the second consecutive quarter.
Recent economic indicators for the major foreign economies in the second quarter have
been mixed. Indicators for Japan and Canada have been strong, while indicators for the
United Kingdom and the euro area have been weak.
Consumer price inflation remained subdued overall, despite recent increases in oil prices.
In the euro area, 12-month inflation edged down to 1.9 percent in April. In Canada,
consumer prices continued rising at moderate rates. Even though the inflation rate in the
United Kingdom moved up earlier in the year, it continued to be slightly below the Bank
of England’s 2-percent target. Mild deflation persisted in Japan.
In Japan, first-quarter growth jumped markedly to 4.9 percent at an annual rate. Private
consumption grew 4.6 percent, fueled in part by a further decline in household saving
rates. Private investment rose 7.1 percent after minimal growth in the previous two
quarters. Although high-tech inventories continued to decline gradually, stocks in other
sectors have risen over the last two quarters, and overall inventory investment contributed
1.1 percentage points to GDP growth. Net exports continued to make a slight negative
contribution to growth.
Indicators of second-quarter activity have so far been positive. After falling in February
and March, industrial production rose 1.9 percent in April. Real spending by households
rose 1 percent on the month in April, matched by a similar rise in retail sales, and
consumer sentiment rose in May to its highest level in nearly a year. Labor markets
continued to improve gradually. In April, the unemployment rate fell to 4.4 percent,
marking its lowest level since late 1998. The job-offers-to-applicants ratio, a leading
indicator of employment, rose to 0.94, matching highs not seen in twelve years. The
external sector continued to make negative contributions: Real exports of goods rose 0.4
percent in April while real imports of goods rose 1.1 percent.

IV-15

Japanese Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component
GDP
Total domestic demand
Consumption
Private investment
Public investment
Government consumption
Inventories2
Exports
Imports
Net exports2

2004

20031 20041
2.2
1.3
1.0
8.8
-12.5
1.0
-.3
10.6
2.8
.9

.9
.7
.3
1.3
-11.8
3.1
.4
10.8
10.4
.3

2005

-.6
-1.5
.2
13.5
-52.4
2.7
-.7
14.4
7.8
1.0

-1.0
-.3
-.4
.7
-7.2
1.2
-.1
2.1
9.4
-.6

.2
.5
-1.4
.2
-1.4
2.6
.8
5.5
8.8
-.2

4.9
5.5
4.6
7.1
-2.5
2.4
1.1
-1.5
1.9
-.4

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

Core consumer goods prices in the Tokyo area (which exclude fresh food but include
energy) rose one tenth of a percentage point in May from the previous month and were
down 0.4 percent from a year earlier. Wholesale price inflation ticked down to 1.8
percent in May. While continuing to state that it would maintain its policy of quantitative
easing until deflation ends, the Bank of Japan’s (BOJ) Policy Board in late May decided
to allow temporary breaks below the target range for banks’ balances with the BOJ if
banks’ demand for funds was too weak to satisfy the target. The balance of reserve
accounts fell below the ¥30 trillion lower end of the target range in early June but
reversed these declines subsequently.

IV-16

Japanese Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

Indicator
Industrial production1
All-industries index
Housing starts
Machinery orders2
Machinery shipments3
New car registrations
Unemployment rate4
Job offers ratio5
Business sentiment6
CPI (core, Tokyo area)7
Wholesale prices7

2005

Feb.

-.1
0.0
5.0
-5.4
-.7
10.0
4.8
.85
2.0
-.1
1.8

-.9
-.1
-3.9
5.7
-.8
1.0
4.6
.90
1.0
-.3
2.0

1.8
1.3
3.3
.8
-.4
-2.7
4.6
.91
-2.0
-.5
1.3

-2.3
-1.3
-9.9
4.8
-3.5
-.6
4.7
.91
…
-.5
1.3

Mar.
-.2
-.5
-.6
1.9
.8
-.3
4.5
.91
…
-.5
1.4

Apr.
1.9
n.a.
-2.4
-1.0
4.5
.3
4.4
.94
…
-.5
1.9

May
n.a.
n.a.
n.a.
n.a.
n.a.
-.7
n.a.
n.a.
…
-.4
1.8

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

GDP growth in the euro area picked up in the first quarter to a 2 percent pace. Net
exports rebounded sharply to contribute 2.2 percentage points to GDP, as imports fell and
exports firmed. Domestic demand made a slight negative contribution to growth, as
contractions in investment and government spending more than offset a moderate rise in
household consumption. Among individual countries, Italian GDP contracted for the
second straight quarter. In contrast, German GDP growth rose to more than a 4 percent
pace, but that gain was exaggerated by inadequate adjustment for working days.
Indicators for the second quarter generally have pointed to economic weakness,
especially in the industrial sector. The European Commission’s measure of euro-area
economic sentiment fell in May to its lowest level in more than a year and a half. The
euro-area manufacturing PMI declined in May to 48.7, its lowest level in nearly two
years and below the 50 threshold for growth. In contrast, the PMI for the services sector
picked up a bit in May and has fluctuated around 53 during the past nine months,
indicating positive growth. The continued buoyancy of the consumer sector has been
called into question by a decline in consumer confidence and the 1.2 percent decline in
euro-area retail sales in April.

IV-17

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

2004

20031 20041

2005

GDP
Total domestic demand
Consumption
Investment
Government consumption
Inventories2
Exports
Imports
Net exports2

.9
1.7
.7
1.1
2.3
.5
.6
2.7
-.7

1.5
1.7
1.6
1.2
2.1
.1
5.5
6.4
-.2

1.7
1.3
.4
1.7
2.8
.2
11.3
11.2
.4

1.1
3.3
1.3
1.9
3.5
1.3
3.9
9.8
-2.0

.6
1.6
2.5
3.1
1.0
-.7
1.0
3.6
-1.0

2.0
-.2
1.1
-2.8
-.7
-.0
.9
-4.4
2.2

Memo:
GDP of selected countries
France
Germany
Italy

1.4
.3
.1

2.1
.5
.8

2.4
.8
1.5

.8
-.2
1.5

2.7
-.5
-1.7

.8
4.2
-2.0

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

Labor markets conditions remained weak in the euro area, with the unemployment rate
unchanged at 8.9 percent in April. In Germany, the national definition of the
unemployment rate was 11.8 percent in May, down a bit from 12 percent in March.
Euro-area twelve-month consumer price inflation inched down to 1.9 percent in May, just
below the ECB ceiling, from 2.1 percent in April. Core inflation, excluding energy and
unprocessed food, was up a bit to 1.5 percent but remained below the first quarteraverage. In April and May, on average, energy prices were up more than 1½ percent
from March.
French and Dutch voters rejected the EU constitutional treaty in recent referendums.
Nearly 55 percent of French voters voted “no” on May 29, and nearly 62 percent of
Dutch voters followed suit on June 1. The future of this treaty is now very uncertain.
Nine countries, accounting for nearly half of the EU population, have already ratified the
constitutional treaty, although only one – Spain – did so by referendum. Several EU
countries, including the United Kingdom, have put plans for constitutional referendums

IV-18

Euro-Area Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

Indicator
Industrial production1
Retail sales volume2
Unemployment rate3
Consumer confidence4
Industrial confidence4
Manufacturing orders, Germany
CPI5
Producer prices5
M35

2005

Feb.

Mar.

Apr.

May

.2
-.2
8.8
-13.7
-3.7
-.1
2.2
3.1
6.0

-.3
0.0
8.8
-13.0
-3.3
1.6
2.3
3.8
6.6

-.1
.7
8.9
-13.3
-6.3
-.3
2.0
4.1
6.5

-.6
0.0
8.9
-13.0
-6.0
-2.0
2.1
4.2
6.6

-.2
.1
8.9
-14.0
-8.0
2.1
2.1
4.2
6.5

n.a.
-1.2
8.9
-13.0
-9.0
-2.9
2.1
4.2
6.7

n.a.
n.a.
n.a.
-15.0
-11.0
n.a.
2.0
n.a.
n.a.

1. Excludes construction.
2. Excludes motor vehicles.
3. Percent. Euro-area standardized to ILO definition. Includes Eurostat estimates in some cases.
4. Diffusion index based on European Commission surveys in individual countries.
5. Eurostat harmonized definition. Percent change from year earlier, n.s.a.
n.a. Not available.

on hold. So far, the recent decline in the exchange value of the euro has been the main
economic effect of the rejections. In the medium term, however, the rejection of the
Constitution could make it more difficult for member states to agree on EU affairs and
hinder structural reforms that the EU Commission has promoted in recent years.
Real GDP in the United Kingdom rose 2 percent at an annual rate in the first quarter,
slightly lower than the preliminary estimate. Total domestic demand growth slowed
sharply in the first quarter to a paltry 0.6 percent rate. Consumption growth improved
over the fourth quarter but remained quite weak. Investment surprised on the downside,
actually contracting 0.1 percent. Imports fell more than exports, leading to a large
positive contribution from net exports. House prices were essentially unchanged in April
and May, marking a slowdown from the first quarter. Consistent with the deceleration in
house prices, household net mortgage borrowing weakened somewhat in April, staying
well below its 2003 peak.
Business confidence has fallen considerably since the end of the first quarter. Consumer
confidence, after increasing at the end of the first quarter, fell back below its long-run
average in April and May. The PMI for manufacturing fell below 50 in April and
dropped further in May, signaling a possible contraction in manufacturing. The PMI for

IV-19

U.K. Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component
GDP
Total domestic demand
Consumption
Investment
Government consumption
Inventories2
Exports
Imports
Net exports2

2004

20031 20041
2.7
2.7
2.1
2.3
5.1
-.0
4.7
4.5
-.2

2.9
3.4
3.0
4.5
3.6
-.0
4.4
5.7
-.6

2005

3.9
3.3
3.2
10.7
2.8
-.7
8.9
6.0
.5

2.2
4.7
3.1
4.3
4.7
1.2
-.2
8.6
-2.7

2.8
3.6
1.1
2.3
3.4
1.7
6.6
8.9
-1.0

2.0
.6
1.3
-.1
2.8
-.6
-3.8
-7.4
1.4

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

services has remained unchanged, on balance, over the course of the year and continues
to indicate expansion in the services sector.
The twelve-month rate of consumer price inflation has remained at 1.9 percent since
March, just below the Bank of England’s 2 percent target. Twelve-month consumer price
inflation excluding energy has also remained stable near 1.5 percent since March. In its
May Inflation Report, the Bank of England forecast inflation, using market expectations
for interest rates, to edge just above the target in the very near term and then fall back
below target at a two-year horizon.

IV-20

U.K. Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

Indicator
Industrial production
Retail sales volume1
Unemployment rate2
Claims-based
Labor force survey3
Business confidence4
Consumer confidence5
Consumer prices6
Producer input prices7
Average earnings7

2005

Feb.

Mar.

Apr.

May

-1.2
.9

-.1
.2

-.8
.1

-.5
.1

-1.0
-.3

.8
.5

n.a.
.1

2.7
4.7
12.3
-3.3
1.2
5.6
3.8

2.7
4.7
4.3
-.7
1.4
6.8
4.3

2.6
n.a.
12.7
1.0
1.7
10.5
4.6

2.6
4.7
19.0
0.0
1.6
10.8
5.7

2.7
4.7
9.0
3.0
1.9
11.0
4.0

2.7
n.a.
5.0
0.0
1.9
10.2
4.3

2.7
n.a.
-1.0
-3.0
1.9
7.8
n.a.

1. Excludes motor vehicles.
2. Percent.
3. Three-month average centered on month shown.
4. Percentage of firms expecting output to increase in the next four months less
percentage expecting output to decrease.
5. Average of the percentage balance from consumers’ expectations of their financial
situation, general economic situation, unemployment, and savings over the next 12 months.
6. Consumer prices index (CPI), percent change from year earlier.
7. Percent change from year earlier.
n.a. Not available. . . . Not applicable.

In Canada, real GDP grew 2.3 percent in the first quarter, a slight acceleration from the
previous quarter. The sharp divergence between net external demand, which made a
negative contribution to GDP growth and domestic demand, which expanded strongly,
continued for the third quarter in a row. Following two quarters of declines, exports
rebounded to post a 5.9 percent advance. However, a much larger surge in imports
caused net exports to subtract 1.7 percentage points from growth. Personal consumption
and business investment, especially of machinery and equipment, continued their strong
growth.
Indicators for the second quarter suggest further strengthening of economic activity. The
merchandise trade surplus ticked up in April as exports rose and imports fell slightly.
Housing starts dipped a bit in May, but still remain solid. Manufacturing shipments and
new orders each perked up in April following a weak finish in the first quarter. Retail
sales surged in April, continuing their first-quarter strength. In May, the composite index
of leading indicators continued its recent solid advances.

IV-21

Employment growth was quite strong in both April and May, with the notable exception
of the manufacturing sector, which continues to shed jobs. The unemployment rate
continued to edge down in the first two months of the second quarter, reaching a fiveyear low of 6.8 percent.
In April, the twelve-month rate of consumer price inflation edged up to 2.4 percent, while
the twelve-month rate of core inflation, which excludes the eight most volatile
components from the overall price index, moved down slightly to 1.7 percent.
In May, as part of a deal to help keep the minority Liberal government in place, the
government announced roughly C$10 billion of additional spending in 2005 and 2006.
The new spending is targeted mostly for health care and other social programs.
Canadian Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component
GDP
Total domestic demand
Consumption
Investment
Government consumption
Inventories2
Exports
Imports
Net exports2

20031
1.7
3.9
2.7
8.5
2.7
.0
.1
5.7
-2.1

2004

20041
3.3
5.1
3.9
5.4
2.5
1.2
3.0
8.3
-1.9

2005

5.0
1.7
2.2
2.3
3.2
-.7
19.0
11.6
3.0

3.5
9.7
3.5
6.3
2.0
5.5
-2.8
12.4
-5.8

2.1
6.2
3.8
7.5
2.1
1.9
-3.1
8.3
-4.5

2.3
3.2
6.3
6.9
3.2
-2.4
5.9
10.6
-1.7

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

IV-22

Canadian Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

Indicator
Q3
GDP by industry
Industrial production
New manufacturing orders
Retail sales
Employment
Unemployment rate1
Consumer prices2
Core consumer prices2,3
Consumer attitudes (1991 = 100)
Business confidence (1991 = 100)

2005
Q4

.9
.5
1.3
0.0
1.5
-.9
1.5
1.5
.3
.4
7.1
7.1
2.0
2.3
1.7
1.6
122.8 123.7
151.4 139.8

Feb.

Mar.

Apr.

May

.5
-.2
3.1
2.4
.1
7.0
2.1
1.7
123.7
135.9

.2
-.4
-4.9
1.6
.2
7.0
2.1
1.8

-.1
-.6
-.5
.1
.0
6.9
2.3
1.8

n.a.
n.a.
.4
1.5
.2
6.8
2.4
1.7

n.a.
n.a.
n.a.
n.a.
.2
6.8
n.a.
n.a.

…
…

1. Percent.
2. Percent change from year earlier, n.s.a.
3. Excluding the 8 most volatile components (fruits, vegetables, gasoline, fuel oil, natural gas,
mortgage interest, intercity transportation, and tobacco).
n.a. Not available. . . . Not applicable.

IV-23

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

2004
Q3

Japan
Trade
Current account
Euro area
Trade
Current account
Germany
Trade
Current account
France
Trade
Current account
Italy
Trade
Current account
United Kingdom
Trade

Current account
Canada
Trade

Current account

2005

2005
Feb

Mar

Apr.

102.7 105.5 102.8 105.2 102.1 79.4
169.8 173.8 174.3 190.0 156.6 155.5
57.3
19.6

61.6
36.8

75.9
33.9

79.2
n.a.

69.3
36.4

n.a.
n.a.

182.0 195.3 215.0
100.5 83.7 144.2

205.7 232.2 195.4
128.1 119.6 91.9

-16.2
-12.2

-26.2
-16.9

-28.1
-24.4

-23.7 -37.1
13.8 -25.5

-49.9
n.a.

-1.3
-3.2

-8.6
-24.4

-9.2
-24.8

-8.2 -14.1
-16.6 -31.8

n.a.
n.a.

-110.1 -115.3 -112.6 -108.9 -106.0 -110.1
-68.7

-37.7

n.a.

50.7

47.3

42.9

21.9

17.3

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

13.0

…
46.9

…

47.4

49.1

IV-24

Consumer Price Inflation in Selected Industrial Countries
(12-month change)
Japan

Germany
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

-1

-2

France

1998 1999 2000 2001 2002 2003 2004 2005

-2

United Kingdom
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

-1

-2

Italy

1998 1999 2000 2001 2002 2003 2004 2005

-2

Canada
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

-1

-2

1998 1999 2000 2001 2002 2003 2004 2005

-2

IV-25

Industrial Production in Selected Industrial Countries
Japan

1998=100

1998 1999 2000 2001 2002 2003 2004 2005

France

1998 1999 2000 2001 2002 2003 2004 2005

Italy

1998 1999 2000 2001 2002 2003 2004 2005

120

Germany

1998=100

120

110

100

120

1998 1999 2000 2001 2002 2003 2004 2005

United Kingdom

120

110

100

120

1998 1999 2000 2001 2002 2003 2004 2005

Canada

120

110

100

1998 1999 2000 2001 2002 2003 2004 2005

IV-26

Economic Situation in Other Countries
Indicators have varied across the developing economies but, on balance, point to
moderation in economic performance. In Asia, some ASEAN countries are showing
signs of a sharp pickup from a weak first quarter, while performance has disappointed in
Korea and recent data suggest some slowing in China’s extraordinary pace of growth.
For the major Latin American economies, tighter monetary policy has contributed to a
step-down in growth. With the notable exception of China and Mexico, inflation rates in
most of the emerging economies have held steady or risen from their levels last year.
Indicators from China point to strong growth, albeit off the blistering pace of the first
quarter. The trade balance has widened significantly in recent months; exports continued
to grow rapidly while imports slowed considerably. The weakness in imports has been
widespread across categories and is likely due to the effects of last year’s measures to
rein in investment growth as well as to the increased domestic production of certain
imported goods. Imports of steel, for example, have slowed as domestic steel production
has soared in response to significant investment in steel manufacturing capacity.
Industrial production was flat in May after surging in April. Investment growth remains
robust, though below its first-quarter pace, and the Chinese PMI fell in May but stayed in
expansionary territory. Consumer price inflation remained low, as declining food prices
have offset modest increases in non-food prices.
Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Consumer prices2
Trade balance3

2003
10.0
18.6
3.2
25.5

2004
9.5
14.5
2.6
32.1

2004

2005

Mar.

Apr.

May

11.7
3.6
3.3
72.9

13.0
3.0
2.8
90.9

…
1.0
2.8
97.4

…
2.5
1.6
93.4

…
.2
1.9
110.0

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.

IV-27

Real GDP in Hong Kong grew over 6 percent at an annual rate in the first quarter.
Exports and investment both made strong positive contributions to growth. The
unemployment rate continued its steady decline, and the trade deficit narrowed a bit in
April, with a rise in exports outpacing that of imports. Twelve-month consumer price
inflation remains positive but low.
Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Consumer prices3
Trade balance4

2003
4.5
7.9
-1.9
-8.5

2004
6.8
6.9
.2
-12.0

2004

2005

Mar.

Apr.

May

2.4
6.5
.2
-7.4

6.1
6.1
.3
-9.4

…
6.1
.8
-9.0

…
5.9
.5
-7.6

…
5.7
n.a.
n.a.

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

Taiwanese real GDP grew just over 2½ percent (a.r.) in the first quarter. Export growth
was strong enough to offset a large negative contribution from the change in inventories.
Industrial production rose in April after contracting, on average, in each of the last two
quarters. Orders for electronic goods rebounded in April following a weak first quarter.
Consumer price inflation was up from the first quarter, largely due to increases in food
prices.

IV-28

Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Industrial production
Consumer prices3
Trade balance4
Current account5

2003
5.8
5.0
7.1
-.1
16.9
29.3

2004
3.2
4.5
9.8
1.6
6.1
18.7

2004

2005

Mar.

Apr.

May

2.1
4.2
-.5
1.8
-3.1
7.4

2.6
4.2
-.2
1.6
2.8
16.7

…
4.2
-1.0
2.3
.4
…

…
4.2
1.1
1.6
4.9
…

…
4.2
n.a.
2.3
1.2
…

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.

Data for Korea have generally weakened. Real GDP rose only 1.4 percent (a.r.) in the
first quarter. Output was boosted by consumption and a notable increase in net exports
but held down by a sharp inventory runoff and a drop in investment. Indicators for the
second quarter are mixed. Recent sales and confidence surveys were up from firstquarter levels but industrial production fell in April and the current account registered a
deficit as export growth moderated and foreigners received sizable investment income.
Consumer price inflation remained within the government’s target range of
2.5-3.5 percent and the unemployment rate was basically unchanged.
Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

2003
4.2
4.9
3.4
3.4
22.0
11.9

2004
3.0
10.2
3.5
3.0
38.2
27.6

2004

2005

Mar.

Apr.

May

3.8
2.0
3.5
3.4
35.5
29.4

1.4
1.1
3.5
3.1
43.1
23.8

…
3.9
3.5
3.0
38.8
13.4

…
-1.7
3.6
3.2
28.3
-10.9

…
n.a.
3.5
3.1
n.a.
n.a.

IV-29

In the ASEAN region, first-quarter performance was mixed. Real GDP growth increased
in Malaysia and the Philippines, moderated in Indonesia, and turned negative in Thailand
and Singapore. Domestic factors, including a recovery in the Philippine agriculture
sector and the effects of the tsunami in Thailand, contributed to the divergent
performance. More recently, for a number of countries, April industrial production was
up from the first-quarter average.
The ASEAN economies continued, on average, to run trade surpluses. The exception is
Thailand where the effect of higher oil prices on imports has contributed to large trade
deficits so far this year.
Aside from Singapore, consumer price inflation remained elevated across the region,
reflecting higher food and energy prices and the effect of reductions in oil subsidies in
some countries. The Thai central bank continued tightening monetary policy by raising
interest rates 25 basis points to 2.50 percent on June 9, the fifth rate increase since August
2004.
ASEAN Economic Indicators: Growth
(Percent change from previous period, s.a., except as noted)
2004
Indicator

2003

2005

2004
Q4

Feb.

Mar.

Apr.

…
…
…
…
…

4.8
.0
-3.9
-1.2
6.1

n.a.
1.7
n.a.
13.4
-.8

Real GDP1
Indonesia
Malaysia
Philippines
Singapore
Thailand

5.0
6.6
4.9
5.5
7.6

6.5
5.7
5.5
6.5
5.5

9.8
5.0
3.3
7.9
6.1

6.0
9.3
4.6
-5.5
-2.4

…
…
…
…
…

Industrial
production2
Indonesia3
Malaysia
Philippines
Singapore
Thailand

3.9
9.3
.0
3.0
14.0

4.1
11.3
1.0
13.9
6.4

4.5
1.3
.6
5.3
2.9

-1.5
1.4
-2.6
-7.8
-3.0

6.2
3.8
.2
-10.4
-5.2

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

IV-30

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

2003

Indonesia
Malaysia
Philippines
Singapore
Thailand

28.5
21.4
-1.3
16.2
3.8

2004
25.1
21.2
-.7
16.1
1.7

2004

2005

Mar.

Apr.

30.4
18.3
-.5
18.3
3.6

28.2
27.5
1.0
14.9
-12.3

29.5
30.7
.3
13.9
-12.3

19.3
29.5
n.a.
12.4
-15.7

May
n.a.
n.a.
n.a.
17.2
n.a.

n.a. Not available.

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

20031 20041

2004
Q4

Indonesia
Malaysia
Philippines
Singapore
Thailand

5.2
1.2
3.9
.7
1.8

6.4
2.1
8.6
1.3
2.9

6.3
2.1
8.1
1.7
3.2

2005
Q1
7.8
2.4
8.5
.3
2.8

Mar.

Apr.

May

8.8
2.6
8.5
.4
3.2

8.1
2.7
8.5
.4
3.6

7.4
3.1
8.5
n.a.
3.7

1. Dec./Dec.
n.a. Not available.

Recent indicators for India have been generally positive. Industrial production surged in
March before pausing in April. Although consumer price inflation has risen recently,
growth in the more-watched wholesale price index remains well below the fourth-quarter
pace. Export growth is up but has been outpaced by surging imports, and the current
account deficit has expanded. The Reserve Bank of India surprised market participants
by increasing a key target rate 25 basis points at its late April meeting, citing concerns
over higher oil and other commodity prices.

IV-31

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

2003

2004

2004
Q4

Real GDP1
Industrial production
Consumer prices2
Wholesale prices2
Trade balance3
Current account4

11.0
6.6
3.7
5.8
-13.8
6.9

6.2
8.5
3.8
6.7
-21.7
-1.6

6.0
4.6
4.2
7.2
-28.8
-21.9

2005
Q1

Mar.

Apr.

May

n.a. …
4.6
3.4
4.2
4.2
5.3
5.4
-33.6 -28.8
n.a. …

…
-.1
5.0
5.8
-46.5
…

…
n.a.
n.a.
5.5
-33.6
…

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.

In Mexico, recent data suggest a moderation in economic activity. First-quarter real GDP
grew 1.7 percent at an annual rate, down from 5.4 percent in the fourth quarter, reflecting
weaker U.S. demand for Mexican manufacturing exports and higher Mexican real interest
rates. Fewer working days in the first quarter–as the Easter holidays fell in March this
year compared with April in 2004–also contributed to the soft economic performance.
Production remained sluggish in April.
After tightening monetary policy a dozen times from early 2004 to March 2005, the Bank
of Mexico has left its monetary stance unchanged so far in the second quarter. The rate
on 28-day peso-denominated bills is now about 9.6 percent, up from about 5 percent
when tightening began. Twelve-month consumer prices rose 4.6 percent in May, below
the 5.3 percent registered at the end of last year, but still above the target range of 2 to
4 percent. Core inflation (not shown) has been trending down, however.

IV-32

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

2003

2004

2004
Q4

Real GDP1
Overall economic
activity
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Imports4
Exports4
Current account5

2.1

4.8

1.4
4.0
-.2
3.5
3.2
3.7
4.0
5.2
-5.8
-8.8
170.5 196.8
164.8 188.0
-8.4
-7.3

5.4

2005
Q1
1.7

1.2
.3
.5
-.1
3.7
3.8
5.3
4.4
-14.4 -11.7
207.9 210.8
193.5 199.1
-18.8 -10.4

Mar.

Apr.

May

…

-.4
n.a.
-1.0
.0
3.9
4.1
4.4
4.6
-8.8
-7.6
210.2 211.1
201.3 203.5
…
…

n.a.
n.a.
n.a.
4.6
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.

In Brazil, data releases since the April Greenbook have pointed to continued weakening
in economic activity. Real GDP growth was up only 1.3 percent (a.r.) in the first quarter,
with private consumption declining over 2 percent and investment dropping for the
second consecutive quarter. The export sector was the only bright spot. In April,
industrial production held steady, but output of capital goods declined. Both headline
inflation and core inflation (excluding food and administered prices) slowed in May, and
the median expected inflation for twelve months ahead declined to about 5 percent.
After a surprise 25 basis point rate hike in May, the Brazilian central bank has left its
policy rate, the Selic, unchanged at 19¾ percent in response to the weaker economy.
Scandals involving members of Lula’s political coalition have dominated the headlines in
recent weeks. Although Lula has not been implicated, the crisis is eroding his previously
high level of popular support and raising some concerns about the future of the
government’s reform efforts.

IV-33

Brazilian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

2003
.8
.1
12.3
9.3
24.8
4.2

2004
4.6
8.3
11.5
7.6
33.7
11.7

2004

2005

Mar.

Apr.

May

1.7
.6
10.8
7.2
34.0
8.0

1.3
-.2
10.6
7.4
39.8
10.8

…
1.5
10.4
7.5
39.8
21.1

…
.0
10.3
8.1
49.1
9.1

…
n.a.
n.a.
8.1
41.2
7.4

1. Annual rate. Annual data are Q4/Q4.
2. Percent; break in October 2001 as a result of change in methodology.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
Price index is IPC-A.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

The economic recovery in Argentina appears to be maturing. Real GDP rose at an
annual rate of just 2 percent in the first quarter as construction in part took a respite from
the heady pace of expansion of late last year. The unemployment rate moved up in the
first quarter after having fallen relatively steadily to about half of its crisis peak. More
recently, industrial production ticked down in April following previous strong gains.
Twelve-month consumer price inflation was 8½ percent in May as a result of a jump in
food prices earlier in the year. Inflation remains above the upper end of the central
bank’s unofficial target range of 5-8 percent for 2005.
The final settlement of Argentina’s debt exchange was completed in early June. On
June 1, Standard & Poor’s changed Argentina’s long-term sovereign credit rating from
selective default to B-. Argentina’s access to international capital markets may partially
depend on the fate of Argentina’s hold-out investors, accounting for almost $20 billion
(about 25 percent) in defaulted bonds, and on the outcome of upcoming negotiations with
the IMF over a new loan program.

IV-34

Argentine Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

2003
11.8
16.2
17.3
3.7
15.7
7.4

2004
9.1
10.7
13.6
6.1
12.1
3.0

2004

2005

Mar.

Apr.

May

10.6
2.0
12.1
5.8
10.2
1.9

2.1
2.0
13.0
8.2
9.7
n.a.

…
2.0
…
9.2
9.7
…

…
-.4
…
8.8
9.3
…

…
n.a.
…
8.6
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, preliminary estimates point to strong real GDP growth in the first quarter,
supported by oil revenue-financed government spending. Inflation has continued to be
high, with the monthly CPI rising 2.6 percent in May, driven by pass-through from the
March devaluation of the bolivar as well as by expansionary fiscal policies. International
reserves edged up to $28 billion in mid-June. Oil production is widely believed to have
declined in recent months, reflecting numerous problems at the government oil firm and
the government’s continued hostility toward private investors.
Venezuelan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Consumer prices3
Non-oil trade balance4
Trade balance4
Current account5

2003
6.6
18.0
27.1
-5.5
16.5
11.4

2004
12.1
15.1
19.2
-10.5
21.4
13.8

2004

2005

Mar.

Apr.

8.2
14.1
19.5
-12.2
24.6
14.3

n.a.
13.3
17.0
-14.5
28.1
18.5

…
13.2
15.7
…
…
…

…
11.6
15.8
…
…
…

May
…
n.a.
17.4
…
…
…

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.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, June 29-30, 2005 : Greenbook Part 2

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