Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 16, 2010 : Greenbook Part 2

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Prefatory Note

The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.

Content last modified 01/29/2016.

Class III FOMC - Internal (FR)

Part 2

March 10, 2010

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)

March 10, 2010

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
Economic activity appears to have expanded at a moderate pace in early 2010. Business
investment in equipment and software seems to have picked up, consumer spending
increased further in January, and private employment would likely have turned up in
February in the absence of the snowstorms that affected the East Coast. Moreover,
output in the manufacturing sector has continued to trend up as firms have increased
production to meet strengthening final demand and to slow the pace of inventory
liquidation. On the downside, the recovery in the housing sector has faltered, and
nonresidential construction has weakened further. Meanwhile, a sizable increase in
energy prices has pushed up top-line consumer price inflation in recent months; in
contrast, core inflation has been particularly soft.
Labor Market Developments
As best we can judge, the labor market seems to be bottoming out. 1 Private nonfarm
payroll employment fell only 25,000, on average, in January and February and, in the
absence of the storms, probably would have risen last month. 2 The average workweek
for production and nonsupervisory workers fell back in February after ticking up to
33.3 hours in January—its highest level since early 2009—but the drop was likely due to
the storms.

This apparent bottoming out follows employment losses in 2009 that were significantly greater than
suggested by the BLS’s initial estimates. In the January employment report, the BLS incorporated the 2009
benchmark revision to the payroll survey, which sharply reduced the estimate of the level of employment in
the first quarter of last year. Additionally, the BLS used the revised data to recalibrate its estimates of
employment changes for the months after the benchmark period. The combination of these adjustments led
to a cumulative downward revision to the level of private nonfarm employment of nearly 1.4 million by
December. In addition to the annual benchmark revision, in January, the BLS introduced new series on the
workweek, aggregate hours, and average hourly earnings for all employees. The trends in the series on the
workweek and aggregate hours, which only go back to 2006, are mostly similar to the trends in hours
worked for production and nonsupervisory workers.
2
Although the uncertainty surrounding this calculation is considerable, we estimate that private payroll
employment would have posted an increase of roughly 75,000 in February in the absence of the
snowstorms. This estimate reflects the historical relationship between the payroll estimates and the number
of individuals in the household survey who report not being at work due to bad weather—our best proxy
for the effect of weather on the labor market. According to this measure, a bit more than 1 million people
were not at work due to the weather in February, nearly one-half as many as the number recorded during
the period that included the January 1996 blizzard. In the household survey, workers who are with a job
but not at work because of bad weather are counted as employed; thus, the unemployment rate was
probably not affected much by the storms.

__________________________
Note: A list of abbreviations is available at the end of Part 2.

II-1

II-2

Changes in Employment
(Thousands of employees; seasonally adjusted)
2009
Measure and sector

2009

2010
Q4

Dec.

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

Jan.

Feb.

Monthly change

-395
-388
-8
-107
-97
-84
-32
-52
-19
-42
-29
-12
-6
-7
4
-450

-477
-478
-12
-143
-118
-88
-37
-51
-20
-30
-37
-38
7
2
4
-272

-261
-233
-5
-49
-59
-72
-22
-50
-11
-39
-20
-11
18
-28
3
-423

-90
-90
0
-33
-33
-39
-6
-33
-5
-23
-9
62
-12
0
2
-325

-109
-83
0
-18
-17
-36
-2
-35
-4
-15
-9
50
-3
-26
-9
-589

-26
-33
4
20
-7
-77
-15
-61
-16
42
-13
50
23
7
27
541

-36
-18
3
1
11
-64
-11
-54
-1
0
-10
48
33
-18
7
308

-6.1
-5.6

-8.8
-8.0

-4.1
-2.9

-1.5
-1.4

-.4
.0

.3
.3

-.3
-.6

33.9
33.1
39.8

33.9
33.1
39.5

33.8
33.1
39.9

33.8
33.1
40.3

33.8
33.2
40.5

33.9
33.3
40.7

33.8
33.1
40.3

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

Changes in Private
Payroll Employment
400

Aggregate Hours and Workweek
Thousands

3-month moving average

400

36.0

Hours

2007 = 100
Production workers
All workers

200

35.5

100

Aggregate
hours
(right scale)

98
96

35.0
0

0
Feb.

-200

94
34.5

-200

Workweek
(left scale)

34.0
-400

90
88

-400
Feb.

33.5

-600

102

86
84

33.0
82

-800

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

2010
2010

-800

32.5

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

2010
2010

Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical lines
represent the last business cycle peak as defined by the NBER.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

II-3

Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2009
Rate and group

2009

Dec.

Jan.

Feb.

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

9.3
24.3
14.8
8.8
6.9

9.3
23.1
14.9
8.9
6.9

9.7
25.4
15.1
9.4
7.1

10.0
27.2
15.7
9.5
7.5

10.0
27.1
15.6
9.2
7.6

9.7
26.4
15.8
9.0
7.3

9.7
25.0
16.0
9.1
7.4

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

65.4
37.5
73.0
74.7
59.9

65.7
38.3
73.9
74.9
60.2

65.3
37.4
72.8
74.8
59.8

64.9
35.8
71.4
74.3
59.6

64.6
35.6
71.1
73.8
59.5

64.7
35.2
70.7
73.7
59.8

64.8
35.1
71.3
74.0
59.7

Unemployment Rate and Persons Working
Part Time for Economic Reasons
11

Percent of household employment

Percent of labor force

Duration of Unemployment
11

Feb.

Feb.
30

Unemployment rate (right scale)

45
40
35

30
Mean (left scale)
25

6
5

Persons working part
time for economic
reasons (left scale)

4
10

3
2

Percent of unemployed

Weeks

2010

Long-term unemployed*
(right scale)

3
2002

2004

2006

2008

2010

Source: U.S. Department of Labor, Bureau of Labor Statistics.

2002

2006

2008

2010

*Unemployed more than 26 weeks.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Labor Force Participation Rate

Job Losers Unemployed
Less Than 5 Weeks
Percent

67.5

2004

Percent of household employment

67.5

1.8

67.0

1.6

66.5

1.4

66.0

65.5

1.2

65.0

Feb.

64.5
64.0

2002

2004

2006

2008

2010

Source: U.S. Department of Labor, Bureau of Labor Statistics.

Feb.

1.8

1.2

1.0

64.5

0.8

64.0

0.6

65.0

2002

2004

2006

2008

2010

0.6

Note: Thick line is the 3-month moving average.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

II-4

Labor Market Indicators

Layoffs and Initial Claims
3.0

Insured Unemployment

Percent of private employment

Thousands

2.5

700

650

600

550
500
Feb.
27 450
Jan.
400

Layoffs and discharges
(left scale)

2.0

1.5
Initial claims
(right scale)
1.0

120

2000

2002

2004

2006

2008

2010

350

300

250

Regular state programs
2000

2002

2004

2006

2
2008

2010

Job Openings

Hiring and Hiring Plans
Percent

4.0

100

3.5

Job openings*
(right scale)

3.0

80
Jan.

70
Composite
Help Wanted
Index** (left scale)

60
50

Feb.

40
2000

2002

2004

2006

2008

2010

2.0

3.5

0.5

-10

NFIB hiring plans*
(left scale)
Manpower hiring plans*
(left scale)

0
-5

*Percent of private employment plus job openings.
**Index of staff composite help-wanted advertising as a percent
of payroll employment.
Source: For job openings, Job Openings and Labor Turnover
Survey; for Composite Help Wanted Index, Conference Board
and staff calculations.

2000

2002

2004

2006

Feb.
2008

2010

3.0
2.5
2.0

*Percent planning an increase in employment minus
percent planning a reduction. Seasonally adjusted by
FRB staff.
Source: For hires, Job Openings and Labor Turnover Survey;
for hiring plans, National Federation of Independent Business;
Manpower, Inc.

Job Availability and Hard-to-Fill Positions
Percent

4.0
Jan.

1.0

5.0
4.5

Hires (right scale)

1.5

Percent of private employment

Percent

2.5

4
3

Note: 4-week moving averages.
Source: U.S. Dept. of Labor, Employment and Training
Administration.

110

Expected Labor Market Conditions
Index

5
Feb.
20

Incl. extended and
emergency benefits

10
Feb.
13 9

Note: Data for initial claims are 4-week moving averages.
Source: For layoffs and discharges, Job Openings and
Labor Turnover Survey; for initial claims, U.S. Dept.
of Labor, Employment and Training Administration.

Index, 1980=100

4.5

Millions

150
130

Index

120
110

Conference Board

110

100
Job availability*
(right scale)

110

120

100
Feb.

25
20
15
10
5

50
Hard-to-fill**
(left scale, 3-month moving average)

Feb.

2000
2002
2004
2006
2008
2010
*Proportion of households believing jobs are plentiful, minus
the proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one
‘‘hard-to-fill’’ job opening. Seasonally adjusted by FRB staff.
Source: For job availability, Conference Board; for hardto-fill, National Federation of Independent Business.

30
10

Thomson Reuters/Michigan

2004
2006
2008
2010
2000
2002
Note: The proportion of households expecting labor
market conditions to improve, minus the proportion expecting
conditions to worsen, plus 100.
Source: Conference Board; Thomson Reuters/University of
Michigan Surveys of Consumers.

II-5
Output per Hour
(Percent change from preceding period at an annual rate;
seasonally adjusted)

Sector
Nonfarm business
All person
All employees2

2007:Q4
to
2008:Q4

2008:Q4
to
2009:Q41

Q41

1.4
.9

5.7
6.3

.9
1.7

7.6
8.5

7.8
7.7

6.5
7.4

2009

1. Staff estimates.
2. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of employees.
Source: For output, U.S. Dept. of Commerce, Bureau of Economic Analysis; for hours, U.S. Dept. of Labor,
Bureau of Labor Statistics.

The recent data from the household survey also point to a bottoming out in the labor
market. After dipping to 9.7 percent in January, the unemployment rate held steady in
February, and the fraction of workers on part-time schedules for economic reasons
remained below the levels of late 2009. In addition, the number of new job losers as a
fraction of employment continued to drop, while unemployment durations—as gauged by
the average length of unemployment spells and the share of the unemployed who have
been out of work for more than 26 weeks—fell back a bit from their historic highs in
January. The labor force participation rate has inched up over the past two months.
Nonetheless, on net, participation has fallen steeply since mid-2009 in response to the
scarcity of employment opportunities; indeed, individuals’ perceptions of job availability
from February’s Conference Board survey remain quite negative.
The message from other labor market indicators is mixed. After smoothing through the
volatility induced by storms and various reporting problems, initial claims have risen a bit
since the January Greenbook. 3 However, help-wanted advertising has risen noticeably of
late, and readings on future hiring plans from the Manpower survey are up, on net, since
the start of 2010. In contrast, information from JOLTS—the layoff, job openings, and
hiring rates—indicates little recent improvement in labor market conditions. Both the
number of firms with hard-to-fill positions and hiring plans as reported in the NFIB
survey are also little changed since the end of last year. Households’ expectations of
future labor market conditions remain well above their lows from early 2009.
We estimate that output per hour of all persons in the nonfarm business sector rose at an
annual rate of 6.5 percent in the fourth quarter of 2009—the result of a surge in output
3

The continuing high level of initial claims, along with large numbers of unemployed individuals
exhausting their regular benefits and shifting into emergency and extended benefits programs, has pushed
up the total number of UI recipients to around 10½ million.

II-6
Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2009

Component

2009

20091

(percent)

2009
Q4

Nov.

Annual rate
Total
Previous

2010
Dec.

Jan.

Monthly rate

100.0
100.0

-4.7
-4.5

6.4
6.9

6.6
7.0

.6
.6

.7
.6

.9
...

Manufacturing
Ex. motor veh. and parts

79.8
76.0

-5.0
-4.9

8.4
4.6

5.5
4.6

1.0
.9

-.1
-.1

1.0
.8

Mining
Utilities

8.4
11.9

-5.8
-2.1

5.8
-5.3

7.7
13.8

2.1
-3.0

-.2
6.3

.7
.7

Selected industries
Energy

22.7

-3.4

-1.6

10.7

-1.2

3.2

High technology
Computers
Communications equipment
Semiconductors2

3.7
.8
1.4
1.4

-2.7
-6.7
-3.5
.5

10.8
15.7
-11.3
32.1

8.2
16.1
7.2
4.8

.8
1.3
2.9
-1.3

1.2
1.3
2.2
.3

1.9
1.2
2.9
1.3

Motor vehicles and parts

3.7

-7.3

122.6

24.0

2.2

-.3

4.9

Aircraft and parts

2.7

8.9

7.7

-2.4

-1.8

-.7

-.1

Total ex. selected industries3
Consumer goods
Durables
Nondurables

67.2
23.0
3.4
19.5

-5.8
-2.2
-9.6
-.8

4.5
1.2
1.9
1.1

4.7
4.3
.6
5.0

1.1
.4
.8
.3

-.1
-.2
-.7
-.1

.9
1.0
.2
1.1

Business equipment
Defense and space equipment

6.7
1.3

-11.5
1.4

-.2
14.9

3.9
-6.6

-.4
-.4

1.4
-1.4

.6
2.5

Construction supplies
Business supplies

4.7
7.4

-13.5
-8.5

1.7
.5

-6.6
4.0

1.6
1.5

-1.7
-.4

1.0
.6

24.1
11.2
12.9

-5.4
-13.1
2.4

10.4
10.5
10.3

8.5
9.4
7.8

2.2
1.7
2.6

.1
.7
-.4

1.0
1.3
.8

Materials
Durables
Nondurables

1. From fourth quarter of preceding year to fourth quarter of year shown.
2. Includes related electronic components.
3. Includes manufactured homes (not shown separately).
... Not applicable.
Source: Federal Reserve, G.17 Statistical Release, "Industrial Production and Capacity Utilization."

Capacity Utilization
(Percent of capacity)
19722009
average

199495
high

200102
low

Dec.

Jan.

Total industry

80.6

84.9

73.5

68.7

70.0

71.4

71.9

72.6

Manufacturing
Mining
Utilities

79.2
87.5
86.6

84.5
89.1
93.3

71.4
84.9
84.2

65.4
81.8
79.6

67.0
83.2
78.2

68.2
85.1
80.3

68.4
85.7
82.7

69.2
86.2
83.1

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.5
81.6
77.5

89.9
87.9
80.3

81.7
74.3
70.0

79.6
66.2
67.1

82.4
67.0
68.5

84.4
68.3
69.8

85.2
69.0
70.1

85.9
69.4
71.0

Sector

2009

2010

Source: Federal Reserve, G.17 Statistical Release, "Industrial Production and Capacity Utilization."

II-7
and a small increase in hours. This rise was the third consecutive outsized quarterly gain
in productivity and brought the increase over the four quarters of 2009 to 5.7 percent.
Industrial Production
After increasing briskly in the second half of 2009, industrial production (IP) continued
to expand, on net, in the early months of 2010. IP shot up 0.9 percent in January, and
indicators for February (including production worker hours and available product data)
suggest that total IP was little changed as higher output at mines and utilities offset a
decline in manufacturing production that was, at least in part, due to the effects of the
East Coast snowstorms. In recent months, gains across industries have remained broadly
based: The January reading of the diffusion index of three-month changes in
manufacturing IP indicated that two-thirds of individual industries recorded increases in
output relative to three months earlier. According to the staff’s flow-of-goods system,
recent production gains have reflected a pickup in final demand, both domestic and
foreign, and efforts by firms to slow the pace of inventory liquidation.
Capacity utilization in manufacturing rose to 69.2 percent in January, 4 percentage points
above its trough in June, but still some 10 percentage points below the longer-term
average. As a result, incentives for firms to expand production capacity are weak.
Indeed, based on data for investment, business surveys, and physical measures in some
industries, factory capacity is estimated to decrease 1 percent in 2010 after declining
1.2 percent in 2009. 4
Production of light motor vehicles declined a bit in February after stepping up in January.
Over the first two months of 2010, assemblies averaged roughly 7½ million units at an
annual rate, an increase of ½ million units from the pace in the fourth quarter. Production
in February was held down somewhat by a disruption at Toyota, where a major safety
recall led the firm to temporarily halt production and sales of several models in late
January and early February. 5 Dealers’ inventories of light vehicles continued to expand
in the first two months of 2010, and days’ supply moved up to 63 days at the end of
February. Although days’ supply is currently slightly below the industry target of
65 days, automakers appear cautious about the outlook for sales, and manufacturers’
initial assembly plans suggest that production will remain at an annual rate of about
7½ million units in the second quarter.

If realized, this two-year decline in capacity would far exceed the decline of 0.5 percent over 2003
and 2004, the only other contraction since the series began in 1948.
5
Toyota’s suspension of production covered four U.S. assembly plants and lowered production
230,000 units at an annual rate in February. Toyota is also planning some additional downtime through
mid-April for inventory-control purposes.

II-8

Indicators of Industrial Activity

Weekly Production Index excluding Motor
Vehicles and Electricity Generation

IP Diffusion Index
Index

Monthly aggregate of weekly index
Weekly index

Index
9.00

100

8.75

8.50

80
70

8.25

Jan.

8.00

60
50

7.75

7.50

30
20

7.25
Feb.Mar. Apr. MayJuneJuly Aug.Sept.Oct. Nov.Dec. Jan. Feb.
2009
2010
Note: One index point equals 1 percent of 2002 total industrial
output.
Source: Federal Reserve, G.17 Statistical Release, "Industrial
Production and Capacity Utilization."

7.00

2002 = 100
14

0.9

0.6

Actual

8
6

0.4

Feb.

0.3

Medium and heavy trucks
(left scale)

Boeing strike

0.1
0.0

Autos and light trucks
(right scale)

0.5

0.2

180
160
140
120
100
80
60
40
20
0

0.8

2002 2003 2004 2005 2006 2007 2008 2009 2010
+ February values are based on latest industry schedules.
Source: Ward’s Communications.

2
0

2007
2008
2009
2010
2011
Note: 1998 price-weighted index. Actual completions equal
deliveries plus the change in the stock of finished aircraft.
.
Source: Boeing.

ISM Diffusion Index and Average of
Regional New Orders Diffusion Indexes

Utilities Output
2002 = 100

Diffusion index
125

80
ISM
70

Electricity

+ Feb.
Jan.

115
Feb.
105

60
50

Regional average
40

95
Natural gas

30
85
20

75
2002 2003 2004 2005 2006 2007 2008 2009 2010
+February value for electricity generation is based on weekly
generation data from the Edison Electrical Institute (EEI).
Source: EEI; Federal Reserve, G.17 Statistical Release, "Industrial
Production and Capacity Utilization."

10
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Regional average consists of new orders indexes from the
Chicago, Dallas, Kansas City, New York, Philadelphia, and Richmond
surveys.
Source: Institute for Supply Management (ISM); Federal Reserve.

Note: The shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical
line represents the last business cycle peak as defined by the NBER.

Content partially redacted.

Millions of units

1.0

0.7

1998
2000
2002
2004
2006
2008
2010
Note: The diffusion index equals the percentage of series
that increased relative to 3 months earlier plus one-half the
percentage that were unchanged.
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Boeing Commercial Aircraft Completions:
Actual

Motor Vehicle Assemblies
Millions of units

II-9
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2009
Item

2010
Q4

2009
Q2

Nov.

2010
Dec.

Jan.

Feb.

U.S. production1
Autos
Light trucks

6.4
2.5
3.9

7.0
2.8
4.2

7.4
3.0
4.5

7.4
3.2
4.2

7.2
2.7
4.4

7.0
2.8
4.2

7.7
2.9
4.8

7.2
3.0
4.2

Days’ supply2
Autos
Light trucks

50
46
55

53
51
55

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

55
54
55

51
48
55

58
54
61

63
58
66

Inventories3
Autos
Light trucks

1.38
.63
.75

1.43
.65
.79

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

1.48
.67
.81

1.43
.65
.79

1.53
.67
.86

1.60
.71
.89

6.5

7.2

7.6

7.3

7.2

7.8

7.3

Memo: U.S. production,
total motor vehicles4

Note: FRB seasonals. Components may not sum to totals because of rounding.
1. Production rates for February and the first and second quarters of 2010 reflect the latest industry schedules.
2. Quarterly values are calculated with end-of-period stocks and average reported sales.
3. End-of-period stocks.
4. Includes medium and heavy trucks.
n.a. Not available.
Source: Ward’s Communications.

Inventories of Light Vehicles
Millions of units
3.5
3.0
2.5
2.0
Feb.

1.5
1.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.5

2010

Source: Ward’s Communications. Adjusted using FRB seasonals.

Days’ Supply of Light Vehicles
Days
110
100
90
80
70
Feb.

60
50
40
30

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: Constructed from Ward’s Communications data. Adjusted using FRB seasonals.

2007

2008

2009

2010

II-10

Indicators of High-Tech Manufacturing Activity

Capital Expenditures by Selected
Telecommunications Service Providers

U.S. Personal Computer and Server Absorption

Billions of dollars, ratio scale
Annual average
2010 guidance

Millions of units, ratio scale
75

0.80

0.75

0.70

0.65

0.60

0.55

0.50

0.45

Millions of units, ratio scale
22

Servers (left scale)
+ Q1
Q4

PCs (right scale)

20
19
18
17
16
15
14
13
12

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. Includes 11 North American service
providers. 2010 outlook based on guidance from companies
representing 89 percent of total capital expenditures in 2009.
Source: Dell’Oro Group.

Import Penetration for
Computer and Peripheral Equipment

0.40

11
2002 2003 2004 2005 2006 2007 2008 2009
Note: FRB seasonals.
+ Q1 PC units are from the PC forecast data release.
Source: IDC.

2010

High-Tech Exports
Percent

Billions of dollars, annual rate
100

3-month moving average

160
3-month moving average
150

90
Dec.

140

80
Dec.

130
120

110

1998
2000
2002
2004
2006
2008
2010
Note: Nominal imports relative to domestic absorption
(shipments minus net exports plus change in inventories).
Source: FRB staff calculation.

100
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Includes semiconductors and related equipment,
communications equipment, and computers and peripherals.
Source: U.S. International Trade Commission.

Semiconductor Manufacturing Equipment
Orders and Shipments

Global Semiconductor Prices
2007 = 100, ratio scale

Billions of dollars, annual rate
24

500
425
350

20
Shipments

275

16
200
Orders

Jan.

125
8
4

Feb.
2002 2003 2004 2005 2006 2007 2008
Source: FRB constant quality price index.

2009

2010

0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. North American headquartered manufacturers.
Source: SEMI’s Book-to-Bill Report.

II-11
Elsewhere in the transportation sector, output of commercial aircraft is likely being held
down by the slowing of Boeing’s production of 777 passenger planes.
.
.
Production in high-tech industries increased moderately in the fourth quarter and posted a
solid gain in January. In the fourth quarter, the output of communications equipment
recorded its first quarterly increase in a year as telecommunications service providers
continued to increase capital expenditures in order to boost cellular network capacity.
U.S. computer spending surged in the fourth quarter, but this jump provided only a
limited boost to domestic computer production because the increase in demand was
concentrated in products that are primarily imported. Meanwhile, exports of high-tech
products rose in December and have been climbing rapidly since mid-2009.
Upstream, domestic semiconductor production has edged up, on balance, in recent
months. Microprocessor production has flattened out at a high level after surging in the
middle of last year, but production of other chips and electronic components has
increased steadily. More broadly, the global semiconductor industry, which slashed
capacity during the downturn, has struggled to meet demand from downstream producers.
As a result, prices have risen for some semiconductor components, and the industry is
spending heavily on new equipment, much of which is manufactured in the United States.
Looking ahead, available indicators suggest that high-tech production will be supported
by increased business spending in the coming months. Surveys indicate that businesses
are intending to replace aging equipment and have increased IT budgets for 2010. With
inventories of high-tech equipment already lean, any pickup in investment will likely lead
to higher production. That said, outside forecasters generally expect revenues for major
U.S. information technology companies to only move sideways in 2010, which would be
consistent with just a modest increase in production.
Energy output has boosted IP in recent months. As a result of unseasonably cold
weather, utilities output jumped in December and rose further in January; for February,
weekly electricity data point to another solid increase in the output of utilities. In
addition, weekly product data suggest that oil and gas drilling, which has risen sharply
since mid-2009, moved up further in February and will boost the output of mined energy
products for the month.
Outside of energy, motor vehicles and parts, aircraft and parts, and high-tech industries,
production rebounded 0.9 percent in January after moving sideways in December. Gains

II-12
Real Personal Consumption Expenditures
(Percent change from preceding comparable period)

Category

2009
Q3

2009
Nov.
Dec.

Annual rate

Total real PCE
Motor vehicles
Goods ex. motor vehicles
Services
Ex. energy
Memo:
Real PCE control1
Nominal retail control2

2010
Jan.

Monthly rate

-.9
-6.2
-2.8
.2
.7

2.8
53.9
3.8
.8
.8

1.7
-24.0
5.6
1.2
.7

.4
3.0
1.1
-.1
.1

.1
1.8
-.5
.3
.2

.3
-1.5
1.0
.1
.1

-2.5
-2.1

3.2
1.4

6.1
5.4

1.1
.9

-.3
-.3

.8
.8

1. Durables excluding motor vehicles, nondurables excluding gasoline, and food services.
2. Total sales less outlays at building material and supply stores, automobile and other
motor vehicle dealers, and gasoline stations.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Goods
Percent

0.8
0.6

Jan.

0.8

2.8

0.6

2.0

0.4

0.2

-0.0

-0.2

6-month moving average

1.2

Percent

2.0

6-month
moving average
Jan.

0.4

-1.2

-0.4

-0.6

-2.0

-0.8

-2.8

1.2
0.4

-0.4

2.8

-0.4
Monthly

-1.2
-2.0

-2.8
2006 2007 2008 2009 2010
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical line
represents the last business cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Services
Percent

0.5

0.4

0.3

0.2

Percent

0.6
6-month
moving average

0.4

0.2

6-month moving average

0.1

0.0

-0.1

-0.2

0.4
0.2
Jan.

Jan.
0.1

0.6

-0.2

0.0

Monthly

-0.2

-0.2
-0.4
-0.4
2006 2007 2008 2009 2010
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical line
represents the last business cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

II-13
were widespread across major market groups, as consumer goods, business equipment,
construction supplies, and materials each increased about 1 percent. The available data
suggest that production in February was likely little changed, as a number of industries
were negatively affected by last month’s snowstorms.
The available indicators of near-term manufacturing activity point to moderate gains in IP
in the coming months. The new orders diffusion indexes from the national ISM survey
and from the regional manufacturing surveys remain at levels consistent with a further
expansion in production in the near term. The three-month moving average of the staff’s
series on real orders for durable goods (adjusted to exclude industries for which reported
orders have little information content for predicting shipments) also suggests moderate
gains in the near future.
Consumer Spending
Consumer spending has continued to move up. In total, real PCE rose a solid 0.3 percent
in January after similar gains, on average, over the preceding three months. The rise in
spending in recent months has been driven by sizable increases in outlays for a wide
variety of goods, while real outlays for services have remained on a more gradual
uptrend.
On average, sales of new automobiles and light trucks were at an annual rate of
10.6 million units in January and February, slightly less than in the fourth quarter of
2009. The softening was concentrated in the retail segment and appears to reflect, in part,
the safety recall at Toyota, which led the firm to halt sales of eight models in late January
and the first half of February. 6 Smoothing through the effects of the Toyota
suspension—as well as the unwinding of the “cash for clunkers” effects—we estimate
that underlying consumer demand for light vehicles has been essentially steady in recent
months, consistent with the stability in households’ assessments of car-buying conditions.
Incentive programs were little changed in January and February; however, in early
March, Toyota announced an aggressive incentive program to lure customers back into
showrooms, a move that was quickly followed by other automakers.
Household income looks less supportive of spending than at the time of the January
Greenbook. After incorporating the unemployment insurance tax records for the third
quarter of 2009, the Bureau of Economic Analysis (BEA) lowered its estimates for wages
and salaries in the second half of last year by roughly $100 billion at an annual rate; as a
result, real DPI is now estimated to have risen just 1 percent over the year as a whole, and
even this small gain reflected a substantial boost from fiscal stimulus. In January, real
6

Toyota estimated that the sales suspension reduced its sales by roughly 310,000 units at an annual
rate in January and 240,000 units in February. However, these estimates appear to cover only the recalled
models and thus do not include any spillovers to other Toyota vehicles.

II-14
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2009
Category

2009

Total

2010
Q4

Dec.

Jan.

Feb.

10.3

9.6

11.5

10.8

11.2

10.8

10.3

Autos
Light trucks

5.4
4.9

4.9
4.7

6.4
5.1

5.7
5.2

5.9
5.3

5.7
5.1

5.4
4.9

North American1
Autos
Light trucks

7.6
3.6
4.0

7.1
3.2
3.9

8.4
4.2
4.2

8.2
3.9
4.4

8.6
4.1
4.4

8.1
3.8
4.3

7.9
3.7
4.1

Foreign-produced
Autos
Light trucks

2.7
1.8
.9

2.4
1.6
.8

3.1
2.1
.9

2.6
1.8
.8

2.6
1.9
.8

2.5
1.7
.8

44.7

46.8

43.1

45.0

45.3

45.7

46.3

Memo:
Detroit Three
market share (percent) 2

Note: Components may not sum to totals because of rounding.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.
2. Includes domestic and foreign brands affiliated with the Detroit Three.
Source: Ward’s Communications. Adjusted using FRB seasonals.

Content redacted.

Car-Buying Attitudes
Percent
110
Appraisal of car-buying conditions (right scale)
100

Average Value of Incentives on Light Vehicles
Current dollars per vehicle, ratio scale

Index

180

3000

160

2600

140

Feb.

2200

120

Feb.
28

70
100
60

Good time to buy: low prices
(left scale)

Feb.

80
1400
60

30
20

1800

2002

2004

2006

2008

2010

Source: Thomson Reuters/University of Michigan Surveys
of Consumers.

2004

2005

2006

2007

2008

2009

2010

1000

Note: Weekly weighted average of customer cash rebate
and the present value of interest rate reduction.
Source: J.D. Power and Associates. Adjusted using FRB seasonals.

II-15

Fundamentals of Household Spending
Household Net Worth
and Dow Jones Total Market Index
18000

15400

Change in Real Disposable Personal Income

Index

Ratio

7.0
6.5

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

6.0

12800
Mar. 9

5.5

10200
Total Market Index
(left scale)

5.0
4.5

2000
2002
2004
2006
2008
2010
* The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.
Source: Federal Reserve Board; U.S. Department of
Commerce, Bureau of Economic Analysis; Wall Street Journal.

4.0

Percent

-1

-2

-3

-3
2000
2002
2004
2006
2008
2010
Note: Values for December 2004 and December 2005
exclude the effect on income of the one-time Microsoft dividend
in December 2004.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

4
Jan.

Percent

3
2
2

-1

2000
2002
2004
2006
2008
2010
Note: The value for December 2004 excludes the effect
on income of the one-time Microsoft dividend in that month.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

7
6

Treasury
yield

-1

1
Jan.

Target Federal Funds Rate
and 10-Year Treasury Yield

Personal Saving Rate
7

7600

5000

12-month percent change

2
Federal
funds
rate

1
Mar. 9

0
-1

2000
2002
2004
2006
Source: Federal Reserve Board.

2008

2010

Consumer Confidence
1985 = 100

1966 = 100

170

115

Thomson Reuters/
Michigan
(right scale)

150

105

130

110

90
70
50

Feb.
Conference Board
(left scale)

75
65

Feb.

35
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical line
represents the last business cycle peak as defined by the NBER.
Source: Thomson Reuters/University of Michigan Surveys of Consumers; Conference Board.

II-16
Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2009
Sector

2009

All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
New homes
Sales
Months’ supply2
Existing homes
Sales
Months’ supply2
Multifamily units
Starts
Built for rent
Built for sale
Permits
Condos and co-ops
Existing home sales

2010

Nov.

Dec.

Jan.

.55
.57

.59
.57

.56
.60

.58
.59

.58
.65

.59
.62

.45
.44
.44

.50
.46
.48

.48
.47
.49

.49
.47
.49

.48
.51
.52

.48
.50
.52

.37
9.12

.41
7.72

.37
7.71

.36
7.82

.35
8.03

.31
9.09

4.57
8.34

4.65
8.06

5.23
6.89

5.71
6.26

4.76
7.62

4.43
8.15

.11
.09
.02
.14

.09
.08
.01
.11

.08
.06
.02
.12

.09
n.a.
n.a.
.12

.10
n.a.
n.a.
.15

.11
n.a.
n.a.
.12

.59

.63

.73

.78

.68

.62

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
2. At current sales rate; expressed as the ratio of seasonally adjusted inventories to seasonally adjusted
sales. Quarterly and annual figures are averages of monthly figures.
n.a. Not available.
Source: Census Bureau.

Private Housing Starts and Permits
(Seasonally adjusted annual rate)
Millions of units
2.0

2.0

1.8

1.8
Single-family starts

1.6

1.4

1.2

1.2
Single-family adjusted permits

1.0

.6
Jan.

Multifamily starts
Jan.

1999

2000

2001

2002

2003

2004

2005

2006

2007

Note: Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
Source: Census Bureau.

2008

2009

2010

II-17
DPI fell 0.6 percent, dragged down by a large increase in the BEA’s estimate of personal
taxes, and the personal saving rate dropped to 3.3 percent, ¾ percentage point below its
fourth-quarter average, but still almost 2 percentage points above its pre-recession level. 7
With equity prices having posted moderate gains and house prices holding steady in the
fourth quarter of 2009, the ratio of household net worth to income was little changed after
increasing appreciably over the prior two quarters. At the end of last year, the wealth-toincome ratio stood close to its long-run average, but the loss in household net worth from
mid-2007 to the end of last year was still equivalent to nearly 1½ years of household
income. So far in 2010, equity prices have moved up modestly, on net.
Housing
The recovery in the housing market seems to have stalled. Single-family housing starts
moved sideways over the second half of 2009 and remained at an annual rate of about
480,000 in January. Unusually bad weather apparently depressed new construction in
January (and likely did so again in February); this factor, along with the small positive
gap between adjusted permits and starts in January, suggests that some improvement in
starts may be in the offing once the weather returns to normal. However, reports from
homebuilders and our industry contacts suggest that activity in the new home market is
being held down by the large number of distressed properties on the market, new homes
selling at prices below building costs, and difficulties in obtaining loans for land
acquisition, development, and construction. In the multifamily sector, starts in January
were 18 percent below their year-earlier level as tight credit conditions and elevated
vacancy rates continued to restrain activity.
On the sales front, the Census Bureau’s measure of new home sales agreements, which
had posted sizable declines late last year, dropped a further 11 percent in January to an
annual rate of 309,000 units—a record low for this series, which began in 1963. 8
Meanwhile, sales of existing homes, which appear to have received a substantial boost
last fall from the originally scheduled expiration of the homebuyer tax credit, fell
considerably in December and January; pending home sales agreements also decreased in
January.
7

The jump in personal income tax payments in January reflects the BEA’s incorporation of the
Administration’s projection that net final settlements (final payments less refunds) on 2009 tax liabilities
will rise sharply this spring; following its normal procedure, the BEA incorporated that projection in its
estimates of the level of personal taxes in January and will carry a similar level of net final settlements in
its monthly tax estimates through the end of 2010. The BEA’s estimates of net final settlements are subject
to substantial revision as information on actual payments and refunds is received.
8

II-18

Content partially redacted.

Indicators of Single-Family Housing
Inventories of New Homes
and Homeowner Vacancy Rate

New Single-Family Home Sales
Millions of units
_ (annual rate)
16
1.4

600
550

Total (left scale)

Percent

Thousands of units
Inventories of new homes
(left scale)

2.75
2.50

500

1.2

2.25

450
1.0
400

2.00

0.8
350
0.6

1.75

300

0.4

1.50

250
200
Source: For total, Census Bureau;

Note: Homeowner vacancy rate is seasonally adjusted
by Board staff.
Source: Census Bureau.

Existing Single-Family Home Sales
Millions of units
_ (annual rate)
70

1.25

Mortgage Rates

Index (2001=100)

Percent

140
130

6.5

7.5
7.0

120

6.0

6.5

110
5.5
100
5.0

Existing home sales
(right scale)

Jan.

4.5

6.0

5.5

4.0

Mar. 3

3.5 .....................................
20~0·4........................
2~00~6..........................2~0~08
..........................2.0·1·0............ 60
2002
Source: National Association of Realtors.

Prices of Existing Homes

5.0

Note: 2-week moving average.
Source: Federal Home Loan Mortgage Corporation.

House Price Expectations
Index, 2000 = 100

LP price index
Monthly FHFA purchase-only index
20-city S&P/Case-Shiller monthly price index

240
220

Diffusion index

Feb.

80
60
40

200

20
180

Feb.

160
-20
140

-40

120

-60

~2~0~0~2................~20~0~4,..._.................,.2~00~6,........................,2~0~08~.................2~0~1~0............ 100

....__2~00_7__.~-------2-0~08__.~....___._2_0.0_9_._~..._....__20~1__.0 -80

Note: LP and S&P/Case-Shiller are seasonally adjusted
by Board staff. FHFA is re-indexed to 2000.
Source: For FHFA, Federal Housing Finance Agency;
for S&P/Case-Shiller, Standard & Poor's; for LP,
LoanPerformance, a division of First American CoreLogic.

Note: Diffusion index is constructed by subtracting
expectations of decrease from expectations of increase.
Source: Thomson Reuters/University of Michigan Surveys
of Consumers.

II-19
The slowdown in sales notwithstanding, housing demand is being supported by a number
of factors. Interest rates for conforming 30-year fixed-rate mortgages remain very low by
historical standards, and the recent news on house prices is likely contributing to a
perception that real estate values are near their bottom. The repeat-sales price index for
existing single-family homes calculated by LoanPerformance was about unchanged in the
fourth quarter of last year at a level 4 percent above its trough in April 2009. Moreover,
in the Thomson Reuters/University of Michigan Surveys of Consumers for February, the
number of respondents who expect house prices to increase over the next 12 months
continued to exceed the number of respondents who expect prices to decrease.
After moving down dramatically through the end of last year, the inventory of unsold
new homes remained at the very low level of 234,000 units in January. However,
measured relative to the slow pace of sales in January, the months’ supply of new homes
moved back up to just above 9 months—only about one-fourth below its peak last
January. More broadly, the vacancy rate for homes intended for owner occupancy
(which includes both existing and completed new homes for sale) edged up in the fourth
quarter of last year, and, although significantly below its peak in 2008, it remains high
relative to pre-crisis levels.
Equipment and Software
Real spending on equipment and software increased at an annual rate of 18 percent in the
fourth quarter of 2009 and appears to have risen further early in the first quarter.
Purchases of high-tech equipment are apparently rising briskly, business outlays for
motor vehicles seem to be holding up after a sharp increase in the fourth quarter, and
incoming data point to some firming in outlays on other equipment.
Real spending on high-tech equipment and software increased at an annual rate of about
30 percent in the fourth quarter, and the latest monthly data for manufacturers’ shipments
and IP point to further gains in high-tech investment in early 2010. While demand
stemming from the replacement of existing equipment likely remains a major driver of
the step-up in high-tech investment, reports from major high-tech companies suggest that
some firms may have moved beyond replacing aging capital to actually increasing
capacity—for example, both Microsoft and Apple are in the early stages of building large
data centers.
Business purchases of motor vehicles are also faring well. Deliveries of light vehicles to
rental car companies and other businesses continued to increase, on average, in January
and February. And although orders for medium and heavy trucks have fallen sharply
since mid-autumn (a swing that likely is related to the new environmental regulations on
diesel engines that took effect at the start of this year), truck sales were little changed
between November and January after moving up, on net, over the preceding few months.

II-20
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2009
Category

2010
Nov.

Annual rate

Dec.

Jan.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories1

3.8
2.2
.1
33.5
-.2

9.0
8.7
22.0
-5.0
8.8

1.1
1.6
2.5
-2.2
1.9

4.1
2.3
2.2
-3.0
2.8

-4.0
-1.7
7.9
.2
-2.8

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories1

28.6
14.1
5.5
31.2
13.4

1.6
13.5
26.4
-10.4
14.9

-3.0
3.2
7.7
2.6
2.8

2.2
3.0
.4
3.7
3.3

3.1
-4.1
-6.9
-3.4
-3.9

Memo:
Shipments of complete aircraft2

36.4

39.8

37.0

48.3

32.1

1. Excludes most terrestrial transportation equipment.
2. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.
Source: Census Bureau.

Communications Equipment

Non-High-Tech,
Nontransportation Equipment

Billions of chained (2005) dollars, ratio scale

20
17
14

Shipments
Orders

20
17
14

8
Jan.

Billions of chained (2005) dollars, ratio scale

59
54

Orders
48

Shipments

5
36

36
Jan.

2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
2000
Note: Shipments and orders are deflated by a price index
that is derived from the quality-adjusted price indexes of the
Bureau of Economic Analysis and uses the producer price
index for communications equipment for monthly interpolation.
Source: Census Bureau.

Computers and Peripherals
240
210
190

2000 = 100

21
19

Industrial production
(left scale)

170

17
Jan.

130
110

Medium and Heavy Trucks

Billions of chained (2005) dollars, ratio scale
24

150

2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
2000
Note: Shipments and orders are deflated by the staff
price indexes for the individual equipment types included
in this category. Indexes are derived from the quality-adjusted
price indexes of the Bureau of Economic Analysis.
Source: Census Bureau.

Real M3
shipments
(right scale)

1240
940
800
660

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

1240
940
800
660

520

380

240

Sales of class 4-8 trucks

240

Jan.
2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
2000
Note: Shipments are deflated by the staff price index for
computers and peripheral equipment, which is derived from
the quality-adjusted price indexes of the Bureau of Economic
Analysis.
Source: Census Bureau; FRB Industrial Production.

100

2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
2000
Note: Annual rate, FRB seasonals.
Source: For sales, Ward’s Communications; for orders,
ACT Research.

100

II-21

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change

2
Q4

-2

-4

-6

1990 1991
1991 1992 1993
1993 1994 1995
1995 1996 1997
1997 1998 1999
1999 2000 2001
2001 2002 2003
2003 2004 2005
2005 2006 2007
2007 2008 2009
2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

User Cost of Capital

Corporate Bond Yields
4-quarter percent change

-6

Percent

Non-high-tech

-5

-5
Q4

-10
-15

1990
2000
2010
1991 1993 1995
1995 1997 1999
2001 2003 2005
2005 2007 2009

8
6

-15

Source: Staff calculation.

Percent

Mar.

8
6

10-year BBB

4
1990
19951996 19982000
20052006 20082010
1990 1992 1994
2000 2002 2004
2010
Note: End of month. March value as of March 8.
Source: Merrill Lynch.

NFIB: Survey on Loan Availability
20

-10
High-tech

10-year high-yield

Surveys of Business Conditions
Percent

18
14

Credit expected to be tighter (right scale)
Feb.

10
6

Diffusion index

80
70

ISM (left scale)
Philadelphia Fed (right scale)

80
70

Feb.
60

2
8

-2
-6

-10
-14

0
Credit more difficult to obtain (left scale)
-4

1990
19951996 19982000
20052006 20082010
1990 1992 1994
2000 2002 2004
2010
Note: Of borrowers who sought credit in the past 3 months,
the proportion that reported or expected more difficulty in
obtaining credit less the proportion that reported or expected
more ease in obtaining credit. Seasonally adjusted.
Source: National Federation of Independent Business (NFIB).

-18
-22

1990
19951996 19982000
20052006 20082010
1990 1992 1994
2000 2002 2004
2010
Source: Institute for Supply Management (ISM),
Manufacturing ISM Report on Business; Philadelphia Fed
Business Outlook Survey.

Note: Shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research (NBER). The vertical
lines represent the last business cycle peak as defined by the NBER.

II-22

Nonresidential Construction and Indicators
(All spending series are seasonally adjusted at an annual rate; nominal CPIP deflated by
BEA prices through Q3 and by staff projection thereafter)

Office, Commercial,
Communication, and Other

Total Structures
Billions of chained (2005) dollars

380

120
110

360

100

340

90
80

320

360

Billions of chained (2005) dollars

100
Other

300

280

280
Jan.

260
240

2000

2002

2004

2006

2008

2010

260

20
10

240

70
65

55
50

Power

Jan.

2006

2008

2010

20
15

2006

2008

2010

Number

Millions of feet

Footage drilled
(left scale)

Drilling rigs
in operation
(right scale)

Mar.

Percent

3.0
2.5

Office

15
Q4
Industrial

1400
1200
1000
800

2008
2010
2000
2002
2004
2006
Note: The March readings for drilling rigs are based on
data through March 5, 2010. Both series are seasonally
adjusted by FRB staff.
Source: For footage drilled, U.S. Department of Energy,
Energy Information Agency; for drilling rigs, Baker Hughes.

Percent

Diffusion index

400

2.0
50

1.5
12

1.0

Jan.

9
Retail

-0.5

Change in
employment (left scale)

-1.0

-1.5

30
Feb.

-2.0
2006

2008

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

2010

-2.5

45
40

0.0
9

Billings (right scale)

0.5

2004

1600

Architectural Billings and
Nonresidential Construction Employment

2002

1800

600

Vacancy Rates

2000

2600

2000
Jan.

Source: Census Bureau.

2200

2004

40
35

2002

20
10

2400

40
35

2004

2000

Drilling and Mining Indicators

Manufacturing

2002

Jan.
Communication

50
40

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

Billions of chained (2005) dollars

2000

Office

Manufacturing and Power

70
65

Commercial

50
40

Source: Census Bureau.

90
80
70

60
300

120
110

2000
2002
2004
2006
2008
2010
Note: Both series are 3-month moving averages.
Employment consists of industrial, commercial, and specialty
trade construction.
Source: For billings, American Institute of Architects; for
employment, U.S. Department of Labor, Bureau of Labor
Statistics.

25
20

II-23
Real business investment in equipment other than high tech and transportation posted
another small decline in the fourth quarter, but the incoming data hint that an upturn may
be under way. Shipments and orders for this broad category of nondefense capital goods
have moved erratically in recent months, mainly because of swings in the volatile engine
and turbines category. Excluding engines and turbines, shipments rose modestly in
January and stood nearly 1½ percent above their average level in the fourth quarter.
Meanwhile, new orders have been on a steep uptrend since mid-2009 and now stand just
below shipments.
The recent step-up in investment spending is consistent with improvements in many
indicators of business demand. Business output rose robustly in the fourth quarter, and
the February readings of the ISM and Philadelphia Fed business sentiment indicators
were near the top of their ranges for the past several years. Meanwhile, the cost of capital
has fallen sharply over the past four quarters, and corporate bond yields are similar to
those seen before the recession began. However, credit conditions for small businesses
remain difficult, as a large number of NFIB survey respondents again reported having
trouble obtaining credit in February.
Nonresidential construction
Conditions in the nonresidential construction sector generally remain bleak. After
folding in the latest monthly construction data, we estimate that real outlays on structures
outside of the drilling and mining sector fell at an annual rate of about 30 percent in the
fourth quarter, and nominal expenditures dropped further in January. The weakness has
been widespread across categories and likely reflects the drag from rising vacancy rates,
plunging property prices, and difficult financing conditions for new projects. In addition,
the current level of architectural billings is consistent with further declines in spending
over the next six months, and the nonresidential construction industry has continued to
shed workers.
In contrast, real spending on drilling and mining structures has picked up strongly in
response to the rebound in oil and natural gas prices in the second half of last year.
Spending was up about 70 percent at an annual rate in the fourth quarter, and increases in
the number of drilling rigs in operation and footage drilled suggest that spending will
remain robust in the first quarter. Nonetheless, this pickup follows a massive decline in
the first half of 2009, and spending still stands well below late 2008 levels.
Business Inventories
The pace of inventory liquidation slowed dramatically in late 2009. Indeed, as measured
in the NIPA, real nonfarm inventories excluding motor vehicles were drawn down at an
annual rate of less than $35 billion in the fourth quarter, compared with reductions of

II-24
Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2009
Measure and sector

-163.1
-48.1
-115.1

-141.4e
e
-4.6
-136.9

Manufacturing and trade ex. wholesale
and retail motor vehicles and parts
-110.9
Manufacturing
-39.8
Wholesale trade ex. motor vehicles & parts -52.5
Retail trade ex. motor vehicles & parts
-18.6

Real inventory investment
(chained 2005 dollars)
Total nonfarm business
Motor vehicles
Nonfarm ex. motor vehicles

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

-152.6
-66.0
-62.9
-23.7

2010
Nov.

Dec.

Jan.

-13.5
20.9
-34.5e

...
...
...

-129.3
-55.3
-51.9
-22.1

-17.8 e
-5.3e
-1.4 e
-11.2

17.4 e
-1.9 e
39.6 e
-20.2

-62.8 e
-19.6 e
-42.2 e
-1.1

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

-124.7
-49.8
-50.7
-24.2

23.2
7.5
19.3
-3.6

74.0
10.5
74.3
-10.7

-37.5
-10.0
-36.3
8.8

n.a.
9.0
-7.0
n.a.

n.a. Not available.
... Not applicable.
e Staff estimate of real inventory investment based on revised book-value data.
Source: For real inventory investment, U.S. Dept. of Commerce, Bureau of Economic Analysis;
for book-value data, Census Bureau.

ISM Customers’ Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.9
1.8

1.9

Index

1.8

Staff flow-of-goods system

1.7

1.7
Jan.

1.6

1.5

1.4

1.3

Dec.

1.2

40
Feb.

1.2

Census book-value data
1.1

2000
2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
Note: Flow-of-goods system covers total industry ex.
motor vehicles and parts, and inventories are relative
to consumption. Census data cover manufacturing and
trade ex. motor vehicles and parts, and inventories are
relative to sales.
Source: Census Bureau; staff calculation.

1.1

2000
2000 2001 2002
2002 2003 2004
2004 2005 2006
2006 2007 2008
2008 2009 2010
2010
Note: A number below 50 indicates inventories are "too low."
Source: Institute for Supply Management (ISM),
Manufacturing ISM Report on Business.

II-25
more than $100 billion in each of the preceding two quarters. 9 Inventory data for January
are still incomplete, but the book-value figures for the manufacturing and wholesale trade
sectors are consistent with a further small liquidation of real stocks early this year.
Information from the staff’s flow-of-goods inventory system, which uses data on
industrial production through January, also suggests that large-scale liquidations have
substantially subsided. According to this system, inventories outside motor vehicles were
little changed in January, and months’ supply decreased further. In all, this months’
supply measure has reversed about one-half of its run-up from mid-2008 to mid-2009.
Among market groups, months’ supply remains elevated for equipment, materials, and, to
a lesser degree, construction supplies, while inventories of consumer goods and of
business supplies appear low relative to demand. Meanwhile, the number of supply
managers who described their customers’ inventories as too low in the manufacturing
ISM survey for February continued to exceed by a wide margin the number of supply
managers who described these inventories as too high.
Federal Government Sector
Real purchases by the federal government were flat in the fourth quarter, as a hefty
increase in nondefense spending was offset by a decrease in defense spending, which can
be volatile from quarter to quarter. As for the current quarter, information from the
Monthly Treasury Statement for January, along with our read of the Daily Treasury
Statements for February, points to little, if any, increase in real defense purchases.
Meanwhile, nondefense purchases should be bolstered by ongoing stimulus-related
spending and by hiring for the decennial census, which began in earnest in February and
will continue through May. 10
The deficit in the unified federal budget widened further in the first four months of fiscal
year 2010. Net receipts were about 10 percent lower in the October to January period
relative to the same period a year earlier, primarily because of the effects of continued
weakness in taxable income as well as the revenue-reducing provisions of stimulus
legislation. 11 On the spending side, outlays declined about 2 percent in the first four
months of the fiscal year relative to the same year-earlier period, mainly reflecting the
substantial decrease in TARP-related outlays. Excluding outlays associated with the
9

In the main, the positive inventory swing in the fourth quarter reflected a widespread slowing in the
pace of liquidation, but it also was influenced by a sizable accumulation of wholesale stocks of farm
products as a result of last year’s unusually large and delayed harvest.
10
We estimate that the four snow days in February had only a modest effect on real federal purchases
in the first quarter because the vast majority of the federal workforce is outside of the geographic area hit
by the storms.
11
More recently, daily tax data indicate that individual refunds are running well above year-earlier
levels, mainly because of the expansion of refundable tax credits in the 2009 stimulus package.

II-26

Federal Government Indicators
Total Real Federal Purchases
Percent change, annual rate

20
15

Real Defense Spending

Current
4-quarter moving average

Billions of chained (2005) dollars

700
Unified (monthly)
NIPA (quarterly)

700

650

600

550

500

-5

450

400

400
2004
2005
2006
2007
2008
2009
2010
Note: Nominal unified defense spending is seasonally adjusted
and deflated by BEA prices. NIPA defense purchases exclude
consumption of fixed capital.
Source: Monthly Treasury Statement; U.S. Department of
Commerce, Bureau of Economic Analysis.

10
5

650
600

Jan.

-10

-10
2004
2005
2006
2007
2008
2009
Note: National Income and Product Accounts (NIPA) measure.
Source: U.S. Department of Commerce, Bureau of Economic
Analysis.

Unified Budget Deficit
4

Federal Debt Held by the Public
Billions of dollars

Percent of GDP

Billions of dollars (right scale)
Percent of GDP (left scale)

2
0

600
300

-300

-4

-600

-6

-900

-8

Jan.

-10

-1500
2000
2002
2004
2006
2008
2010
Note: Adjusted for payment-timing shifts; cumulative deficit
over the previous 12 months.
Source: Monthly Treasury Statement.

-1800

2000
2002
2004
2006
Source: Monthly Treasury Statement.

2008

2010

Recent Unified Federal Outlays and Receipts

Percent change from year earlier

-1200

Unified Outlays and Receipts

Jan.

-2

-12

Percent of GDP

Outlays
Receipts

Oct. 2009-Jan. 2010
20
15

5
Jan.

-5

-10

-15

-20

-20
2000
2002
2004
2006
2008
2010
Note: Adjusted for payment-timing shifts; based on cumulative
outlays or receipts over the previous 12 months.
Source: Monthly Treasury Statement.

Function or source

Billions
of dollars

Outlays
National defense
Major transfers1
Other primary spending
Net interest

1124
235
651
168
70

-2.3
3.8
14.9
-43.0
12.2

Receipts
Individual income and
payroll taxes
Corporate income taxes
Other

693
580

-10.4
-11.5

37
76

-32.3
19.5

-431

14.5

Deficit (-)

Percent
change*

Note: Adjusted for payment-timing shifts.
* Relative to same year-earlier period. Percent change in
deficit is calculated on an absolute-value basis.
1. Includes Social Security, Medicare, Medicaid, and income
security programs.
Source: Monthly Treasury Statement.

II-27

State and Local Indicators

Real Spending on Consumption and Investment
Percent change, annual rate
12

12
Spending
4-quarter moving average

-3
-6

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-3
-6

2009

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; national income and product accounts.

Real Construction

Net Change in Employment

Billions of chained (2005) dollars, annual rate

Thousands of jobs, monthly average
50

-10

-20

-20
Q1

-30
-40

-30

250

240

240
Jan.

230

220

210

200

-40

-50

2000

2002

2004

2006

2008

2010

-50

190

2000

2002

State Revenues
30

25
20

Individual and
corporate income
taxes

Total
revenues

-5

-5
-10

-15

-20

-25

-25
1999

2001

2003

2010

190

2005

2007

2009

Source: Census Bureau, Quarterly Summary of State
and Local Government Tax Revenue through Q3;
Q4 is a preliminary estimate from the Rockefeller
Institute of Government.

Property taxes

15
Total revenues

-10

-30

2008

Percent change from year earlier

2006

Local Revenues

Percent change from year earlier

2004

Note: Nominal CPIP deflated by BEA prices through
Q4 and by a staff projection thereafter.
Source: Census Bureau, Construction Spending.

Note: Q1 is the average of January and February.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics,
Employment Situation.

-30

Q3
0

-5

-10

1999

2001

2003

2005

2007

2009

Source: Census Bureau, Quarterly Summary of State
and Local Government Tax Revenue.

-10

II-28

Price Measures
(Percent change)
12-month change

Measures

Jan.
2009

3-month change

1-month change

Annual rate

Monthly rate

Jan.
2010

Oct.
2009

Jan.
2010

Dec.
2009

Jan.
2010

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

.0
5.3
-20.4
1.7
-.5
2.5
1.8
3.6
1.6
.2
1.6

2.6
-.4
19.1
1.6
2.9
1.0
-.2
2.8
1.3
2.8
1.2

3.0
.0
21.0
1.7
2.0
1.6
.6
3.5
1.6
...
...

2.3
1.9
25.6
.0
1.7
-.6
-1.6
2.1
-.1
...
...

.2
.1
.8
.1
.1
.1
.0
.2
.1
...
...

.2
.2
2.8
-.1
.1
-.2
-.3
.1
-.1
...
...

PCE prices
Total
Food and bev. at home
Energy
Ex. food and energy
Core goods
Core services
Housing services
Other services
Memo: core ex. tobacco
Core market-based
Core non-market-based

.5
5.9
-22.8
1.7
-.1
2.4
2.4
2.4
1.7
2.1
-.1

2.1
-1.4
19.5
1.4
1.2
1.5
.4
1.8
1.2
1.4
1.5

2.7
-.8
28.7
1.6
.2
2.1
-.4
2.9
1.6
1.5
2.6

2.0
1.6
26.9
.6
-1.3
1.2
-.6
1.8
.5
.3
2.6

.1
.2
.8
.1
.0
.1
.0
.2
.1
.1
.3

.2
.1
2.9
.0
-.2
.1
-.1
.1
.0
.0
.1

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

-.9
1.8
-18.1
4.2
4.3
4.0
-3.6
1.2
-27.7
-26.7

4.6
1.5
20.2
1.0
1.7
.1
4.6
1.1
25.2
35.2

5.7
7.6
27.7
-1.2
-1.1
-1.5
9.5
5.2
38.4
57.8

14.0
8.9
56.2
3.3
4.0
2.3
15.0
5.1
81.7
47.7

.4
1.3
.7
.0
.1
-.1
.6
.5
.8
4.5

1.4
.4
5.1
.3
.4
.3
1.7
.5
9.6
6.6

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted (n.s.a.).
... Not applicable.
Source: For consumer price index (CPI) and producer price index (PPI), U.S. Dept. of Labor, Bureau of
Labor Statistics; for personal consumption expenditures (PCE), U.S. Dept. of Commerce, Bureau of
Economic Analysis.

II-29
TARP, expenditures increased about 12 percent, boosted by both the effects of the weak
labor market on low-income support programs (such as unemployment insurance and
food stamps) and the spending from the stimulus package. In all, the CBO now estimates
that the stimulus package will cost $862 billion; by the end of February, about
$340 billion of the stimulus funds had been distributed in the form of spending increases
and tax cuts.
In the Administration’s Budget of the U.S. Government: Fiscal Year 2011, the OMB
projected a deficit of $1.4 trillion in fiscal 2010, assuming current policies; under the
President’s budget proposals, which included some additional stimulus, the deficit would
reach $1.6 trillion. The CBO’s latest projections of this year’s deficit are slightly lower
than the OMB’s, though not materially different.
State and Local Government Sector
Real purchases by state and local governments held up reasonably well in the face of
difficult fiscal conditions for much of 2009, but they fell appreciably in the fourth
quarter. Moreover, the incoming data suggest that these expenditures dropped further in
early 2010, with considerable weakness in both employment and construction spending.
At the state level, revenues continued to decline in the fourth quarter, although the
hemorrhaging of revenues that took a heavy toll on the sector’s budgets for much of
2009 seems to be ending. Indeed, according to The Nelson A. Rockefeller Institute of
Government, total state tax collections fell “just” 4 percent over the year ending in the
fourth quarter of 2009, compared with average declines of 13 percent in the first three
quarters of the year. States will also continue to receive significant amounts of federal
stimulus aid over the next several quarters. Nonetheless, many are confronting budget
gaps in the current fiscal year and are dealing with significant challenges as they prepare
their budgets for the 2011 fiscal year (which begins on July 1 in most states). States are
addressing their fiscal difficulties by paring expenditures, raising taxes, and drawing
down reserve funds.
Prices
Although rising energy prices have continued to boost overall consumer price inflation,
consumer prices excluding food and energy have been soft. Overall PCE prices increased
0.2 percent in January and have risen at an annual rate of 2¼ percent over the past six
months. Core PCE prices were unchanged in January following increases of 0.1 percent
in each of the preceding two months. 12 Over the past six months, core prices were up at

The CPI excluding food and energy fell 0.1 percent in January, but we think the weakness in this
index was exaggerated by a technical issue associated with the incorporation of updated expenditure
weights; without that technical quirk, the core CPI would have been unchanged.

II-30

Consumer Prices
(12-month change except as noted)

Measures of Core PCE

PCE Prices
Percent

5
4

Jan.

PCE excluding food and energy
Market-based components
Trimmed mean

4
Total PCE

Percent

Core PCE

Jan.
0

-1

-2

2000
2002
2004
2006
2008
2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-2

CPI and PCE excluding Food and Energy

2000
2002
2004
2006
2008
2010
Source: For trimmed mean, Federal Reserve Bank of
Dallas; for all else, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

Percent

5
4

CPI

2
CPI
chained

Jan.

2000
2002
2004
2006
2008
2010
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor
Statistics; for PCE, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

-3

1
0

-1

Total PCE

-1
Goods ex.
food and energy

-2

2000
2002
2004
2006
2008
2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-3

PCE excluding Food and Energy
Percent

2
Jan.

-2
0

3
Services ex. energy

0
1

5
4

3
2

PCE

PCE Goods and Services

Percent

3-month change, annual rate

Jan.
0

-3

-6

3-month change, annual rate

-9

2000
2002
2004
2006
2008
2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

1
Jan.

-6

-1

-9

-2

2000
2002
2004
2006
2008
2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-2

II-31

Energy and Food Price Indicators
(Data from U.S. Department of Energy, Energy Information Administration, except as noted)

Total Gasoline Margin
180

Gasoline Price Decomposition
Cents per gallon

Retail price less average spot crude price*

180

160

140

Cents per gallon

450
400

Retail price*

400

350

120

100

100
Mar. 8

80
60

2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff,
less average spot crude price: 60% West Texas Intermediate,
40% Maya heavy crude. Includes gasoline taxes.

300

450

350
Rack price

300
Mar. 8

250

200

150

100
50

Gasoline Inventories

100

Average spot crude price**
2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff.
** 60% West Texas Intermediate, 40% Maya heavy crude.

Natural Gas Prices
Millions of barrels

250

Dollars per million BTU

Adjusted for ethanol use*

Futures price

240

240
Mar. 5

230

Mar. 9

220

210

200

190

180

2006
2007
2008
2009
2010
Note: Bounds are defined as the monthly mean over the
preceding five years, plus or minus the standard deviation
for each month. Monthly data through December 2009,
weekly data thereafter.
* The RBOB component of total motor gasoline inventories
is adjusted for ethanol use after 2006, boosting reported
stocks; estimated by FRB staff.

12-month percent change

8
6

Food and beverages

4
Jan.

16
14
12

2009

2010

Dollars per bushel

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

Mar. 9

-4

10
8

-2

2005
2006
2007
2008
2009
2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

10
2
0

-2

Ex. food and energy
0

Spot Prices of Agricultural Commodities

PCE: Food at Home and Core Prices
8

2005
2006
2007
2008
Note: National average spot price.
Source: Bloomberg.

-4

2005
2006
2007
2008
Source: Commodity Research Bureau.

2009

2010

II-32
Broad Measures of Inflation
(Percent change, Q4 to Q4)
Measure

2006

2007

2008

2009

Product prices
GDP price index
Less food and energy

2.9
3.0

2.7
2.8

1.9
1.7

.7
.8

Nonfarm business chain price index

2.3

2.2

1.6

Expenditure prices
Gross domestic purchases price index
Less food and energy

2.6
2.9

3.5
2.8

1.9
2.0

.6
.7

PCE price index
Less food and energy

1.9
2.3

3.6
2.5

1.7
2.0

1.2
1.5

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

1.8
2.2

3.5
2.2

1.9
2.3

1.3
1.6

CPI
Less food and energy

1.9
2.7

4.0
2.3

1.6
2.0

1.5
1.7

Chained CPI
Less food and energy

1.7
2.3

3.6
1.9

1.8
1.9

1.6
1.3

Median CPI
Trimmed mean CPI

3.0
2.6

3.1
2.8

2.9
2.9

1.2
1.2

Trimmed mean PCE

2.7

2.5

1.4

Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for median and trimmed mean CPI,
Federal Reserve Bank of Cleveland; for all else, U.S. Dept. of Commerce, Bureau of Economic Analysis.

Surveys of Inflation Expectations
(Percent)
Thomson Reuters/Michigan Survey

Period

Actual
CPI
inflation 1

1 year 2

Professional
forecasters
(10 years) 4

5 to 10 years 3

Mean

Median

Mean

Median

CPI

PCE

2008:Q2
Q3
Q4

4.4
5.3
1.6

6.4
5.4
3.0

5.0
4.7
2.8

3.8
3.6
2.9

3.3
3.1
2.8

2.5
2.5
2.5

2.2
2.2
2.2

2009:Q1
Q2
Q3
Q4

.0
-1.2
-1.6
1.4

2.4
3.4
3.1
3.1

2.0
2.9
2.6
2.7

3.3
3.1
3.2
3.1

2.9
2.9
2.9
2.9

2.4
2.5
2.5
2.3

2.2
2.3
2.2
2.1

2010:Q1

n.a.

2.4

2.1

2009:Oct.
Nov.
Dec.
2010:Jan.
Feb.

-.2
1.8
2.7
2.6
n.a.

3.2
3.1
3.0
3.4
3.6

2.9
2.7
2.5
2.8
2.7

3.2
3.2
3.0
3.3
3.3

2.9
3.0
2.7
2.9
2.7

...
2.3
...
...
2.4

...
2.1
...
...
2.1

1. Percent change from the same period in the preceding year.
2. Responses to the question, By about what percent do you expect prices to go up, on
average, during the next 12 months?
3. Responses to the question, By about what percent per year do you expect prices to go up,
on average, during the next 5 to 10 years?
4. Median CPI and PCE price projections.
... Not applicable.
n.a. Not available.
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for Thomson Reuters/Michigan Survey,
Thomson Reuters/University of Michigan Surveys of Consumers; for professional forecasters, the Federal Reserve
Bank of Philadelphia.

II-33

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

Percent

Percent
12

Quarterly

Monthly

Median, next 5 to 10 years

Feb.

6
4
Q4
2
0

Median, next 12 months

1985
1990 199319951997 2000
2005
197319751977 1980
1981
1985
1989
2001
2005
Source: Thomson Reuters/University of Michigan Surveys of Consumers.

Inputs to Models of Inflation
12

2010
2009

2005 2006 2007 2008 2009 2010

Percent

Quarterly

Percent

Quarterly

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

6
2

4
Distributed lag of
core PCE inflation

2
0

0
0
0
1985
1990 199319951997 2000
2005
2010
2005 2006 2007 2008 2009 2010
197319751977 1980
1981
1985
1989
2001
2005
2009
Note: The distributed lag of core PCE inflation is derived from one of the reduced-form Phillips curves used by Board staff.
Source: For the distributed lag of core PCE inflation, FRB staff calculations; for the FRB/US measure, for 2007 forward, the median
projection for PCE inflation over the next 10 years from the Survey of Professional Forecasters (SPF); for 1990 to 2006, the equivalent
SPF projection for the CPI; for 1981 to 1989, a related survey for the CPI conducted by Richard Hoey; and for the period preceding 1981,
a model-based estimate constructed by Board staff. The survey data before 2007 are adjusted down 0.5 percentage point to put the CPI
projections approximately on a PCE basis.

Inflation Compensation from TIPS
Percent
4
3

Quarterly
5 to 10 years ahead

Percent
4

4 Weekly

Q4
2

3
Mar. 9

-1

-2

Next 5 years

-2
-2
-2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2005 2006 2007 2008 2009 2010
Note: Based on a comparison of an estimated TIPS (Treasury inflation-protected securities) yield curve with an estimated nominal
off-the-run Treasury yield curve, with an adjustment for the indexation-lag effect.
Source: FRB staff calculations.

II-34

Commodity Price Indexes
Journal of Commerce

Ratio scale, 2006 = 100
180
Mar. 9

100

140
100
100

Industrials
60

Metals
1992
1992

1994
1994

1996
1996

1998
1998

2000
2000

2002
2002

2004
2004

2006
2006

2008
2008

2010
2010

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

Commodity Research Bureau

500

Ratio scale, 1967 = 100
650
Mar. 9 600
550
500

400

600

450
Spot industrials
350
300

300
250

200

Futures

200

1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Note: The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial commodities, excluding
energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals.

Selected Commodity Price Indexes
(Percent change)

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

2008 1

12/30/08
to
1/19/10 2

-41.4
-48.2
-35.1
-14.1
-24.7

73.1
101.7
53.0
20.4
39.9

1/19/10 2 52-week
to
change to
3/9/10
3/9/10
3.2
2.6
.9
1.8
-3.7

77.0
91.2
55.4
26.3
36.5

1. From the last week of the preceding year to the last week of the year indicated.
2. January 19, 2010, is the Tuesday preceding publication of the January Greenbook.

150

II-35
an annual rate of only a bit more than 1 percent, as a wide variety of goods and services
exhibited persistently low inflation or outright price declines.
Consumer energy prices increased again in January. The PCE price index for energy rose
almost 3 percent, led by a nearly 5 percent increase in gasoline prices. In addition,
consumer prices for natural gas moved up 3½ percent, likely reflecting the effect of cold
weather on spot prices. According to survey data through early March, gasoline prices
have fallen, on balance, following their January surge.
The PCE price index for food and beverages edged up 0.1 percent in January after
posting small increases over the preceding three months; even so, food prices in January
were still 1½ percent below the level from a year earlier. Spot prices of farm
commodities have changed little since the January Greenbook.
On a 12-month change basis, core PCE inflation slowed from 1¾ percent in January 2009
to 1½ percent in January 2010, as a marked (¾ percentage point) deceleration in marketbased core PCE prices was partly offset by a sharp acceleration in nonmarket prices.
Meanwhile, the 12-month average of trimmed mean PCE inflation (as calculated by the
Dallas Fed) has fallen 1¼ percentage points from a year earlier, highlighting the
widespread nature of the deceleration in PCE prices. Notably, housing services inflation
slowed dramatically, likely because of the poor state of the housing market, while
inflation for other market-based services stepped down considerably, possibly reflecting
the deceleration in labor costs. Apart from tax-induced increases in tobacco prices and a
rebound in motor vehicles prices, prices for core goods also decelerated over the past
12 months.
Movements in survey measures of inflation expectations over the intermeeting period
have been small. Median near-term inflation expectations in the Thomson
Reuters/University of Michigan survey ticked down 0.1 percentage point in February to
2.7 percent, while median inflation expectations over the next 5 to 10 years edged down
0.2 percentage point, to 2.7 percent—near the lower end of the narrow range that has
prevailed over the past few years. According to the first-quarter reading of the Survey of
Professional Forecasters, expected PCE inflation over the next 10 years held steady at
2.1 percent, and expected CPI inflation over the next 10 years edged up from a historic
low to 2.4 percent. The TIPS-based measures of inflation compensation 5 years and 5 to
10 years ahead have both moved down somewhat since the January Greenbook.
At earlier stages of processing, the PPI for core intermediate materials has risen at a brisk
pace in recent months. However, despite these increases, the index in January stood only
1 percent above its year-earlier level. In contrast, commodity prices—though up steeply
over the past year—have increased more slowly of late. Since the January Greenbook,

II-36

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

Category

2007:Q4 2008:Q4
to
to
2008:Q4 2009:Q4e

2009
Q1

Q4 e

Compensation per hour
Nonfarm business

3.1

-4.2

7.7

-.4

Output per hour
Nonfarm business

1.4

5.7

7.6

7.8

6.5

Unit labor costs
Nonfarm business

1.7

-4.6

-5.0

-7.6

-5.7

e Staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Compensation per Hour

Unit Labor Costs

(Percent change from year-earlier period)

(Percent change from year-earlier period)
Percent
10

10
8

8
Productivity and costs*

Percent

6
4

-2
2

ECI

2
Q4

199619971998199920002001200220032004200520062007200820092010
*Value for 2009:Q4 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-2
Q4

-4
-6

Average Hourly Earnings

-4
199619971998199920002001200220032004200520062007200820092010
Note: Value for 2009:Q4 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-6

Markup, Nonfarm Business

(Percent change from year-earlier period)
Percent

6
5

Production workers
All employees

6
5

3
Feb.

2
1

1996 1998 2000 2002 2004 2006 2008 2010
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Ratio

1.76

1.72

1.76
1.72

1.68

1.64

1.60

1.56
1.52

Average,
1968-present
199619971998199920002001200220032004200520062007200820092010
Note: The markup is the ratio of output price to unit
labor costs. Value for 2009:Q4 is a staff estimate.
Source: For output price, U.S. Dept. of Commerce, Bureau
of Economic Analysis; for unit labor costs, U.S. Dept. of Labor,
Bureau of Labor Statistics.

1.56
1.52

II-37
Change in Employment Cost Index of Hourly Compensation
for Private-Industry Workers
2008
Measure

2009

Dec.

Mar.

1.9
1.8
1.5

.7
.7
.7

Total hourly compensation
Wages and salaries
Benefits

June
Sept.
Quarterly change
(compound annual rate) 1
.7
.7
.7

Dec.

1.8
1.8
1.1

1.5
1.8
1.5

1.2
1.4
1.1

1.2
1.4
1.0

12-month change
Total hourly compensation
Wages and salaries
Benefits

2.4
2.6
2.0

1.9
2.0
1.6

1.5
1.6
1.3

1. Seasonally adjusted.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Change in ECI Benefits (unpublished)*
Health Insurance

(Private-industry workers; 12-month change)
Nonproduction Bonuses
Percent

Dec.

0
-5

-5

-10

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-5

-15

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

-15

Workers’ Compensation Insurance
Percent

30
25

5
Dec.

-5
-10

0
Dec.

Retirement and Savings
30

Percent

-5

-10

0
Dec.

0
-5

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Percent

-5
-10

-5

1990
1995
2000
2005
2010
1994
1999
2004
2009
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

*The data on the costs of individual benefits should be interpreted with care because, with the exception of health insurance, they
do not meet BLS’s standard publication criteria.

-10

II-38
the Journal of Commerce index of industrial materials has risen 3¼ percent, while the
Commodity Research Bureau spot index of industrial materials has edged up 1 percent.
Labor Costs
Last year’s deceleration in hourly compensation now appears to have been even sharper
than had been indicated earlier. Based on the revised data on labor compensation from
the NIPA (which were discussed in the “Consumer Spending” section) and updated
estimates of hours worked, hourly compensation in the nonfarm business sector is now
reported to have edged down in the third quarter of last year, and we estimate that it
increased at a subdued ½ percent annual rate in the fourth quarter. For 2009 as a whole,
hourly compensation rose only ¾ percent, 1½ percentage points less than suggested by
previous BLS estimates and more than 2 percentage points less than the increase recorded
over 2008. Given the limited increase in compensation and the sharp rise in productivity,
unit labor costs are estimated to have plunged 4½ percent last year and the markup
moved up further.
Other measures of compensation costs have decelerated as well. The employment cost
index (ECI) for hourly compensation of private industry workers rose at an annual rate of
1½ percent over the three months ending in December, with the indexes for wages and
salaries and for benefits both posting small increases. Over the 12 months of 2009, the
ECI increased 1¼ percent, down from 2½ percent in 2008. This deceleration was led by
a noticeable slowing in wage gains, a sharp fall in nonproduction bonuses, and a drop in
employer contributions to retirement and savings plans.
The new BLS measure for average hourly earnings of all employees—now the main
source data for the BEA’s estimates of wages and salaries in quarters for which
information from unemployment insurance records is not yet available—rose 0.1 percent
in February to a level 1¾ percent higher than a year earlier; over the previous 12 months,
the increase had been 3½ percent. As for the narrower average hourly earnings measure
that covers only production and nonsupervisory workers, the 12-month change in
February was 2½ percent, down from 3¾ percent in February 2009.
Last page of Domestic Nonfinancial Developments

Domestic Financial
Developments

Domestic Financial Developments
Overview
Financial conditions remained supportive of economic growth over the intermeeting
period, despite economic data that were somewhat weaker than expected, on balance, and
a temporary escalation in concerns about fiscal strains in Europe. Investors marked down
the expected path of the federal funds rate, on net, over the period. Nominal Treasury
yields were about flat, and TIPS-based measures of inflation compensation declined.
Broad stock price indexes increased, boosted by positive earnings news, while risk
spreads on corporate bonds were little changed. The expiration of many of the Federal
Reserve’s special liquidity facilities on February 1 had no significant effects in financial
markets. Also, despite further tapering of the Federal Reserve’s large-scale asset
purchases of agency debt and agency-backed MBS and the imminent completion of the
program at the end of this month, MBS yields were roughly unchanged. Conditions in
both the commercial and residential mortgage markets remained strained, with
delinquency rates rising further. Meanwhile, net debt financing by nonfinancial firms
was roughly flat, as solid bond issuance was offset by declines in commercial paper and
C&I loans. Consumer credit expanded in January for the first time in a year.
Policy Expectations and Treasury Yields
The expected path of monetary policy implied by futures market quotes moved lower, on
net, over the intermeeting period. Implied rates on Eurodollar futures contracts maturing
around year-end decreased about 10 basis points, and those on contracts maturing in early
2012 fell about 25 basis points. Although the outcome of the January FOMC meeting
was largely in line with expectations, market participants reportedly read the statement’s
characterization of the economic outlook as somewhat more upbeat than they had
anticipated, and Eurodollar futures rates rose a bit in response. However, subsequent
economic data were somewhat weaker than expected, on balance, leading investors to
mark down the expected policy path. The changes to terms for primary credit and TAF
loans that were announced on February 18 resulted in a small increase in near-term
futures rates, but this uptick proved short lived, as the statement and subsequent Federal
Reserve communications—most notably the Chairman’s congressional testimony the
following week—emphasized that the modifications did not represent a shift in the
overall stance of monetary policy.
Based on the staff’s usual term premium assumption of 1 basis point per month, futures
quotes currently indicate that the federal funds rate is expected to rise above 25 basis
points at the end of the third quarter of 2010 and reach about 1¾ percent by the end of
2011. In contrast, quotes from the market for interest rate caps suggest that the most
III-1

III-2
Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2008

2009

Change to Mar. 9 from
selected dates (percentage points)

2010

Instrument
Sept. 12

Dec. 15

Jan. 26

Mar. 9

2008
Sept. 12

2009
Dec. 15

2010
Jan. 26

2.00

.13

-1.87

.00

1.46
1.80

.05
.17

.07
.14

.16
.21

-1.30
-1.59

.11
.04

.09
.07

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

2.39
2.75

.13
.20

.14
.20

.25
.23

-2.14
-2.52

.12
.03

.11
.03

Large negotiable CDs1
3-month
6-month

2.79
3.09

.22
.31

.20
.29

.21
.32

-2.58
-2.77

-.01
.01

.01
.03

Eurodollar deposits3
1-month
3-month

2.60
3.00

.32
.45

.28
.40

-2.32
-2.60

-.04
-.05

.00
.00

Bank prime rate

5.00

3.25

-1.75

.00

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

2.24
2.97
3.93

.87
2.33
3.79

.85
2.38
3.80

.87
2.36
3.85

-1.37
-.61
-.08

.00
.03
.06

.02
-.02
.05

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

1.33
1.77

.50
1.42

.38
1.37

.57
1.59

-.76
-.18

.07
.17

.19
.22

Municipal general obligations (Bond Buyer)6

4.54

4.19

4.30

4.34

-.20

.15

.04

4.26
4.36
6.62
7.22
10.66

3.74
4.08
5.04
6.09
9.29

3.72
4.14
5.04
5.74
8.76

3.75
4.15
5.05
5.74
8.70

-.51
-.21
-1.57
-1.48
-1.96

.01
.07
.01
-.35
-.59

.03
.01
.01
.00
-.06

5.78
5.03

4.94
4.34

4.98
4.29

4.97
4.27

-.81
-.76

.03
-.07

-.01
-.02

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

Private instruments
10-year swap
10-year FNMA7
10-year AA8
10-year BBB8
10-year high yield8
Home mortgages (FHLMC survey rate)
30-year fixed
1-year adjustable

Record high

2009

Change to Mar. 9
from selected dates (percent)

2010

Stock exchange index
Dow Jones Industrial
S&P 500 Composite
Nasdaq
Russell 2000
D.J. Total Stock Index

Level

Date

Dec. 15

Jan. 26

Mar. 9

Record
high

2009
Dec. 15

2010
Jan. 26

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

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

10,452
1,108
2,201
606
11,385

10,194
1,092
2,204
612
11,282

10,564
1,140
2,341
670
11,875

-25.42
-27.13
-53.64
-21.75
-24.88

1.08
2.94
6.34
10.44
4.30

3.63
4.42
6.21
9.39
5.26

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect.
6. Most recent Thursday quote.
7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
_______________________________________________________________________
NOTES:
September 12, 2008, is the last business day before Lehman Brothers Holdings filed for bankruptcy.
December 15, 2009, is the day before the December 2009 FOMC monetary policy announcement.
January 26, 2010, is the day before the most recent FOMC monetary policy announcement.
_______________________________________________________________________

III-3

likely path of the federal funds rate—that is, the mode rather than the mean of the
distribution—involves a later liftoff in the policy rate and was roughly unchanged over
the intermeeting period. The results of the Desk’s March primary dealer survey were
about in line with those from the January survey, with one-half of the respondents
expecting the first policy rate increase to occur by the end of the year.
Nominal Treasury yields were essentially unchanged over the intermeeting period.
Yields may have been supported by an easing of flight-to-quality demands with a modest
reduction in perceived downside risks to the economic outlook, broadly consistent with
increases in equity prices and reductions in implied volatilities on Treasury securities
over the period. TIPS-based measures of inflation compensation moved down at all
horizons, likely reflecting the weaker-than-expected incoming economic data and the
publication of lower-than-anticipated CPI figures. Survey measures of inflation
expectations that were released during the period also pointed to slight declines in both
short- and long-term inflation expectations. In addition, analysts reported that supply
pressures may have boosted yields on TIPS somewhat relative to their nominal
counterparts.
Federal Reserve Purchase Programs and Facilities
Over the intermeeting period, the Federal Reserve continued to taper its large-scale asset
purchases. Cumulative Federal Reserve purchases of agency debt securities and agency
MBS reached about $171 billion and $1.22 trillion, respectively. All purchases are
expected to be executed by the end of March.
On February 18, the Federal Reserve announced an increase of 25 basis points in the
primary credit rate, effective February 19, and a reduction in the typical maximum
maturity for primary credit loans to overnight, beginning on March 18. These changes
were made in light of recent improvements in financial market conditions.
The Federal Reserve’s emergency lending facilities continued to wind down with no
apparent adverse effects on markets or institutions. The expiration of the AMLF, CPFF,
PDCF, TSLF, and the temporary liquidity swap arrangements with foreign central banks
on February 1 had no significant effect on financial markets. The final two non-CMBS
TALF subscriptions took place over the intermeeting period and supported a large
number of deals relative to recent subscriptions, as sponsors reportedly sought TALF
support for deals that would otherwise have been more difficult to bring to market. At
the mid-February CMBS subscription, $1.3 billion in loans collateralized by legacy
CMBS were extended, an amount about in line with recent subscriptions. The final TAF

III-4

Policy Expectations, Treasury Yields, and Liquidity Facilities
Interest Rates
Percent
4.0

Percent

Jan. FOMC

Employment
report

3.8

Discount rate
CPI

10-year Treasury
yield (left scale)

Chairman’s
testimony

2.0

Employment
report

1.5

3.6
1.0
3.4

December 2010
Eurodollar (right scale)
0.5

3.2
3.0

0.0
Jan. 26

Jan. 29

Feb. 3

Feb. 8

Feb. 11

Feb. 17

Feb. 22

Feb. 25

Mar. 3

Mar. 8

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

Treasury Yield Curve

Implied Federal Funds Rate
Percent

Percent
3.5

5.0
March 9, 2010

4.5

3.0

4.0
2.5

January 26, 2010

3.5
3.0

2.0

2.5

January 26, 2010

1.5

2.0

1.0

1.5

March 9, 2010

1.0
0.5

Jan.

May
Sept.
2010

Jan.

May
Sept.
2011

0.5

0.0

Jan.

0.0
1

Years ahead

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

Note: Smoothed yield curve estimated from off-the-run Treasury
coupon securities. Yields shown are those on notional par Treasury
securities with semiannual coupons.
Source: Federal Reserve Board.

Inflation Compensation

Usage of TALF and Other Lending Facilities
Percent
Jan.
FOMC

Daily

Billions of dollars
5

1600

1400

5 to 10 years ahead
3
Mar.
9

Billions of dollars
Jan.
FOMC

Daily

Next 5 years*

200

800

600

400

-1
-2
Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan.
2007
2008
2009
2010
Note: Estimates based on smoothed nominal and inflationindexed Treasury yields.
*Adjusted for lagged indexation of Treasury inflation-protected
securities.
Source: Federal Reserve Board.

250

1200
1000

300

150
Mar. 100
8
50

Other facilities*
(left scale)
TALF
(right scale)

200
0
Jan.

July
2007

Jan.

July
2008

Jan.

0
July
2009

Jan.
2010

* Includes primary, secondary, and seasonal credit; TAF; PDCF;
dollar liquidity swaps; CPFF; and AMLF.
Source: Federal Reserve Board.

III-5

auction occurred on March 8, offering $25 billion in 28-day credit. The minimum bid
rate for this auction was raised 25 basis points, to 50 basis points, consistent with the
change in the primary credit rate. The auction was undersubscribed, with bids totaling
just $3 billion, compared with $15 billion of maturing loans.
On March 8, the Federal Reserve Bank of New York announced plans to expand the list
of counterparties with which it can conduct reverse repurchase agreements to include
domestic money market mutual funds. The announcement elicited little price reaction.
Stock Prices and Corporate Interest Rates
Broad stock price indexes rose about 4 percent, on net, over the intermeeting period,
boosted in part by favorable earnings reports from the retail sector. Bank equity prices
slightly outperformed the broader equity markets. Option-implied volatility on the
S&P 500 index dropped back to post-crisis lows after ratcheting up early in the period on
concerns about Chinese monetary policy tightening and fiscal strains in Europe. Even so,
the gap between the staff’s estimate of the expected real equity return over the next
10 years for S&P 500 firms and the real 10-year Treasury yield—a measure of the equity
risk premium—remained well above its average over the past decade.
Over the intermeeting period, yields on investment- and speculative-grade corporate
bonds were little changed. As a result, spreads on corporate bonds remained at their
lowest levels since early 2008. Spreads on A2/P2-rated commercial paper and AA-rated
ABCP held steady at slightly above their pre-crisis levels.
Corporate Earnings and Credit Quality
Earnings news was generally favorable, particularly in the retail sector. Profits of
nonfinancial corporations in the S&P 500 continued to rebound, with quarter-over
quarter growth maintaining a double-digit pace in the fourth quarter. In contrast,
financial corporations, in aggregate, continued to post near-zero profits. On balance, in
the month ending mid-February, analysts again revised up their forecasts of earnings for
S&P 500 firms over the coming year.
The credit quality of nonfinancial firms has continued to improve, on balance, in recent
months. The aggregate ratio of debt to assets for nonfinancial corporations moved lower
again in the fourth quarter, while the aggregate liquid asset ratio rose a bit further to a
new high of about 11 percent. Moreover, the pace of nonfinancial corporate ratings
downgrades by Moody’s slowed again in the first two months of 2010 and was below the
pace of upgrades. Meanwhile, the six-month trailing bond default rate for nonfinancial

III-6

Corporate Yields, Risk Spreads, and Stock Prices
Selected Stock Price Indexes

Implied Volatility on S&P 500 (VIX)
Jan. 26, 2010 = 100

Daily

Jan.
FOMC

S&P Banks

Percent
185
160

Weekly Friday*

Jan.
FOMC

135
Mar.
9

95
85
75

110

65
85

S&P 500

45
60

35
25
Mar.
9

35
Sept. Dec.
2008

Mar.

June Sept. Dec. Mar.
2009
2010

5
2007

2008

2009

2010

* Latest observation is for most recent business day.
Source: Chicago Board of Exchange.

Source: Standard & Poor’s.

Expected Real Equity Return and
Long-Run Treasury Yield

Corporate Bond Yields
Percent

Percent
14

Monthly

Daily

Jan.
FOMC

12
Expected 10-year real equity return

Mar.
9

10-year high-yield

Mar.
9

-2

3
2007

2008

2009

2010

* Off-the-run 10-year Treasury yield less 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.
Source: Thomson Financial.

Source: Staff estimates of smoothed yield curves based on Merrill
Lynch bond data.

Corporate Bond Spreads

30-Day Commercial Paper Spreads
Basis points

Daily

Jan.
FOMC

1600

7
5

10-year BBB

1992 1995 1998 2001 2004 2007 2010

1800

21
17

Expected real yield on 10-year Treasury*

23
19

10
8

Basis points

Basis points
1000
900

Daily
A2/P2

Jan.
FOMC

700
600

800

1400

500

700

1200

400

600

1000

500
800

10-year high-yield
(left scale)

600

200

300

400
10-year BBB
(right scale)

200

300

400
Mar.
9

200

100

Mar.
9

ABCP

0
2002

2004

2006

2008

2010

Note: Spreads over 10-year Treasury yield.
Source: Staff estimates of smoothed corporate yield curves based
on Merrill Lynch data and smoothed Treasury yield curve.

2007

2008

2009

2010

Note: The ABCP spread is the AA ABCP rate minus the AA
nonfinancial rate. The A2/P2 spread is the A2/P2 nonfinancial rate
minus the AA nonfinancial rate.
Source: Depository Trust & Clearing Corporation.

III-7

Corporate Earnings and Credit Quality
S&P 500 Earnings Per Share

Revisions to Expected S&P 500 Earnings
Dollars per share

Percent
24

Quarterly

Monthly

3
MidFeb.

20
e

-1

18
16

-3

-5

-7

-9

-11

4
2001

2003

2005

2007

2009

2000

2004

2006

2008

-13
2010

Note: Index is a weighted average of the percent change in the
consensus forecasts of current-year and following-year earnings per
share for a fixed sample.
* Revision in Feb. 2009 was -17.2%.
Source: Thomson Financial.

Note: Data are seasonally adjusted by Board staff.
e Estimate.
Source: Thomson Financial.

Financial Ratios for Nonfinancial Corporations
Ratio

Bond Ratings Changes of Nonfinancial Companies

Ratio

Percent of outstandings
0.13

0.36

0.33

2002

Debt over
total assets
(left scale)

Liquid assets over
total assets
(right scale)

40
Annual rate

Upgrades

0.11

20
H2
H1

0.30

0.27

Jan.-Feb.

0.09

0.07

0.05

40
Downgrades

0.24
0.03
1991 1994 1997 2000 2003 2006 2009

1992

1995

1998

2001

2004

2007

2010

Source: Calculated using data from Moody’s Investors Service.

Note: Data are annual through 1999 and quarterly thereafter.
p Preliminary.
Source: Compustat.

Selected Default and Delinquency Rates

Expected Nonfinancial Year-Ahead Defaults

Percent of outstandings

Percent of liabilities
7

Nonfinancial bond
default rate*

C&I loan
delinquency rate

Monthly

5
4

2
Feb.

1
Feb.

2
1

0
0

1992 1995 1998 2001 2004 2007 2010
* 6-month trailing defaults divided by beginning-of-period
outstandings, at an annual rate.
Source: For default rate, Moody’s Investors Service; for
delinquency rate, Call Report data.

1995

1998

2001

2004

2007

2010

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

III-8

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2009
Type of security

Bonds2
Investment grade
Speculative grade
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3
Financial corporations
Stocks1
Bonds2

Jan.

Feb. p

5.2
1.1
4.1

3.1
.0
3.1

2.3
.8
1.5

50.1
32.6
5.3
12.2

31.1
13.9
7.8
9.5

21.4
7.5
3.6
10.3

34.3
17.8
7.8
8.7

1.6

-12.4

-1.9

-3.0

-.6

21.2

12.8

-17.4

-27.7

-23.7

-16.4

8.6
151.7

13.5
45.4

15.9
44.5

12.6
33.9

4.0
33.7

5.3
23.7

2006

2007

2008

4.7
1.8
2.9

5.5
1.6
3.8

3.7
.3
3.4

5.3
.2
5.1

29.3
13.1
6.2
10.1

35.1
17.5
7.5
10.0

27.7
19.5
1.8
6.4

2.4

-.4

11.0
5.3
180.6

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

2010

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. For all nonfinancial firms; period-end basis, seasonally adjusted.
p Forecast based on preliminary data.
Source: Depository Trust & Clearing Corporation; Thomson Financial; Federal Reserve Board.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

Billions of dollars
80

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

60
H1

Total

80
Monthly rate, nonfinancial firms

Public issuance
Private issuance
Repurchases
Cash mergers

60
40

Total
H2

Jan.-Feb.e

20
20
0
0
-20
-20
-40
-40

-60

-80

-80
2005

2006

2007

2008

2009

2010

* Seasonally adjusted, period-end basis.
e Estimate.
Source: Depository Trust & Clearing Corporation; Thomson
Financial; Federal Reserve Board.

-100
2005

2006

2007

2008

2009

e Estimate.
Source: Thomson Financial, Investment Benchmark Report;
Money Tree Report by PricewaterhouseCoopers, National
Venture Capital Association, and Venture Economics.

III-9

firms edged down in January and February to the low end of its historical range. The rise
in the C&I loan delinquency rate moderated a bit in the fourth quarter, and the year-ahead
expected default rate for nonfinancial firms from Moody’s KMV was roughly unchanged
in February, although at a somewhat elevated level.
Business Finance
In January and February, the pace of gross bond issuance by nonfinancial corporations
remained strong. In contrast, commercial paper outstanding continued to contract and
C&I loans ran off steeply again. Overall, net debt financing by nonfinancial firms was
about zero over the first two months of 2010, consistent with firms’ weak demand for
credit and banks’ tight credit policies.
Gross public equity issuance by nonfinancial firms was robust in the fourth quarter of last
year. Meanwhile, equity retirements from cash-financed mergers rose sharply as two
large deals in the pharmaceutical industry were completed. In addition, equity
retirements from share repurchases are estimated to have increased a bit from recent low
levels. As a result, net equity issuance by nonfinancial firms, which had been positive in
the first three quarters of 2009, turned negative in the fourth quarter. Since the turn of the
year, gross public equity issuance has slowed somewhat, while announcements of both
new share repurchase programs and cash-financed mergers and acquisitions have picked
up.
Public equity issuance by financial firms declined in January and February following
very strong issuance in December, when several large banks issued equity to facilitate the
repayment of capital received under the TARP program. Gross bond issuance by
financial firms remained solid.
Commercial Real Estate Finance
The contraction in commercial mortgage debt accelerated in the fourth quarter. The
dollar value of commercial real estate sales remained at a very low level in February, and
the share of properties sold at a nominal loss inched higher. Property prices in December
were about 40 percent below their 2007 peaks. The delinquency rate on commercial
mortgages in securitized pools increased to more than 6 percent in January, and the
delinquency rate on commercial mortgages at commercial banks deteriorated further in
the fourth quarter. The percentage of delinquent construction loans at banks also ticked
higher in the fourth quarter. Nonetheless, commercial mortgage CDS index prices
changed little, on balance, over the intermeeting period.

III-10

Commercial Real Estate
Commercial Mortgage Debt

Commercial Real Estate Sales

Percent change, annual rate

Billions of dollars
24

Quarterly

21
18
15
12
9

120

Feb.
Share of properties sold
at nominal loss (right scale)

100

3
0
-3
e

-6

2005

2007

40
30

Value of sales (left scale)

Feb.

-9
-12

2003

2001

Percent

140

2009

2002

2004

2006

2008

2010

Note: 3-month moving averages.
Source: Real Capital Analytics.

e Estimate.
Source: Federal Reserve.

Prices of Commercial Real Estate

Index, 2001:Q1=100
225

Delinquency Rates on Commercial Mortgages
Percent
on Existing Properties

200
175

Moody’s index

Jan.

At life insurance companies
CMBS
At commercial banks*

150

NCREIF
TBI

Q4
Dec.

7
6
5
4

125

100

25
1996

1998

2000

2002

2004

2006

2008

2010

1996

Delinquency Rates on Construction Loans at Banks
Percent

2000

2002

2004

2006

2008

Percent
Jan.
FOMC

Daily, by rating

Senior AAA
Mar.
9

Junior AAA

60
40

BBB20

5
0

2007

2008

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

2009

15
10

Commercial
construction

120
100

Residential
construction

2010

Commercial Mortgage CDS Index Prices
CMBX

Quarterly

1998

Note: CMBS are commercial mortgage-backed securities.
* Excluding farmland.
Source: Citigroup; Call Report data; ACLI.

Note: NCREIF TBI series re-weighted by staff to exclude
multifamily.
Source: NCREIF; MIT Center for Real Estate; Moody’s Investors
Service.
0.75

0
July
Dec.
2007

May
Oct.
2008

Mar.

Aug.
2009

Jan.
2010

Note: Each index corresponds to pools of mortgages
securitized in 2006:H1.
Source: JPMorgan Chase & Co.

III-11

Residential Mortgages
Spread of Mortgage Rate to Treasury Yield

Mortgage Rate and MBS Yield
Percent
Jan.
FOMC

Weekly
30-year conforming
fixed mortgage rate

Basis points
8.0

Jan.
FOMC

Weekly

7.5

30-yr. FRM to 10-yr. Treasury

300

250

7.0
6.5

200

6.0
5.5
Mar.
3

150

5.0
4.5

MBS yield
Mar.
9

Mar.
3

4.0

100

3.5
50
Apr.
Oct.
2007

Mar.

Aug.
2008

Jan.

June Nov.
2009
2010

Apr.
Oct.
2007

Mar.

Aug.
2008

Jan.

June Nov.
2009
2010

Note: For MBS yield, Fannie Mae 30-year current coupon rate.
Source: For mortgage rate, Freddie Mac; for MBS yield,
Bloomberg.

Note: Spread is relative to corresponding off-the-run
Treasury yield.
Source: Bloomberg; Freddie Mac.

Residential Mortgage Debt

Prices of Existing Homes

Percent change from year earlier

Index peaks normalized to 100
18

Quarterly

110

Monthly

16
14

100

12
10
Dec.

6
80

FHFA price index
LP price index
20-city S&P/Case-Shiller
price index

4
2

Dec.
Dec.

0
Q4 e

-2
-4

2001

2003

2005

2007

2009

2005

e Estimate.
Source: Federal Reserve Board.

2006

2007

2008

2009

Source: For FHFA, Federal Housing Finance Agency; for
LP, LoanPerformance, a division of First American CoreLogic;
for S&P/Case-Shiller, Standard & Poor’s.

Delinquencies on Subprime and FHA-Backed
Mortgages

Delinquencies on Prime Mortgages
Percent of loans

Number of loans (thousands)
20

Monthly
Jan.

Variable-rate
Fixed-rate

600

Percent of loans
40

Monthly

Dec.
Dec.

500

12
400

Jan.

20
15

300

Subprime (right scale)

10
FHA (left scale)

0
2004

2006

2008

Note: Percent of loans 90 or more days past due or in
foreclosure. Prime includes near-prime mortgages.
Source: McDash Analytics.

2010

35
30

2002

200

5
0

2004

2006

2008

2010

Note: Percent of loans 90 or more days past due or in foreclosure.
For subprime mortgages, rates are for securitized loans.
Source: For FHA-backed mortgages, U.S. Department of Housing
and Urban Development; for subprime mortgages, LoanPerformance,
a division of First American CoreLogic.

III-12

Consumer Credit and Mutual Funds
Consumer Credit

Gross Consumer ABS Issuance

Percent change, annual rate
16

3-month change

Revolving

Monthly rate

TALF eligible
Non-TALF

Jan.

24
20

4
Nonrevolving

Billions of dollars

-4

-8
Jan.

-12
-16

2004

2005

2006

2007

2008

2009

2005

2010

2006

2007

2008

2009

2010

Spread of Consumer Interest Rates to Treasury Yield

Delinquencies on Consumer Loans

Percent

Percent
16

Jan.

Credit card loans
in securitized pools

Jan.

Credit cards (offer rate)
Nonrevolving
consumer loans at
commercial banks

8
6

New auto loans (transaction rate)
Feb.
28

4
Q4
Jan.

Auto loans at captive
finance companies

0
2008

2010

1
1998

2000

2002

2004

2006

2008

2010

Source: For auto loans, Federal Reserve Board; for credit cards,
Moody’s Investors Service; for nonrevolving consumer loans, Call
Report.

Note: Spreads are relative to 2-year Treasury yields. For
credit cards, monthly; for auto loans, weekly.
Source: For credit cards, Mintel; for auto loans, PIN.

Net Flows into 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
Money market funds

2008
H2

2009
Q4

Jan.

Feb.e

Assets
Jan.

11.8
-3.6
-5.0
1.3
1.7
13.8
-0.2
11.1
2.9
56.1

-49.4
-35.2
-20.1
-15.1
-5.0
-9.3
0.1
-7.7
-1.6
59.6

23.4
-0.1
1.0
-1.0
-0.3
23.8
2.8
16.2
4.8
-27.3

47.9
0.9
-3.7
4.6
5.2
41.8
1.4
31.8
8.7
-81.1

34.0
-4.4
-10.8
6.4
2.8
35.7
0.5
30.4
4.8
-43.0

46.8
16.3
6.2
10.1
3.5
26.9
0.7
21.7
4.5
-83.0

26.5
-2.3
-5.7
3.4
2.1
26.8
-2.6
24.5
4.9
-69.0

7,670
4,777
3,553
1,224
633
2,260
190
1,606
464
3,219

Note: Excludes reinvested dividends.
e Staff estimate.
Source: Investment Company Institute.

4
2

2006

6
5

2004

Note: Credit card, auto, and student loan ABS.
Source: Inside MBS & ABS; Merrill Lynch; Bloomberg;
Federal Reserve Board.

Source: Federal Reserve Board.

2002

III-13

Household Finance
Mortgage interest rates and spreads were about flat, on net, over the intermeeting period.
The average interest rate on 30-year conforming fixed-rate mortgages stayed around
5 percent, and its spread to the 10-year Treasury yield remained at the low end of its
range over the past few years. Agency MBS yields were also little changed, on balance,
despite some volatility surrounding the initial announcements and subsequent
information about Freddie Mac’s and Fannie Mae’s buyouts of delinquent mortgages
from agency MBS pools.1 The tapering of the Federal Reserve’s agency MBS purchases
over the same period and the impending end of its asset purchase program seems to have
had little effect on MBS yields to date. However, the high level of the Federal Reserve’s
purchases and the relatively low level of mortgage originations have reportedly
contributed to reduced liquidity in the MBS market, leading to a higher incidence of
secondary market fails-to-deliver.
Residential mortgage debt declined further in the fourth quarter. House price data for
December were mixed: The FHFA price index decreased, while the LoanPerformance
and S&P/Case-Shiller price indexes increased slightly. Delinquency rates on prime
mortgages continued to climb in January, and the number of delinquent FHA-backed
mortgages topped 530,000 in December, up from 320,000 a year earlier.
Consumer credit expanded at an annual rate of about 2 percent in January, its first
increase since January 2009. The three-month percent change in revolving consumer
credit became a bit less negative, while the respective change in nonrevolving consumer
credit moved up to about zero. Despite low and stable consumer ABS spreads, the pace
of ABS issuance in the first two months of the year was somewhat below that in the
fourth quarter, reflecting the very weak pace of consumer credit originations late last
year. The spread of credit card interest rates over the two-year Treasury yield ticked up
in January, while spreads on new auto loans declined slightly, on net, over the
intermeeting period. Delinquency rates on credit card loans in securitized pools and auto
loans at captive finance companies remained elevated in January but were down a bit
from their recent peaks.
Long-term mutual funds continued to receive sizable net inflows in January and
February, largely driven by continued robust inflows into bond funds. Money market

Financial Accounting Standards Nos. 166 and 167, implemented by the GSEs on January 1, 2010,
removed mark-to-market capital expenses imposed on a GSE when it purchases a loan from its MBS pools.
As a result, the GSEs have a strong incentive to purchase delinquent mortgages from their pools to avoid
the costs associated with forwarding monthly payments of principal and interest to MBS investors.

III-14

Treasury Finance
Foreign Participation in Treasury Auctions

Treasury Auction Amounts
Billions of dollars

Percent of total issue
140

Quarterly

Jan.
FOMC

6-month moving average

120

2-year
3-year
5-year
10-year

100

Indirect bids

30
Mar.
1
20

60
40
20

Actual foreign allotment

0
2005

2006

2007

2008

2009

2010

0
2003

2005

2009 2010

2007

Note: Data for 2010:Q1 are through February 2010. No 3-year
issuance occurred between 2007:Q3 and 2008:Q3.
Source: U.S. Treasury.

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

Daily Treasury Market Volume

Average Absolute Nominal Yield Curve
Basis points
Fitting Error

Billions of dollars
Jan.
FOMC

Monthly average

250

Mar.
40
1

Jan.
FOMC

Daily

200

150

100

Mar.

Mar.
9

0
2004

2005

2006

2007

2008

2009

2010

2001

Note: March observation is the month-to-date average.
Source: Bloomberg.

2003

2005

2007

2009 2010

Note: Calculated from securities with 2 to 10 years until maturity,
excluding on-the-run and first off-the-run securities.
Source: Federal Reserve Board.

Treasury On-the-Run Premium

Fails-to-Deliver of Treasury Securities
Basis points
Jan.
FOMC

Monthly average

Billions of dollars
70

Jan.
FOMC

Weekly

3000
2500

60
50

2000

1500

1000

10-year note
20
Mar.

Feb.
24

0
2000

2002

2004

2006

2008

2010

Note: Computed as the spread of the yield read from an estimated
off-the-run yield curve over the on-the-run Treasury yield. March
observation is the month-to-date average.
Source: Federal Reserve Board.

500

Q3
2007

Q3
2008

Q3
2009

Q1
2010

Source: Federal Reserve Board, FR 2004, Government Securities
Dealers Reports.

III-15

mutual funds, especially institutional funds, experienced further substantial net outflows,
as yields paid by these funds remained extremely low.
Treasury Finance
During the intermeeting period, the Treasury issued about $325 billion of nominal
coupon securities across the term structure. The auctions were generally well received,
with bid-to-cover ratios within their recent ranges. Measures of foreign participation in
Treasury auctions remained elevated, although they have trended downward somewhat
since late 2009. The Treasury also conducted the first 30-year TIPS auction since 2001.
While the yield at the auction was 7 basis points above the when-issued rate prior to the
auction, the bid-to-cover ratio was 2.45, and market participants generally characterized it
as successful.
In its quarterly refunding statement, the Treasury announced that it expects nominal
auction sizes to stabilize near current levels, while noting that TIPS issuance would
gradually increase going forward. Following the passage of legislation raising the federal
debt ceiling, the Treasury began increasing the balance in the Supplementary Financing
Account; this account now stands at $50 billion and will increase to $200 billion by midApril.
Treasury market functioning was about unchanged over the intermeeting period. The
average absolute fitting error of the staff’s nominal Treasury curve—a proxy for
unexploited arbitrage opportunities in the nominal Treasury market—declined slightly
over the period, and fails-to-deliver in the Treasury market remained low. On-the-run
premiums on the 10-year Treasury note increased slightly, while trading volumes in the
nominal and TIPS markets were little changed on net.
State and Local Government Finance
Conditions in the municipal bond market showed little sign of strain despite the growing
evidence of budget problems faced by many states and municipalities. Gross issuance of
long-term municipal bonds remained solid in January and February, mostly driven by
continued strength in new capital issuance. In contrast, the pace of short-term issuance
stayed subdued. The number of municipal bonds downgraded by Moody’s rose further in
the fourth quarter, far outpacing the number of upgrades, as a large number of small
municipalities saw their ratings lowered. Even so, yields on long-term municipal bonds
were about flat over the intermeeting period, and their ratios to yields on comparablematurity Treasury securities were also roughly unchanged.

III-16

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

2009
Type of security
Total
Long-term 1
Refundings 2
New capital
Short-term
Memo: Long-term taxable

2006

2007

2008

36.1
32.5
10.6
21.9
3.7

40.4
35.5
12.6
22.9
4.9

2.5

2.4

2010

Jan.

Feb.

37.6
32.6
14.6
17.9
5.0

36.6
33.0
11.6
21.3
3.6

42.7
35.5
13.1
22.5
7.2

34.7
32.6
10.1
22.6
2.0

28.0
26.9
12.0
14.9
1.1

2.3

4.5

9.9

11.4

8.0

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

Ratings Changes
Number of ratings changes
1200
Annual rate

Upgrades

900
H1

600
Q4

300
0
300
600

Downgrades

900
1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

1200

2009

Source: Moody’s Credit Trends.

Municipal Bond Yields

Municipal Bond Yield Ratio
Percent

Weekly

Jan.
FOMC

General Obligation over Treasury
9

Ratio

Weekly

Jan.
FOMC

8
7
6

20-year general
obligation
Mar.
4

5
4
3

7-day SIFMA
swap index*

2
20-year

1
Feb.
24

Mar.
4

0
-1

2005

2006

2007

2008

2009

2010

* SIFMA is the Securities Industry and Financial Markets
Association.
Source: Municipal Market Advisors; Bond Buyer.

2002

2004

Source: Bond Buyer.

2006

2008

2010

2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8

III-17

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Aggregate and components

Percent change (annual rate)1

Level

2009

(billions
of dollars),

2008

2009

8.5

4.9

1.6

3.4

-8.6

7.9

8,519

Components2
Currency
Liquid deposits3
Small time deposits
Retail money market funds

5.8
6.9
12.3
13.0

6.9
17.2
-16.0
-23.0

3.8
14.5
-23.6
-32.2

2.0
18.7
-31.8
-34.8

-1.4
-1.8
-29.5
-33.6

8.5
17.5
-18.4
-24.0

867
5,749
1,122
775

Memo:
Institutional money market funds
Monetary base

24.9
70.3

-1.9
41.6

-11.0
-1.9

-27.6
62.1

-23.1
-18.4

-39.4
73.2

2,105
2,108

2010
Jan.
Feb.
(p)

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

Feb.
(p)

III-18

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

Total

Feb.e

Q3
2009

Q4
2009

Jan.
2010

2010

Level1
Feb.e 2010

2008

2009

H1
2009

4.9

-6.4

-5.4

-7.1

-8.3

-9.4

-13.4

8,921

Loans2
Total
Core
To businesses
Commercial and industrial
Commercial real estate

4.4
5.0

-9.6
-7.6

-7.4
-4.8

-12.4
-9.5

-12.3
-12.1

-11.9
-14.5

-15.0
-15.4

6,581
5,836

16.3
6.1

-17.0
-4.3

-14.1
-1.6

-19.8
-5.5

-24.3
-8.8

-22.2
-15.4

-15.3
-5.6

1,301
1,620

To households
Residential real estate
Revolving home equity
Closed-end mortgages
Consumer
Memo: Originated3
Other

-3.2
13.0
-8.0
7.1
5.7
.4

-5.3
.5
-7.4
-2.2
-3.6
-22.8

-2.2
6.2
-5.1
-.2
-2.0
-25.3

-7.8
-4.5
-9.1
-3.7
-4.6
-33.5

-9.5
-5.7
-11.0
-4.8
-5.9
-14.1

-5.8
-5.2
-6.1
-22.5
-12.0
8.8

-27.0
-1.8
-36.8
-4.3
-4.3
-12.4

2,101
598
1,503
814
1,209
745

6.8
16.3
-4.2

4.1
8.0
-1.4

1.3
2.2
.1

9.6
18.0
-2.2

4.0
9.1
-3.5

-2.4
5.2
-14.2

-8.8
-2.2
-19.5

2,341
1,443
898

Securities
Total
Treasury and agency
Other4

Note: Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data have been
adjusted to remove the effects of mark-to-market accounting rules (FAS 115) and the initial consolidation of certain variable
interest entities (FIN 46) and off-balance-sheet vehicles (FAS 166 and 167). Data also account for the effects of nonbank
structure activity of $5 billion or more.
1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels.
2. Excludes interbank loans.
3. Includes an estimate of outstanding loans securitized by commercial banks that retained recourse or servicing rights.
4. Includes private mortgage-backed securities; securities of corporations, state and local governments, and foreign governments;
and any trading account securities that are not Treasury or agency securities.
e Estimate.
Source: Federal Reserve Board.

C&I Loan Rate Spread

Return on Assets

Basis points
NBER
peak

Quarterly

Loan Loss Provisions
Percent

240

Percent of total loans
2

Quarterly, s.a.a.r.

NBER
peak

Quarterly, s.a.a.r.

220

Top 25*
All other banks

200

180

Top 25*
All other banks

-1

-2

160
Q4

-3
140
1998

2002

2006

2010

Weighted average for all banks, adjusted for
changes in the nonprice loan characteristics.

NBER
peak

1986

1992

1998

2004

-4
2010

*Top 25 refers to all commercial banks
in the 25 largest bank holding companies.

0
1986

1992

1998

2004

2010

*Top 25 refers to all commercial banks
in the 25 largest bank holding companies.

Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER). Vertical line represents the last
business cycle peak, as defined by the NBER.

III-19

Money and Bank Credit
M2 decreased 8½ percent at an annual rate in January, reflecting in part a contraction in
liquid deposits. Several institutions opted out of the FDIC’s Transaction Account
Guarantee Program because of higher fees associated with participation after the year
end, reportedly driving depositors to transfer funds out of transaction accounts and into
alternative investments outside of M2. In February, however, M2 expanded 8 percent at
an annual rate, as liquid deposits resumed their growth. Small time deposits and retail
money market mutual funds contracted in January and, to a lesser extent, in February,
while currency declined a bit in January but advanced notably in February. Growth of
the monetary base averaged 27½ percent at an annual rate in both months, as the increase
in reserve balances resulting from the ongoing large-scale asset purchases more than
offset the contraction in reserve balances associated with the decline in credit outstanding
under liquidity and credit facilities.
Total bank credit contracted at an 11 percent average annual rate in January and
February. Banks’ securities holdings declined at a modest pace in both months after
several months of steady growth. Total loans on banks’ books continued to fall at a rapid
pace.2 C&I loans again declined steeply, as spreads of interest rates on C&I loans over
comparable-maturity market instruments climbed further in the first quarter and
nonfinancial firms’ need for external finance likely remained subdued. Commercial real
estate loans also posted substantial declines. Household loans on banks’ books
contracted as well, in part because of a pickup in banks’ securitization of first-lien
residential mortgages with the GSEs in February. The decline in consumer loans
originated by banks was mostly associated with a big drop in credit card loans. In
contrast, other consumer loans—including auto, student, and tax advance loans—were
about flat over the two-month period.
According to Call Reports, bank profitability remained low in the fourth quarter, as
slightly improved profits at banks in the 25 largest bank holding companies were about
offset by a sixth consecutive quarterly loss at all other banks. The better results at larger
banks primarily reflected higher noninterest income. Although the rate of banks’
provisioning declined somewhat in the fourth quarter, provisions continued to be the
most significant drag on earnings. Reduced provisions are consistent with signs of
stabilization in delinquency and charge-off rates for certain categories of loans,
particularly credit card loans.
2

Available data indicate that, so far, about 20 banks have consolidated about $300 billion in total
assets onto their books in conjunction with the adoption of new accounting rules FAS 166 and FAS 167,
and more banks are expected to do so by the end of the first quarter of 2010. The effects of these
consolidations have been removed from the bank credit data presented here.

III-20

Call Report data also showed a continued decline in unused loan commitments,
consistent with industry commentary suggesting that banks have moved to trim credit
lines. The further drop in industry assets last quarter, combined with additional capital
infusions from parent holding companies, boosted banks’ aggregate regulatory capital
ratios from already high levels.
Last page of Domestic Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to $40.2 billion in December, from
$36.4 billion in November, as a sharp rise in nominal imports outpaced an increase in
exports.

The value of exports of goods and services moved up 3.3 percent in December after
increasing about 1 percent in November. The December increase was fairly broadly
based across product categories, with notable gains in industrial supplies, capital goods,
and automotive products. Half of the increase in industrial supplies was driven by
chemicals, while most of the increase in capital goods was due to strong aircraft sales
following a decline in the previous month. Automotive products further added to
increases that occurred in October and November, which were driven by strong increases
in sales outside of North America.
In the fourth quarter, nominal exports jumped a robust 28½ percent at an annual rate,
continuing to retrace the declines recorded in late 2008 and the first half of 2009. The
fourth-quarter increase was broad based across all major categories of goods and
services.

IV-1

IV-2

IV-3

IV-4

The value of imports of goods and services jumped 4.8 percent in December following a
gain of 2.6 percent in November. Imports of oil accounted for more than one-third of the
December increase, reflecting both higher prices and volumes. Most other major
categories of imports also recorded gains in December, with the exception of consumer
products, which were flat. A notable contributor to the rise in capital goods was
computer products and accessories, which added to strong increases in the previous two
months.
For the fourth quarter, nominal imports rose 34¾ percent at an annual rate, about the
same pace as in the third quarter. However, as with exports, these increases have
reversed only a portion of the earlier steep decline. The fourth-quarter increase was
broadly based across major categories of imports.
Prices of Internationally Traded Goods
Non-oil imports. Prices of imported non-oil goods rose 0.6 percent in January, in line
with their increases over the past five months. The pickup was driven by higher prices
for material-intensive goods. Although prices for finished goods were flat, on net, prices
for consumer goods increased slightly after several months of remaining unchanged.
Oil. The Bureau of Labor Statistics price index of imported oil rose 4.8 percent in
January following a decrease of 1.4 percent in December. Similarly, the spot price of
West Texas Intermediate (WTI) crude oil rose about 5 percent in January to average
$78.50 per barrel. Spot WTI fell back a touch in February to average about $76.50 per
barrel before rising once again to close most recently on March 9 at nearly $82. Over the
past 8 months, the spot price of WTI has generally traded between $70 and $80 per
barrel.
Exports. Exported goods prices rose 0.8 percent in January, a bit faster than in
December. The increase largely reflected higher prices for material-intensive goods,
which rose 1.8 percent. Prices for finished goods increased 0.3 percent, a step-up from
the pace of recent monthly changes. Prices for automotive products and capital goods
pushed finished goods prices higher, more than offsetting declining consumer goods
prices.

IV-5

IV-6

IV-7

U.S. International Financial Transactions
Since the previous Greenbook, we have received Treasury data on international financial
transactions through January and partial custody data from FRBNY through early March.
In several respects, U.S. financial flows have returned to their pre-crisis levels. In
particular, foreign official inflows, bank lending, and outflows associated with U.S.
purchases of foreign securities have returned to near pre-crisis levels. The one notable
exception is foreign private purchases of U.S. corporate debt securities. These purchases
have declined steadily since mid-2007 and remain well below their pre-crisis level.
Foreign official inflows slowed a bit in January to $13 billion (see line 1 of the table
“Summary of U.S. International Transactions”; see also the figure “Foreign Official
Financial Inflows through January 2010”).
.
.
.
.
.
.
Net official financial inflows in January also received a boost from a further $10 billion
decline in outstanding drawings by foreign central banks on the Federal Reserve swap
lines (line 2). Drawings on the swap lines involve Federal Reserve purchases of foreign
currency, which are recorded as an official claim on foreigners, and repayments of those
drawings therefore generate inflows. These swap lines, which were closed in February,
had a balance of only $100 million at the end of January, down from a high of
$583 billion in December 2008.
When swap line drawings were on-lent by foreign central banks, they were generally
priced at a backstop or penalty rate. As such, the reduction in drawings reflect a
renormalization of funding markets. Indeed, the small net bank lending abroad in
January (line 3) reflects a return to a more normal pattern.

IV-8

Private foreigners purchased, on net, $6 billion of Treasury securities in January, in line
with the pattern of net purchases prior to the crisis (line 4a; see also the figure “Private
Securities Flows through January 2010”). These purchases reflected strong acquisitions
of bonds and notes that were partly offset by reductions in bills (not shown separately) –
a pattern similar to that of official holdings. Private foreign investors continued to show
interest in U.S. equities (line 4d) in January but continued to sell, on net, agency (line 4b)
and corporate bonds (line 4c). This lack of interest in U.S. corporate debt can be
attributed to several factors, including the structure of U.S. issuance, a rebound in
issuance by foreign firms, and an increase in general home bias on the part of foreigners.
These considerations are discussed further in the box entitled “Recent Weak Foreign
Demand for U.S. corporations’ Debt Securities” in Greenbook Part I.
U.S. investors purchased, on net, $18 billion of foreign securities in January, about the
pace recorded for 2009 (line 5). These purchases of foreign securities were concentrated
in foreign bonds (line 5a), along with small net purchases of foreign stocks (line 5b).

IV-9

IV-10

IV-11

IV-12

Foreign Financial Markets
The trade-weighted value of the dollar, as measured by the staff’s broad nominal index,
has risen a little more than 1 percent since the January Greenbook, as the euro fell
5 percent against the dollar and the British pound fell 9 percent. The dollar’s strength
against the euro owed to disappointing euro-area data and the heightened focus on the
risks posed by the fiscal situation in Greece and some other euro-area countries. The
appreciation against the pound owed to weak U.K. economic data, including sluggish
fourth-quarter GDP and January retail sales and the first January budget deficit on record,
as well as to concerns that a potential political deadlock after the upcoming elections
could significantly hinder future deficit reduction. The dollar was little changed on net
against most emerging market currencies; although it appreciated against many
currencies early in the period following reports that Chinese authorities were moving to
restrain bank lending, this appreciation was largely reversed as data for emerging markets
came in, on average, stronger than the market had expected.
The large fiscal deficits in Greece and, to a lesser extent, in Ireland, Italy, Portugal, and
Spain, coupled with questions about their ability and willingness to take meaningful steps
to shrink their deficits, have led to elevated spreads on sovereign bonds yields relative to
German bonds. Greek sovereign bond spreads have been volatile and are currently just
above 300 basis points, about 50 basis points higher than at the time of the January
Greenbook. Spreads of other peripheral euro-area countries over German bonds are
down slightly, on average, over that period. Last week Greece announced further plans
to reduce its 2010 deficit, and EU officials stated that these plans put Greece “on track,”
likely indicating that the EU will not take action to sanction Greece. Sentiment was also
aided by reports that EU countries were assembling a plan to help Greece in the event it
is necessary, reportedly involving potential purchases of Greek debt by quasi-national
institutions in Germany and France or possible guarantees of some Greek sovereign debt.
After these announcements, the government was able to successfully issue €5 billion in a
syndicated debt auction. Market estimates indicate Greece must finance €13-€15 billion
in maturing debt and deficit spending before the end of May.
Yields on benchmark German government bonds have fallen about 15 basis points since
the January Greenbook, as concerns about sovereign risk prompted flows from peripheral
European countries into core countries. Other major foreign sovereign benchmark yields
are little changed.

IV-13

Weak incoming data have pushed back market expectations for policy tightening by both
the ECB and BOE. Market-based measures of expectations for policy tightening in the
United Kingdom and the euro area point to tightening in the first and fourth quarters of
2011, respectively, about two quarters later than at the time of the January Greenbook.
The Bank of Canada is expected to tighten late in the third quarter of this year, and the
Bank of Japan is expected to remain on hold for the foreseeable future; both of these
expectations are little changed.
Foreign equity prices are down, on net, although most of the decline took place shortly
after the time of the January Greenbook following reports that Chinese authorities were
acting to restrain bank lending and following the announcement of the Obama
Administration’s proposal to place limits on the activities of big banks. Japanese and
euro-area equities are down roughly 3 percent, since the January Greenbook. Emerging
market equity prices are down less than 5 percent on average.

IV-14

IV-15

IV-16

IV-17

IV-18

IV-19

Developments in Advanced Foreign Economies
Economic performance in the advanced foreign economies was mixed in the fourth
quarter, with real GDP advancing sharply in Canada and Japan but rising only slightly in
the euro area and the United Kingdom. That divide appears to have persisted in the first
quarter, as indicators point to continued rapid economic growth in Canada and moderate
expansion in Japan but somewhat anemic growth in Europe. Manufacturing PMIs and
industrial-sector confidence indicators continued to rise in all major countries, spurred by
rebounding global trade. However, retail sales showed weakness recently in the euro
area and the United Kingdom. Furthermore, consumer confidence turned down in the
euro area, as the turmoil over Greek debt depressed asset prices and raised concerns over
economic prospects.
Amid rising energy prices, 12-month headline inflation for January rose in all major
countries but remained below their respective targets except in the United Kingdom,
where an increase in the value-added tax helped push inflation to 3½ percent. Excluding
food and energy, inflation in the advanced foreign economies remained subdued. All
major foreign central banks kept their policy rates unchanged.

IV-20

IV-21

In Japan, real GDP increased 4.6 percent at an annual rate in the fourth quarter according
to the initial estimate, but growth was revised down from 1.3 percent to zero in the
previous quarter. The recovery continued to benefit from the rebound in global trade and
showed signs of spreading through the economy. Domestic demand, which had fallen
since the first quarter of 2008, finally rose in the fourth quarter, as private and public
consumption accelerated and private investment turned up.
Recent indicators suggest that the Japanese economy has continued to expand in the first
quarter. Real exports rose in January at a pace just below the fourth-quarter average,
while real imports accelerated, pointing to a positive but moderating contribution of net
exports to GDP growth. Other January data suggest that the recovery continues to spill
over to the domestic sector. Industrial production rose 2.5 percent, the eleventh
consecutive monthly gain; retail sales increased 2.9 percent, the fastest growth in six
years; and housing starts, which had fallen to a record low last August, continued to
rebound. In addition, more than half a million jobs were added in January, driving down
the unemployment rate to 4.9 percent from 5.2 percent in December. Furthermore,
consumer and business confidence edged up during the first quarter. In contrast, new car
registrations fell for the second straight month in February and machinery orders slipped
in January.

IV-22

IV-23

The 12-month inflation rate rose 0.4 percentage point in January, to negative 1.3 percent,
but the so-called core-core inflation, which excludes both fresh food and energy prices,
remained at negative 1.2 percent, the lowest rate since records began in 1971.
Preliminary data for February, available only for the Tokyo metropolitan area, suggest
that deflationary pressure may have eased a bit, and Japanese 12-month wage growth
turned positive in January for the first time in 20 months.
On February 18, the Bank of Japan left its policy rate near zero and repeated its
commitment to overcome deflation and return to a sustainable growth path with price
stability. On March 2, the Japanese parliament advanced a record large budget for the
next fiscal year. The new budget includes increased transfers to households and local
governments but also substantial cuts to public works projects.

In the euro area, real GDP grew at an anemic annual rate of 0.5 percent in the fourth
quarter. Import growth slowed more than export growth so that net exports made a
1¼ percentage point contribution to GDP growth, but final domestic demand continued to

IV-24

decline and inventory adjustment made a negligible contribution to growth. Among
countries, German GDP stagnated after two quarters of growth; Italian GDP retreated
0.8 percent after one quarter of growth; and Spanish GDP declined 0.4 percent, a
significant improvement over the previous three quarters. France was the one major
country with strong growth at 2.4 percent.
Other recent data also suggest little near-term momentum in the euro-area economy. The
euro-area composite PMI has been about flat, on net, since November. Continued
improvement in the manufacturing PMI has been offset by declines in January and
February in the services PMI, as the export-driven recovery in manufacturing has been
slow to spread to the domestic economy. Euro-area retail sales fell 0.3 percent and new
passenger car registrations declined 8.5 percent in January, consistent with continued
weak household demand. Consumer sentiment retreated in February amid deteriorating
prospects for personal finances and the overall economy. Euro-area industrial production
declined 1.7 percent in December, but data for individual countries pointed to a rebound
in January.
Indicators for Greece since the last Greenbook point to worsening economic conditions
and increasing fiscal strains. Output fell 3 percent in the fourth quarter, economic
sentiment turned down notably in January and February, and the purchasing managers’
survey stayed in recessionary territory for January. Since last fall’s announcement of
revised deficit projections of almost 13 percent of GDP for 2009, market sentiment
toward Greece has turned sharply negative. An ambitious 3-year consolidation plan
presented in January called for budget cuts of 4 percent of GDP this year and 3 percent in
each of the following two years. In addition, as part of negotiations with the European
Union related to the Stability and Growth Pact, the Greek parliament recently approved
further austerity measures, including lowering public sector wage costs and increasing a
number of taxes. Moreover, so far this month there have been additional indications that
European aid could be made available to Greece, if needed.
In February, 12-month inflation in the euro area eased slightly to 0.9 percent according to
the flash estimate. Core inflation, excluding energy and unprocessed food, was
0.9 percent in January, the lowest rate in 10 years.
The ECB kept its benchmark policy rate unchanged at 1 percent at its February and
March meetings but took further steps to unwind its enhanced credit support measures.
The ECB announced on March 4 that it would return to variable-rate tender procedures in

IV-25

its three-month refinancing operations starting on April 28 but with allotment amounts
aimed at “ensuring smooth conditions in money markets.” The ECB said it will continue
to conduct its main refinancing operations (of one-week funds), as well as its special onemonth operations, as fixed-rate tenders with full allotment as long as necessary, and at
least until October 12. The ECB has continued to implement plans to buy €60 billion
worth of covered bonds; by early March, it had purchased €40 billion in such bonds.

IV-26

IV-27

In the United Kingdom, real GDP expanded at an annual rate of 1.1 percent in the fourth
quarter, the first quarterly increase since 2008:Q1. Many analysts had expected
households to bring forward consumption expenditures ahead of the expiration of the
value-added-tax cut on January 1, 2010. The rise in private consumption was modest,
however, and was more than offset by a sharp drop in investment spending. Inventories
contributed nearly 2 percentage points to GDP growth, as the decline in manufacturers’
stocks slowed markedly. Imports rebounded more strongly than exports, despite weak
domestic demand and the relatively low level of the pound, leading to a negative
contribution from trade.

Incoming data suggest that overall activity has continued to expand at a moderate pace.
The February readings of the PMIs for services and manufacturing were consistent with
GDP growth at its historical average, and confidence indicators have more than retraced
their year-end losses. Moreover, the level of employment has been roughly stable in the
second half of 2009.
The nascent recovery remains fragile, however, as several sectors continue to stagnate.
Construction orders were flat in the fourth quarter, and industrial production in December
remained close to its nadir. Investment intentions improved only marginally in January,
while the volume of retail sales dropped nearly 2 percent. However, net lending to
individuals increased more than expected in January.

IV-28

The 12-month change in consumer prices jumped to 3.5 percent in January, prompting
Bank of England (BOE) Governor Mervyn King to write an open letter to the chancellor
of the exchequer, explaining that headline inflation had exceeded the 2 percent target
because of three factors: the expiration of the temporary value-added-tax cut on
January 1, 2010; the recent increase in oil prices; and the effects of the sharp depreciation
in sterling in 2007 and 2008. The BOE judged that inflation is more likely than not to
fall below target over the coming year as these “short-run factors wane and spare capacity
builds.”
The BOE completed its £200 billion asset purchase program at the end of January. Gilts
accounted for almost all (£198.3 billion) of assets purchased. The BOE voted to keep the
size of its quantitative easing program unchanged in February and March but left the door
open to further purchases should the outlook warrant it.

IV-29

IV-30

Real GDP in Canada rose 5.0 percent at an annual rate in the fourth quarter following an
upwardly revised 0.9 percent increase in the third. The strong growth was driven
primarily by domestic demand, as private consumption, residential investment, and
government expenditures all rose robustly. In contrast, nonresidential fixed investment
fell and inventory accumulation subtracted from growth. Net exports contributed about
1½ percentage points to GDP growth. Exports surged, boosted by strong gains in
automotive exports; the rise in imports also was concentrated in automotive products.

Acceleration in activity late in the fourth quarter, combined with a few positive indicators
for the first quarter, points to robust near-term growth. The pace of monthly GDP growth
increased over the fourth quarter, rising from an annual rate of 4 percent in October to
7.5 percent in December. The gains were widespread across industries. Consumer
credit, which remained relatively strong throughout the downturn, has accelerated lately,
rising 7.9 percent over the 12 months ending in December.
The Canadian housing market has continued to rebound forcefully. Building permits
have increased more than 80 percent from their February 2009 lows to a level near the
average of the boom years of 2006 and 2007, and prices for new houses are increasing.
The business sector continues to lag behind the household sector. Manufacturing
industrial production in December was only 2.7 percent above its June 2009 low and

IV-31

remained more than 20 percent below its January 2006 peak. Manufacturing orders,
however, rose a robust 13 percent in December, and the Bank of Canada’s Business
Outlook Survey indicates strong growth and healthy investment in 2010.
Labor market conditions continued to improve in January, as total employment rose by
43,000. Total hours of work also rose following a strong increase in December. The
unemployment rate fell slightly to 8.3 percent in January.
Consumer prices rose 1.9 percent over the 12 months ending in January, up
0.6 percentage point from December. Excluding food and energy, inflation jumped to
1.3 percent from 0.7 percent in December. The increase in inflation was due to a rise in
gasoline prices and a sharp increase in the prices of passenger vehicles, which were up
3.2 percent in the 12 months to January, the first 12-month increase since June 2007.
At its March meeting, the Bank of Canada maintained its policy rate at 0.25 percent and
reiterated its intention, conditional on the outlook for inflation, to keep rates at this level
until at least the end of the second quarter of 2010.

IV-32

IV-33

Economic Situation in Other Countries
Economic activity in the emerging market economies continued to expand in the fourth
quarter, although performance was somewhat uneven across countries. In emerging Asia,
growth was robust in China, and several other economies, but stalled in Korea, and
slipped into negative territory in India and Singapore. Inventory restocking, along with
increased domestic and foreign demand, appears to have supported activity for a number
of countries. Exports continued to pick up, although merchandise trade balances declined
for some countries where strong domestic demand caused imports to outpace exports. In
Latin America, economic activity also remained strong, particularly in Mexico, where it
was supported by continued expansion in manufacturing and exports to the United States.
However, the severe earthquake in Chile is having a negative impact on activity there.
Although inflation has moderated a bit in parts of emerging Asia, headline inflation
remained elevated in much of the emerging market world and moved up in Mexico and
Brazil. Adverse weather-related food price increases remained the key driver of inflation
in most cases.
In China, real GDP growth remained robust in the fourth quarter. Recent indicators
point to a continuation of strong growth in the current quarter. The PMI for the
manufacturing sector edged lower to 52 in February, but still signals expansion. Auto
sales in January set a monthly record, with 1.7 million cars sold, up 126 percent from
their year-earlier level. Both imports and exports rose in January and February, keeping
the average trade surplus over the two months about the same as in the fourth quarter.
Authorities reported a $284 billion current account surplus for 2009, down from
$426 billion in 2008.
In February, the People’s Bank of China raised required reserve ratios 50 basis points, to
16½ percent for large banks and 14½ percent for smaller banks, the second increase this
year. Chinese authorities acted partly in response to an acceleration in bank lending in
January and an upward trend in consumer price inflation since the middle of last year,
although inflation edged lower in January. In addition, the China Banking Regulatory
Commission ordered banks to limit new lending to investment companies set up by local
governments; these companies have been the primary vehicles by which local
governments have funded stimulus spending.

IV-34

In India, real GDP contracted in the fourth quarter, marking the first quarter of negative
growth since 2004. The contraction was primarily driven by a decline in agricultural
output, which reflected a poor harvest following a drought in the summer. Industrial
production continued to grow at a strong pace in the fourth quarter. The merchandise
trade deficit widened sharply in December, with a run-up in imports at the end of the
year, but narrowed somewhat in January. Recent indicators point to a continuation of
momentum in manufacturing activity in the first quarter: The PMI for manufacturing
shot up to 58½ in February, indicating the fastest pace of expansion since June 2008.
Headline consumer price inflation continued to increase, reaching 15¼ percent on a
12-month basis in January. The rise in inflation primarily reflected rapidly rising food
prices. However, more recent indicators point to a moderation of inflationary pressures
from food prices.

IV-35

IV-36

IV-37

In the newly industrialized economies (NIEs), real GDP growth slowed sharply during
the fourth quarter in Korea and Singapore but rose in Taiwan and Hong Kong. 1
According to the advance estimate, growth slowed to less than 1 percent at an annual rate
in Korea, partly reflecting frontloading of production into the previous quarter due to the
lunar holiday in October. The rapid increase in fourth-quarter real GDP in Taiwan and
Hong Kong reflected broad-based gains in both domestic and external demand. In
Taiwan, there was also a large contribution from inventory accumulation. Recent
indicators point to a continuation of recoveries in manufacturing and exports, with
Singapore’s manufacturing sector appearing to be particularly strong.
Headline inflation in the NIEs has generally risen this year from very low levels. Within
the region, Korea experienced the largest increase in consumer prices—2.7 percent in
February from a year earlier—largely reflecting rising food prices; core inflation, which
excludes food and energy, has moderated in recent months. To date, central banks in the
region have kept policy rates on hold.

The NIEs are Hong Kong, Singapore, South Korea, and Taiwan.

IV-38

IV-39

IV-40

In the Association of Southeast Asian Nations (ASEAN-4), real GDP grew rapidly in
Thailand and Malaysia in the fourth quarter, reflecting a rapid rise in inventories after
several quarters of destocking. 2 In addition, economic activity was boosted by a new
fiscal stimulus package and the recovery of private consumption in Thailand, and a
continued increase in investment in Malaysia. Real GDP in Indonesia and the Philippines
expanded at a moderate pace, led by domestic demand. Within the region, indicators for
the current quarter are only available in Thailand, where consumer confidence and
exports continued to improve in January; industrial production declined after a spike in
December, but remained above the average level of the fourth quarter.
Headline inflation in the region continued to rise this year on a 12-month basis. Core
inflation is also following an upward trend, amid an economic recovery, most notably in
Thailand and the Philippines. Inflationary pressures from food prices remained
significant in Thailand, but eased elsewhere. Inflation generally remained below central
bank target ranges, except in the Philippines. In early March, Malaysia's central bank
raised its main policy rate 25 basis points to 2.25 percent, the first rate hike in the
ASEAN region.

The ASEAN-4 is Indonesia, Malaysia, the Philippines, and Thailand.

IV-41

IV-42

IV-43

In Mexico, real GDP grew at a strong 8.4 percent pace in the fourth quarter, led by
surprisingly rapid expansion in the manufacturing sector, and an increase in exports. A
competitive exchange rate and a surge in demand for durable goods from the United
States supported the rise in manufacturing exports. However, growth in the services
sector remained subdued as still-weak employment and tight credit conditions weighed
on consumer demand. Incoming data suggest that the economy continued to expand in
the current quarter, albeit at a slower pace. The PMI edged up higher in February for the
services sector but decreased a bit for the manufacturing sector. The trade surplus
narrowed as imports rose more than exports.
Twelve-month headline inflation jumped to 4.5 percent in January and increased further
to 4.8 percent in February, above the 2-to-4 percent target range of the Bank of Mexico
(BOM). The increase in inflation primarily reflected the effects of the recent hikes in
taxes and administered prices. Unusual weather conditions also boosted prices of fresh
fruits and vegetables. In late February, Mexico's Foreign Exchange Commission—
composed of officials from the BOM and the Ministry of Finance—announced a revival
of the foreign exchange reserve mechanism that was in place during the 1996-2001
period. The BOM will auction $600 million worth of put options to domestic financial
institutions at the end of each month. The owners of the options will have the right to sell
U.S. dollars to the BOM in exchange for pesos at the previous day’s fix rate, whenever
that rate in pesos per dollar is lower than its average over the previous 20 days. With this
mechanism, the Mexican authorities aim to accumulate reserves on a gradual basis
without putting too much pressure on the peso.

IV-44

In Brazil, economic activity was strong in the fourth quarter, with industrial production
and retail sales growing briskly. Activity appears to have continued to expand in the first
quarter, albeit at a more moderate pace. In January, industrial production was boosted by
still-strong growth in output of consumer durables, which has benefitted from tax breaks
introduced in response to the financial crisis. Consumer confidence continued to rise.
The PMI for manufacturing declined in February, but remained in expansionary territory.
Although the government has begun to withdraw fiscal stimulus measures, governmentdirected credit continued to expand and reached 42 percent of total credit in January, up
from 34 percent in September 2008. The trade balance narrowed in January and
February, with imports rising more than exports.
Headline inflation increased to 4.8 percent in February on a 12-month basis, above the
central bank’s inflation target of 4½ percent. Central bank officials have expressed
concern about inflationary pressures. In late February, the central bank announced
changes in its complex system of reserve and liquidity requirements that partially unwind
the unconventional measures enacted in the fall of 2008. There is policy uncertainty
amid speculation that central bank President Henrique Meirelles might leave his post to
run for political office in the upcoming elections in October.

IV-45

IV-46

Last page of International Developments

Abbreviations–Part 2

Abbreviations—Part 2
ABCP

asset-backed commercial paper

ABS

asset-backed securities

AMLF

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility

ASEAN-4

Association of Southeast Asian Nations (Indonesia, Malaysia,
the Philippines, and Thailand)

BEA

Bureau of Economic Analysis, Department of Commerce

BLS

Bureau of Labor Statistics, Department of Labor

BOE

Bank of England

BOM

Bank of Mexico

CBO

Congressional Budget Office

CDS

credit default swap

C&I

commercial and industrial

CMBS

commercial mortgage-backed securities

CPFF

Commercial Paper Funding Facility

CPI

consumer price index

DPI

disposable personal income

ECB

European Central Bank

ECI

employment cost index

European Union

EUC

emergency unemployment compensation

FAS

Financial Accounting Standards

FHA

Federal Housing Administration, Department of Housing and Urban
Development

FHFA

Federal Housing Finance Agency

FOMC

Federal Open Market Committee; also, the Committee

FRBNY

Federal Reserve Bank of New York

GDP

gross domestic product

GSE

government-sponsored enterprise
V-1

V-2

industrial production

ISM

Institute for Supply Management

information technology

JOLTS

Job Openings and Labor Turnover Survey

MBS

mortgage-backed securities

NFIB

National Federation of Independent Business

NIEs

newly industrialized economies (Hong Kong, Singapore, South Korea,
and Taiwan)

NIPA

national income and product accounts

OMB

Office of Management and Budget

PCE

personal consumption expenditures

PDCF

Primary Dealer Credit Facility

PMI

purchasing managers index

PPI

producer price index

TAF

Term Auction Facility

TALF

Term Asset-Backed Securities Loan Facility

TARP

Troubled Asset Relief Program

TIPS

Treasury inflation-protected securities

TSLF

Term Securities Lending Facility

unemployment insurance

WTI

West Texas Intermediate

Last page of Part 2

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 16, 2010 : Greenbook Part 2

FRASER