Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 22, 2005 : Greenbook Part 2

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Please note that some material may have been redacted from this document if that
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Content last modified 03/31/2011.

Confidential (FR) Class III FOMC

Part 2

March 16, 2005

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Confidential (FR) Class III FOMC

March 16, 2005

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
Overview
The economy appears to be expanding at a solid pace this quarter. Consumer spending is
on track for another brisk gain, and residential construction expenditures continue to
trend higher. In addition, apart from motor vehicle expenditures, spending on equipment
and software appears to have entered 2005 with considerable thrust. Industrial
production increased moderately in January and February. More broadly, firms across
the economy continued to add employees at a steady pace early this year. Both overall
and core consumer prices moved up in January after no change in December.
Labor Market Developments
The labor market continued to improve in February. Private nonfarm payroll
employment rose 229,000 last month for the fifth consecutive monthly increase of more
than 100,000 jobs—the longest such stretch since 1999.1 Job gains last month were
widespread across industries. Manufacturing employment moved up 20,000 after five
straight months of decline. Construction employment bounced back after having been
held down by inclement weather in January, and retail trade registered a large increase as
well. Employment also rose briskly in February in the services sector with gains in most
services categories.
The workweek was revised down to 33.7 hours in December and is reported to have
remained at that level through February. Still, aggregate hours increased 0.2 percent in
February to a level 0.4 percent above the fourth-quarter average.
In the household survey, the unemployment rate moved back up to its December level of
5.4 percent, and the labor force participation rate held steady at 65.8 percent. The
employment-population ratio, which combines these two measures, fell back to
62.3 percent in February, a level below its fourth-quarter average but above the lows
reached in the middle of 2003.2 Smoothing through the recent fluctuations in the data,
both the unemployment rate and the employment-population ratio suggest that while
slack remains in the labor market, it is diminishing.

1

The January employment report included the annual benchmark revision to the payroll survey, which
raised the level of total nonfarm payroll employment by 161,000 in December. The revised data have been
incorporated in the BLS measures of hours worked in the nonfarm business sector, which are used in
estimating productivity.
2
In contrast to the increase in nonfarm payroll employment, household employment was about
unchanged on net in January and February. Over the past twelve months, payroll employment has risen
2.4 million, and household employment has risen 1.8 million.

II-2

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

2004

Q2

Q3

2005
Q4

Dec.

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

Jan.

Feb.

Monthly change

183
171
169
3
23
7
13
9
-2
12
45
15
59
12
146

231
235
235
18
19
8
13
10
5
15
77
25
67
-4
250

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

190
182
175
-6
29
4
13
5
0
15
53
14
67
8
210

155
161
140
-3
26
4
-4
-1
-6
21
63
-5
58
-6
-137

132
110
134
-20
0
-4
6
26
-7
21
24
5
62
22
85

262
229
...
20
30
3
30
6
-2
12
81
30
44
33
-97

2.4
33.7
40.8

2.6
33.7
40.8

2.4
33.7
40.8

2.4
33.7
40.6

.1
33.7
40.5

.2
33.7
40.7

.2
33.7
40.5

1. Nonbusiness services comprises education and health, leisure and hospitality, and "other."
2. Establishment survey. Annual data are percent changes from Q4 to Q4. Quarterly data are percent changes from preceding
quarter at an annual rate. Monthly data are percent changes from preceding month.
3. Establishment survey.
... Not applicable.

Changes in Private
Payroll Employment
500

Thousands
500

Aggregate Hours of Production or
Nonsupervisory Workers
106

2002 = 100
106

104

104

3-month moving average
400

400

300

300
Feb.

200

200

100

100

0

Feb.

102

100

100

98

98

96

96

0

-100

-100

-200

-200

-300

-300

-400

102

1997 1998 1999 2000 2001 2002 2003 2004

-400

94

1997 1998 1999 2000 2001 2002 2003 2004

94

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

2005

2004

H1

Q4

Dec.

Jan.

Feb.

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

5.5
17.0
9.4
4.4
4.4

5.6
16.9
9.6
4.5
4.5

5.4
17.1
9.3
4.3
4.2

5.4
17.6
8.9
4.4
4.2

5.2
16.3
9.5
4.0
4.1

5.4
17.5
10.1
4.1
4.2

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

66.0
43.8
75.0
75.3
59.3

66.0
43.7
74.9
75.3
59.2

66.0
44.1
75.3
75.3
59.2

66.0
44.1
75.0
75.2
59.3

65.8
43.3
74.7
75.1
59.2

65.8
43.2
74.2
75.2
59.2

Labor Force Participation Rate
and Unemployment Rate

Percent
67.4

Percent
7.0

67.2

6.5

67.0
6.0

Participation rate (left scale)

66.8

5.5

66.6
66.4
Feb.
66.2

5.0
4.5

66.0
Unemployment rate (right scale)

4.0

65.8
65.6

1994

1995

1996

1997

1998

1999

2000

2001

65.0
64.5

64.5

64.0

64.0

63.5

63.5

63.0

63.0
Feb.

62.5

62.0

61.5

61.5
1994

1996

1998

2000

2002

2004

2004

61.0

2005

3.5

Percent
4.0

(Percent of household employment)

4.0

3.5

3.5

3.0

3.0
Feb.

62.5

62.0

61.0

2003

Persons Working Part-Time
for Economic Reasons

Employment-Population Ratio
Percent
65.0

2002

2.5

2.0

2.5

1994

1996

1998

2000

2002

2004

2.0

II-4

Labor Market Indicators

Positions Hard to Fill

Job Availability
Percent
40

40

150

Index
150

130

130

3-month moving average
35

35

30

30
Feb.

25

25

20

20

15

15

10

10

5

1990

1992

1994

1996

1998

2000

2002

2004

5

110

110
Feb.

90

90

70

70

50

1990

1992

1994

1996

1998

2000

2002

Note. Percent of firms surveyed with at least one
"hard to fill" job opening.
Source. National Federation of Independent Businesses.

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

Job Openings and Help Wanted Index

Hiring and Hiring Plans
1999 = 100
110

Percent of private employment
3.6
3.4

Percent
30

90
Job openings
(left scale)

3.0

80

2.8

Percent of private employment
4.2
Hires
(right scale)

100

3.2

50

2004

25

4.0
Jan.
3.8
Q2

20

70
2.6
2.4

Jan.

50

2.2
2.0
1.8

60

Help wanted index
(right scale)
2001

2002

3.6
15

10

3.2

40
2003

30

2004

5

2001

2002

2003

2004

2005

Unemployment Insurance

Expected Labor Market Conditions

Millions
4.5
4-week moving average

Thousands
550

4.0

500
Feb. 26
Insured unemployment
(left scale)

Index
140

Index
120

Michigan SRC
(right scale)

120

100

450
100

3.0

400

2.5

350

80
Feb.

80

1.5

Mar. 5

Initial claims
(right scale)

2.0

1990

1992

1994

1996

1998

3.0

*Percent planning an increase in employment minus
percent planning a reduction.
Source. For hires, Job Openings and Labor Turnover
Survey; for hiring plans, Manpower Employment Outlook
Survey.

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

3.5

3.4

Hiring Plans*
(left scale)

2000

2002

2004

300
250

60
Conference Board
(left scale)

60

40

40

1990

1992

1994

1996

1998

2000

2002

2004

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

20

II-5

Most other labor market indicators appear to support that impression. The percentage of
individuals working part time for economic reasons dropped sharply in February and now
stands 0.2 percentage point below its average level in 2004. Similarly, both the
percentage of firms with hard-to-fill positions (from a survey by the National Federation
of Independent Businesses (NFIB)) and the percentage of households believing jobs are
plentiful rather than hard to get (from a survey by the Conference Board) have improved
recently. In addition, the help-wanted index ticked up to a recent high in January, and job
openings as measured in the Job Openings and Labor Turnover Survey (JOLTS) have
moved up, on balance, over the past year.
Most measures of hiring and job separation point to continued solid employment growth
in coming months. The JOLTS hiring rate moved up toward the end of last year, and
both the Manpower and the NFIB measures of hiring plans have remained at relatively
high levels. In addition, initial claims for unemployment insurance have averaged
313,000 over the past four weeks, well below the levels prevailing toward the end of last
year. In contrast, household expectations for the labor market as measured by both the
Conference Board and the Michigan surveys were somewhat less optimistic in February.
The Bureau of Labor Statistics reported that output per hour for all persons in the
nonfarm business sector increased at an annual rate of 2.1 percent in the fourth quarter;
the staff’s current estimate is 2.8 percent. Over the four quarters of 2004, we estimate
that productivity rose a little under 3 percent, a deceleration from the outsized gain of 5½
percent in 2003 but close to the average rate of increase since 1995.

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

2001
3.3
3.4
1.9

2002
3.5
3.7
4.1

2003
5.5
6.0
5.4

Q2
3.9
3.4
3.3

Q3
1.3
2.2
4.9

Q4
2.1
1.8
n.a.

2003:Q4
to
2004:Q4
2.8
2.6
n.a.

Note. Annual changes are from fourth quarter of preceding year to fourth quarter of year shown.
1. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of
employees.
2. All corporations doing business in the United States except banks, stock and commodity brokers,
and finance and insurance companies. The sector accounts for about two-thirds of business employment.
n.a. Not available.

II-6

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

Component

2004

20041

(percent)

Q3

2004
Q4

Dec.

Annual rate
Total
Previous

2005
Jan.

Feb.

Monthly rate

100.0
100.0

4.3
4.1

2.7
2.7

4.4
4.0

.8
.7

.1
.0

.3
...

81.9
74.7
70.2

5.1
5.3
4.4

4.0
4.5
3.8

4.6
3.5
2.8

.5
.5
.4

.5
.7
.5

.5
.1
.0

Mining
Utilities

8.3
9.8

-2.0
2.4

-2.0
-4.7

-3.3
9.4

1.1
2.4

.0
-2.8

.2
-1.1

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.5
1.0
1.2
2.3

18.9
6.8
9.6
30.4

15.6
-1.0
22.3
20.0

15.3
13.7
13.2
17.1

2.1
1.0
1.0
3.2

3.2
.8
4.5
3.5

1.5
.7
2.3
1.5

Motor vehicles and parts

7.2

2.9

-1.1

16.2

1.1

-1.5

5.1

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

22.0
4.3
17.7

3.6
1.3
4.2

1.4
-2.9
2.5

3.2
-1.0
4.2

.1
.0
.1

.4
-.2
.5

.6
.5
.6

Business equipment
Defense and space equipment

7.7
1.9

9.2
6.1

11.7
9.1

1.7
5.0

1.2
.6

.5
.3

-.1
.5

Construction supplies
Business supplies

4.3
8.1

4.0
3.2

3.6
1.6

.6
1.0

.4
.6

.3
.9

-.3
-.7

25.2
13.9
11.3

3.9
4.7
2.9

4.3
5.5
2.9

3.1
4.5
1.4

.1
-.1
.3

.5
.8
.3

-.2
-.1
-.5

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

Materials
Durables
Nondurables

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

Capacity Utilization
(Percent of capacity)
19722004
average

1982
low

19901991
low

Q2

Q3

Q4

Jan.

Feb.

Total industry

81.0

70.8

78.6

77.9

78.2

78.8

79.2

79.4

Manufacturing
High-tech industries
Excluding high-tech industries

79.8
78.3
79.9

68.5
74.1
68.2

77.2
74.3
77.3

76.5
69.7
77.2

77.0
69.9
77.8

77.6
69.9
78.5

78.2
71.8
79.0

78.5
72.0
79.3

Mining
Utilities

87.1
86.8

78.6
77.7

83.5
84.2

86.6
85.1

86.3
83.7

85.7
85.2

86.9
84.1

87.2
83.1

Sector

2004

2005

II-7

Industrial Production
After increasing 0.1 percent in January, total industrial production (IP) moved up
0.3 percent in February. A surge in the production of motor vehicles and parts
contributed importantly to the increase in total IP last month. Mining output also edged
up, but utilities output dropped for a second consecutive month as a result of
unseasonably warm weather.
Manufacturing IP excluding motor vehicles edged up just 0.1 percent in February. But
that modest increase came on the heels of four solid monthly gains, and the diffusion
index of three-month percent changes for IP remained elevated, an indication that there
has been fairly widespread improvement in the factory sector in recent months. The
manufacturing operating rate moved up for the fifth consecutive month, rising to
78.5 percent, but was still 1.3 percentage points below its 1972-2004 average.
Motor vehicle assemblies rose 700,000 in February to an annual rate of 12.6 million
units. In March, however, assemblies are scheduled to fall back to an annual rate of
12.2 million units, a decline that would shave about 0.1 percentage point from the change
in IP this month. Elsewhere in transportation, the output of commercial aircraft expanded
for the second consecutive month in February. Boeing recently announced an increase in
planned assemblies in 2006, a move that suggests that the level of production in this
category should increase at a brisk pace throughout the year.
Overall production of high-tech goods rose 1½ percent in February. Although the output
of communications equipment jumped more than 2¼ percent for a second consecutive
month, production increases for computers continued at the relatively sluggish pace of
recent months. Semiconductor output rose at a moderate clip in February after having
accelerated noticeably in the previous three months. The stepped-up gains for
semiconductors coincide with reports from industry contacts that the excess inventories
that had accumulated last year at semiconductor manufacturers and the electronics firms
that use their chips have been largely eliminated. Although orders for semiconductor
equipment have dropped lately, rising capacity utilization rates for semiconductor
manufacturers could signal a recovery in equipment sales later in the year.
Consistent with this interpretation, Intel’s midquarter update to its earnings forecast for
the first quarter points to a more rapid pace of real semiconductor output in coming
months. Intel, along with IBM and other manufacturers, also has bullish plans to press
ahead with the release of next-generation chips, especially for high-end servers.

II-8

Indicators of High-Tech Manufacturing Activity

Capacity Utilization for Semiconductors
and Electronic Components

Industrial Production in the High-Tech Sector
1997 = 100, ratio scale

Semiconductors

Percent
1200
1000

110

110

800

100

100

600

90

400

80

80
Feb.

Feb.

70

Computers
200

70

60

60

Communications equipment

Electronic components

50
1999

2000

2001

2002

2003

100

2004

90

Semiconductors

40

Semiconductor Manufacturing
Equipment Orders and Shipments

1999

2000

2001

2002

50
2003

2004

2005

40

Microprocessor Unit (MPU) Shipments
and Intel Revenue
Billions of dollars, ratio scale
9.5
Q1
9.0

Billions of dollars, ratio scale
3.5
3.0
2.5

Q4

2.0

Shipments

8.5

Intel revenue

8.0
7.5

1.5
Orders

7.0

Jan.

6.5

1.0

6.0
5.5

Worldwide MPU shipments
1999
2000
2001
2002
2003
2004
Source. Semiconductor Equipment and Materials
International.

2005

0.5

5.0
1999
2000
2001
2002
2003
2004
2005
Note. Q1 is the range of Intel’s guidance as of Mar. 10, 2005.
FRB seasonals.
Source. Intel and Semiconductor Industry Association.

CIO Magazine Future Spending
Diffusion Indexes

U.S. Personal Computer and Server Sales
0.78
0.72

Millions of units, ratio scale

0.66
0.60

Millions of units, ratio scale
17
Q1
16
Q1
15

PCs (right scale)

0.54

75

70

70

65

Feb.

13

0.48

12

0.42
0.36

14

Index
75

11

60

65
60

55

55
Data networking equipment

Servers (left scale)

10

50

50
Computer hardware

0.30

1999
2000
2001
2002
2003
2004
2005
Note. FRB seasonals. Values for Q1 are Gartner forecasts.
Source. Gartner.

9

45

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

II-9

Indicators of Manufacturing Activity

Motor Vehicle Assemblies

Utilities Production
Millions of units
15

Annual rate

1997=100
124
120

14

14

13

13
+ Mar.

12

11

12

11

1999
2000
2001
2002
2003
2004
2005
Note. March value is based on Ward’s latest production
schedules.

10

112

108

108

104

104

100

100

96

96

92

92

Natural gas transmission

88

84
84
July Jan. July Jan. July Jan. July Jan. July
2001
2002
2003
2004
Note. March value for electricity generation is based on
weekly data.

Boeing Commercial Aircraft Completions

75

75
3-month change

70

65

65
Feb.

60

55

55

50

50

45

45

40

40

35

35

30

30

25

120
116

Index

60

+ Mar.

112

Industrial Production Diffusion Index

70

Electricity generation

116

88
10

124

1999
2000
2001
2002
2003
2004
2005
Note. The diffusion index equals the percentage of
series that increased over 3 months plus one-half the
percentage that were unchanged.

25

160
150
140
130
120
110
100
90
80
70
60
50
40

New Orders: ISM and
FRB Philadelphia Surveys

1997 = 100
160
150
140
130
120
110
100
90
80
70
60
50
40
1998
2000
2002
2004
2006
Note. 1998 price-weighted index. Actual completions equal
deliveries plus the change in the stock of finished aircraft.
Data through February are actual completions; the remainder
are Boeing scheduled assembly rates.
3-month moving average

Change in Real Adjusted
Durable Goods Orders
Diffusion index

Percent
80
75
70

FRB Philadelphia survey

65
60
Feb.

1999
2000
2001
2002
2003
2004
2005
Note. The diffusion index equals the percentage of
respondents reporting greater levels of new orders plus
one-half the percentage of respondents reporting that
new orders were unchanged.

4
3-month moving average

3

3

2

Jan.

1

2
1

55

0

0

50

-1

-1

-2

-2

35

-3

-3

30

-4

45
ISM

4

40

2002

2003

2004

-4

Content partially redacted.

15

II-10

Reinforcing this optimism, Gartner’s preliminary estimates point to a pickup in sales for
both PCs and servers in the first quarter.
Nevertheless, many industry analysts remain cautious about the high-tech outlook. For
semiconductors, our contact at the Semiconductor Industries Association (SIA) expects
nominal sales to increase at a rate in the high single-digits in 2005, roughly half the longrun historical average. For computers and communications equipment, CIO Magazine’s
diffusion indexes for future spending on computer hardware and on networking
equipment have trended down in recent months, although these indexes remain elevated.
Echoing this view, Gartner’s IT Watch for February predicts cautious business spending
in 2005 on computers and communications equipment.
The output of business equipment excluding high-tech, transportation, and energy
production ticked down in February after having posted large gains in the previous two
months. The production of both construction and business supplies, as well as materials,
also declined in February. In contrast, the production of consumer goods increased as
production of both durables and nondurables moved up.
Most of the forward-looking indicators of production, as well as reports from the staff’s
industry contacts, suggest that activity in the industrial sector will continue to expand at a
moderate pace in the coming months. For example, the three-month moving average of
the staff’s series on real adjusted durable goods orders advanced 1.8 percent in January.
And although the diffusion index of new orders as measured by the Institute for Supply
Management has trended down from the high levels in late 2003, it nevertheless remained
elevated last month; in addition, the index of new export orders moved up. Finally, the
various regional diffusion indexes are still at levels that suggest further gains in
production.
Motor Vehicles
Sales of light vehicles dropped sharply in the first two months of the year to an average
annual rate of 16.3 million units, down nearly one million units from the average pace in
the second half of last year. The decline was concentrated in the retail sector, most
notably in the sales of light trucks. The automakers attributed some of the weakness in
January and February to a payback from the unusually high sales rate in December. In
addition, part of the decline likely reflected the continued paring back of incentives.
Average incentives per vehicle have been falling since October, and the level of
incentives in early March was the lowest in about two years. Confidential reports from

II-11
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2004
Category

2004

Total

Q2

2004

Q3

Q4

Dec.

2005
Jan.

Feb.

16.9

16.5

17.1

17.2

18.3

16.2

16.3

7.5
9.4

7.5
9.1

7.3
9.7

7.7
9.5

8.3
10.1

7.4
8.8

7.4
8.9

North American1
Autos
Light trucks

13.5
5.4
8.1

13.1
5.3
7.9

13.8
5.3
8.5

13.6
5.4
8.2

14.6
5.9
8.7

13.0
5.4
7.6

12.9
5.3
7.6

Foreign-produced
Autos
Light trucks

3.4
2.1
1.2

3.4
2.2
1.2

3.3
2.0
1.2

3.6
2.3
1.3

3.7
2.3
1.4

3.2
2.0
1.2

3.4
2.1
1.2

.43

.40

.44

.48

.52

.53

.49

Autos
Light trucks

Memo:
Medium and heavy trucks

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

Sales of Light Vehicles

Average Value of Incentives on Light Vehicles

Millions of units, annual rate

Ratio scale, current dollars per vehicle
19.0
18.5

Quarterly averages

3400
3000

Quarterly averages

18.0

2600

17.5

2200

17.0

1800

16.5
Feb.

Mar. 6
1400

16.0
15.5

2002

2003

15.0

2004

2002

2003

2004

2005

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

Note. FRB seasonals.

Michigan Survey Index of Car-Buying Attitudes

Days’ Supply of Autos and Light Trucks

Index

Days
165

100

160

90
Light trucks

155

80

150
Feb.

Feb.

60
50

135

Autos
40

130
2001

2002

2003

2004

2005

70

145
140

2000

1000

125

1998

1999

2000

2001

2002

2003

2004

2005

30

II-12

the automakers early this month suggest that they expect light vehicle sales to edge up
slightly in March.
Consistent with the decline in incentives, consumers’ perceptions of buying conditions
have become more negative. The Michigan SRC index of car-buying attitudes fell for a
second month in February, and an increased fraction of respondents cited high prices as
the reason for their worsened perceptions. Those views appear to be well grounded: The
CPI for new vehicles has accelerated sharply, with an average monthly increase of nearly
0.5 percent per month over the four months ending in January.
Despite the slowdown in sales, motor vehicle production picked up in January and
February, and inventories rose sharply over this period. The increase in stocks was
particularly large for light trucks, for which days’ supply on dealer lots approached ninety
days; days’ supply for autos also moved up but only to about sixty days. Automakers’
initial production schedules for the second quarter call for a sizable drop in total
assemblies, to an annual rate of 11.8 million units. This drop, however, is concentrated in
autos, while scheduled truck assemblies are a bit above the rate in the first quarter. This
production schedule presents something of a puzzle because it implies that inventories of
light trucks will remain high through the spring unless sales pick up noticeably. One
possible explanation is that with an increasing variety of light truck models, automakers
are willing to tolerate higher levels of overall stocks.
Production of Domestic Autos and Trucks
(Millions of units at an annual rate except as noted; FRB seasonals)
2004
Item
U.S. production
Autos
Trucks
Days’ supply2
Autos
Trucks
Inventories3
Autos
Trucks

2004

2005
Q11

Q4

2005
Q21

Jan.

Feb.

Mar.1

12.0
4.3
7.8

12.0
4.1
7.9

12.2
4.5
7.7

11.8
3.9
7.9

11.9
4.4
7.5

12.6
4.6
8.0

12.2
4.4
7.7

73
59
83

73
58
82

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

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

76
59
89

78
61
89

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

3.21
1.02
2.19

3.21
1.02
2.19

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

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

3.23
1.03
2.20

3.27
1.04
2.23

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

Note. Components may not sum to totals because of rounding.
1. Production rates for March and the first and second quarters reflect the latest schedules from Ward’s Communications.
2. Quarterly and semiannual values are calculated with end-of-period stocks and average reported sales; excludes medium
and heavy trucks.
3. End-of-period stocks; excludes medium and heavy trucks.
n.a. Not available.

II-13

Consumer Spending
Consumer spending increased at an annual rate of nearly 4¼ percent last quarter, and
supported by strong income gains and rising wealth, it is on track for another solid
advance in the current quarter. Although household purchases of motor vehicles appear
to be stepping down this quarter, other outlays have continued to rise at a brisk pace. In
the retail control category of goods—which excludes sales by auto dealers and building
material and supply stores—nominal spending increased 1.1 percent in January and
0.6 percent in February. The gains in recent months have been widespread, but have
been especially strong at electronics and appliance stores and at clothing stores.
Factoring in our projection of consumer prices, we estimate that real spending in the PCE
control category increased 0.9 percent in January and 0.3 percent in February.3
Meanwhile, real outlays for consumer services rose 0.2 percent in January (the latest
available data), and the increases were broadly based.
The fundamental factors underlying consumer spending are quite favorable. Disposable
personal income is now reported to have increased more rapidly in the second half of last
year than we estimated at the time of the January Greenbook. The increase reflects an
upward revision to wages and salaries based on unemployment insurance tax records for
the third quarter. In recent months, a number of special factors have buffeted personal
income. The Microsoft dividend payout provided a large, temporary boost to income in
December, and annual cost-of-living increases in federal government salaries and transfer
payments generated a small, permanent increase in income in January (offset partly by
annual increases in contributions to social insurance programs). Leaving aside these
special factors, real disposable personal income increased at an average annual rate of
about 6½ percent in December and January, a rate noticeably higher than the 2¾ percent
that prevailed over the first three quarters of 2004. Regarding wealth, increases in equity
prices and house values pushed up the wealth-income ratio in the fourth quarter to its
highest level since early 2001. The saving rate was 3.6 percent in December (0.4 percent
excluding the effect of the Microsoft dividend on income) and 1.0 percent in January, still
low by historical standards.

3

The difference in January growth rates between real PCE control and nominal retail control cannot be
explained by changes in prices (which were roughly flat in January for this category of goods). It reflects
instead an unusual divergence between nominal PCE control and retail control that is due to two factors:
First, the BEA inserted a stepdown in the level of PCE control between December and January to account
for the fact that 2004 was a leap year and 2005 is not; and second, there was an unusually large decline in
“other motor vehicles,” a category of spending that is included in the control category and available to the
BEA but not to Board staff.

II-14

Retail and Food Services Sales
(Percent change from preceding period; seasonally adjusted current dollars)
2004
Category
Total sales
Previous estimate
Retail control1
Previous estimate
GAF2
Gasoline stations
Food services
Other retailers3

2005

H1

Q3

Q4

Dec.

Jan.

Feb.

4.2
4.2
4.2
4.2
2.9
14.3
4.0
3.2

1.4
1.4
1.4
1.4
1.0
2.2
1.5
1.5

2.4
2.4
2.5
2.4
1.6
6.2
2.5
2.0

1.3
1.1
.3
.2
.5
-2.3
1.4
.2

.3
-.3
1.1
.7
1.0
1.8
.8
1.1

.5
...
.6
...
.8
.9
1.2
.3

1. Total retail trade and food services less sales at building material and supply stores and automobile
and other motor vehicle dealers.
2. Furniture and home furnishing stores; electronics and home appliance stores; clothing and
accessories stores; sporting goods, hobby, book, and music stores; and general merchandise stores.
3. Health and personal care stores, food and beverage stores, electronic shopping and mail-order
houses, and miscellaneous other retailers.
... Not applicable.
Real PCE Goods Excl. Motor Vehicles

Real PCE Services

Billions of chained (2000) dollars
2968
Feb.

4430

2910

2910

4390

4390

2852

2852

4350

4350

2794

2794

4310

4310

2736

2736

4270

4270

2678

2678

4230

4230

2620

4190

2968

2620

Quarterly average

2003

2004

Quarterly average

2003

Billions of chained (2000) dollars
4430
Jan.

4190

2004

Note. December, January, and Q4 are staff estimates;
February is a staff forecast.

Change in Real Wages and Salaries and Other Real DPI
Percent, annual rate
9

9
7

Real wage and salary disbursements
Other components of real DPI*

7

5

5

3

3

1

1

-1

-1

-3
H1

H2

H1

Q3

2003
2004
* 2004:Q4 and January values exclude the effect on income of the one-time Microsoft dividend payment in December.

Q4

Jan.

-3

II-15

Household Indicators

Household Net Worth and Wilshire 5000
Index
15000

Ratio
7.0

13000

6.5

Feb.
Wilshire 5000
(left scale)

11000

6.0
Q4

9000

5.5

7000

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

5000
3000

4.5

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

4.0

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

Personal Saving Rate*
7

Percent
7

6

6

5

5

4

4

3

3

2

2
Jan.

1

1

0

0

-1

-1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

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

Consumer Confidence
1985 = 100
160

1966 = 100
120
Michigan SRC
(right scale)

140

110

120

100
Feb.

100
80

80

60
40

90

70

Conference Board (left scale)
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

60

II-16
Private Housing Activity
(Millions of units; seasonally adjusted annual rate except where noted)
2004
Sector
All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
Permit backlog2
New home sales
Existing home sales
Multifamily units
Starts
Permits
Permit backlog2
Mobile homes
Shipments
Condos and Co-ops
Existing home sales

2005

2004

Q2

Q3

Q4

Dec.

Jan.

Feb.

1.96
2.02

1.92
2.02

1.97
2.01

1.98
2.03

2.06
2.03

2.18
2.13

2.20
2.07

1.61
1.57
1.58
.150
1.20
5.96

1.60
1.57
1.60
.136
1.21
6.07

1.63
1.57
1.60
.141
1.16
5.97

1.62
1.56
1.59
.150
1.23
6.05

1.71
1.57
1.61
.150
1.22
5.97

1.77
1.64
1.67
.140
1.11
5.94

1.78
1.62
1.65
.134
n.a.
n.a.

.35
.45
.075

.32
.45
.058

.34
.44
.067

.35
.47
.075

.34
.47
.075

.41
.49
.074

.42
.45
.068

.131

.127

.128

.139

.136

.151

n.a.

.82

.83

.83

.83

.84

.86

n.a.

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

Private Housing Starts

(Seasonally adjusted annual rate)

Millions of units
2.4

2.4
2.2

Feb.

2.0

2.2
2.0

1.8

Feb.

Total

1.8

1.6

1.6

1.4

1.4

1.2

1.2
Single-family

1.0

1.0

.8

.8

.6

.6

Multifamily
Feb.

.4
.2
.0

.4
.2

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

.0

II-17

According to surveys by both the Michigan SRC and the Conference Board, consumer
sentiment edged down in February, as the expectations components of both surveys
weakened. However, both indexes remain at levels consistent with the continued solid
gains in consumer spending that are suggested by the fundamentals.
Housing Markets
Starts of single-family homes rose slightly in February to an annual rate of almost
1.8 million units. During the first two months of this year, single-family starts averaged
1.77 million units, 9¼ percent higher than the average pace in the fourth quarter of last
year. The level of permits for single-family homes (adjusted for activity in areas where
permits are not required) was considerably lower than starts in both January and
February, and the permit backlog declined in both months, an indication that starts likely
will show a decline in March. In the multifamily sector, starts rose 1.7 percent in
February to an annual rate of 420,000 units. The average level of multifamily starts in
January and February was 17½ percent higher than the fourth-quarter reading. However,
the permit backlog for multifamily starts declined during the past two months, suggesting
that starts moderated in March.
Home sales fell in January, but other indicators do not suggest a downshift in housing
demand. Sales of new homes were at an annual rate of 1.11 million units in January,
nearly 10 percent less than the fourth-quarter level. Sales of single-family existing homes
edged down slightly in January, and their 5.94 million unit pace was just 1¾ percent less
than the fourth-quarter average, the highest quarterly level on record. Builders’ ratings of
new home sales during the first three months of this year were at the high end of the
elevated range that has prevailed during the past year and a half. The thirty-year fixedrate mortgage rate stood at 5.85 percent on March 10, up only 11 basis points from the
average during the fourth quarter of last year; the one-year adjustable mortgage rate has
increased about the same amount. The most recent reading on the four-week moving
average of the Mortgage Bankers Association index of mortgage applications for home
purchase was in the middle of the range it has occupied during the past year and a half.
Home prices have continued to rise rapidly. The repeat-transactions price index for
existing homes, which measures the change in the value of properties when they are sold
or refinanced, rose 11¼ percent over the year ending in the fourth quarter, a pace below
the year-over-year reading in the previous quarter but well above the average pace during
the past two years. A version of the index that includes only home purchase transactions
was up 10 percent in the fourth quarter from the level of a year earlier. The constant-

II-18

Indicators of Single-Family Housing
Existing Home Sales

New Home Sales
Thousands of units
6500

6500
6000

Jan.

1500

Thousands of units
1500

1300

1300

6000

5500

5500

5000

5000

4500

4500

4000

4000

Jan.

1100

900

3500

1998

1999

2000

2001

2002

2003

2004

2005

3500

700

Mortgage Rates
Percent
9
Fixed rate
8

8

7

7

6

Mar.

5
One-year ARM

Mar.

4

1999

2000

2001

2002

2003

2004

2005

6
5

20

4

0

3

-20

Percent change from year earlier
14
Repeat transactions
Repeat transactions (purchases only)

2005

700

6

4

4

2

2
2002

2003

300
250
1998 1999 2000 2001 2002 2003 2004 2005 2006

200

2004

Source. Office of Federal Housing Enterprise
Oversight.

Percent change from year earlier
10

10

8

6

2001

2004

2005

8

10
8

2000

2003

12

8

1999

2002

Constant quality
Q4
Q4

1998

2001

Prices of New Homes

10

0

2000

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

Prices of Existing Homes

12

1999

Diffusion index
Index
550
100
MBA purchase index (right scale)
Builders’ ratings of current new home sales
500
80
(left scale)
Mar. 11
450
60
Mar.
400
40
350

Note. The March readings are based on data
through Mar. 9.
Source. Freddie Mac.

14

1998

Homebuying Indicators

9

1998

900

Source. Census Bureau.

Source. National Association of Realtors.

3

1100

0

Q4
6

6

4

4

2

2

0

1998

1999

2000

2001

Source. Census Bureau.

2002

2003

2004

2005

0

II-19

quality price index for new homes—which controls for changes in the geographic
composition of sales, home size, and a few other readily measurable attributes—was up
6.7 percent in the fourth quarter from a year earlier, a pace similar to the average during
the past couple of years.
Equipment and Software
Real business spending on equipment and software (E&S) advanced at an annual rate of
18 percent in the fourth quarter, according to our current estimate.4 The overall pace of
E&S spending appears likely to step down in the current quarter, reflecting a decline in
outlays for motor vehicles. However, real E&S spending excluding motor vehicles is on
track to increase this quarter at a rate that is comparable to the average rate over the
previous year. In addition, investment fundamentals are still accommodative: Business
output continues to expand at a brisk pace, firms hold large cushions of liquid assets, and
the cost of capital remains attractive—despite the expiration of the partial-expensing
provision—because of low interest rates. Moreover, anecdotal reports from the Beige
Book, recent business surveys, and our industry contacts support a favorable outlook for
nontransportation capital spending in the near term.
In the high-tech sector, nominal shipments of computing equipment accelerated in
January, and shipments of communications gear more than bounced back from their
December drop. High-tech orders look fairly strong as well: Bookings of computers
decreased in January but reversed only part of their previous months’ advance, and orders
for communications equipment jumped (although the signaling content in this volatile
series for future deliveries is quite weak). The few available revenue projections from
software vendors for the current quarter point to a smaller rise in business spending on
software than in the fourth quarter. Outside of high-tech, shipments posted a sizable and
broad-based increase in January, although the gains were most pronounced in the
machinery sector. In addition, the backlog of orders continued to increase, pointing to
further gains in shipments in coming months.
After surging in the second half of last year, business demand for transportation
equipment appears to have fallen back in the current quarter. Although fleet sales of light
vehicles were up in January and February, the much larger retail component of light
vehicle sales fell sharply over the same period, and we suspect that a portion of this
4

The BEA’s preliminary estimate of the fourth-quarter increase in real business spending on
equipment and software did not incorporate revised data on orders and shipments or on international trade
for December.

II-20

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

Q3

Q4

2005
Nov.

Annual rate

Dec.

Jan.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

14.1
15.0
10.9
11.8
16.2

9.7
9.6
40.3
-17.1
8.6

-2.4
-1.7
-2.9
1.1
-1.8

4.1
3.1
2.1
-3.9
4.3

2.7
3.7
6.5
6.5
2.7

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

25.5
14.1
5.6
-10.9
19.7

4.7
6.3
34.6
-23.0
5.9

7.7
1.2
5.8
-8.1
1.5

-.6
3.4
9.9
2.0
2.3

-.2
2.9
-3.3
21.6
2.0

Memo:
Shipments of complete aircraft1

26.2

27.1

20.6

30.7

25.4

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

Computers and Peripherals

Communications Equipment

Billions of dollars, ratio scale

12
Shipments
Orders

11

12
11

Jan.

10

10

9

9

8

8

7

7

6

6

5

1999

2000

2001

2002

2003

2004

2005

5

Billions of dollars, ratio scale

21
18

Shipments
Orders

15

740

12

9

9
Jan.

6

3

1999

2000

470

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

890

2002

2003

2004

2005

Billions of dollars, ratio scale

52
Shipments
Orders

740
650
Feb.

3

Feb.

470
380

290

290

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

52

Jan.

48

48

45

45

42

42

39

39

560

380

200

2001

6

Other Equipment

650
560

15

12

Medium and Heavy Trucks
890

21
18

200

36

1999

2000

2001

2002

2003

2004

2005

36

II-21

decline will show up as reduced purchases by businesses.5 Elsewhere, medium and
heavy truck sales continued their strong upward trajectory, and the level of new truck
orders suggests that demand will remain robust in coming months. Nominal shipments of
aircraft fell back a bit in January. Smoothing through the monthly fluctuations in the
data, however, domestic demand for aircraft appears to be firming a little after two years
of weakness in the wake of the September 11 attacks.
We had previously expected expenditures on equipment and software to decline this
quarter as a consequence of the termination of the partial-expensing tax provision.
Although a deceleration does seem to be under way, the expiration of partial expensing
does not appear to be the dominant influence. Indeed, much of the apparent deceleration
is in spending on light vehicles, which probably was not greatly affected by the tax
incentive. In addition, shipments of long-lived assets in the non-high-tech,
nontransportation category—whose user cost was reduced the most by the tax
incentive—moved up in January from their December level. All told, if partial expensing
boosted E&S spending in the second half of last year and depressed it in the current
quarter, the size of the effect was much smaller than we had anticipated.
Nonresidential Construction
Real construction of nonresidential structures has been about flat in recent months at a
depressed level. Outlays in the power and communications sector and in the
manufacturing sector have been increasing since the middle of last year. However, real
spending on commercial structures, which had moved up in the first half of 2004, has
trended lower since then, even though the vacancy rate for retail buildings has edged
down in recent quarters and remains at the low end of the range observed during the past
few years. Office construction has also slipped further of late, in part because of
continued high vacancy rates. The number of rigs drilling for natural gas edged up in
January and February, pointing to another increase in the drilling and mining component
of outlays for nonresidential structures.
Business Inventories
We currently estimate that a pickup in real inventory investment contributed about
¾ percentage point to the increase in real GDP in the fourth quarter, and a similar-sized
contribution seems possible this quarter. For the manufacturing and trade sector
excluding motor vehicles, which accounts for 85 percent of total inventory stocks, the
5

On average over the past year, 70 percent of total light vehicle sales to businesses were classified as
retail sales, and 30 percent were classified as fleet sales.

II-22

Nonresidential Construction and Indicators
Real Construction
(Seasonally adjusted, annual rate; nominal CPIP deflated by
BEA prices through Q3 and by staff projection thereafter)

Total Structures

Office and Commercial

290

Billions of chained (2000) dollars
290

270

270

250

250

Billions of chained (2000) dollars
70

70

Commercial
60

60
Jan.

50
230

230

210

210

40

Jan.

190
170

1997 1998 1999 2000 2001 2002 2003 2004 2005

190
170

Billions of chained (2000) dollars
60
Power & communication

50

50

Jan.

30

20

1997 1998 1999 2000 2001 2002 2003 2004 2005

20

Manufacturing

75

Billions of chained (2000) dollars
75

70

70

65

65

40
30

Jan.

20
60

Jan.
10
0

30
Jan.

Other

60

20

40

Office

30

Manufacturing and Power &
Communication

40

50

60

10

1997 1998 1999 2000 2001 2002 2003 2004 2005

0

55

1997 1998 1999 2000 2001 2002 2003 2004 2005

55

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

Indicators
Vacancy Rates

Drilling Rigs in Operation

18

Percent
18

1200

15

1000

12

800

9

600

6

400

Number
1200
Mar.

15
12

Office

Q4
Industrial
Q4

9
6
Retail

Q4

3
0

1997 1998 1999 2000 2001 2002 2003 2004 2005
Source. National Council of Real Estate Investment
Fiduciaries.

1000
800

Natural gas

600
400
Petroleum

3

200

0

0

Mar.
1997 1998 1999 2000 2001 2002 2003 2004 2005
Note. Mar. values are averages through Mar. 11.
Source. DOE/Baker Hughes.

200
0

II-23

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

2005

Q2

Q3

Q4

Nov.

Dec.

Jan.

120.4

84.1

88.4

162.1

36.8

136.6

94.1

75.9

107.6

139.5

68.2

139.9

Manufacturing
Ex. aircraft

38.9
39.0

32.3
33.9

35.9
33.2

53.9
45.7

5.7
6.6

73.4
73.1

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

33.7
1.3
32.4

39.1
3.3
35.7

35.7
-2.0
37.7

47.9
3.1
44.8

16.2
-4.0
20.2

42.0
7.3
34.7

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

47.7
25.0
22.7

12.8
4.9
7.9

16.8
-17.1
33.9

60.3
19.5
40.8

14.9
-27.4
42.3

21.2
-10.7
31.8

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

Book-Value Inventories Relative to Shipments and Sales
Ratio
1.8

1.8

Retail trade ex. motor vehicles and parts

1.6

1.6

Manufacturing

1.4

1.4

Jan.

1.2

1.2

Wholesale trade ex. motor vehicles and parts

1.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1.0

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

64

62

62
Total

60

60

58

58

56

56
Total ex. motor vehicles and parts

54

54

52

52

50

Feb. 50

48

48

46

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

46

II-24

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

January-February
Function or source

2004

2005

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

375.5
-.3
-12.1
387.9

408.5
-.1
-12.4
421.0

Receipts
Payment timing
Adjusted receipts

277.2
.0
277.2

Surplus or deficit (-)
Selected components
of adjusted outlays
and receipts
Adjusted outlays
Net interest
Non-interest
National defense
Social Security
Medicare
Medicaid
Income security
Agriculture
Other
Adjusted receipts
Individual income and
payroll taxes
Withheld + FICA
Nonwithheld + SECA
Less: Refunds
Corporate
Gross
Less: Refunds
Other
Adjusted surplus or deficit (-)

Percent
change

Percent
change

2004

2005

8.8
...
...
8.5

2206.7
-2.0
-11.7
2220.3

2359.9
-1.5
-.1
2361.5

6.9
...
...
6.4

303.1
.0
303.1

9.3
...
9.3

1795.3
.0
1795.3

1952.1
.0
1952.1

8.7
...
8.7

-98.3

-105.4

...

-411.4

-407.8

...

387.9
25.1
362.8
73.5
81.8
40.5
27.5
76.2
2.5
60.8

421.0
28.1
392.9
77.3
86.5
45.0
27.6
80.4
6.1
70.1

8.5
11.9
8.3
5.2
5.8
10.9
.3
5.5
139.2
15.3

2220.3
151.8
2068.5
430.6
482.6
252.8
166.7
340.4
22.6
372.8

2361.5
166.1
2195.4
468.1
506.4
280.0
178.1
338.2
23.9
400.6

6.4
9.4
6.1
8.7
4.9
10.8
6.8
-.7
5.7
7.5

277.2

303.1

9.3

1795.3

1952.1

8.7

243.0
240.4
49.0
46.3
5.2
9.1
3.8
29.0

265.5
260.7
52.4
47.6
8.4
12.5
4.1
29.2

9.3
8.5
7.0
2.8
61.4
38.6
7.6
.8

1458.5
1366.6
287.2
195.2
147.2
201.7
54.5
189.6

1551.1
1437.9
292.5
189.1
213.7
248.9
35.2
187.3

6.3
5.2
1.9
-3.1
45.2
23.4
-35.5
-1.2

-110.7

-117.9

...

-425.0

-409.3

...

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

II-25

book value of inventories increased at an annual rate of $140 billion in January after an
average $108 billion accumulation in the fourth quarter. In January, manufacturers
accumulated inventories at twice the rate of the fourth quarter, while wholesalers and
retailers excluding auto dealers about matched the fourth-quarter pace of inventory
investment.
Despite rapid sales growth, the recent pace of inventory investment has kept inventorysales ratios in all three major sectors about flat since the middle of last year, rather than
on the downward path that we think characterizes the longer-run trend. Nevertheless,
business surveys and reports from our industry contacts provide little evidence that these
accumulations are unwanted. In the February ISM Report on Business, the number of
respondents stating that their customers’ inventories are too low increased from
December to February, whereas the number of respondents stating that they are too high
decreased. That said, data from the staff’s flow-of-goods inventory system indicate that
inventories remain elevated relative to consumption for a few products, including motor
vehicles, food, and paper.
Federal Government Sector
The federal budget situation over the past two months is similar to that recorded during
the same period last year, as both receipts and outlays have posted large increases.
According to the Monthly Treasury Statement, the federal government recorded a
cumulative $105 billion deficit in January and February, an amount only a bit higher than
the $98 billion deficit posted during the comparable months of 2004.
Receipts in January and February rose about 9¼ percent from year-earlier levels.
Increases in income and payroll taxes, boosted in part by recent income gains, were
sizable. Individual refunds were up only a little in January and February. However, the
refundable portions of the earned income and child tax credits, which are counted as
outlays rather than as individual refunds, each posted large increases. According to
separate IRS data, the total of all these refunds through early March was about 6 percent
above year-earlier levels. The average size of refund checks issued thus far is about $200
higher than it was last year, although the number of tax returns certified for a refund is
about 2 percent lower than it was last year. However, the tax refund season is far from
over; the total amount of refunds to date is less than half of the expected total for the
entire season.

II-26

II-27

Outlays in January and February, adjusted for financial transactions and payment timing
shifts, rose 8½ percent from year-earlier levels. Outlays increased in all major categories.
Spending for national defense in January and February rose about 5¼ percent, an increase
consistent with developments in Iraq and Afghanistan. Medicare spending posted a
double-digit rate of increase, while Medicaid expenditures, which had received a
temporary increment between mid-2003 and mid-2004 under the Jobs and Growth Tax
Relief Reconciliation Act of 2003, were little changed. Spending in the “other” category
picked up noticeably, largely because of variation in the timing of payments for programs
such as the financing of foreign military sales.
President Bush has submitted to the Congress his budget for fiscal 2006. The
Administration expects that, if the Congress enacts the supplemental appropriation for
spending in Iraq that was requested in late February and the President’s other policy
proposals, the unified deficit will reach $427 billion in fiscal 2005, up from $412 billion
last fiscal year and higher than the CBO’s most recent estimate of $394 billion. Under
these assumptions, the Administration projects that the deficit would be cut in half over
the next five years, to a level of $207 billion in 2010. However, the President’s budget
submission excluded any significant funding for activities in Iraq and Afghanistan
beyond that already in train and omitted any budgetary effect of the President’s proposal
to add personal accounts to Social Security. The President’s policy proposals that were
included in the budget would have little effect on the deficit over the next five years, as
small revenue losses would be offset by small spending cuts. However, the proposals
would increase the deficit significantly after 2010 because the Administration is
proposing to extend the tax cuts that are due to expire then.
State and Local Governments
Recent indicators signal that state and local government finances are improving this year
and that the sector’s spending is strengthening. Employment rose 31,000 in February,
with gains primarily at educational establishments. The sector’s employment has now
risen for eight consecutive months. Similarly, construction spending, which has been
increasing since September, rose another 1.4 percent in nominal terms in January.
Outlays for highways and streets have been on an unusually steep upward trajectory;
spending on educational facilities has also trended higher. Together, these two categories
account for about 60 percent of state and local construction.
News on state finances during the current fiscal year continues to be encouraging; most
states have reported strong revenue growth month after month. However, many officials

II-28

Measures of Inflation
(Percent)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Jan.
2004

Jan.
2005

Oct.
2004

Jan.
2005

Dec.
2005

Jan.
2005

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

1.9
3.5
7.8
1.1
-2.3
2.5
1.7
.8

3.0
2.9
10.6
2.3
.9
2.8
2.6
1.9

3.2
2.2
14.4
2.3
1.4
2.5
...
...

1.3
1.5
-6.0
2.0
1.7
2.4
...
...

.0
.0
-1.3
.2
.0
.2
...
...

.1
.1
-1.1
.2
.3
.2
...
...

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

1.8
3.0
7.8
1.2
-2.0
2.6
1.1
1.5

2.2
2.6
11.6
1.6
.4
2.1
1.7
1.0

2.3
2.4
16.5
1.4
.3
1.9
1.2
2.3

1.4
1.2
-7.0
2.1
1.3
2.4
2.1
2.0

.0
.1
-1.4
.0
-.2
.1
.0
-.1

.2
.0
-1.2
.3
.4
.2
.3
.4

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

3.3
4.3
11.2
1.0
1.1
.9
3.9
2.4
16.1
25.4

4.2
4.1
9.8
2.7
2.6
2.8
8.7
8.5
10.8
13.0

7.2
6.5
24.6
3.2
2.8
3.7
9.2
8.7
-4.8
26.7

2.7
1.0
-3.0
4.8
5.1
4.3
5.0
6.8
13.1
-6.6

-.3
.1
-2.5
.2
.1
.2
-.1
.5
-3.0
-1.3

.3
-.2
-1.0
.8
.9
.6
.4
.8
-2.0
-2.5

Measures

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
... Not applicable.

II-29

remain concerned about fiscal 2006, which starts July 1 in all but four states. According
to a new survey from the National Conference of State Legislatures, nearly half the states
reported that they are projecting budget gaps in their general fund account for 2006 if no
corrective budget actions are taken. The prospective shortfalls range from a low of
0.2 percent of expenditures in West Virginia to a high of 15 percent in Alaska.
California, Illinois, New Jersey, and New York are among the states anticipating large
budget gaps.
Prices and Labor Costs
After having held steady in December, prices of consumer goods and services moved up
in January. Core consumer prices rose a touch faster than overall prices, and the increase
in the core was fairly widespread among commodities and services. A decline in
consumer energy prices held down the January increase in the overall price indexes.
However, gasoline and other energy prices turned back up in February and early March.
The price index for personal consumption expenditures (PCE) rose 0.2 percent in
January. During the twelve months that ended in January, PCE prices rose 2.2 percent,
boosted by a climb of almost 12 percent in energy prices. PCE prices excluding food and
energy moved up 0.3 percent in January after increases averaging 0.1 percent per month
in the fourth quarter. On a twelve-month basis, the change in core PCE prices has been
around 1½ percent since last spring.
PCE energy prices fell 1.2 percent in January, a decrease that reflected the passthrough of
the decline in crude oil prices late last year. However, crude prices have turned back up
this year, and survey data suggest that seasonally adjusted gasoline prices increased about
2½ percent in February and will rise even more sharply in March. Higher crude prices
have also induced some substitution toward natural gas by industrial users of heavy fuel
oil, and this substitution has pushed up prices of natural gas a little despite ample
inventories for this time of year.
PCE prices for food were flat in January, as they were held down by substantial declines
in prices for fruits and vegetables. These prices continued to reverse their earlier,
hurricane-related run-ups, but wholesale prices of fruits and vegetables suggest that this
adjustment has now largely run its course.
Within the core PCE price index, goods prices rose 0.4 percent in January. Prices of new
motor vehicles climbed appreciably, as sales incentives fell further. Price increases were

II-30

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

3

CPI and PCE ex. Food and Energy

Percent
3

3

2

2

Percent

PCE excluding Food and Energy

3

CPI
Core PCE
2

Jan.

2
Jan.

PCE
1

CPI
chained

1

1

1
Market-based components

0

5

1999

2000

2001

2002

2003

2004

2005

0

Percent

PCE excluding Food and Energy

3-month change, annual rate

4

0

3

5

4

4

3

3

1999

2000

2001

2002

2003

2004

2005

Percent

PCE Services and Commodities

4
3

Services ex. energy

2

Jan.

1
2

Jan.

1

0
1

0

0

-2

-1

-3

30

220

30

1999

2000

2001

2002

2003

2004

2005

20

20

Jan.

10

0

-1

Percent

PCE Energy

-1
Commodities ex. food and energy

1999

2000

2001

2002

-2

2003

Gasoline Price Decomposition

190

2004

2005

Cents per gallon

Mar. 7

Retail price*

160

-10

1999

2000

2001

2002

2003

2004

2005

190

130

Mar. 7
100

-20

220

160

0

-10

-3

10
130

0

2

Jan.

2

1

-1

0

-20

100

WTI spot price

70
40

70

2003

2004

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

2005

40

II-31

fairly widespread among other goods as well. Prices of core consumer services moved
up 0.2 percent in January, about in line with the average increase seen over the previous
few months. The January uptick in core PCE inflation was apparent in both the marketbased and the non-market-based components of the index. On a twelve-month change
basis, inflation in core PCE services has trended down consistently for the past three
years. However, inflation in core PCE goods prices has moved sharply higher since late
2003 apparently as a result of higher import prices, the indirect effects of higher energy
prices, and higher prices for core intermediate materials.
The twelve-month change in the core CPI was 2.3 percent over the year ending in
January, a pickup of 1.2 percentage points from a year earlier. The greater acceleration in
the CPI compared with the PCE price index can be traced in large part to its different
treatment of medical services. The PCE medical services index includes some
components (for example, Medicare and Medicaid reimbursements) that are not covered
in the CPI.6 In addition, PCE medical services prices are mostly derived from producer
price indexes rather than from the CPIs. Because of these differences in scope and data
sources, the CPI for medical services accelerated 0.7 percentage point in the twelve
months ending in January, while the PCE for medical services decelerated 1.6 percentage
points.
According to the final release of the Michigan Survey for February, the median
expectation for inflation over the next year was 2.9 percent, the same reading as in
January and a little below its fourth-quarter average. The median expectation for
inflation over the next five to ten years was 2.8 percent, roughly the average reported
over the past several years.
Regarding producer prices, the PPI for capital equipment jumped 0.6 percent in January.
The January increase brought the twelve-month change in prices for capital equipment to
2.8 percent, almost 2 percentage points greater than the change in the preceding year.
The PPI for core intermediate materials climbed 0.8 percent in January after several
months of somewhat smaller increases. The January advance leaves these prices
8½ percent higher than they were a year earlier; rising prices for energy and imported
materials and rising rates of capacity utilization can explain much of that run-up,
although the acceleration is larger than our models that incorporate these factors would
predict.
6

Because of this difference in scope, medical care has a much larger weight in the PCE index than in
the CPI.

II-32

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

2001

2002

2003

2004

Product prices
GDP price index
Less food and energy

2.4
2.3

1.6
1.7

1.7
1.4

2.4
2.2

Nonfarm business chain price index

1.9

1.0

.8

2.2

Expenditure prices
Gross domestic purchases price index
Less food and energy

1.6
2.1

1.8
1.6

1.8
1.4

2.9
2.1

PCE price index
Less food and energy

1.7
2.2

1.8
1.5

1.7
1.2

2.5
1.6

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

1.3
1.8

1.7
1.4

1.6
1.0

2.7
1.6

CPI
Less food and energy

1.8
2.7

2.2
2.1

1.9
1.2

3.4
2.1

Chained CPI
Less food and energy

1.5
2.1

1.8
1.7

1.7
.8

2.9
1.8

Median CPI
Trimmed mean CPI

3.9
2.6

3.0
2.1

2.0
1.6

2.3
2.2

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

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10-year) 4

2003:Q2
Q3
Q4

2.1
2.2
1.9

2.6
2.8
3.0

2.2
2.3
2.6

3.1
3.1
3.1

2.7
2.7
2.8

2.5
2.5
2.5

2004:Q1
Q2
Q3
Q4

1.8
2.9
2.7
3.3

3.1
4.0
3.3
3.4

2.7
3.3
2.9
3.0

3.4
3.3
3.1
3.1

2.9
2.8
2.8
2.8

2.5
2.5
2.5
2.5

2005:Q1

n.a.

n.a.

n.a.

n.a.

n.a.

2.5

2004:July
Aug.
Sept.
Oct.
Nov.
Dec.
2005:Jan.
Feb.

3.0
2.7
2.5
3.2
3.5
3.3
3.0
n.a.

3.5
3.1
3.2
3.6
3.3
3.4
3.5
3.3

3.0
2.8
2.8
3.1
2.8
3.0
2.9
2.9

3.1
3.1
3.1
3.2
3.1
3.1
3.2
3.1

2.8
2.7
2.8
2.8
2.7
2.8
2.7
2.8

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

Period

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

II-33

Commodity Price Measures
Journal of Commerce
1996 = 100
140

140

130

130
Mar. 15

120

Metals

120

110

110

100

100

90

90
Total

80

80

70
60

70
1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

60

Commodity Research Bureau
1967 = 100
400

400

350

350
Spot industrials

Mar. 15

300

300

250

250
Futures

200
150

1986

1988

1990

1992

1994

1996

200

1998

2000

2002

2004

Note. The Journal of Commerce index is based almost entirely on industrial commodities, with a small weight given to
energy commodities. The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial
commodities, excluding energy. The CRB futures index gives about a 60 percent weight to food commodities and splits
the remaining weight roughly equally among energy commodities, industrial commodities, and precious metals. Copyright
for Journal of Commerce data is held by CIBCR, 1994.

Spot Prices of Selected Commodities
(Percent change)

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

2004 1

12/28/04
to
1/25/05 2

1/25/05 2
to
3/15/05

52-week
change to
3/15/05

8.7
19.4
5.0
2.7
11.1

.0
-2.6
-.8
-2.3
.8

4.4
4.8
4.5
3.3
11.9

1.6
8.2
6.2
-9.9
14.6

1. From the last week of the preceding year to the last week of the year indicated.
2. January 25, 2005, is the Tuesday preceding publication of the January Greenbook.

2006

150

II-34

Nonfarm Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2004
2003

2004

Q1

Q2

Q3

Q4 e

Compensation per hour

5.3

4.2

2.1

5.9

5.4

3.4

Unit labor costs

-.2

1.1

-1.6

1.9

4.0

.6

Category

Note. Annual changes are from fourth quarter of preceding year to fourth quarter of year shown.
e Staff estimates.

Markup, Nonfinancial Corporations

Markup, Nonfarm Businesses
1.66
Q4

1.64
1.62

1.66

1.59

1.59

1.64

1.57

1.57

1.62

1.55

1.55
Q3

1.60

1.60

1.53

1.58

1.58

1.51

1.53
1.51
Average, 1968-present

1.56

Average, 1968-present

1.54
1.52

1990

1992

1994

1996

1998

2000

2002

2004

1.56

1.49

1.49

1.54

1.47

1.47

1.52

1.45

1990

1992

1994

1996

1998

2000

2002

2004

1.45

Note. Markup defined as ratio of output price to unit
labor costs.

Note. Markup defined as ratio of output price to unit
labor costs.

Labor Costs for Production or Nonsupervisory Workers
(12-month change)
4.5

Percent
4.5

4.0

4.0

3.5

3.5

3.0

3.0
ECI wages and salaries
Feb.

2.5
Average hourly earnings

2.0

2.0

1.5
1.0

2.5

1.5
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1.0

II-35

Prices for core crude materials fell 2½ percent in January after a 1¼ percent decline in
December. However, prices for industrial metals (aside from steel scrap) have been
increasing in recent weeks, and the Journal of Commerce metals index is up 4¾ percent
since the January Greenbook. Among the other commodity indexes that exclude energy,
the CRB spot industrials index has risen 4½ percent since the last Greenbook, and the
CRB spot foodstuffs index has risen 3¼ percent. The JOC industrial index and the CRB
futures index, both of which contain a substantial energy component, have moved up
4½ percent and 12 percent respectively.
Average hourly earnings were flat in February after a 0.3 percent gain in January. They
rose 2½ percent during the twelve months ending in February, about 1 percentage point
faster than in the preceding year. The BEA estimates that compensation per hour in the
nonfarm business sector moved up 4.2 percent last year, compared with an increase of
5.3 percent in the preceding year. 7 The markup of prices over unit labor costs remained
somewhat higher than the long-term norm for both the nonfarm business sector (through
the fourth quarter) and the nonfinancial corporate sector (through the third quarter, the
latest quarter for which data are available).

7

The most recent Productivity and Costs release, which incorporated the updated estimates of wages
and salaries in the third quarter, now shows that compensation per hour in the nonfarm business sector
increased about 2 percentage points faster in the third quarter than had previously been reported.

Domestic Financial
Developments

III-T-1

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

Change to Mar. 15 from
selected dates (percentage points)

2005

Instrument
June 28

Dec. 31

Feb. 1

Mar. 15

2004
June 28

2004
Dec. 31

2005
Feb. 1

1.00

2.25

2.25

2.50

1.50

.25

.25

1.36
1.74

2.18
2.52

2.47
2.70

2.75
3.01

1.39
1.27

.57
.49

.28
.31

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

1.28
1.45

2.29
2.28

2.51
2.69

2.72
2.89

1.44
1.44

.43
.61

.21
.20

Large negotiable CDs1
3-month
6-month

1.53
1.82

2.50
2.72

2.71
2.94

2.98
3.23

1.45
1.41

.48
.51

.27
.29

Eurodollar deposits3
1-month
3-month

1.29
1.51

2.32
2.49

2.53
2.68

2.77
2.96

1.48
1.45

.45
.47

.24
.28

Bank prime rate

4.00

5.25

5.25

5.50

1.50

.25

.25

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

2.88
3.97
4.90

3.08
3.63
4.34

3.28
3.70
4.24

3.77
4.21
4.64

.89
.24
-.26

.69
.58
.30

.49
.51
.40

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

1.56
2.23

1.02
1.67

1.18
1.66

1.33
1.81

-.23
-.42

.31
.14

.15
.15

Municipal revenue (Bond Buyer)5

5.37

5.04

4.90

5.02

-.35

-.02

.12

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

5.21
5.30
5.59
6.18
8.30

4.65
4.61
4.98
5.38
7.34

4.53
4.48
4.87
5.28
7.46

4.91
4.82
5.26
5.61
7.48

-.30
-.48
-.33
-.57
-.82

.26
.21
.28
.23
.14

.38
.34
.39
.33
.02

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

6.21
4.19

5.77
4.10

5.63
4.23

5.85
4.24

-.36
.05

.08
.14

.22
.01

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

Record high

2004

Change to Mar. 15
from selected dates (percent)

2005

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

Level

Date

Dec. 31

Feb. 1

Mar. 15

Record
high

2004
Dec. 31

2005
Feb. 1

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

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

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

10,552
1,189
2,069
628
11,722

10,745
1,198
2,035
627
11,817

-8.34
-21.59
-59.69
-4.24
-19.89

-.35
-1.17
-6.46
-3.80
-1.29

1.83
.70
-1.63
-.21
.81

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Most recent Thursday quote.
6. Constant maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
8. Home mortgage data for Mar. 15, 2005, is from Mar. 10, 2005.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the most recent policy tightening began.
February 1, 2005, is the day before the most recent FOMC announcement.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Futures Contract Rates
Chairman’s
February Core
testimony PPI minutes PCE

February
FOMC

Percent

February
employment report

4.2

January
employment report

4.0
3.8
3.6

December 2005 Eurodollar
3.4
3.2
3.0

April 2005 federal funds

2.8
2.6
Feb. 1

Feb. 4

Feb. 9

Feb. 14

Feb. 17

Feb. 23

Feb. 28

Mar. 3

Mar. 8

Mar. 11

Note. 5-minute intervals.

Implied Federal Funds Futures Rate Percent

Policy Uncertainty
4.5

Basis points
400

Daily
FOMC

March 15, 2005

350

12 months ahead

4.0

300
Mar.
15

3.5

250
200
150

February 1, 2005

3.0

100
6 months ahead

50

2.5
Mar.

July
2005

Nov.

Mar.

July
2006

Nov.

Mar.
2007

Jan.

Apr.

July
2004

Oct.

Jan.
2005

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

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

Treasury Yields

Inflation Compensation

Percent
7

Daily

FOMC

Daily

6
10-year

Mar.
15

Percent
4.0

5 to 10
years ahead

FOMC

3.5
Mar.
15

5

3.0

4
2-year

2.5

3

2.0

5-year

2
1
Jan.

Apr.

July
2004

Oct.

Jan.
2005

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

1.5
Jan.

Apr.

July
2004

Oct.

Jan.
2005

Note. Estimates based on smoothed nominal and inflationindexed Treasury yield curves.

Domestic Financial Developments
Overview
During the intermeeting period, investors focused on Federal Reserve statements that
suggested continued tightening of monetary policy and on incoming data that pointed to
sustained economic growth and the possible emergence of inflationary pressure. Market
participants shifted up the anticipated path for the federal funds rate, and nominal
Treasury yields rose sharply across the yield curve, accompanied by significant increases
in inflation compensation. Despite the higher interest rates and oil prices, stock prices
edged up and spreads on corporate bonds narrowed, especially for speculative-grade
firms. In recent months, the pace of total net business borrowing has quickened, and
household borrowing has remained brisk.
Policy Expectations and Interest Rates
The decision at the February FOMC meeting to increase the federal funds rate target
25 basis points and to retain the “measured pace” language matched market expectations.
However, investors marked up their policy expectations in the wake of several events,
including higher-than-expected readings on inflation, increases in oil prices, and the
Chairman’s monetary policy testimony, which was interpreted as indicating no imminent
pause in monetary tightening. The release of the minutes of the February FOMC meeting
the week after the monetary policy testimony prompted little market reaction. The
market has now fully priced in 75 basis points of cumulative tightening over the next
three FOMC meetings. Uncertainty about the future path of policy was about unchanged
over the intermeeting period.
The yield on the two-year Treasury note rose by about 50 basis points over the
intermeeting period, while the ten-year yield increased 40 basis points. Market
expectations for faster inflation likely contributed to the rise in yields, especially at
shorter maturities. Five-year TIPS-based inflation compensation increased about 35 basis
points amid the higher-than-expected inflation data and rising oil prices; although
inflation compensation over the subsequent five years only edged up, the front-loaded
rise still implies a 25 basis point increase over a ten-year period. Upward pressures on
the ten-year yield also may have been amplified by the Chairman’s remark in his
semiannual testimony that the then-prevailing low level of long-term interest rates was a
“conundrum.”
Corporate Yields, Risk Spreads, and Stock Prices
Broad equity price indexes rose on net by less than 1 percent over the intermeeting period
after touching four-year highs in early March, as generally positive earnings news and a

III-2
Corporate Yields, Risk Spreads, and Stock Prices
Stock Price Indexes

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

Ratio scale, Feb. 2, 2005=100
120

Daily

12

Monthly

115

FOMC

110
Mar.
15

S&P 500

10

105
12-month forward
trend E/P ratio

100

8

95
90

+

6

85
Mar.
15

80
Dow Jones Energy Index

75

+

Long-run real Treasury yield*

70

4
2

65
Jan.

Mar.

May

July
2004

Sept.

Nov.

1985

Jan. Mar.
2005

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

1997

2001

2005

Percent
60

FOMC

1993

Yields for BBB and High-Yield Corporate Bonds
14

Weekly Friday*

1989

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

Percent
9

Daily
FOMC

Nasdaq

50

12
7

10-year BBB
(right scale)

40
10
30
20
S&P 500

Mar.
15

8
5-year high yield
(left scale)

Mar.
15

10
6
2002

2003

2004

2005

1100

Basis points
450

Daily

900

2003

2004

2005

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

Corporate Bond Spreads to Similar-Maturity Treasuries
Basis points

3
2002

* Latest observation is for most recent business day.

5

5-year high yield
(left scale)

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

Basis points

Weekly Friday*

150

350

120

700

90
250
60

500
150

10-year BBB
(right scale)

300

Mar.
15

Mar.
15

100

0
50

1995

1997

1999

2001

2003

2005

30

1999

2001

2003

* Latest observation is for most recent business day.

2005

III-3

continued flow of merger announcements offset the effects of higher long-term interest
rates and oil prices. Energy-related and basic materials stocks posted especially large
gains in response to the recent run-up in the prices of oil and other commodities, while
the remainder of the market edged down. The gap between the trend-adjusted forward
earnings-price ratio and the real perpetuity Treasury yield was little changed and
remained near its long-term average and well below its recent high in early 2003.1 Both
implied and realized volatilities on the Nasdaq 100 and S&P 500 have stayed near
historical lows.
Yields on investment-grade bonds moved up a bit less than comparable-maturity
Treasury yields over the intermeeting period and spreads fell a touch. Spreads on highyield bonds narrowed considerably more—roughly 50 basis points. The implied risk
premium for high-yield spreads based on the staff’s model of expected defaults and
recoveries is now quite narrow and near levels last seen in 1997. The quality spread on
commercial paper has remained low.
Corporate Earnings and Credit Quality
With fourth-quarter reports in hand from virtually all of the S&P 500 firms, earnings per
share are estimated to have risen roughly 19 percent relative to a year earlier, a pace that
continues the solid growth recorded over the past few years. Revisions to forecasts of
year-ahead earnings were slightly positive on net in February and early March, a
reflection of upward revisions for energy firms. Net revisions excluding these firms were
slightly negative and similar to their levels in recent months.
Credit quality for nonfinancial firms remains strong. Aggregate cash positions are still
very large, although they appear to have ticked down in the fourth quarter because of
Microsoft’s special dividend and Cingular’s cash-financed acquisition of AT&T
Wireless. The value of bond upgrades exceeded bond downgrades in January and
February. Meanwhile, the six-month trailing bond default rate, which edged up in recent
months, remains at a modest level, and the C&I loan delinquency rate continued to trend
downward in the fourth quarter. Firm-level estimates by KMV as of January indicate that
the aggregate expected year-ahead default rate has remained low.
1

The unadjusted forward earnings-price ratio, which we have presented previously in the Greenbook
as a rough estimate of the expected real return on the S&P 500, has a cyclical bias. In particular, when
twelve-month-ahead (forward) earnings are above trend, as in recent months, the ratio is biased upward,
and vice versa when earnings are below trend. The trend-adjusted forward earnings-price ratio uses the
estimated trend component of forward earnings per share in place of actual forward earnings per share to
eliminate this cyclical bias.

III-4
Corporate Earnings and Credit Quality
Corporate Earnings Growth

S&P 500 Revisions Index

Percent

Quarterly*

30

Percent

Monthly

2

20

Q4

1

10

0
MidFeb.

Q3

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

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

-20

-3

-30
1989

1992

1995

1998

2001

2002

2003

2004

2005

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

Bond Ratings Changes of
Nonfinancial Companies

Cash and Equivalents
Ratio
0.12

-4

2004

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

-1

Ratio

Percent of outstandings
30

Nonfinancial corporations

2.5

Upgrades

20

e

Q4

H1

2.0

0.09

H2

Q1*

10
0

1.5

Over fixed investment
(right scale)

10
20

0.06

1.0
30
Over assets
(left scale)

0.5

40

Downgrades

0.03

50
1989

1992

1995

1998

2001

2004

1993

Note. Computstat data, annual through 1999 and quarterly thereafter; fixed
investment is at an annual rate.
e Staff estimate.

Bond Defaults and
C&I Loan Delinquency Rates

1995

1997

1999

2001

2003

2005

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

Expected Year-Ahead Defaults
Percent of outstandings

Percent of liabilities
7

2.0

Monthly

6
1.5

5
4

C&I loan delinquency rate
(Call Report)

1.0

3
Q4

2

0.5
Jan.

1

Bond default rate*
Feb.

0.0

0
1990

1993

1996

1999

2002

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

2005

1993

1996

1999

2002

2005

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

III-5

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2004
Type of security

2005

2001

2002

2003

H1

H2

Jan.

Feb.

6.5
2.1
4.4

5.2
0.7
4.4

3.7
0.4
3.2

5.7
0.8
4.9

4.9
2.3
2.6

2.0
0.9
1.1

7.7
4.8
2.9

39.8
27.5
8.9
3.4

24.8
15.7
4.8
4.2

31.6
16.0
11.3
4.3

22.8
8.2
10.5
4.1

22.7
8.5
8.5
5.7

15.5
4.6
7.3
3.6

17.6
5.5
9.0
3.2

-8.0

-6.3

-3.8

2.8

-0.1

19.2

3.8

-5.8

-5.2

-7.9

-0.7

7.2

18.1

3.8

4.2
80.2

4.0
87.0

6.9
111.1

8.3
131.1

5.1
147.6

4.2
164.2

3.7
93.7

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings
Bonds2
Investment grade
Speculative grade
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3,4
Financial corporations
Stocks1
Bonds2

Note. Components may not sum to totals because of rounding.
1. Excludes private placements and equity-for-equity swaps that occur in restructurings.
2. Data include regular and 144a private placements. Bond totals reflect gross proceeds rather than par value of
original discount bonds. Bonds are categorized according to Moody’s bond ratings, or to Standard & Poor’s if
unrated by Moody’s.
3. End-of-period basis, seasonally adjusted.
4. Adjusted for FIN 46 effects.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

Billions of dollars

50
Monthly rate, nonfinancial firms

50
Monthly rate, nonfinancial firms

Commercial paper*
C&I loans*
Bonds

Public issuance
Private issuance
Repurchases
Cash mergers

40

Total

40
30

Total

30

20
H1

Q3

20

Q4

e

10
0

10

-10
-20

0
H1

H2

Jan. Feb.

-30
-10
-40
-20
2001

2002

2003

* Seasonally adjusted, period-end basis.

2004

2005

-50
2001
e Staff estimate.

2002

2003

2004

III-6

Commercial Real Estate
Gross Issuance of CMBS

Growth of Commercial Mortgage Debt

Billions of dollars

Percent
18

Quarterly, s.a.a.r.

35

Quarterly
16
Q4

30

14

**
25

12

20

10
8

*

15

6
10
4
5

2
0
1996

1998

2000

2002

0

2004

1996
1998
2000
2002
* Through March 11.
** Staff estimate for Q1.
Source. Commercial Mortgage Alert.

10-Year Commercial Mortgage Rates

Investment-Grade CMBS
Spreads over 10-Year Treasury

Percent
10

Monthly

2004

Basis points
300

Weekly

9

250

8

200

BBB
7

150
6
AAA

Jan.

Mar. 9

5

100
50

4
3
2000

2001

2002

2003

2004

0

2005

2000
2001
2002
Source. Morgan Stanley.

Source. Barron’s/Levy.

Delinquency Rates on Commercial
Mortgages and CMBS

2003

2004

2005

Commercial Real Estate Valuation
Percent

CMBS
At commercial
banks

Index, 1990:Q1=4
4

7

3

6

Feb. 2
Q4

At life
insurance
companies

7

Quarterly
Ratio of net operating income to price*
(left scale)

6

5

5

4

Q4

1
3

Q3

Percent

0

Long-run real Treasury yield**
(right scale)

Q4

2
1996

1998

2000

2002

2004

Source. Call Report, ACLI, Morgan Stanley.

4

3

2
1986 1989 1992 1995 1998 2001 2004
* Staff calculation from NCREIF data.
** Yield on synthetic Treasury perpetuity minus
Philadelphia Fed 10-year expected inflation.

III-7

Business Finance
Gross issuance of bonds by nonfinancial corporations in February and early March
maintained the relatively slow pace seen in January and was held down by limited
offerings from investment-grade firms. In contrast, speculative-grade issuance remained
brisk, similar to the pace last year, and the share of issuance by the weaker firms in this
group—those rated B minus and below—has picked up this year. Nevertheless, in
contrast to 1997 and the first half of 1998, speculative-grade issuers are reportedly still
largely using the proceeds to refinance their existing debt—and thereby improve their
balance sheets—rather than to fund expansion. With regard to shorter-term borrowing,
commercial paper and C&I loans expanded further in February, albeit at a more moderate
pace than in January. Overall, net debt financing from these sources in the current
quarter is on a somewhat stronger track than it was in the second half of 2004, but it
remains moderate.
Equity issuance by nonfinancial firms through mid-March stayed at the moderate pace
recorded last year. IPOs have accounted for the bulk of issuance this year, as seasoned
offerings have continued to be muted by firms’ low leverage and ample cash.
Completions of share repurchases, which were fueled by strong profits and substantial
liquid assets, rose from an already elevated rate to a record pace in the fourth quarter.
Cash-financed mergers jumped as well, in part because of the merger of Cingular and
AT&T Wireless. For the first quarter, announcements of share repurchases and merger
activity have been strong but have not matched the torrid pace of the fourth quarter.
Commercial Real Estate
Commercial mortgage debt rose at a 12½ percent annual rate in the fourth quarter, and a
full CMBS calendar suggests solid growth in the current quarter. Investment-grade
CMBS spreads over the ten-year Treasury yield are still narrow. Delinquency rates on
loans backing CMBS have fallen almost 1 percentage point on net since their peak in late
2003, and those on commercial mortgages on the books of banks and life insurance
companies remain quite low. The ratio of net operating income to property prices—an
indicator of the rate of return on commercial real estate—declined further in the fourth
quarter. The spread of this ratio over the real perpetuity Treasury yield, a rough measure
of the risk premium on commercial real estate assets, widened somewhat in the fourth
quarter but remained in the lower part of the range observed over the past decade.

III-8

Household Liabilities
Mortgage Debt Growth

30-year Fixed-Rate Mortgage Rate
Percent

Percent
18

Quarterly, s.a.a.r.

9

Weekly
16

8

14
12
e
Q1

7

10

Mar. 9

8

6

6
4

5

2
0
1996
1998
e Staff estimate.

2000

2002

2004

4
1996
1998
2000
Source: Freddie Mac.

Consumer Credit Growth

2002

2004

Financial Obligations Ratio

Percent change from year earlier

Percent
16

19.0

Quarterly, n.s.a.

14
+

12

18.5

Q4

10

18.0
8
6

17.5

Jan.
4
2
1996

1998

2000

2002

2004

17.0
1996
1998
2000
2002
+ Q4 value excluding Microsoft dividend.

2004

Household Bankruptcies

Delinquency Rates
Percent
Credit card loans
at commercial banks

Filings per 100,000 persons
650

8-week moving average, s.a.a.r.
5

600
Mar. 12

Q4

550

4

500

Auto loans at captive
finance companies
3

450
400

Residential mortgages
at commercial banks

2
Jan.

350

Q4
1
1996
1998
2000
2002
Source. Call Reports, Federal Reserve.

2004

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

III-9

Household Assets

Asset Prices

1993:Q1 = 100
350

Quarterly, n.s.a.
Stock prices (Wilshire 5000)
Q4

250

Q4

150

House prices*

1990

1992

1994

1996

1998

2000

2002

50

2004

* Source. Office of Federal Housing Enterprise Oversight (OFHEO).

Net Worth Relative to Disposable Income

Ratio
7

Quarterly, period-end, s.a.

6
Q4

5

1990

1992

1994

1996

1998

2000

2002

2004

4

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

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

2003

18.0
12.7
10.7
2.0
2.7
2.6
2.2
1.0
-0.6

2004

18.5
15.1
9.5
5.7
3.6
-0.3
-0.8
1.6
-1.1

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

Q2

Q3

2004
Q4

Jan.

Feb.e

Assets
Jan.

3.8
11.3
7.6
3.7
3.1
-10.5
-2.7
-4.0
-3.9

11.7
6.9
3.8
3.1
2.8
2.0
0.5
2.0
-0.5

21.8
14.0
6.7
7.3
3.3
4.5
0.6
4.0
-0.2

18.9
8.7
0.7
8.1
5.3
4.8
-2.1
6.0
0.9

28.5
20.9
9.2
11.7
3.6
4.0
0.1
2.8
1.1

6,109
4,290
3,601
688
517
1,302
155
816
331

III-10
Treasury Financing
(Billions of dollars)
2004

Item

2005

Q1

Q2

Q3

Total surplus, deficit (–)

-170.8

-25.7

-85.7

-118.6

8.6

-113.9

Means of financing deficit
Net borrowing
Nonmarketable
Marketable
Bills
Coupons

135.9
-10.1
146.0
56.1
89.9

40.7
6.2
34.5
-34.9
69.4

83.4
-5.2
88.6
14.3
74.3

102.8
3.1
99.7
43.6
56.0

20.2
5.4
14.8
-16.4
31.2

79.5
-0.7
80.2
43.9
36.2

11.9
23.0

-23.3
8.3

8.3
-6.0

11.7
4.2

-36.6
7.9

41.7
-7.2

21.3

44.6

36.3

24.7

61.3

19.6

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

Q4

Jan.

Feb.

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

Agency Market Developments
Agency Stock Prices

Ten-year Agency Spreads over Treasury
Oct. 1, 2004 = 100

Basis points
115

Daily

Fannie Mae

45

Daily

110

40
Freddie Mac

105

35

100

30

95

25

Freddie Mac

Mar. 15
Fannie Mae
90

20
Mar. 15

85
Oct.

Nov.
2004

Dec.

Jan.

Feb.
Mar.
2005

15
Oct.

Nov.
2004

Dec.

Jan.

Feb.
Mar.
2005

III-11

Household Finance
Household mortgage debt continued to expand at a double-digit annual rate in the fourth
quarter. Although interest rates on thirty-year fixed-rate mortgages have risen in recent
weeks, they remain low and should contribute to strong mortgage debt growth in the
current quarter. Consumer credit posted another moderate gain in the fourth quarter and
picked up a bit in January.
The household financial obligations ratio declined in the fourth quarter because an
increase in required debt payments was more than offset by a spike in disposable personal
income stemming from Microsoft’s special dividend payment. Without the Microsoft
dividend, the financial obligations ratio would have edged up to its highest value in more
than a year. Even so, measures of household credit quality have remained strong. At
commercial banks, delinquency rates on credit card loans were about unchanged, and
rates on residential mortgages declined in the fourth quarter. In addition, delinquency
rates on auto loans at captive finance companies remained low in January, and
bankruptcy filings thus far in the year have continued to run below their year-ago levels.
However, filings may surge in coming months if the bankruptcy bill now working its way
through the Congress becomes law.2
The ratio of household net worth to disposable personal income increased in the fourth
quarter; the lift came from solid gains in both equity and house prices. Although stock
prices were little changed on net in January and February, equity mutual fund inflows in
these months maintained the strong pace seen in the fourth quarter.
Treasury and Agency Finance
Treasury borrowing has continued to expand at a steady pace in recent months. Indirect
bidding at recent Treasury auctions—a rough proxy for demand from foreign official
institutions—has remained generally strong. Treasury securities held in custody at the
Federal Reserve Bank of New York (FRBNY) on behalf of foreign official institutions
resumed their robust growth with an increase of about $22 billion over the intermeeting
period.
Fannie Mae’s stock price declined in response to both the revelation of more accounting
irregularities at the company and Chairman Greenspan’s remarks about the desirability of
2

This bill, which has been passed by the Senate but not yet by the House, would make it more difficult
for households to discharge their debts through chapter 7 filings. The tougher standards would take effect
180 days after the President signs the bill and so could spur a rush to file in the intervening months.

III-12

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

2004
Type of security

2001

2002

2003

29.0
24.3
7.6
16.7
4.7

36.3
30.3
10.1
20.2
6.0

1.4

1.7

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

2005

H1

H2

Jan.

Feb.

37.8
32.0
10.0
22.1
5.8

36.1
31.9
11.5
20.5
4.2

33.4
27.8
10.0
17.9
5.5

24.3
22.7
9.2
13.5
1.6

32.1
30.5
13.1
17.4
1.6

3.5

2.5

1.6

1.1

1.6

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

Bond Rating Changes
Number of rating actions
2000

Q1*

Annual rate

Upgrades

1500
1000
500
0
500

Downgrades

1000
1500

1991

1993

1995

1997

1999

2001

2003

2005

2000

* Data through March 9 at an annual rate.
Source. S&P’s Credit Week Municipal and Ratings Direct.

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
7

Weekly

Ratio

Weekly

1.0

6

20-year

20-year
Mar.
10

5

Mar.
10

4

0.9

3
1-year

Mar.
15

0.8

2
1

1996

1999

2002

Source. Bloomberg and Bond Buyer.

2005

0

1996

1999

Source. Bond Buyer.

2002

2005

0.7

III-13

the size of the housing GSEs’ investment portfolios. However, credit spreads for the
GSEs remain very low amid reduced issuance as well as continued strong demand from
foreign official institutions, as judged by FRBNY custody holdings.
State and Local Government Finance
Gross issuance of long-term municipal bonds was rapid in February. Advance refundings
were boosted by municipalities taking advantage of a temporary dip in long-term rates,
while new capital issuance continued to be supported by projects related to higher
education. In contrast, short-term issuance was muted, likely because of the stronger
budget situation in many states. Credit quality continued to improve, as upgrades of
municipal bonds far outpaced downgrades. Municipal bond yields increased, and the
ratio of long-term municipal bond yields to comparable-maturity Treasury yields was
about unchanged in recent weeks.
Money and Bank Credit
M2 growth averaged about 2½ percent at an annual rate over the first two months of the
year, about half of the fourth-quarter pace. The weaker growth was concentrated in
liquid deposits, likely the result of the higher opportunity costs associated with holding
such deposits. In contrast, small time deposits, whose rates typically align more closely
with market rates, expanded rapidly in January and February. The ongoing runoff in
money market funds also contributed to the slow M2 growth; investors evidently found
bond and equity funds an attractive alternative to money market funds.
Bank credit growth has picked up sharply this year to an average annual rate of
17 percent in January and February. A jump in holdings of securities, particularly
agency-related mortgage-backed securities, accounted for a bit more than half of the
expansion. Loan growth was also brisk, with business and real estate loans posting solid
increases.

III-14

Monetary Aggregates
(Based on seasonally adjusted data)
2004

Aggregate or component
Aggregate
1. M22
2. M33

2003

5.5
4.8

Components of M24
3. Currency
5

4. Liquid deposits
5. Small time deposits
6. Retail money market funds
Components of M3
7. M3 minus M26
8. Large time deposits, net7
9. Institutional money
market funds
10. RPs
11. Eurodollars
Memo
12. Monetary base

2004

Q3

20 05

Q4

Jan.

Percent change (annual rate)1
5.3
3.5
5.7
2.6
5.9
4.3
3.5
5.0

Feb.
(p)

Level
(billions of
dollars),
Feb.
(p)

2.6
2.2

6,465
9,511

5.9
14.1
-9.3
-11.4

5.5
10.2
-.3
-11.8

7.5
6.1
1.7
-11.4

5.0
8.5
5.5
-9.5

4.8
1.2
13.8
-3.7

3.4
2.2
16.2
-11.1

702
4,213
836
707

3.5
4.3
-5.6

7.2
20.9
-5.7

5.9
17.9
-6.3

-1.0
10.0
-12.2

10.1
66.2
-13.1

1.2
18.3
-20.1

3,046
1,141
1,040

14.1
27.7

1.2
26.9

-.4
23.0

-17.8
28.4

-66.8
21.2

40.3
-39.2

498
367

5.9

5.5

7.3

4.5

4.2

5.6

765

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

-1.1

14.8

17.3

9.9

53.3

7.9

1,263

3.1

-10.4

-9.8

-3.7

50.6

-1.4

89

-.3

.2

-2.8

1.9

1.9

1.1

18

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

III-15

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

Securities
Adjusted1
Reported
Treasury and agency
Other2

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

Loans3
Total
Business
Real estate
Home equity
Other
Consumer
Adjusted4
Other5

Level,
Feb. 2005
($ billions)

2003

H1
2004

Q3
2004

Q4
2004

Jan.
2005

Feb.
2005

5.9
5.6

11.8
10.4

5.2
5.8

6.3
6.2

13.9
11.0

20.2
18.6

6,705
6,850

8.6
7.2
8.9
4.8

16.9
11.6
17.9
2.0

-8.1
-4.8
-4.4
-5.6

1.0
1.3
-11.2
22.1

30.5
18.8
30.9
.6

36.7
29.7
34.7
21.9

1,834
1,979
1,211
768

4.9
-9.4
11.1
30.8
8.8
5.4
5.8
6.7

9.9
-3.9
15.8
39.9
12.4
7.9
4.0
9.9

10.3
7.0
8.3
37.2
3.7
19.9
12.3
12.4

8.2
6.2
12.8
37.3
8.6
-1.8
2.3
4.6

7.9
23.3
11.7
20.5
10.0
9.8
11.3
-29.0

14.1
11.6
12.0
5.0
13.4
.0
-15.9
40.1

4,871
921
2,587
407
2,180
679
1,044
683

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

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to $58.3 billion in January from $55.7 billion
in December (revised).
Net Trade in Goods and Services
(Billions of dollars, seasonally adjusted)
2004

Annual rate
2004
Q2
Q3
Q4

Monthly rate
2004
2005
Nov.
Dec.
Jan.

Real NIPA1
Net exports of G&S

-584.3

-580.3

-583.2

-623.4

...

...

...

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

-617.1
-665.5
48.4

-605.3
-655.5
50.2

-623.5
-668.1
44.6

-684.2
-734.2
50.0

-59.4
-63.5
4.1

-55.7
-59.9
4.1

-58.3
-62.3
4.0

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

In January, the value of exports of goods and services increased 0.4 percent. Exports of
automotive products were strong, due to sizable growth in exports to non-NAFTA
countries. However, most other categories of goods exports showed modest declines.
Among capital goods, telecommunications equipment was the only category that
exhibited an increase, with computers, semiconductors, aircraft, and other capital goods
all declining. Exports of industrial supplies fell slightly, while consumer goods retreated
a bit from an extremely robust December.
In December, the value of exports of goods and services jumped 3.2 percent after falling
almost 1 percent in November. The export figures for November were revised up more
than $1.5 billion, largely on account of a correction to data provided by Statistics Canada,
which are used to measure U.S. exports to Canada. In the fourth quarter, exports of
goods and services climbed 8¼ percent at an annual rate. The increase was widespread,
with the exception of exports of automotive products, which fell in the quarter.
The value of imported goods and services increased 1.9 percent in January. A large
decline in the value of imported oil was more than offset by a sharp increase in imports of
non-oil goods. Services imports also increased smartly. The rise in non-oil goods

IV-2

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

Bil$, s.a.a.r.

Nominal
BOP basis

Contribution of Net Exports to Real GDP Growth
-50

Percentage points, s.a.a.r.

-100
-150
-200
-250
-300

Real
NIPA basis
(2000$)

1997

1999

2001

2003

2005

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

-350
-400

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

-450

20
0

-500

-20

-550

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

-600
-650

-60
2003

2005

-80

-700

1997

1999

2001

2003

2005

-750

400

Selected Imports

Bil$, s.a.a.r.

380

Selected Exports

Bil$, s.a.a.r.

220
200

Machinery 2/

270

360
340

250
Consumer goods
230

320
180

210

300
160

Industrial
supplies 1/
Consumer goods

290

280

140

260

120

240

100

220

190
Industrial
supplies 1/

170
150

Machinery 2/

130

200
80
Aircraft

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

110
180

60

90

160

40

140

20

120

Automotive 3/
(overseas)

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

70
50

IV-3

U.S. Exports and Imports of Goods and Services
(Billions of dollars, s.a.a.r., BOP basis)
Levels
2004 2005
Q3
Q4
Dec.
Jan.
1160.4 1183.5 1205.1 1209.9
2004

Exports of G&S
Goods exports
Gold
Other goods

2004
Q3
22.0

Change1
2004 2005
Q4
Dec.
Jan.
23.2
37.2
4.8

820.0
5.0
815.1

834.2
4.9
829.3

853.6
5.0
848.6

855.0
5.8
849.2

21.2
1.5
19.7

14.2
-0.0
14.2

36.3
0.4
35.8

1.5
0.8
0.7

51.9
43.2
46.4
193.3

51.9
43.6
46.0
194.5

51.9
45.7
44.7
202.4

50.7
45.1
43.8
202.7

4.2
1.3
-2.8
2.5

0.0
0.4
-0.4
1.2

1.7
3.3
-1.9
15.8

-1.3
-0.6
-0.9
0.3

92.2
52.1
14.6
25.5

91.9
50.7
16.3
25.0

93.7
54.0
13.6
26.1

97.0
53.8
14.1
29.1

6.8
5.2
-1.4
3.1

-0.3
-1.4
1.7
-0.6

3.4
5.7
-4.0
1.7

3.3
-0.2
0.5
3.0

61.1
190.5
102.8
33.7

62.8
200.1
108.1
30.4

62.7
204.9
112.8
29.7

61.9
204.5
110.6
33.0

-2.2
6.6
0.4
2.8

1.6
9.6
5.3
-3.3

0.3
8.4
7.3
5.9

-0.8
-0.4
-2.2
3.2

340.3

349.3

351.5

354.9

0.8

9.0

1.0

3.4

Imports of G&S

1783.8 1867.7 1874.0 1909.2

40.2

83.9

-6.8

35.2

Goods imports
Petroleum
Gold
Other goods

1488.1 1568.4 1571.9 1602.4
179.0 217.3 209.6 198.4
4.0
4.8
5.5
3.5
1305.1 1346.3 1356.8 1400.5

33.8
15.3
0.7
17.7

80.3
38.2
0.8
41.2

-7.2
-25.2
1.4
16.6

30.5
-11.2
-2.0
43.7

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

Aircraft & parts
Computers & accessories
Semiconductors
Other capital goods

24.2
91.6
27.6
208.6

28.0
91.9
25.5
213.8

28.1
93.5
24.0
217.2

26.8
91.0
25.7
225.4

-0.2
3.6
0.2
6.7

3.7
0.3
-2.1
5.3

4.7
2.8
-1.3
0.4

-1.4
-2.5
1.7
8.2

Automotive
from Canada
from Mexico
from ROW

231.5
69.3
42.1
120.1

230.4
70.5
44.1
115.9

230.4
70.9
39.3
120.2

236.9
69.8
35.9
131.2

2.9
1.4
-2.7
4.1

-1.1
1.1
2.0
-4.2

2.3
3.9
-4.2
2.7

6.5
-1.1
-3.4
11.0

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

240.8
366.2
60.9
53.7

246.6
390.4
65.0
54.7

250.8
391.6
66.8
54.4

255.3
415.3
66.6
57.5

16.6
-9.9
-1.6
-0.4

5.8
24.2
4.1
1.1

10.2
-2.5
1.6
-1.5

4.5
23.7
-0.2
3.1

295.7

299.3

302.1

306.8

6.4

3.6

0.3

4.6

13.02
37.57

14.55
40.90

15.12
37.85

14.59
37.24

0.08
3.04

1.53
3.33

-0.44
-3.37

-0.54
-0.61

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

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

IV-4

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

Annual rate
2005
2004
Q3
Q4
Q1

Monthly rate
2005
2004
Nov.
Dec.
Jan.

----------------------- BLS prices --------------------7.4
7.9
7.3
-0.3
-1.4
0.9
43.2
57.1
35.1
-6.0
-11.5
4.6
3.0
1.5
3.2
0.9
0.4
0.2

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

4.3
0.0
1.4
-0.5
7.8
18.7

2.4
1.6
1.7
-0.4
3.3
8.3

4.2
2.6
2.5
1.2
10.0
11.4

1.1
0.3
0.1
0.2
0.2
3.8

0.4
0.5
0.2
0.3
0.8
0.9

0.4
0.8
-0.1
0.4
-0.2
0.1

Computers
Semiconductors

-8.6
-7.0

-9.0
-4.4

-7.3
-4.5

-0.3
0.1

-0.1
-0.1

-1.4
0.1

6.0

-0.1

3.8

0.3

0.2

0.7

6.6
0.8
1.3
1.1
17.5
14.4

0.6
1.3
0.9
2.3
-31.0
14.5

5.1
3.4
1.2
0.1
-11.4
17.4

0.4
0.3
0.1
0.1
0.3
0.8

0.3
0.2
0.1
0.2
-1.0
0.5

0.8
0.7
0.3
0.6
0.3
1.5

0.3
2.1

-7.6
-3.9

-9.2
-1.5

-0.9
0.0

-0.7
0.3

-1.0
-0.1

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

--------------------5.1
7.9
1.3
3.2
2.3
4.2

Exports of goods & services
Total merchandise
Core goods*

1.6
1.2
1.8

3.8
3.9
5.0

NIPA prices --------------------n.a.
...
...
...
n.a.
...
...
...
n.a.
...
...
...

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

...
...
...

...
...
...

...
...
...

*/ Excludes computers and semiconductors.
n.a. Not available. ... Not applicable.

Oil Prices
Dollars per barrel

Spot West Texas Intermediate

Import unit value
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

55
50
45
40
35
30
25
20
15
10
5

IV-5

imports was widespread across categories, with notable increases in consumer goods and
automotive products. Within capital goods, declines in the imports of computers,
telecommunication equipment, and aircraft were more than offset by large gains in
semiconductors and other capital goods.
The value of imported goods and services was little changed in December, as a large
decline in the value of imported oil offset an increase in non-oil imports. In the fourth
quarter, nominal imports of goods and services increased just over 20 percent at an
annual rate, with the increase roughly split in half between oil and non-oil imports.
Within non-oil imports, most broad categories recorded gains, with the exception of
automotive products which fell.
Prices of Internationally Traded Goods
Non-oil imports. In January, the prices of U.S. imports of non-oil goods and of core
goods rose 0.2 and 0.4 percent, respectively. Higher prices for capital goods (excluding
computers and semiconductors) and consumer goods were the main contributors to the
price increase. For capital goods, the January price increase of 0.8 percent was the
largest one-month change recorded since May 1995. The price index for imported
industrial supplies increased only 0.1 percent in January, held down by an 8.3 percent
decline in natural gas prices. Other categories of industrial supplies had notable price
increases; for example, prices of building materials and chemicals each rose by just over
2 percent. Prices for imported automotive products and foods, feeds and beverages fell
0.1 and 0.2 percent, respectively, in January. Prices of imported computers
fell 1.4 percent, whereas prices for semiconductors edged up.
Oil. The BLS price of imported oil rose 4.6 percent in January. The spot price of West
Texas Intermediate crude rose 8.1 percent in January, averaging about $46.80 per barrel.
Although the average spot price in February was only about $1 per barrel higher, the spot
price began to rise late in the month and closed on March 15 at $55.05 per barrel. The
increase in oil prices is a reaction in part to oil demand that is stronger than was
previously anticipated and remarks by OPEC that imply the cartel is targeting a higher
level of oil prices. In addition, concerns about future supplies from Iraq, Iran, Nigeria,
Venezuela, and Russia also continue to support oil prices. On March 16, OPEC
announced a 500,000 barrel per day increase in its production target, but this had little

IV-6

immediate impact on prices. Subsequently, oil prices surged to new record highs in
intraday trading after the release of lower-than-expected U.S. oil inventory data.
Exports. In January, the prices of U.S. exports of total goods and of core goods
increased 0.7 and 0.8 percent, respectively. Much of January’s rise was due to a
1.5 percent increase in prices of industrial supplies, reflecting higher prices for chemicals
and petroleum products. In addition, export prices of capital goods (excluding computers
and semiconductors) and consumer goods rose 0.7 and 0.6 percent, respectively. Prices
for agricultural products and automotive products both increased 0.3 percent. For both
computers and semiconductors, export prices fell in January.
U.S. International Financial Transactions
Foreign private demand for U.S. securities (line 4 of the Summary of U.S. International
Transactions table) continued strong in both December and January. In each month there
were substantial net acquisitions of agency (line 4b) and corporate (line 4c) debt
securities, continuing recent trends. January saw the highest level of foreign net
purchases of equities (line 4d) recorded in several years. Foreign acquisitions of U.S.
Treasuries (line 4a) were flat in December but picked up sharply in January. For the
fourth quarter as a whole, net private inflows were above the yearly average; for 2004,
net purchases were the highest yet recorded and well above the 2003 level. During 2004
foreign investors acquired Treasuries, corporate debt, and equities at about the same pace
as the preceding year and returned to acquiring agency debt after selling these securities
during 2003.
Net foreign official inflows (line 1) continued at about their yearly average in December
at $30 billion, but fell to $19 billion in January.
. Net inflows during the fourth quarter remained high and
in line with recent quarters; for the year, net official inflows were almost 50 percent
larger than the previous year's record of $250 billion, owing in part to substantial firstquarter inflows. Partial data from the Federal Reserve Bank of New York indicate a large
increase in reserve assets during February and early March, with the largest inflows from
China and Russia.
U.S. investors acquired foreign equities (line 5b) at an unusually high rate in December
before returning to more normal levels in January, while recorded net purchases of

IV-7

foreign debt securities (line 5a) in December were offset by net sales in January.
Although net U.S. acquisitions of foreign securities (line 5) were well above average
during the fourth quarter, for the year they were only slightly above those recorded in
2003 and resulted almost entirely from increased holdings of foreign equities.
During both 2002 and 2003 net inflows from foreign official institutions (primarily into
securities) combined with foreign private purchases of U.S. securities exceeded U.S.
acquisitions of foreign securities by slightly over $500 billion. For 2004, this same
calculation results in a net inflow of over $700 billion.
The volatile banking sector (line 3) recorded a modest inflow in December and a
substantial outflow of $68 billion in January. For the year, the banking sector recorded a
modest net outflow.
Full balance of payments data for the fourth quarter, including direct investment, will be
released March 16 and included in the Greenbook Supplement. U.S. direct investment
abroad is expected to show a large increase during the fourth quarter resulting from the
re-incorporation in the United States of News Corporation Ltd. (Australia), the Rupert
Murdoch controlled media conglomerate valued at nearly $60 billion. The reincorporation itself does not represent a net financial inflow. The positive entry that will
appear in the direct investment account will be offset elsewhere, most likely by stock
swaps reducing the value of U.S. portfolio assets abroad and increasing the value of
foreign portfolio holdings of U.S. securities.

IV-8

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

5

2004

2004
Q1

Dec.

2005
Jan.

Q2

Q3

Q4

250.1 363.3 137.0

71.5

71.9

82.8

29.5

18.6

248.6 360.5 136.4
114.7 162.7 96.8
6.1 12.1
3.3
127.9 185.7 36.4

70.4
46.2
-2.1
26.3

71.5
20.1
3.2
48.1

82.1
-.4
7.7
74.8

28.8
-3.7
.6
31.9

14.8
.4
3.2
11.2

1.5

2.8

.6

1.1

.4

.7

.7

3.8

295.6

...

1.6

93.4

81.3

...

…

…

64.7

-5.8

-39.9

35.6

-17.7

16.1

7.0

-68.1

94.3 147.6
1.2 12.6
5.8 42.8
81.7 69.4
5.6 22.8

57.7
.4
15.6
35.0
6.7

54.6
13.1
9.9
14.5
17.2

369.0 486.3
114.0 120.0
-10.1 83.7
224.7 244.8
40.4 37.8
-90.5 -112.3
21.9
2.1
-95.0 -101.1
-17.4 -13.3
-173.8
39.9
16.6
69.7
-530.7
-3.1
-12.0

94.8 149.6
42.9 63.2
1.9 33.3
44.2 49.5
5.7
3.6
-7.1
11.9
-19.0
.0

-20.5
-3.2
-16.7
-.6

-51.4
-14.9
-36.5
.0

-23.5
-7.0
-16.5
.0

-2.1
5.5
-7.6
.0

... -47.6 -55.3 -43.5
...
10.2 32.6 53.1
...
-1.8
8.8
2.6
...
-7.0 -44.6 12.9
... -147.2 -164.4 -164.7

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

…
…
…
…
…

…
…
…
…
…

...
...

...
...

…
…

…
…

-0.4
8.9

-33.3
8.3
-28.9
-12.7

-0.3
-0.2

-0.4
11.8

NOTE. Data in lines 1 through 5 differ in timing and coverage from the balance of payments data published by the Department
of Commerce. Details may not sum to totals because of rounding.
1. Changes in dollar-denominated positions of all depository institutions and bank holding companies plus certain transactions
between broker-dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements). Includes
changes in custody liabilities other than U.S. Treasury bills.
2. Includes commissions on securities transactions and therefore does not match exactly the data on U.S. international transactions
published by the Department of Commerce.
3. Includes (4d) or represents (5c) stocks acquired through mergers.
4. Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere plus amounts resulting
from adjustments made by the Department of Commerce and revisions in lines 1 through 5 since publication of the quarterly data in
the Survey of Current Business
5. Consists of transactions in nonproduced nonfinancial assets and capital transfers.
n.a. Not available. ... Not applicable.

IV-9

Foreign Financial Markets
The trade-weighted exchange value of the dollar against the major foreign currencies
declined 2.4 percent on net over the intermeeting period. The dollar appreciated for
several days following the Chairman’s speech on February 4, which many analysts
interpreted as reflecting a reduced level of concern about the large and rising U.S. current
account deficit. However, that move was quickly reversed. The dollar’s subsequent
decline appeared to be linked in part to news stories and official statements, sometimes
contradictory, about the intent of several Asian monetary authorities, including Japan and
Korea, to alter the currency composition of their foreign reserves. Late in the period,
renewed investor concerns about the financing burden associated with the U.S. current
account deficit again appeared to weigh on the dollar.
Exchange Value of the Dollar
February 2, 2005 = 100
102
Daily

Feb.
FOMC

Other important
trading partners

101

100
Broad

99

98

97

Major currencies

96
Dec

Jan

Feb

Mar

On a bilateral basis, the dollar depreciated against all other major currencies over the
period, with the exception of the Japanese yen. The dollar depreciated 3 percent, on net,
against the euro, despite lackluster economic data in the euro area and a downward
revision of the European Central Bank’s economic growth forecast for 2005. A news
report late in the period that the ECB’s Governing Council viewed its current policy rate
as “well below” its own estimate of a neutral monetary policy stance boosted the euro’s
exchange value. The dollar also declined 2.3 percent versus sterling and 3.5 percent

IV-10

against the Swiss franc. In contrast, the dollar was little changed on net against the yen
amid continued concerns about the pace of Japanese economic activity. Sharp increases
in the prices of crude oil, industrial metals, and some agricultural commodities over the
period were thought to have also contributed to the depreciation of the dollar against the
Canadian and Australian currencies.

Financial Indicators in Major Industrial Countries

Country
Canada

Three-month rate
Percentage
Mar. 16
point
(Percent)
change

Ten-year yield
Percentage
Mar. 16
point
(Percent)
change

Equities
percent
change

2.60

.05

4.39

.14

4.74

.05

-.02

1.47

.19

4.02

Euro area

2.14

-.01

3.72

.18

1.08

United Kingdom

4.89

.11

4.81

.22

.46

.70

.01

2.37

.20

3.71

Australia

5.84

.36

5.68

.36

2.14

United States

2.98

.27

4.54

.39

.70

Memo:
Weighted-average
foreign

1.97

.02

3.54

.20

n.a.

Japan

Switzerland

NOTE. Change is from February 1/2 to March 16 (10 a.m. EDT).
n.a. Not available.

Short-term interest rates were little changed on balance over the period in the euro area,
Canada, and Japan. Three-month rates rose 11 basis points in the United Kingdom, in
part as the minutes of the February meeting of the Bank of England’s Monetary Policy
Committee showed some willingness to consider a rate increase. Three-month Australian
interest rates rose 36 basis points. The Reserve Bank of Australia increased its main
policy rate 25 basis points on March 2, to 5.50 percent, and the Reserve Bank of New
Zealand also raised its policy rate 25 basis points, to 6.75 percent, on March 10. Both
central banks cited concerns over inflationary pressures as a factor in their decisions.
Ten-year sovereign yields rose substantially in all industrial countries over the period, led
by the United States, reflecting in part an uptick in expected future inflation shown in the
price of inflation-indexed bonds. Benchmark nominal yields rose about 20 basis points in
the United Kingdom, the euro area, and Japan. Headline equity indexes rose about 1

IV-11

percent in the euro area and the United Kingdom and about 4 percent in Japan and
Canada.
Financial Indicators in Latin America, Asia, and Russia
Currency/
US dollar
Economy
Mexico

Mar. 16

Short-term
Dollar-denominated
bond spread2
interest rates1
Percentage
Percentage
Percent Mar.15/16
point Mar.15/16
point
change (Percent)
change (Percent)
change

Equity
prices
Percent
change

11.25

.70

9.30

.20

1.71

.08

-1.17

Brazil

2.76

5.48

18.91

.54

4.29

.08

13.40

Argentina

2.92

-.10

n.a.

n.a.

50.46

-1.50

.92

Chile

593.30

2.24

3.17

.50

.56

.03

4.46

China

8.28

.00

n.a.

n.a.

.57

.05

.25

Korea

1003.55

-2.36

3.55

.05

...

...

7.78

31.02

-2.11

1.39

-.03

...

...

.89

Singapore

1.62

-1.06

1.88

.13

...

...

2.44

Hong Kong

7.80

.00

1.99

1.12

...

...

2.04

Malaysia

3.80

-.01

2.80

.00

.46

.02

-2.29

Thailand

38.40

-.21

2.44

.12

.41

.04

-.52

9328.00

1.61

7.45

.02

.97

-.61

8.11

Philippines

53.80

-2.11

3.94

-1.06

4.00

-.25

5.50

Russia

27.47

-1.80

n.a.

n.a.

1.94

-.10

6.14

Taiwan

Indonesia

NOTE. Change is from February 1/2 to March 15/16.
1. One month interbank interest rate, except Chile: 30-day deposit rate; Korea: 1-week call rate.
No reliable short-term interest rates exist for China or Russia.
2. Spread over similar maturity U.S. Treasury security yield. Mexico, Brazil, Argentina, Korea,
the Philippines and Russia: EMBI+ yield. Chile and China: Global bond yield. Malaysia: Eurobond
yield. Thailand and Indonesia: Yankee bond yield. Taiwan, Singapore, and Hong Kong do not have
outstanding sovereign bonds denominated in dollars.
n.a. Not available. ... Not applicable.

The dollar was little changed on a trade-weighted basis against the currencies of our other
important trading partners, on balance over the period. The dollar rose less than 1
percent against the Mexican peso but, in contrast, appreciated 5.5 percent against the
Brazilian real, as Brazil’s central bank sold financial derivatives designed to weaken its
currency. The dollar depreciated about 2 percent against the Korean won and the Taiwan
dollar despite (unconfirmed) reports of intervention activity by the respective central
banks to dampen their currencies’ strength. Equity prices generally rose throughout Latin
America and Asia, reflecting the perception that economic conditions are improving in a

IV-12

number of emerging market countries. Brazil’s main equity index rose 13 percent,
touching a record high, amid reports of large capital inflows from foreign private
investors. Korean equity prices rose 8 percent, with shares of “old economy” firms
outperforming those of the technology sector. Latin American dollar-denominated bond
spreads ended the period little changed, on net, after declining to multi-year lows in early
March. The spreads rose in the last days of the intermeeting period, reportedly amid
concerns that higher U.S. Treasury yields would make carry trades into emerging market
bonds less attractive to international investors. Argentina’s offer to exchange much of its
defaulted sovereign debt for new issues was accepted by investors holding 76 percent of
the eligible bonds, which was widely seen as a success for the Argentine government.
The new bonds, to be formally issued on April 1, were trading on the when-issued market
at a spread of about 550 basis points over Treasuries, compared with spreads in the 4000
to 6000 basis point range for the old debt.

IV-13

Developments in Foreign Industrial Countries
Data on fourth-quarter GDP in the major foreign economies confirm that a widespread
decline in net exports led to a general slowdown in the pace of economic activity in the
second half of 2004. Japanese output rose slightly after two quarters of contraction but
growth was lackluster as imports surged and consumption remained weak. The euro-area
economy continued to lose steam as real GDP fell in Germany and Italy. In Canada, a
decrease in exports for the second consecutive quarter contributed to a slowing of output
growth. The U.K economy, in contrast, expanded at a robust rate, as strong domestic
demand more than offset the negative contribution of net exports.
Leading indicators for the current quarter are generally positive, pointing to a broad
pickup in growth. Industrial production rose briskly in Japan and continued to increase in
the major euro-area economies. Retail sales posted strong gains in Japan and the United
Kingdom, and firmed in the euro area.
Consumer price inflation remained subdued. In the euro area, the rate of change of the
harmonized inflation index edged slightly above the ECB’s ceiling in February, following
a substantial drop in January. In the United Kingdom and Canada, consumer prices
continued rising at moderate rates. Mild deflation persisted in Japan.
In Japan, revised data show that real GDP rose 0.5 percent during the fourth quarter,
following two consecutive quarters of negative growth. Fourth-quarter growth was
depressed by a 1 percent decline in personal consumption. Business fixed investment
was roughly flat, while government investment fell almost 2 percent. Exports accelerated
from their anemic third-quarter pace, rising 5 percent, but were outpaced by a jump in
imports. As a result, net exports subtracted 0.4 percentage point from growth. An
increase in inventories added nearly 1 percentage point to growth. Nominal GDP rose
0.1 percent from the previous quarter. The GDP deflator was down 0.4 percent from its
year-ago level, the smallest decline since 1998, as the PCE deflator fell only a little from
a year ago and the government consumption deflator rose nearly 1 percent.
A stream of positive data releases recently points to further strengthening in the first
quarter. Retail sales and household expenditures posted near-record monthly gains in
January. Industrial production rose 2.5 percent in January, and inventories of high-tech
goods eased back from recent highs. The manufacturing PMI moved up in February.

IV-14

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

2004

20031 20041
2.1
1.3
.9
8.6
-12.5
1.0
-.3
10.6
2.9
.9

1.0
.9
.3
1.6
-11.8
3.1
.4
10.4
10.4
.3

Q1

Q2

Q3

Q4

6.0
5.1
3.0
-7.0
39.5
4.7
2.1
20.2
13.9
1.0

-1.0
-1.9
.3
13.4
-52.4
3.2
-1.3
14.8
8.3
1.0

-1.1
-.5
-.9
.3
-7.4
1.4
.0
2.6
9.3
-.6

.5
1.0
-1.0
.8
-1.8
3.3
.9
4.9
10.1
-.4

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

Real exports rose 3 percent in January from their fourth-quarter average, but real imports
also rose strongly. Housing starts also registered a strong start to the first quarter. In
addition, measures of business confidence turned up in January and February, following
several consecutive months of declines. However, core machinery orders, a leading
indicator of business investment, gave back some of their fourth-quarter gains in January.
In February, the Diet passed a FY2004 supplementary budget allocating an extra ¥1.2
trillion (0.2 percent of GDP) for public works projects related to damage caused by last
October’s earthquake.
Labor market conditions continued to improve, but deflation persisted. In January, the
unemployment rate held steady at 4.5 percent and employment surged. The job-offers-toapplicants ratio, a leading indicator of employment, returned to the thirteen-year high hit
in November. Nominal wages continued to fall through December, dragged down by
sharp cuts in winter bonuses in the services sector. Core consumer goods prices in the
Tokyo area (which exclude fresh food but include energy) rose 0.1 percent in February
from the previous month, and were down 0.5 percent from a year earlier. Wholesale
price inflation eased markedly in the early months of this year.

IV-15

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

Indicator
Q2
Industrial production1
All-industries index
Housing starts
Machinery orders2
Machinery shipments3
New car registrations
Unemployment rate4
Job offers ratio5
Business sentiment6
CPI (core, Tokyo area)7
Wholesale prices7

Q3

2.7
-.7
1.8
-.2
-2.6
5.0
10.3
-8.4
4.3
-1.6
-9.5 10.6
4.6
4.8
.80
.85
.0
2.0
-.1
-.1
1.0
1.7

2005

Q4

Nov.

Dec.

Jan.

Feb.

-.7
-.1
-3.9
6.0
1.2
-.7
4.6
.90
1.0
-.3
1.9

1.7
.2
-2.9
19.9
1.7
4.8
4.6
.91
...
-.3
2.0

-.8
-.3
2.9
-8.8
3.3
-1.9
4.5
.90
...
-.4
1.8

2.5
n.a.
9.9
-2.2
1.8
1.9
4.5
.91
...
-.5
1.3

n.a.
n.a.
n.a.
n.a.
n.a.
-2.8
n.a.
n.a.
...
-.5
1.3

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

Euro-area real GDP continued to decelerate in the fourth quarter, rising just 0.6 percent.
Net exports made a negative contribution for the second consecutive quarter as imports
grew faster than exports. Final domestic demand rose 1.7 percent, supported by solid
growth in consumption and especially in investment. The change in inventories
subtracted 0.4 percentage point from growth. At the country level, the pace of economic
activity continued to diverge: GDP rose robustly in France and Spain, while it fell in
Germany, Italy and the Netherlands.
Incoming data suggest a limited pickup in growth in the first quarter. Euro-area retail
sales rose 0.3 percent in January from the previous month. In January, industrial
production surged in Germany and continued to rise in France. Euro-area manufacturing
and services PMIs moved up a bit in January and February, on average, from the fourthquarter level. In contrast, the European Commission’s index of business sentiment fell in
February to its lowest level since March 2004. The fall was widespread across all sectors
of the economy, except for consumer confidence that was flat. In Germany, the IFO
index rose in January but edged down in February.

IV-16

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

2004

20031 20041
Q1

Q2

Q3

Q4

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

.8
1.5
.6
.2
1.4
.8
.2
2.0
-.6

1.6
1.9
1.3
1.6
1.2
.5
6.0
7.1
-.3

3.0
1.3
3.1
-.4
.9
-.5
5.7
1.5
1.6

1.9
1.2
.2
1.9
1.6
.4
11.4
10.1
.7

1.0
3.8
.3
2.6
1.5
2.6
5.2
13.1
-2.6

.6
1.3
1.8
2.4
.7
-.4
1.9
3.9
-.7

Memo:
GDP of selected countries
France
Germany
Italy

1.3
.0
.1

2.2
.6
1.0

3.0
2.0
2.2

2.8
1.4
1.4

-.1
.1
1.7

3.1
-.9
-1.2

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

Labor market conditions remained weak in the euro area, with the unemployment rate
unchanged at 8.8 percent in January. In Germany, the unemployment rate increased to
11.7 percent in February, a substantial jump from the 10.8 percent rate recorded in
December. However, according to the German Federal Statistical Office, the recent
surge in measured unemployment is mostly attributable to the implementation of the
Hartz IV laws, as welfare recipients able to work now are counted as unemployed.
The twelve-month rate of consumer price inflation in the euro area dropped to 1.9 percent
in January but edged up to 2.1 percent, above the ECB’s ceiling, in February. Prices of
both manufactured goods and services contributed to the moderation of the headline
inflation rate since last year. Within manufactured goods, most of the moderation is
explained by a favorable base effect as the sharp hike in tobacco prices in January 2004
was not repeated in January of this year. Similarly, in services, the effect of last year’s
German health care reform fell out of the calculation of inflation. Energy prices edged
down in January and February, on average, with respect to the fourth-quarter level.

IV-17

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

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

2005

Q2

Q3

Q4

Nov.

Dec.

Jan.

Feb.

1.0
-.1
8.8
-14.3
-5.0
2.1
2.3
2.0
5.3

.3
-.2
8.8
-13.7
-3.7
-.1
2.2
3.1
6.0

-.4
.1
8.8
-13.0
-3.3
1.6
2.3
3.8
6.4

-.4
.0
8.7
-13.0
-3.0
-2.6
2.2
3.7
6.0

.5
.0
8.8
-13.0
-4.0
7.6
2.4
3.5
6.4

n.a.
.3
8.8
-13.0
-5.0
-3.4
1.9
3.9
6.6

n.a.
n.a.
n.a.
-13.0
-7.0
n.a.
2.1
n.a.
n.a.

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

Real GDP in the United Kingdom rose 2.9 percent in the fourth quarter. Private
consumption grew a sluggish 1.5 percent, its smallest rise in almost two years, and net
exports made a negative contribution of 0.5 percentage point. However, fixed investment
grew by 5.6 percent.
U.K. Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component

2004

20031 20041
Q1

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

2.7
2.3
2.2
1.4
5.6
-.3
5.9
4.2
.3

2.9
3.3
2.8
6.0
3.5
-.1
3.6
5.6
-.8

2.4
3.8
4.3
7.4
2.9
-1.0
-6.3
1.0
-2.1

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

Q2
4.2
3.4
3.0
7.4
2.8
.0
8.7
5.6
.5

Q3
2.1
3.0
2.3
3.7
4.7
.0
4.8
7.7
-1.1

Q4
2.9
3.2
1.5
5.6
3.4
.5
8.0
8.3
-.5

IV-18

House prices remained almost flat over the fourth quarter. However, since the beginning
of this year, they have begun to rise again. According to the Halifax index, house prices
have increased around 6 percent at an annual rate over the three-month period ending in
February. Household net mortgage borrowing rose in both December and January but is
still about 20 percent below its 2003 peak.
Business confidence has recovered solidly from its slump in the fourth quarter.
Consumer confidence, however, has remained unchanged at a level of zero, which
separates positive from negative sentiment. The PMI for both services and construction
fell slightly in February while the PMI for manufacturing remained unchanged. All three
surveys continue to indicate expansion.
U.K. Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

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

2005

Q2

Q3

Q4

Nov.

Dec.

Jan.

Feb.

1.3
1.9

-1.2
1.0

-.1
.3

.5
.6

.3
-1.1

-.1
.9

n.a.
n.a.

2.8
4.8
16.3
-4.0
1.4
3.9
4.2

2.7
4.7
12.3
-3.3
1.2
5.6
3.8

2.7
4.7
4.3
-.7
1.4
6.8
4.4

2.7
4.7
5.0
.0
1.5
6.8
4.6

2.7
4.7
-6.0
.0
1.6
4.4
4.4

2.6
n.a.
10.0
.0
1.6
9.7
4.2

2.6
n.a.
19.0
.0
n.a.
10.7
n.a.

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

The labor market continued to be tight; the official-claims-based measure of the
unemployment rate remained near its lowest point since 1975, and the labor-force-survey
measure stayed near its all-time low.

IV-19

The twelve-month rate of consumer price inflation stayed at 1.6 percent in January, well
below the Bank of England’s 2 percent target. In its February Inflation Report, the Bank
of England forecast inflation, using market expectations for interest rates, to edge just
above the target at a two-year horizon.
In Canada, real GDP growth slowed to 1.7 percent in the fourth quarter, as exports fell
sharply for the second consecutive quarter. Exports decreased in virtually all goods
categories as the appreciation of the Canadian dollar over the past two years seems to be
exerting strong downward pressure on external demand. Imports continued to grow
strongly, and net exports subtracted 4.7 percentage points from growth. In contrast, final
domestic demand continued to accelerate. Business investment growth reached its fastest
pace of the year, while consumption also registered a healthy advance. Inventory
accumulation was large for the second consecutive quarter.
Canadian Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
Component
GDP
Total domestic demand
Consumption
Investment
Government consumption
Inventories2
Exports
Imports
Net exports2

20031
1.7
3.9
2.8
7.0
3.5
.1
-.8
5.0
-2.1

2004

20041
3.0
4.9
3.9
5.8
2.1
.9
3.6
9.1
-2.0

Q1

Q2

Q3

Q4

2.8
2.5
6.2
6.4
2.9
-2.9
4.9
4.3
.3

4.5
1.5
1.9
4.3
1.9
-.9
17.9
9.6
3.3

2.9
9.9
3.6
5.2
1.5
5.9
-3.4
14.2
-6.7

1.7
5.9
4.1
7.4
2.2
1.5
-3.5
8.4
-4.7

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

Domestic demand appears to have remained healthy in the early part of 2005. Housing
starts remained strong in January and February. The composite index of leading
indicators rose again in January, the second consecutive monthly advance since growth in
the index stalled in November. The sub-index for retail trade continued to advance in
January, although more slowly than in the previous few months.
The manufacturing sector, which is heavily export-oriented, was hard-hit during the third
and fourth quarters of 2004. However, indicators suggest a pickup at the turn of the year.

IV-20

In January, both new orders and shipments surged, as nearly every sub-sector posted
solid gains.
Canadian Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

Indicator
Q2
GDP by industry
Industrial production
New manufacturing orders
Retail sales
Employment
Unemployment rate1
Consumer prices2
Core consumer prices2,3
Consumer attitudes (1991 = 100)
Business confidence (1991 = 100)

Q3

1.0
.9
1.4
1.3
5.1
1.5
.6
1.7
.6
.3
7.2
7.1
2.2
2.0
1.7
1.7
115.5 123.0
145.6 151.4

Q4
.5
.4
-1.0
.6
.4
7.1
2.3
1.6
123.7
139.8

2005
Nov.
.3
.4
-.6
-.4
.0
7.2
2.4
1.5
...
...

Dec.
.2
.5
.2
-1.5
.1
7.0
2.1
1.7
...
...

Jan.

Feb.

n.a.
n.a.
7.1
n.a.
-.0
7.0
2.0
1.6
...
...

n.a.
n.a.
n.a.
n.a.
.2
7.0
n.a.
n.a.
...
...

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

On February 23, the government released a new budget plan that includes roughly C$42
billion (about 3 percent of GDP) in new spending initiatives over the next five years and
projects a surplus of C$4 billion for 2005-2006. Further new initiatives are expected to
be consistent with budgets that are balanced or in surplus, with the goal of reducing the
federal debt-to-GDP ratio, over the next ten years, to 25 percent from the current level of
41 percent.
The labor market was little changed through the first two months of 2005, with the
unemployment rate steady at 7 percent. In addition, both total and manufacturing
employment were flat, on average, in January and February.
In January, the twelve-month rate of consumer price inflation moderated to 2 percent,
although gasoline prices moved up. The twelve-month rate of core inflation, excluding
the eight most volatile components, also declined slightly in January to 1.6 percent.

IV-21

External Balances
(Billions of U.S. dollars, s.a.a.r.)
2004

Country and balance
Q2
Japan
Trade
Current account
Euro area
Trade
Current account
Germany
Trade
Current account
France
Trade
Current account
Italy
Trade
Current account
United Kingdom
Trade
Current account
Canada
Trade
Current account

Q3

Q4

2005
Nov.

Dec.

Jan.

116.5 102.7 105.5 113.2 109.3 99.2
170.2 169.8 173.4 167.0 198.8 175.4
115.0
73.5

59.2
18.1

54.9
30.3

53.5
26.5

67.4
43.4

n.a.
n.a.

201.8 184.3 192.7 187.8 199.3 202.8
107.4 100.5 83.7 96.6 78.3 170.3
-4.0
-4.2

-17.2
-9.4

-26.0
-15.8

-17.1
-14.7

-40.9
-18.0

-14.7
n.a.

1.5
-20.0

-.7
-3.2

-8.1
-18.1

-3.8
-20.2

-7.2
-20.4

n.a.
n.a.

-101.9 -108.6 -114.5 -114.5 -114.3 -116.7
-42.0 -63.8
n.a.
...
...
...
56.3
32.4

51.0
25.6

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

50.8
20.7

55.0
...

51.3
...

39.2
...

IV-22

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

Germany
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

France

1998 1999 2000 2001 2002 2003 2004 2005

-2

United Kingdom
Percent

1998 1999 2000 2001 2002 2003 2004 2005

Percent

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

Italy

1998 1999 2000 2001 2002 2003 2004 2005

-2

Canada
Percent

1998 1999 2000 2001 2002 2003 2004 2005

5

Percent

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

1998 1999 2000 2001 2002 2003 2004 2005

-2

IV-23

Industrial Production in Selected Industrial Countries
Japan

1998=100

1998 1999 2000 2001 2002 2003 2004 2005

France

1998 1999 2000 2001 2002 2003 2004 2005

Italy

1998 1999 2000 2001 2002 2003 2004 2005

120

Germany

1998=100

120

110

110

100

100

90

120

1998 1999 2000 2001 2002 2003 2004 2005

United Kingdom

90

120

110

110

100

100

90

120

1998 1999 2000 2001 2002 2003 2004 2005

Canada

90

120

110

110

100

100

90

1998 1999 2000 2001 2002 2003 2004 2005

90

IV-24

Economic Situation in Other Countries
Recent data suggest that economic performance in emerging Asia has been mixed. While
Chinese industrial production fell and Korean growth remained subdued, Hong Kong,
Taiwan, and the ASEAN countries registered some gains. In Latin America, Mexico and
Argentina experienced solid performances, while Brazilian indicators pointed to a
slowdown in activity. Consumer prices in developing countries have remained stable,
suggesting that higher oil prices have only had a modest impact on inflation.
Chinese industrial production fell significantly in January, after a strong fourth quarter.
Average imports for January and February were down sharply from fourth-quarter levels.
Given the shifting of the Chinese New Year holiday between January and February in
different years, seasonal adjustment of data for the first few months of the year is
difficult. The contractions in production and imports may reflect residual seasonal
factors, or they could reflect weakness in the Chinese economy associated with slowing
investment growth. The contraction of imports led to a big increase in the trade surplus
for January. Twelve-month consumer price inflation slowed in January, as food prices
continued to decline, but rose to about 4 percent in February.
Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Consumer prices1
Trade balance2

2003
10.0
18.6
3.2
25.5

2004

2004
9.5
14.5
2.4
31.9

2005

Q3

Q4

Dec.

Jan.

Feb.

10.1
2.9
5.3
44.1

11.2
3.6
3.2
67.2

…
.9
2.4
86.4

…
-2.5
1.9
148.6

…
n.a.
3.9
82.1

1. Annual rate. Quarterly data estimated by staff from reported four-quarter growth
rates. Annual data are Q4/Q4.
2. Billions of U.S. dollars, annual rate. Imports are c.i.f.
n.a. Not available. . . . Not applicable.

Recent indicators in Hong Kong have been generally positive, with real GDP growing at
an annual rate of 6.8 percent in the fourth quarter. The unemployment rate fell again in
January, business confidence is up, and retail sales and tourism have remained strong.
Trade volume, usually a very good indicator of growth for the entrepot economy, is off
slightly from the high reached late last year. Consumer prices were down a bit in January

IV-25

from their year-ago levels. Markets reacted little to the resignation of Chief Executive
Tung earlier this month.
Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
1

Real GDP
Unemployment rate2
Consumer prices3
Trade balance4

2003
4.6
7.9
-1.9
-8.5

2004

2004
7.0
6.9
.2
-12.0

2005

Q3

Q4

Nov.

Dec.

Jan.

4.2
6.8
.8
-13.4

6.8
6.5
.2
-7.5

…
6.7
.2
-6.9

…
6.5
.2
-8.2

…
6.4
-.3
-2.6

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

Taiwanese real GDP grew just over 2 percent in the fourth quarter. Weak exports held
down overall growth, but domestic demand was strong. Indicators of first-quarter growth
have been mixed. Industrial production was up in January. The trade surplus is positive
for the year to date, largely due to a decline in imports of electronic components.
Twelve-month consumer price inflation is a little less than 2 percent, about where it was
during most of last year.
Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Industrial production
Consumer prices3
Trade balance4
Current account5

2003
5.8
5.0
7.1
-.1
16.9
29.3

2004

2004
3.2
4.5
9.8
1.6
6.1
19.0

2005

Q3

Q4

Dec.

Jan.

Feb.

4.5
4.4
-.3
2.9
15.6
21.4

2.1
4.2
-.7
1.8
-7.0
8.7

…
4.2
-.7
1.6
-16.2
…

…
4.2
1.4
.5
-3.3
…

…
n.a.
n.a.
1.9
16.7
…

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

IV-26

Economic growth in Korea remains subdued, led primarily by the export sector.
Production was up significantly in January, with particular strength in high-tech products
such as semiconductors and communication equipment, and exports were up further on
average in January and February relative to the fourth quarter. However, retail sales
continued to trend down through January. One bright spot is the fact that both business
and consumer sentiment has improved. Also, credit card delinquency ratios have
continued to decline, suggesting that the restraint on spending from high consumer debt
may be abating. Twelve-month consumer price inflation, both headline and core, was
around 3¼ percent in February, within the government’s target range of 2.5-3.5 percent
for core inflation.
Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

2003
4.1
4.9
3.4
3.4
22.0
11.9

2004

2004
n.a.
10.2
3.5
3.0
38.2
27.6

2005

Q3

Q4

Dec.

Jan.

Feb.

2.6
-.3
3.6
4.3
41.4
28.4

n.a.
2.0
3.5
3.4
35.5
29.4

…
-.8
3.5
3.0
40.1
23.9

…
3.1
3.6
3.1
58.0
46.4

…
n.a.
n.a.
3.3
n.a.
n.a.

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

Incoming data from the ASEAN countries indicate that economic activity expanded at a
solid pace in the fourth quarter. The exception is the Philippines, where fourth-quarter
growth was lowered by the adverse effects of natural disasters on the agricultural sector.
The Singapore electronics PMI rose in January and February, after falling in the previous
three months, suggesting expansion in economic activity going forward. Recent trade
data for the ASEAN economies have been mixed. Indonesia, Malaysia, and Singapore
continued to run trade surpluses, although the surplus for Singapore decreased in January.
In the Philippines and Thailand, the trade balance turned negative.
Consumer price inflation remained elevated in Indonesia and the Philippines and
moderate elsewhere in the region. Nonetheless, governments in Indonesia, Malaysia, and
Thailand have recently allowed more increases in the domestic prices of subsidized fuel.

IV-27

The Thai central bank continued tightening monetary policy by raising interest rates
25 basis points to 2.25 percent early this month, the fourth rate increase since
August 2004.
ASEAN Economic Indicators: Growth
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2004

2005

Q3

Q4

Nov.

Dec.

Jan.

…
…
…
…
…

…
…
…
…
…

-.8
-.1
-.6
11.4
2.0

n.a.
-2.2
n.a.
-7.6
n.a.

Real GDP1
Indonesia
Malaysia
Philippines
Singapore
Thailand

5.0
6.6
4.8
5.5
7.7

6.5
5.6
5.4
6.5
5.3

6.5
2.3
5.7
.7
6.0

9.8
3.9
2.4
7.9
7.2

…
…
…
…
…

Industrial
production2
Indonesia3
Malaysia
Philippines
Singapore
Thailand

3.9
9.3
.0
3.0
14.0

4.7
11.3
.7
13.9
6.4

5.2
-.3
1.4
1.0
.4

1.9
1.3
-.6
5.3
1.8

-10.4
2.6
.6
-1.7
-.2

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

ASEAN Economic Indicators: Trade Balance
(Billions of U.S. dollars, s.a.a.r.)
Indicator
Indonesia
Malaysia
Philippines
Singapore
Thailand

2003
28.5
21.4
-1.3
16.2
3.8

n.a. Not available.

2004

2004
25.0
21.2
-.7
16.1
1.7

Q3

Q4

26.9
23.8
-.1
16.5
1.5

30.3
18.3
-.5
18.3
3.6

2005

Nov.

Dec.

32.2
17.3
1.9
8.1
-1.8

21.0
13.3
-1.7
32.1
3.8

Jan.
26.9
26.1
n.a.
10.1
-11.4

IV-28

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

2004

20031 20041
Q3

Indonesia
Malaysia
Philippines
Singapore
Thailand

5.2
1.2
3.1
.8
1.8

6.4
2.1
7.9
1.5
2.9

6.7
1.5
6.4
1.7
3.3

Q4
6.3
2.1
7.5
1.7
3.1

2005
Dec.
6.4
2.1
7.9
1.5
2.9

Jan.
7.3
2.4
n.a.
1.0
n.a.

Feb.
7.2
2.4
n.a.
n.a.
n.a.

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

In Mexico, recent data releases point to a solid pickup in economic activity. Real GDP
rose 5.5 percent (s.a.a.r.) in the fourth quarter, above market expectations. Domestic
demand was the main source of growth during the quarter, as suggested by the strong
performance in retail sales, services, and construction activities, aided by increasing bank
credit despite relatively high real interest rates. Solid manufacturing exports—mainly
maquiladora exports to the United States—also contributed to the strong fourth-quarter
performance. High oil revenues have continued to allow government spending to provide
further stimulus to the economy.
In late February the Bank of Mexico tightened monetary policy for the eleventh time in
the past year in an ongoing effort to tame inflation and signal its commitment to its
inflation target. Twelve-month inflation stood at 4.3 percent in February, down from
5.2 percent at the end of 2004 but still above the target range of 2-4 percent. This
reduction in inflation suggests that the Bank of Mexico's aggressive tightening stance is
beginning to bear fruit, aided by declines of food and energy prices.

IV-29

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

2003

2004

2004
Q3

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

2.1

Q4

4.9

3.8

5.5

1.4
4.0
-.2
3.5
3.2
3.7
4.0
5.2
-5.8
-8.5
170.5 197.2
164.8 188.6
-8.5
-8.6

1.1
.6
3.8
4.8
-9.1
200.0
190.9
-7.3

1.3
.8
3.7
5.3
-12.9
208.3
195.4
-18.2

2005
Dec.

Jan.

Feb.

…

…

…

.7
n.a.
.8
.6
3.8
3.8
5.2
4.6
-17.2 -19.0
210.2 213.6
193.0 194.6
…
…

n.a.
n.a.
n.a.
4.3
n.a.
n.a.
n.a.
…

1. Annual rate. Annual data are Q4/Q4.
2. Percent; counts as unemployed those working one hour a week or less.
3. Percent change from year-earlier period, except annual data, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. . . . Not applicable.

In Brazil, data releases since the last Greenbook have pointed to a slowdown. Fourthquarter real GDP rose 1.7 percent (a.r.), down from 4.4 percent in the third quarter and
from 6½ percent in the first half of 2004. The fourth-quarter result was driven by a
15 percent fall in investment that analysts believe was temporary and private
consumption continued to show strength, growing 5½ percent. Industrial production
declined ½ percent in January, while average vehicle production over January-February
was roughly flat, after having risen over 20 percent in 2004. Despite the appreciation of
the real against the dollar during the past months, Brazil continued to record a sizeable
trade surplus.
Monthly CPI inflation declined from 0.8 percent in December to 0.6 percent in February,
bringing the twelve-month increase down to 7.4 percent. Twelve-month-ahead expected
inflation from the central bank’s survey has fallen from 6.3 percent last October to about
5½ percent. Nevertheless, in mid-February, the central bank raised its policy rate for the
sixth consecutive month, to 18.75 percent. The central bank has expressed concerns
about the inflation outlook, in part because of sizeable increases in governmentadministered fuels prices in late 2004. The central bank has been aiming to reduce
inflation to about 5 percent by the end of 2005.

IV-30

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

2003
.8
.1
12.4
9.3
24.8
4.0

2004

2004
4.8
8.3.
11.5
7.6
33.7
11.8

2005

Q3

Q4

Dec.

Jan.

Feb.

4.4
2.4
11.2
6.9
35.7
21.3

1.7
.6
11.3
7.2
34.0
7.9

…
1.2
11.5
7.6
38.9
14.5

…
-.5
10.1
7.4
37.8
9.8

…
n.a.
n.a.
7.4
41.8
n.a.

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

In Argentina, the economic recovery continued in the third quarter, with real GDP and
industrial production growing at annual rates of 12 and 11 percent, respectively. Growth
appears to have slowed somewhat in the fourth quarter, as industrial production increased
at an annual rate of 8.5 percent. The unemployment rate has steadily fallen over the past
few years, reaching about 12 percent in the fourth quarter, half of what it was at the peak
of the 2001-02 financial crisis. The trade surplus has narrowed in recent months.
Twelve-month consumer price inflation rose to just over 8 percent in February, slightly
above the central bank’s unofficial target range of 5 to 8 percent inflation for end-2005.
The government launched its long-awaited debt restructuring in mid-January. The debt
swap offer closed on February 25, and preliminary results indicate that private investors
holding $62 billion out of a total $82 billion in defaulted bonds accepted the
government’s offer, for a global participation rate of 76 percent. After the transaction is
settled, Argentina’s total public debt is expected to fall by $67 billion to $125 billion
(equivalent to about 72 percent of GDP), 37 percent of which will be denominated in
Argentine pesos (up from just 3 percent in 2001). It remains to be seen how the
Argentine government with ultimately deal with the investors holding almost $20 billion
in defaulted bonds who did not accept the government’s offer.

IV-31

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

2003
12.1
16.1
17.3
3.7
15.7
7.4

2004

2004
n.a.
10.7
13.6
6.1
12.1
n.a.

2005

Q3

Q4

Dec.

Jan.

Feb.

12.0
2.6
13.2
5.3
11.7
2.1

n.a
2.1
12.1
5.8
10.4
n.a.

…
1.5
…
6.1
10.6
…

…
.4
…
7.2
12.2
…

…
n.a.
…
8.2
n.a.
…

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

In Venezuela, on March 3 the government devalued the bolivar 10.7 percent.
Venezuela's currency had been pegged to the dollar since early 2003 in an attempt to rein
in inflation; however, inflation has remained very high, ending 2004 at nearly 20 percent.
The devaluation had been expected since early December, when it was factored into the
2005 budget that was approved by the Venezuelan congress. At that time, however,
Finance Minister Tobias Nobrega was removed after he announced that the devaluation
would take place on January 1. Venezuela has been maintaining capital controls, which
have deterred speculative pressures on international reserves.

IV-32

Venezuelan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Consumer prices3
Non-oil trade balance4
Trade balance4
Current account5

2003
6.6
18.0
27.1
-5.5
16.5
11.4

2004

2004
11.2
15.1
19.2
-10.5
22.1
14.6

2005

Q3

Q4

Dec.

Jan.

Feb.

-6.0
14.5
21.5
-11.9
17.9
14.6

8.2
14.1
19.5
-12.2
25.2
15.6

…
13.2
19.2
…
…
…

…
13.5
18.5
…
…
…

…
n.a.
16.8
…
…
…

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