Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 3, 2005 : Greenbook Part 2

View original document

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

Prefatory Note

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

Content last modified 03/31/2011.

Class III FOMC - Internal (FR)

Part 2

April 28, 2005

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

April 28, 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
Economic activity appears to have softened of late after having posted sizable gains
around the turn of the year. Payroll employment increased only modestly in March, and
manufacturing production has risen only a little, on balance, over the past couple of
months. On the expenditure side, consumers seem to have turned cautious—perhaps
partly because of higher energy prices—and housing starts slumped in March after a
string of spectacular readings. In addition, capital spending is entering the second quarter
with less forward momentum than seemed likely a month ago. Rising energy prices have
pushed up headline inflation in recent months, and core inflation also moved up in the
first quarter.
Labor Market Developments
Labor demand has continued to increase, albeit at a slow pace. A rise of just 101,000 in
private nonfarm payroll employment in March left the three-month moving average at
142,000, a level similar to the average monthly gain in the second half of 2004. The
workweek, at 33.7 hours, was unchanged in March, but the increase in employment
generated a small rise in aggregate hours of production workers; for the first quarter as a
whole, these hours were 2 percent (annual rate) above their fourth-quarter level.
Slack in the labor market has continued to erode gradually. In March, the unemployment
rate moved back down to its January level of 5.2 percent. Another measure of the
prevalence of individuals searching for work—the rate of insured unemployment—has
also decreased this year and stands near its level in early 1997. Nevertheless, labor
market conditions have still proven insufficient to pull potential workers back into the
labor force; the labor force participation rate in March remained at its cyclical low of
65.8 percent. In addition, many job seekers have experienced long periods of search.
Long-term unemployment is still high, and the exhaustion rate—the proportion of
workers leaving the unemployment insurance (UI) rolls after having used their entire
period of eligibility (usually twenty-six weeks)—remained elevated in March.
The four-week moving average of initial claims for UI was 323,000 in the week ending
on April 23. Although claims have risen from the low levels observed in February, they
are still below the range that prevailed in the fourth quarter of last year. Meanwhile, the
JOLTS hiring rate moved down further in February after a spike in late 2004, and the
volatile series on hiring plans from the NFIB dropped sharply in March. In contrast, the
job openings rate from the JOLTS survey was unchanged in February at a level

II-2

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

2004

2005
Q4

Jan.

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)

Feb.

Mar.

Monthly change

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

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

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

159
142
...
-7
20
6
11
13
0
12
40
7
41
17
115

124
114
110
-27
4
-4
4
31
-4
22
20
0
62
10
85

243
212
229
15
31
7
39
3
-2
11
72
26
30
31
-97

110
101
...
-8
26
15
-10
6
7
2
27
-4
31
9
357

2.4
33.7
40.8

2.4
33.7
40.6

2.0
33.7
40.6

.3
33.7
40.7

.2
33.7
40.6

.1
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

Aggregate Hours of Production or
Nonsupervisory Workers
106

2002 = 100
106

104

500

Thousands
500

104

3-month moving average
400

400

300

200

Mar.

100

200

102

Mar.

102

100
100

100

-100

-200

-300

-400

1997 1998 1999 2000 2001 2002 2003 2004

-400

1997 1998 1999 2000 2001 2002 2003 2004

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

2004

2005
Q4

Jan.

Feb.

Mar.

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

5.5
17.0
9.4
4.4
4.4

5.5
17.1
9.3
4.4
4.3

5.4
17.1
9.3
4.3
4.2

5.3
16.9
9.5
4.1
4.1

5.2
16.3
9.5
4.0
4.1

5.4
17.5
10.1
4.1
4.2

5.2
16.9
9.0
4.0
4.0

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

66.0
43.8
75.0
75.3
59.3

66.0
43.9
74.9
75.4
59.3

66.0
44.1
75.3
75.3
59.2

65.8
43.5
74.4
75.2
59.1

65.8
43.3
74.7
75.1
59.2

65.8
43.2
74.2
75.2
59.2

65.8
44.0
74.2
75.3
58.9

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
Mar.
66.2

5.0
4.5

66.0
Unemployment rate (right scale)

4.0

65.8
65.6

1994

1995

1996

1997

1998

Long-term Unemployed
(More than 26 weeks)

1999

2000

2001

2002

2003

2004

2005

3.5

Exhaustion Rate
Percent
50

(Percent of labor force)

1.4

1.2

Percent
50

1.2

1.0

Mar.

1.0

0.8

0.6

0.4

0.2

0.0

1994

1996

1998

2000

2002

2004

0.0

Mar.

25
20

30
25

1994

1996

1998

2000

2002

2004

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

II-4

Labor Market Indicators

Unemployment Insurance

Hiring and Hiring Plans

Percent
3.5
4-week moving average
3.0

Thousands
550
500

Rate of insured unemployment
(left scale)

Apr. 16

2.5

450

Percent of private employment
4.4

Percent
30
Hires
(right scale)

4.2
Feb. 4.0

3.8
15
3.6

400
10

2.0

Initial claims
(right scale)

350

1.5
Apr. 23
1.0

1996

1998

2000

2002

2004

3.4

Mar.
5

Hiring plans*
(left scale)

3.2

300

3.0

250

-5

2.8
2001
2002
2003
2004
*Percent planning an increase in employment minus
percent planning a reduction.
Source. For hires, Job Openings and Labor Turnover Survey;
for plans, National Federation of Independent Businesses.

Job Openings and Help Wanted Index

Positions Hard to Fill
1999 = 100
110

Percent
40

100

Percent of private employment
3.6

3.4
3.2

90
Job openings
(left scale)

3.0

Mar.

2.8

70
2.6

Feb.

1.8

Mar.
2.2
2.0

2.4
Help wanted index
(right scale)
2001

2002

2003

2004

1996

1998

2000

2002

2004

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

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

Job Availability

Expected Labor Market Conditions
Index
150

150

130

Index
140

Index
120

Michigan SRC
(right scale)

Apr.(p)

130

100

110

100

110

120

Apr.
Apr.
90

60
Conference Board
(left scale)

1996

1998

2000

2002

2004

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

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.

II-5

somewhat above its late-2004 values, while the help-wanted index fell back in March but
reversed only a portion of its spurt earlier in the year.
Uptrends in the fraction of small firms with hard-to-fill positions and in households’
perceptions of job availability are consistent with the gradual improvement in labor
demand and with the slow erosion of slack implied by the decline in the unemployment
rate. However, in recent months, households seem to have become more pessimistic
about future labor market conditions, and expected conditions in both the Michigan and
Conference Board surveys are now at or below the low end of the range seen in the past
two years.
Industrial Production
Industrial production continued to expand in early 2005, although the pace of expansion
has slowed in recent months. Overall industrial production increased 0.3 percent in
March, but the rise largely reflected a surge in energy output. Manufacturing output
slipped 0.1 percent in March, and the data for both January and February were revised
down to show smaller increases than previously reported. For the first quarter as a
whole, factory output rose at an annual rate of 3.6 percent, the slowest rate since the
middle of 2003. Capacity utilization in manufacturing edged down to 78.0 percent in
March; that figure is 2.1 percentage points above its year-ago level but 1.8 percentage
points below its 1972-2004 average.
Among the energy-producing industries, utilities output jumped 3.6 percent in March, as
temperatures returned to seasonal norms after two months of unseasonably warm
weather. Production also increased in March for all major energy-mining categories.
Available weekly data point to a decline in electricity generation in April; energy mining
is up a touch.
Motor vehicle assemblies fell back in March to an annual rate of 12.0 million units after
having moved up to a rate of 12.6 million units in February. Assemblies are scheduled to
fall another 600,000 units (annual rate) in April, and the lower production of motor
vehicles and parts will likely shave nearly 0.2 percentage point from the change in April
IP. Elsewhere in transportation, production of commercial aircraft jumped in March and

II-6

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

Component

(percent)

2004

2005

20041

2005

Jan.

Annual rate
Total
Previous

Feb.

Mar.

Monthly rate

100.0
100.0

4.3
4.3

4.5
4.4

3.6
...

.0
.1

.2
.3

.3
...

81.9
74.7
70.2

5.1
5.3
4.4

4.6
3.5
2.8

3.6
3.5
1.9

.3
.5
.3

.3
-.1
-.3

-.1
.2
.2

Mining
Utilities

8.3
9.8

-2.0
2.7

-3.6
10.4

6.6
1.4

-.1
-2.3

.4
-1.1

.7
3.6

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.5
1.0
1.2
2.3

18.7
6.9
9.6
29.9

14.5
13.8
13.2
15.4

29.0
12.7
24.2
39.0

3.4
1.1
4.2
3.9

1.7
.9
.5
2.6

.9
.9
-1.0
1.9

Motor vehicles and parts

7.2

2.9

16.3

4.9

-1.6

5.2

-3.6

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

22.0
4.3
17.7

3.7
1.3
4.3

3.4
-1.0
4.5

1.4
.1
1.7

.4
-.1
.6

-.3
.4
-.4

-.1
.1
-.2

Business equipment
Defense and space equipment

7.7
1.9

9.3
6.1

1.9
5.0

5.2
9.8

.5
.4

-.2
1.0

.9
2.1

Construction supplies
Business supplies

4.3
8.1

3.8
3.2

.1
.9

1.4
4.4

.1
1.0

.7
-.5

-.1
.2

25.2
13.9
11.3

3.9
4.6
2.9

3.0
4.2
1.5

.3
.8
-.3

.1
.4
-.1

-.4
-.5
-.4

.1
.3
-.1

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

Feb.

Mar.

Total industry

81.0

70.8

78.6

78.2

78.8

79.3

79.4

Manufacturing
High-tech industries
Excluding high-tech industries

79.8
78.3
79.9

68.5
74.1
68.2

77.2
74.3
77.3

77.0
69.9
77.8

77.6
69.8
78.5

78.1
71.7
78.9

78.2
71.9
79.0

78.0
71.7
78.8

Mining
Utilities

87.1
86.8

78.6
77.7

83.5
84.2

86.3
83.7

85.6
85.4

87.2
85.4

87.1
84.1

87.8
87.1

Sector

2004

2005

II-7

Indicators of High-Tech Manufacturing Activity

Rate of Change in Semiconductor
Industrial Production

Industrial Production in the High-Tech Sector
2000 = 100, ratio scale

Percent
300
250
200

Semiconductors

150

Computers
Mar.

100
Communications equipment

2000

2001

2002

2003

2004

2005

18
16
14
12
10
8
6
4
2
0
-2
-4
-6

Microprocessor Unit (MPU) Shipments
and Intel Revenue

3-month moving average

MPUs

Mar.

Non-MPU chips

1998

1999

2000

2001

2002

2004

2005

Semiconductor Manufacturing
Equipment Orders and Shipments

Billions of dollars, ratio scale
Q2
Intel revenue

2003

18
16
14
12
10
8
6
4
2
0
-2
-4
-6

Billions of dollars, ratio scale
3.5
3.0

10.0
9.5
9.0
8.5

2.5
2.0

Shipments

8.0
7.5

1.5
Orders

7.0

Mar.

6.5

1.0

6.0
5.5

Worldwide MPU shipments
1999
2000
2001
2002
2003
2004
2005
Note. Q2 is the range of Intel’s guidance as of April 19, 2005.
FRB seasonals.
Source. Intel and Semiconductor Industry Association.

5.0

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

Millions of units, ratio scale

Millions of units, ratio scale
Q1

Index
17

16
15

PCs (right scale)

0.5

CIO Magazine Future Spending
Diffusion Indexes

U.S. Personal Computer and Server Sales
0.84
0.78
0.72
0.66

2005

0.60

0.54

0.42

Mar.

0.48

70
65

55
Data networking equipment

0.36

Servers (left scale)

50
Computer hardware

0.30

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

2002

2003

2004

2005

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-8

Indicators of Manufacturing Activity

Utilities Output

Motor Vehicle Assemblies
1997=100

124

120

Electricity

+ Apr.

116

112

108

104

100

Natural gas

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 March are actual completions; the remainder
are Boeing scheduled assembly rates.

Percent
4

12
+ Apr.

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

Index
8.5
8.4
8.3
8.2
8.1
8.0
7.9
7.8
7.7
7.6
7.5
7.4
7.3
7.2

Monthly aggregate of weekly index
Weekly index

Jan. Apr.

July Oct. Jan. Apr. July Oct. Jan. Apr.
2003
2004
Note. One index point equals 1 percent of 1997 total industrial
output.

Diffusion index
100

Diffusion index
80

90
ISM (right scale)

80
70

1
Mar.
0

70
FRB Philadelphia survey

65
Apr.

60
50

Mar.
-1
RADGO (left scale)

New Orders: FRB New York and
FRB Philadelphia Surveys

-2

3-month moving average

New Orders: ISM Survey and Change in
Real Adjusted Durable Goods Orders (RADGO)

Weekly Production Index excluding Motor
Vehicles and Electricity Generation

Boeing Commercial Aircraft Completions
160
150
140
130
120
110
100
90
80
70
60
50
40

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

Content partially redacted.

Annual rate

120

116

Millions of units
15

Apr.

30
20

-3

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. RADGO is a 3-month moving average.

50
45

FRB New York survey

-4

40
35

II-9

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
Q21

Feb.

Mar.

Apr.1

12.0
4.3
7.8

12.0
4.1
7.9

12.2
4.4
7.7

11.8
4.1
7.7

12.6
4.6
8.0

12.0
4.4
7.6

11.4
4.0
7.3

73
59
83

73
58
82

73
56
85

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

78
61
90

71
55
82

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

3.21
1.02
2.19

3.12
.99
2.13

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

3.27
1.04
2.23

3.12
.99
2.13

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

Note. Components may not sum to totals because of rounding.
1. Production rates for April and the second quarter 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.

should increase at a robust clip for the next several months
1

The output of high-tech industries rose a tepid 0.9 percent in March. Still, production
increased at an annual rate of 29 percent for the first quarter as a whole—the largest
quarterly advance since the middle of 2000. Much of the first-quarter strength was in
semiconductors, where gains were broadly based across end-use categories. However,
Intel’s latest revenue forecast suggests that real semiconductor output will rise at a more
moderate rate in the second quarter. Moreover, semiconductor manufacturers appear
cautious about the outlook for high-tech; orders for semiconductor-fabricating equipment
continue to languish well below shipments.2
Downstream from semiconductors, the production of computer and peripheral equipment
continues to increase at a modest pace; Gartner data indicate that unit sales of PCs in the
1

Gartner, a high-tech research firm, expects total worldwide spending on semiconductor equipment to
decline several percentage points in 2005, though spending in the United States is likely to increase. In
fact, Intel recently revised up the range of its planned capital spending in 2005 by $500 million, to between
$5.4 billion and $5.8 billion; this projection is significantly higher than the $3.8 billion the company spent
last year.

II-10
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2004
Category

2004

Total

2005
Q4

Jan.

Feb.

Mar.

16.9

17.1

17.2

16.4

16.2

16.3

16.8

7.5
9.4

7.3
9.7

7.7
9.5

7.5
8.9

7.4
8.8

7.4
8.9

7.7
9.1

North American1
Autos
Light trucks

13.5
5.4
8.1

13.8
5.3
8.5

13.6
5.4
8.2

13.1
5.4
7.7

13.0
5.4
7.6

12.9
5.3
7.6

13.4
5.5
7.9

Foreign-produced
Autos
Light trucks

3.4
2.1
1.2

3.3
2.0
1.2

3.6
2.3
1.3

3.3
2.1
1.2

3.2
2.0
1.2

3.4
2.1
1.2

3.4
2.2
1.2

.43

.44

.48

.50

.53

.49

.47

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

Mar.

1800
Apr. 17

16.5

1400

16.0
15.5
2002

2003

2004

2005

15.0

2002

2003

2004

2005

1000

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
170

100
90

160

Light trucks
80

150
Mar.

140
60
130
Apr.

2000

2001

2002

2003

2004

2005

50
Autos

120
110

40
1998

1999

2000

2001

2002

2003

2004

2005

II-11

United States were soft in the first quarter, although rest-of-world sales apparently were
relatively strong. Communications equipment output, despite falling in March, rose more
than 24 percent at an annual rate for the quarter as a whole. Industry contacts, as well as
company reports, suggest that major providers of telecommunications services are
ramping up spending on communications equipment, both to build wireless network
infrastructure and to expand and upgrade broadband-delivery capabilities. Looking
ahead, the respondents to the recent NABE survey remain upbeat about spending plans
for high-tech equipment. CIO Magazine’s diffusion index for future spending on
computer hardware rose in March after having trended down for a few months.
Outside energy, transportation, and high-tech products, production was mixed across
market groups in the first quarter. The output of business equipment rose at an annual
rate of more than 5 percent, in part because of strong gains in mining, oil, and gas field
machinery. The production of defense and space equipment surged nearly 10 percent.
By contrast, the production of both durable and nondurable consumer goods was slow, as
was the upstream output of both construction supplies and materials.
Outside the declines in motor vehicle assemblies and electricity generation, the other
available weekly production data for April contribute little to the change in IP. The broad
forward-looking indicators of manufacturing activity have been mixed. The diffusion
index of new orders from the ISM in March was consistent with further moderate gains in
IP, and the pop-up in new orders in April’s Philadelphia Fed survey was another positive
sign. However, the information from the New York Fed's April survey and data through
March for the staff’s measure of real adjusted durable goods orders suggest little, if any,
increase in IP in the near term.
Motor Vehicles
Sales of light vehicles have continued to run below the rapid pace of late 2004, although
they have improved appreciably in the past couple of months. Indeed, after having
dropped to an annual rate of 16¼ million units in January and February, sales increased
to 16¾ million units in March, and confidential reports from our industry contacts
suggest that they will rise further in April. Incentives appear to have contributed little to
the pickup in sales. Although some manufacturers have announced programs to boost
sales of last year’s models that are still in stock, the average value of incentives through
mid-April remained well below the levels of last fall.

II-12

Household Indicators

Household Net Worth and Wilshire 5000
Index
15000

Ratio
7.0

13000

6.5
Mar.
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

1
Feb.

0
-1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

0
-1

* 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

90
Apr.

60
40

Conference Board (left scale)
1994

1995

1996

1997

1998

* April 2005 value for the Michigan SRC is preliminary.

1999

2000

2001

2002

2003

2004

2005

II-13

One puzzle is that the recent firming of sales has occurred despite a dramatic worsening
in consumers’ perceptions of buying conditions: The Michigan SRC index of car-buying
attitudes has fallen sharply in the past few months, in part because of a drop in the
fraction of respondents citing either low prices or low interest rates as a reason for it
being a good time to buy a vehicle. The number of respondents who mentioned gas
prices as the source of their pessimistic view of buying conditions also jumped noticeably
in April.3
Motor vehicle inventories shrank a bit in the first quarter. However, dealers’ stocks—
especially of light trucks—remain high by historical standards. The automakers’ latest
plans call for assemblies to drop from 12.2 million units (annual rate) in the first quarter
to 11.8 million units in the second quarter. Even if these plans are realized, however,
inventories will likely remain high through the summer, unless the pace of sales picks up.
Consumer Spending
Apart from a falloff in outlays on motor vehicles, consumer spending appears to have
posted a sizable gain in the first quarter. That said, the first-quarter increase seems to
have been largely the result of a high level of spending early in the year. In particular,
retail sales in the categories that are included in the BEA’s estimate of PCE control—that
is, sales by establishments other than auto dealers and building material and supply
stores—were flat in March in nominal terms; excluding gasoline stations, these sales fell
0.6 percent. The weakness was evident across a broad range of stores. Factoring in our
estimates of consumer prices, we estimate that real spending on PCE goods other than
motor vehicles slumped 0.8 percent in March after having risen 0.8 percent in January
and 0.3 percent in February.4
More recently, weekly data on chain store sales suggest that retail spending has been
decent so far in April, although consumer sentiment declined further. The Michigan
SRC’s preliminary index of consumer sentiment and the Conference Board’s index of
consumer confidence both fell in April for the third straight month. The Michigan index
is now below its average reading in 2004, whereas the Conference Board index remains a
bit above its average 2004 level.

Although increases in prices for gasoline do not appear to have had an appreciable effect on total
light-vehicle sales, we have recently seen a shift in demand away from large, light trucks (including vans,
pickups, and sport-utility vehicles) and toward smaller, more fuel-efficient vehicles.
4
The BEA’s estimate of PCE in March and any revisions to the data for earlier months will be released
on Friday and reported in the Greenbook Supplement.

II-14

Private Housing Activity
(Millions of units; seasonally adjusted annual rate except where noted)
2004
2005
Sector

2004

Jan.

Feb.

1.96
2.02

1.97
2.01

1.98
2.03

2.09
2.09

2.19
2.13

2.23
2.11

1.61
1.57
1.58
.150
1.20
5.96

1.63
1.57
1.60
.141
1.16
5.97

1.62
1.56
1.59
.150
1.24
6.05

1.70
1.61
1.64
.146
1.30
5.99

1.78
1.64
1.67
.139
1.18
5.96

1.80
1.64
1.67
.133
1.28
5.97

.35
.45
.075

.34
.44
.067

.35
.47
.075

.38
.48
.072

.41
.49
.071

.43
.47
.066

.131

.128

.139

n.a.

.151

.137

.82

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

.83

.86

.85

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 tha
been canceled, abandoned, expired, or revoked. Not at an annual rate.
n.a. Not available.

Private Housing Starts

(Seasonally adjusted annual rate)

4
2
0
8

Total

6
4
2
Single-family

Multifamily

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

II-15

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

Item
Q3

2005
Q4

Jan.

Annual rate
Total
Retail control1
Excluding gasoline sales

6.2
6.2
6.8

10.2
10.6
9.1

Feb.

Mar.

Monthly rate
5.4
6.9
6.5

.1
.9
.7

.5
.7
.7

.3
.0
-.6

1. Total less outlays at building material and supply stores and at automobile and other motor
vehicle dealers.

Nevertheless, the fundamental factors underlying consumer spending remain favorable,
although somewhat less so than at the time of the last Greenbook. Real wages and
salaries appear to have risen at a solid rate last quarter. The ratio of wealth to income
was roughly unchanged last quarter and remained high relative to its average level in
recent years and to its long-run average. According to the published data, the saving rate
averaged ¾ percent in the first two months of the year, a figure consistent with the high
wealth-to-income ratio and the low level of interest rates.5
Housing
The sharp drop in starts in March notwithstanding, housing activity retains considerable
vigor. Last month’s fall in single-family starts—to an annual rate of 1.54 million units—
came on the heels of strong readings in January and February, and the substantial
increase in the permit backlog in March suggests that starts will probably move up in
April.6 The multifamily sector exhibited a similar pattern: Starts fell in March, but the
permit backlog rose, a sign that some bounceback in April is likely.
Home sales stayed strong in March. At an annual rate of 6.04 million units, sales of
single-family existing homes remained around the ebullient levels prevailing since mid-

The Annual Benchmark Report for Retail Trade and Food Services, which was released on March 31,
implies a downward revision to the level of consumer spending and an upward revision to the saving rate,
all else being equal. We estimate that the upward revision to the first-quarter saving rate from this source,
in isolation, amounts to about ½ percentage point.
6
The backlog increased both because the level of permits—adjusted for activity in areas where permits
are not required—was slightly higher than the level of starts and because of an apparent correction to a
previous misclassification of permits.

II-16

Indicators of Single-Family Housing
Existing Home Sales

New Home Sales

6500

Thousands of units
6500

6000

Mar.

Thousands of units
1500

1500

Mar.
6000
1300

5000

4500

1100

900

4500

4000

1100

5500

5000

1300

900

5500

4000

3500

1998

1999

2000

2001

2002

2003

2004

2005

3500

700

Source. National Association of Realtors.

1998

1999

2000

2001

2002

2003

2004

2005

700

Source. Census Bureau.

Mortgage Rates

Homebuying Indicators
Percent
9

9
Fixed rate

Diffusion index
Index
550
100
MBA purchase index (right scale)
Builders’ ratings of current new home sales
500
80
(left scale)
Apr. 22
450
60

Apr. 6

-20

Apr.

One-year ARM

Apr.

4
3

1998

1999

2000

2001

2002

2003

2004

2005

350

Note. The April readings are based on data
through Apr. 27.
Source. Freddie Mac.

250
1998 1999 2000 2001 2002 2003 2004 2005 2006

200

Prices of New Homes

Percent change from year earlier
14
Repeat transactions
Average price of homes sold

300

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
14

400

12
Q4
Q1

Percent change from year earlier
25

Constant quality
Average price of homes sold

8
6

-5

8
10

1998

1999

2000

2001

2002

2003

2004

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

2005

5
0

1998

1999

2000

2001

Source. Census Bureau.

2002

2003

2004

2005

-5

II-17

2004. In March, sales of new homes soared to the highest level on record; for the first
quarter as a whole, they averaged 1.30 million units at an annual rate, a pace more than
8 percent above the total for 2004.
The performance of home prices in the first quarter was mixed. The average price of
existing homes was up 10 percent from a year earlier, and the average price of new
homes advanced 7¾ percent during the same period. However, the constant-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 only 4½ percent,
compared with an average pace of about 7½ percent in the second half of last year. The
repeat-transactions index for existing homes in the fourth quarter of last year (the most
recent observation) was 11¼ percent higher than it was a year earlier.
Recent indicators suggest that housing demand likely will hold at a reasonably high level
in the near term. In the last week of April, the rate for thirty-year fixed-rate mortgages
was 5.78 percent, a figure about the same as that at the end of last year and close to its
average over the past two years. The rate for one-year adjustable-rate mortgages has also
changed little, on net, since the end of last year. After having dipped in January, the fourweek moving average of mortgage applications to purchase homes has rebounded during
the past couple of months, and the most recent readings are only slightly lower than the
record highs posted last fall.
Equipment and Software
Real investment in equipment and software appears to have posted a respectable gain in
the first quarter, although spending seems to have lost some steam since the turn of the
year. The weakness in shipments and orders in March implies a less rosy near-term
outlook than seemed likely a month ago, although the fundamentals supporting capital
spending remain favorable. Indeed, business output has been rising at a solid rate, and
the user cost of capital has continued to decline (albeit somewhat more slowly than it did
several years ago). In addition, even though real cash flow did not increase during 2004,
it remains at a high level, and firms continue to hold an abundance of liquid assets. The
Beige Book and other survey evidence suggest that businesses are fairly comfortable
about the outlook.
In the high-tech sector, shipments of computers and communications equipment were
down, on balance, in nominal terms in February and March. Nonetheless, a big rise in

II-18

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

2005

Jan.

Annual rate

Feb.

Mar.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

9.7
9.6
40.3
-17.1
8.6

10.6
11.8
29.8
11.0
8.6

2.6
3.6
7.5
6.7
2.5

-2.9
-2.8
-1.6
-2.2
-3.1

.1
-1.1
-.1
.0
-1.4

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

4.7
6.3
34.6
-23.0
5.9

2.3
15.8
14.3
73.6
10.1

1.1
4.4
-2.3
24.3
3.5

-.7
-2.5
.5
-2.7
-3.1

-6.2
-4.7
-7.8
-13.8
-2.7

Memo:
Shipments of complete aircraft1

27.1

n.a.

25.4

18.4

n.a.

1. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.
n.a. Not available.

Computers and Peripherals

Communications Equipment

Billions of dollars, ratio scale

12
Shipments
Orders

12
11

Mar.

Billions of dollars, ratio scale

21
18

Shipments
Orders

21
18
15

1999

2000

2001

2002

2003

2004

2005

Mar.

1999

2000

Medium and Heavy Trucks
890
740

2001

2002

2003

2004

2005

Other Equipment

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

890

Billions of dollars, ratio scale

740

650

560

Shipments
Orders

560

470

Mar.
Mar.

470

380

290

200

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

200

Mar.

1999

2000

2001

2002

2003

2004

2005

II-19

Equipment and Software Investment Fundamentals

Real Business Output
Four-quarter percent change
8

6
Q4

-2

-4

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

-4

2004

User Cost of Capital
3

High-Tech

Four-quarter percent change

-3

Non-High-Tech

Four-quarter percent change

-3

-6

-6
Q4

-12
-15

-9
-12

1990 1992 1994 1996 1998 2000 2002 2004

-9

-15

-5

-10

-5

-10

1990 1992 1994 1996 1998 2000 2002 2004

NABE Capital Spending Diffusion Index

Real Corporate Cash Flow
Four-quarter percent change

Index

48
36
Q1

-10

1990 1992 1994 1996 1998 2000 2002 2004

-5

-12

-10

-24

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

II-20

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

Total Structures

Office and Commercial

290

Billions of chained (2000) dollars
290

270

250

230

210

Billions of chained (2000) dollars
70

210

Commercial
60

60
Feb.

Office

190
170

Feb.
1997 1998 1999 2000 2001 2002 2003 2004 2005

190
170

Manufacturing and Power &
Communication

Feb.

1997 1998 1999 2000 2001 2002 2003 2004 2005

Other

Billions of chained (2000) dollars
60
Power & communication

Billions of chained (2000) dollars
75

40
Feb.

30
20

30
Manufacturing

10
0

Feb.

1997 1998 1999 2000 2001 2002 2003 2004 2005

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

Indicators
Vacancy Rates

Drilling Rigs in Operation
Percent
18

15
12

Office

1200

Number
Apr. 1200

1000

800

600

400

Q1
Industrial
Q1

9
6

600
400
Petroleum

Retail
3

800

Natural gas

200

200
Apr.

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

1997 1998 1999 2000 2001 2002 2003 2004 2005
Note. Apr. values are averages through Apr. 22.
Source. DOE/Baker Hughes.

II-21

shipments in January and continued falling prices in this category support a substantial
increase in real outlays for these types of equipment in the first quarter.
After having surged in the second half of last year, business purchases of motor vehicles
appear to have moderated in early 2005. As noted, sales of light vehicles dropped
sharply in the first quarter, and some of the decline likely will show up as lower business
spending. However, sales of medium and heavy trucks rose further, on average, through
March, and net new orders—though down from their highs in the fourth quarter—suggest
that sales will remain robust in the months ahead. Order backlogs for these vehicles are
still high as well.
Real business spending on non-high-tech, non-transportation equipment seems to have
softened lately after an exceptionally strong performance around the turn of the year.
Shipments fell 1½ percent in March after having dropped 3 percent in February. The
deceleration has been concentrated in construction, farm, and industrial machinery, all of
which had posted sizable increases in the second half of 2004. Orders for this broad
category have also slackened over the past couple of months but still are running above
shipments.
Nonresidential Construction
Real construction of nonresidential structures remains depressed. Outlays in the power
and communications sector and on manufacturing facilities have picked up a bit recently.
However, spending on commercial structures has moved lower after an uptick in mid2004, and outlays for office buildings are still moribund despite some easing in the
vacancy rate for that sector. The number of rigs drilling for natural gas continues on a
steep upward trend even as petroleum drilling remains soft.
Business Inventories
The book value of business inventories excluding motor vehicles rose at an annual rate of
$108 billion, on average, in January and February, a rate similar to that in the fourth
quarter. Interpreting the book-value data is especially difficult in periods when prices are
rising rapidly, but we suspect that real inventories have continued to expand briskly this
year. The book-value inventory-sales ratios have generally edged up, and although the
majority of purchasing managers in the ISM survey continue to think that customer
inventories are too low, the number with that view has decreased of late. Information
from the staff’s flow-of-goods inventory system indicates that inventories are mostly in

II-22

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

2005

Dec.

Jan.

Feb.

111.2

86.5

84.6

29.3

139.9

71.5

90.3

77.6

101.8

59.8

142.8

72.2

Manufacturing
Ex. aircraft

38.9
39.0

32.3
33.9

35.9
33.2

5.7
6.6

84.0
77.6

31.3
23.6

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

32.2
1.0
31.2

38.3
3.8
34.5

36.7
-2.4
39.1

13.1
-5.9
19.1

41.8
8.2
33.7

23.8
-.9
24.7

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

40.1
20.0
20.2

15.8
5.0
10.8

12.0
-14.8
26.8

10.5
-24.5
35.0

14.1
-11.0
25.1

16.4
.2
16.3

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

Book-Value Inventories Relative to Shipments and Sales
Ratio
1.8

1.8

Retail trade ex. motor vehicles and parts

1.6

Manufacturing

1.4

Feb.
1.2

1.2
Wholesale trade ex. motor vehicles and parts

1.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1.0

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

62
Total

56
Total ex. motor vehicles and parts

50
Mar.

48
46

48
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-23

line with consumption, although days’ supply is high for a few industries, including
motor vehicles, food, paper, and chemicals excluding pharmaceuticals.
Federal Government Sector
The incoming data do not point to any major change in the federal budget situation.
According to the Monthly Treasury Statement (MTS), both receipts and outlays have
posted hefty increases in recent months, and the deficit in the unified budget in March, at
$71 billion, was about the same as it was a year earlier.
Outlays in March, adjusted for financial transactions and payment-timing shifts, were
about 7 percent above their year-earlier level. Defense spending was 9 percent higher
than it was last March, in line with the increases posted over the past year. Outlays in
other categories also rose roughly in line with recent trends.
Adjusted receipts in March were about 12 percent higher than they were last year.
Corporate income tax receipts, which included final payments on 2004 tax liabilities,
were up an impressive 43 percent. Data for April—when the first quarterly payment on
2005 liabilities is due for most firms—point to another strong month for corporate
collections.
According to the MTS, withheld individual income taxes and social insurance taxes rose
moderately in March. Information from the Daily Treasury Statements through late April
suggests that nonwithheld individual and payroll taxes, which are largely final payments
on 2004 individual income tax liabilities, are up more than 25 percent this tax season over
last. This large increase reflects the fact that final payments last year were held down by
the effects of the 2003 tax bill.7 Refunds (including the refundable portions of the EITC
and the child credit, which are counted as outlays) are running only slightly higher than
they did during last year’s filing season.
On the legislative front, the Senate and the House have passed budget resolutions for
fiscal year 2006. The plans from both chambers call for a small increase in real
appropriations for defense and little change in funding for nondefense programs, in line
with the President’s proposals. The two budget resolutions contain different

The 2003 tax bill was passed in the summer of 2003 but was made retroactive to January 1, 2003.
Thus, some of the reductions in 2003 tax liability showed up as lower final payments and higher refunds in
the spring of 2004.

II-24

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

March
Function or source

2004

2005

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

205.3
-.1
.0
205.4

220.0
.7
.0
219.2

Receipts
Payment timing
Adjusted receipts

132.4
.0
132.4

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

Percent
change

2004

2005

7.1
...
...
6.7

2232.8
-2.1
.7
2234.3

2374.5
-.7
-.1
2375.3

6.3
...
...
6.3

148.7
.0
148.7

12.3
...
12.3

1807.4
.0
1807.4

1968.4
.0
1968.4

8.9
...
8.9

-72.9

-71.2

...

-425.4

-406.1

...

205.4
13.4
192.0
40.2
41.1
24.9
15.8
35.8
.8
33.4

219.2
15.0
204.2
43.7
43.5
26.6
17.2
36.8
.2
36.1

6.7
12.3
6.3
9.0
5.7
6.7
8.7
3.0
-71.2
8.1

2234.3
151.7
2082.5
436.9
484.5
256.6
170.2
341.2
22.1
371.1

2375.3
167.7
2207.5
471.7
508.8
281.7
179.5
339.2
23.3
403.3

6.3
10.5
6.0
8.0
5.0
9.8
5.4
-.6
5.6
8.7

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

132.4

148.7

12.3

1807.4

1968.4

8.9

100.4
132.7
7.9
40.2
18.9
24.2
5.3
13.1

106.4
137.5
8.0
39.1
27.0
30.8
3.8
15.3

6.0
3.6
1.6
-2.7
42.9
27.1
-29.0
16.4

1464.2
1375.7
288.5
200.0
154.5
204.1
49.5
188.7

1549.5
1442.7
292.7
188.0
221.9
255.5
33.6
197.1

5.8
4.9
1.4
-6.0
43.6
25.2
-32.1
4.5

Adjusted surplus or deficit (-)

-73.0

-70.5

...

-426.9

-406.8

...

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

guidelines for mandatory spending and receipts, but press reports suggest that the
differences have been resolved.
State and Local Governments
State and local government spending remains on a gradual uptrend. Employment rose
10,000 in March, with small advances in both the education and non-education
categories. In addition, sizable gains in spending on highways and bridges kept nominal
construction expenditures moving up through February (the most recent data).
According to a mid-April report from the National Conference of State Legislatures, the
sector’s fiscal situation continues to improve, although conditions remain uneven across
the states. Revenue flows appear to have quickened, and all but a few states reported that
collections from major taxes in 2005 are coming in at or above projected levels. About
half of the states, however, are facing prospective budget gaps for fiscal 2006 as
Medicaid costs continue to soar and pressures to reverse earlier cuts to K-12 education
remain intense.
Prices
Spurred by sharp increases in energy prices, consumer price inflation turned up in
February and March. Consumer prices excluding food and energy have also been rising a
bit more rapidly of late, with core PCE prices estimated to have increased 2½ percent
(annual rate) in the past three months.8 During the twelve months ending in March, core
PCE prices rose an estimated 1.6 percent, about the same pace as in the preceding twelvemonth period.
Consumer energy prices posted large run-ups in February and March, as the jump in
crude oil prices since the turn of the year showed through to the retail level. Retail
gasoline prices climbed almost 8 percent in March. And although gasoline inventories
are at the upper end of their historical range for this time of year and crude prices have
eased slightly, survey data suggest that retail gasoline margins have shot up in the past
few weeks, thereby pushing consumer gasoline prices up further in April. Higher prices
of crude oil in recent months have also boosted the cost of heavy fuel and induced some
substitution toward natural gas by industrial users; this substitution has lately pushed up
the price of natural gas as well.
8

This Greenbook was published just before the BEA released its initial estimates of PCE prices for
March. As a result, all references in this section to PCE prices including that month represent staff
estimates.

II-26

Measures of Inflation
(Percent)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Mar.
2004

Mar.
2005

Dec.
2004

Mar.
2005

Feb.
2005

Mar.
2005

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

1.7
3.2
.4
1.6
-1.6
2.9
1.6
1.4

3.1
2.5
12.4
2.3
.6
3.0
2.6
1.9

3.4
3.5
15.3
2.0
1.4
2.3
...
...

4.3
1.3
21.1
3.3
1.1
4.0
...
...

.4
.1
2.0
.3
.0
.3
...
...

.6
.2
4.0
.4
.0
.5
...
...

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

1.7
2.8
.6
1.5
-1.2
2.7
1.4
2.3

2.3
2.3
14.5
1.6
.0
2.3
1.7
n.a.

2.5
2.8
16.2
1.6
.4
2.1
1.7
1.0

3.3
.9
22.8
2.6
1.6
3.0
2.4
n.a.

.3
.0
2.1
.2
.0
.3
.2
.4

.4
.2
4.3
.2
.0
.2
.2
n.a.

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

1.5
5.5
-.4
.7
.8
.4
1.5
3.0
.5
31.8

4.9
3.6
15.3
2.6
2.6
2.7
8.7
7.6
10.8
3.3

7.2
7.0
25.4
2.6
2.5
3.1
6.8
4.6
41.9
25.2

5.7
3.7
15.9
3.7
4.5
2.8
8.7
6.8
2.4
-17.0

.4
.8
1.4
.1
.2
-.2
.7
.5
-1.6
-3.0

.7
.3
3.3
.1
.1
.3
1.0
.3
4.3
1.0

Measures

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

II-27

Prices for consumer foods rose 0.2 percent in March, as price increases for food away
from home—which accounts for more than 40 percent of consumer food expenditures—
moderated after having jumped in January and February. Overall, the rise in the CPI for
food so far this year has decelerated to a modest annual rate of 1¼ percent after having
risen at a 3½ percent rate over the final three months of 2004.
A rise of 0.4 percent in the core CPI in March boosted the three-month change to an
annual rate of 3¼ percent. Core goods prices as measured in the CPI were flat for a
second month in March, as a jump in apparel prices was offset by declines in prices of
durable goods, especially motor vehicles. However, prices of core consumer services
rose 0.5 percent after a 0.3 percent increase in February. The large increase in services
prices in March reflects a sharp jump in the price of lodging away from home, which is
sometimes erratic from month to month; sizable increases were also recorded in the
categories of air fares, medical services, and tuition.
We estimate that core PCE prices rose 0.2 percent in March—a rate considerably less
than the core CPI. One important reason for the difference is that lodging away from
home has a much lower weight in PCE prices than it does in the CPI. Taking a longer
perspective, the estimated increase of 1.6 percent in core PCE prices over the past year is
only a touch above the year-over-year readings that have prevailed since last summer.
Core goods prices, despite having remained flat in February and March, have accelerated
noticeably over the past year; the pickup apparently reflects higher import prices, the
indirect effect of higher energy prices, and higher prices for core intermediate materials.
The opposite picture is evident in the incoming data for core PCE services—the twelvemonth change has moved lower over the past year despite the more-rapid increases of the
past few months.9
In the preliminary Michigan survey for April, households’ median expectation for
inflation over the next year edged up one-tenth, to 3.3 percent, after a 0.3 percentage
point jump in March. This shift in near-term inflation expectations is consistent with the
energy-induced pickup in headline inflation. The preliminary April reading on longer-

The twelve-month change in the PCE for core services has moved down during the past year,
whereas its counterpart in the CPI has remained about flat. This relative decline in the PCE measure
reflects a reported deceleration in non-market services prices, a smaller weight on housing services (whose
prices have risen relatively rapidly of late), and the use of PPIs (which have been rising more slowly than
the corresponding CPIs) to measure the cost of many medical services.

II-28

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

CPI and PCE ex. Food and Energy

Percent
3

Percent

PCE excluding Food and Energy

CPI
2

Mar.*

2
Mar.*

PCE
1

CPI
chained

1
Market-based components

1999

2000

2001

2002

2003

2004

2005

* PCE for March is a staff estimate.

2000

2001

2002

2003

2004

2005

Percent
5

3-month change, annual rate

Percent

PCE Goods and Services

4
3

Services ex. energy

Mar.*

1
Mar.*

2
1

-2

-1

-3

1999

2000

2001

2002

2003

2004

2005

Mar.*

-1

* PCE for March is a staff estimate.

2
1

2
0

-1

* PCE for March is a staff estimate.

PCE excluding Food and Energy

1999

0
-1

Goods ex. food and energy

1999

2000

2001

-2

2002

2003

2004

2005

-3

* PCE for March is a staff estimate.

Percent

PCE Energy

220

Gasoline Price Decomposition

Cents per gallon

220

Apr. 25
20

Mar.*
10

190

Retail price*

160

10
130

130

Apr. 25

0
100

-10

-20

-10

1999

2000

2001

2002

2003

* PCE for March is a staff estimate.

2004

2005

-20

100

WTI spot price

70
40

2003

2004

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

2005

II-29

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

2.3

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
2.2

PCE price index
Less food and energy

1.7
2.2

1.8
1.5

1.7
1.2

2.6
1.6

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

1.3
1.8

1.7
1.4

1.6
1.0

2.8
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

3.8
2.6

3.0
2.1

2.0
1.7

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

3.0

3.6

3.0

3.2

2.8

2.5

2004:Oct.
Nov.
Dec.
2005:Jan.
Feb.
Mar.
Apr.

3.2
3.5
3.3
3.0
3.0
3.1
n.a.

3.6
3.3
3.4
3.5
3.3
4.0
4.1

3.1
2.8
3.0
2.9
2.9
3.2
3.3

3.2
3.1
3.1
3.2
3.1
3.3
3.2

2.8
2.7
2.8
2.7
2.8
2.9
2.9

...
...
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-30

Commodity Price Measures
Journal of Commerce
1996 = 100
140

140

130

130
Apr. 26

120

Metals

120

110

100

90
Total

70
60

70
1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Commodity Research Bureau
1967 = 100
400

400

350

350
Spot industrials

Apr. 26

300

250

250
Futures

200
150

1986

1988

1990

1992

1994

1996

200

1998

2000

2002

2004

2006

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
3/15/05 2

3/15/05 2
to
4/26/05

52-week
change to
4/26/05

8.7
19.4
5.0
2.7
11.1

4.4
2.1
3.7
1.0
12.7

-1.8
-1.8
.9
-1.3
-3.3

-.4
8.7
6.8
-11.4
13.0

1. From the last week of the preceding year to the last week of the year indicated.
2. March 15, 2005, is the Tuesday preceding publication of the March Greenbook.

150

II-31

term inflation expectations remained at the upper end of the narrow range seen in the past
few years.
A rise of 0.3 percent in the PPI for capital equipment in March more than reversed a
0.2 percent decline in February; last month, prices for autos and light trucks slipped a bit
further after February’s large decline, whereas prices for heavy trucks rose 0.4 percent
and prices for other capital equipment rose 0.5 percent. During the twelve months ending
in March, the PPI for capital equipment increased 2¾ percent, a pickup of more than
2 percentage points from the preceding year.
At earlier stages of processing, the PPI for core intermediate materials rose a modest
0.3 percent in March after larger increases in January and February. Between March
2004 and March 2005, this index rose 7½ percent, compared with an increase of
3 percent over the preceding year. Higher inflation rates for energy and imported
materials, as well as rising rates of capacity utilization, explain much of this acceleration.
Prices for industrial metals, though a bit off their recent peaks, have remained quite high
so far this year. The metals index in the Journal of Commerce is down 1.8 percent since
the March Greenbook. Among the other commodity indexes that exclude energy, the
CRB spot industrials index has increased 0.9 percent since the last Greenbook, and the
CRB spot foodstuffs index has fallen 1.3 percent. The JOC industrial index and the CRB
futures index, both of which contain a substantial energy component, have declined since
the last Greenbook, although the futures index is up considerably since the beginning of
this year.

Domestic Financial
Developments

III-T-1

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

Change to Apr. 27 from
selected dates (percentage points)

2005

Instrument
June 28

Dec. 31

Mar. 21

Apr. 27

2004
June 28

2004
Dec. 31

2005
Mar. 21

1.00

2.25

2.50

2.75

1.75

.50

.25

1.36
1.74

2.18
2.52

2.80
3.04

2.83
3.08

1.47
1.34

.65
.56

.03
.04

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

1.28
1.45

2.29
2.28

2.78
2.96

2.98
3.06

1.70
1.61

.69
.78

.20
.10

Large negotiable CDs1
3-month
6-month

1.53
1.82

2.50
2.72

3.00
3.26

3.14
3.37

1.61
1.55

.64
.65

.14
.11

Eurodollar deposits3
1-month
3-month

1.29
1.51

2.32
2.49

2.79
2.98

3.01
3.13

1.72
1.62

.69
.64

.22
.15

Bank prime rate

4.00

5.25

5.50

5.75

1.75

.50

.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

3.75
4.17
4.63

3.64
3.91
4.32

.76
-.06
-.58

.56
.28
-.02

-.11
-.26
-.31

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

1.56
2.25

1.03
1.65

1.26
1.78

1.17
1.65

-.39
-.60

.14
.00

-.09
-.13

Municipal revenue (Bond Buyer)5

5.37

5.04

4.99

4.89

-.48

-.15

-.10

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

4.95
4.83
5.26
5.64
7.68

4.66
4.62
5.02
5.51
8.21

-.55
-.68
-.57
-.67
-.09

.01
.01
.04
.13
.87

-.29
-.21
-.24
-.13
.53

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

6.21
4.19

5.77
4.10

6.01
4.24

5.80
4.26

-.41
.07

.03
.16

-.21
.02

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

Record high

2004

Change to Apr. 27
from selected dates (percent)

2005

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

Date

Dec. 31

Mar. 21

Apr. 27

Record
high

2004
Dec. 31

2005
Mar. 21

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

10,565
1,184
2,008
622
11,684

10,199
1,156
1,930
587
11,380

-13.00
-24.29
-61.76
-1.30
-22.86

-5.42
-4.58
-11.26
-9.89
-4.94

-3.47
-2.31
-3.84
-5.54
-2.60

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 Apr. 27, 2005, is from Apr. 21, 2005.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the most recent policy tightening began.
March 21, 2005, is the day before the most recent FOMC announcement.
_______________________________________________________________________

Policy Expectations and Treasury Yields
Eurodollar Futures
Percent
Mar. Feb.
FOMC CPI

Nonfarm
payrolls

Mar. FOMC
Minutes

5.2

Mar.
CPI

5.0

PCE

4.8

December 2006

4.6
4.4
4.2
December 2005

4.0
3.8

Mar. 21

Mar. 24

Mar. 29

Apr. 1

Apr. 6

Apr. 11

Apr. 14

Apr. 19

Apr. 22

Apr. 27

Note. 5-minute intervals.

Probability of a Pause and a 50-basis-point
Rate Hike at June FOMC Meeting
Percent

Expected Federal Funds Rates
Percent
4.5

March 21, 2005

Daily

40
4.0
30

50 b.p. hike

April 27, 2005
3.5

Pause

3.0

0
Apr.

Aug.
2005

Dec.

Apr.

Aug.
2006

Dec.

Apr. Aug.
2007

3/22

3/28

4/1

4/6
4/12
2005

4/18

4/22

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

Note. Implied by options on July federal funds futures with
term premium adjustment. Assumes quarter-point hike at
May meeting is fully priced in.

Treasury Yields

Inflation Compensation
Percent
Mar.
FOMC

Daily

Percent
7

Mar.
FOMC

Daily

3.5

3.0

10-year

5
Apr. 27

Apr. 27

5 to 10
years ahead

2.5

4
3

2-year

2.0

Next 5 years

1.5

1
2003

2004

2005

Note. Based on a smoothed yield curve estimated using
off-the-run securities.

2003

2004

2005

Note. Based on nominal and inflation-indexed Treasury
yields.

Domestic Financial Developments
Overview
During the intermeeting period, policy expectations were shaped more by the weakerthan-expected data on spending and production than by the upside surprises on prices.
On net, market participants marked down the anticipated path for the federal funds rate,
and nominal Treasury yields moved lower across the curve. Despite generally positive
first-quarter earnings reports, equity prices declined in response to indicators of economic
weakness. Credit spreads on corporate bonds widened, particularly for speculative-grade
firms. Business issuance of long-term debt has been subdued in recent months, but shortterm borrowing has continued to expand briskly. Household debt growth, though still
strong, appears to be running at a rate a bit below that of the rapid pace of last year.
Policy Expectations and Treasury Yields
The FOMC’s decision to raise the target federal funds rate 25 basis points at the March
meeting was widely anticipated in financial markets. However, the references in the
statement to increasing inflation pressures and to more-evident pricing power reportedly
led market participants to mark up their expected path for the federal funds rate, as did
the surprising jump in the CPI reported the next day. Despite another outsized increase in
the CPI a month later, these changes to policy expectations were more than reversed
subsequently in response to the weaker-than-expected economic data and the release of
the minutes of the March FOMC meeting, which suggested that the Committee saw less
upside risk to inflation than investors had previously anticipated. Although market
participants seem virtually certain of a quarter-point increase in the target funds rate at
the upcoming meeting, the perceived chance of a pause at the June meeting has risen and
now stands at about one in four. Looking further ahead, investors have ratcheted down
the expected level of the funds rate nearly ¼ percentage point in 2006.
Nominal Treasury yields largely followed changes in policy expectations: Since the
March FOMC meeting, the two-year yield moved down about 10 basis points, while the
five- and ten-year yields fell 25 and 30 basis points respectively. With inflation-indexed
yields down by less, inflation compensation over the next five years declined 15 basis
points, and inflation compensation over the subsequent five years fell almost 20 basis
points.
Stock Prices, Corporate Yields, and Risk Spreads
Broad equity price indexes sank about 3½ percent, on net, over the intermeeting period,
as weaker-than-expected economic data and a few high-profile disappointments in
earnings spooked investors. The fall in stock prices was widespread, with retail and basic

III-2
Stock Prices, Corporate Yields, and Risk Spreads
S&P 500 and Oil Futures Price 24 Months Ahead
Ratio scale, Mar. 22, 2005=100

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

Dollars per barrel
60

Mar.

Daily

FOMC

105

Monthly

50
100

Apr.
27

S&P 500
(left scale)

12-month forward
trend E/P ratio

40
Oil futures price
(right scale)

Apr.
27

35
30

Long-run real Treasury yield*

6
4
2

25
2004

2005

1985

1989

1993

1997

2001

2005

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

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

Percent
14

Mar.

Weekly Friday*

Yields for BBB and High-Yield Corporate Bonds

FOMC

Percent
8

Mar.

Daily

FOMC

Nasdaq

10-year BBB
(right scale)

40
10

30
20
S&P 500

Apr.
27

10
6
2002

2003

2004

2005

1100

900

2003

2004

2005

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

Corporate Bond Spreads
Basis points

4
2002

* Latest observation is for most recent business day.

5-year high yield
(left scale)

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

Basis points
450

Daily

5-year high yield
(left scale)

Basis points

Weekly Friday*

150

350

120

700

90
250
60

500
Apr.
27

10-year BBB
(right scale)

300

150

30
Apr.
27

0
100

50
1999

2001

2003

Note: Measured relative to comparable maturity Treasuries.

2005

1999

2001

2003

* Latest observation is for most recent business day.

2005

III-3

materials stocks posting particularly large declines. The gap between the trend-adjusted
forward earnings-price ratio and the real perpetuity Treasury yield widened a bit and now
stands somewhat above its average level over the past two decades. Implied volatilities
on the Nasdaq 100 and the S&P 500 moved up a bit from very low levels, likely a
reflection of the greater uncertainty about the economic outlook.
Troubles in the auto sector evidently led investors to be more wary about risk. Yields on
investment-grade corporate bonds declined less than those on comparable-maturity
Treasuries, causing spreads on BBB-rated bonds to widen about 20 basis points over the
intermeeting period. Yields on speculative-grade bonds rose about 50 basis points, which
pushed spreads up more than 60 basis points since the last FOMC meeting. The sharp
widening of credit spreads brought the staff’s estimate of the risk premium on high-yield
bonds—which had recently narrowed to levels last seen in 1997—back to more-typical
territory. In the commercial paper market, the quality spread, though narrow on average,
has been somewhat volatile, in part because of the current thinness of the A2/P2 segment
of the market.
Corporate Earnings and Credit Quality
On the basis of reports from about 300 S&P 500 firms to date, earnings per share in the
first quarter most likely rose more than 13 percent from the year-earlier levels, or about 3
percent from the fourth quarter on a seasonally adjusted basis. Although the majority of
announcements beat analysts’ forecasts, retail firms—which almost certainly experienced
a disappointing first quarter in light of sagging sales—have yet to report their earnings.
The index of analysts’ revisions to year-ahead earnings forecasts was slightly above zero
in mid-April because sharply lower year-ahead forecasts for Ford, GM, and IBM largely
offset the still-rising forecast for the energy sector.
Nonfinancial firms remain flush with cash, and credit quality in the sector continues to be
strong on balance. Solid credit quality of commercial loan portfolios was reflected in
reduced loan-loss provisions at a number of large bank holding companies in the first
quarter. The pace of bond downgrades slowed considerably in the first quarter, although
the downgrade of GM in early April will result in a significant deterioration in this
measure of corporate credit quality for the second quarter. The six-month trailing default
rate on bonds was little changed in March at a low level. The aggregate expected yearahead default rate, which is based on KMV’s firm-level estimates, remained low in
March but is likely to edge up in April, given the decline in stock prices and the rise in
equity volatility.

III-4
Corporate Earnings and Credit Quality
Corporate Earnings Growth

S&P 500 Earnings Expectations Revisions Index

Percent

Quarterly*

Percent

Monthly

20
Q1
Q4

0
MidApr.

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

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

-20

-3

-30
1990

1993

1996

1999

2002

2005

-1

-4
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.

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

Bond Ratings Changes of
Nonfinancial Companies

Liquid Assets Held by Nonfinancial Corporations
Ratio

Ratio

Percent of outstandings
30

0.12
2.5

Upgrades

Q4
H1

2.0

0.09

H2Q1

10
0

1.5

Over fixed investment
(right scale)

10
20

0.06

1.0
30
Over assets
(left scale)

0.5

Downgrades

0.03

50
1989

1992

1995

1998

2001

2004

1991 1993 1995 1997 1999 2001 2003

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

Bond Defaults and
C&I Loan Delinquency Rates

2005

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

Expected Year-Ahead Defaults
Percent of outstandings

Percent of liabilities
7

2.0

Monthly

6
1.5

5
4

C&I loan delinquency rate
(Call Report)

1.0

3
Q4

0.5
Mar.

Bond default rate*
Mar.

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)

2001

2004
Q1

2005
Mar.

Apr. e

5.2
0.7
4.4

3.7
0.4
3.2

5.7
0.8
4.9

5.0
2.3
2.6

4.4
2.2
2.1

3.0
0.9
2.1

2.0
1.0
1.0

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

16.9
6.0
7.7
3.3

18.0
7.7
6.8
3.5

15.0
9.0
4.0
2.0

-6.3

-3.8

2.8

-0.1

4.5

-9.6

12.0

-5.2

-7.9

-0.8

7.3

9.4

7.6

6.0

4.2
80.2

Financial corporations
Stocks1
Bonds2

-5.8

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

-8.0

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

2003

39.8
27.5
8.9
3.4

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

2002

6.5
2.1
4.4

Type of security

4.0
87.0

6.9
111.1

8.3
131.1

5.1
147.6

5.0
157.4

6.1
187.1

3.0
100.0

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.
e Staff estimate.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

60
Monthly rate, nonfinancial firms

Commercial paper*
C&I loans*
Bonds

Public issuance
Private issuance
Repurchases
Cash mergers

50
40

Total

50
40

Total

30
Apr.
H2

20
H1

-10

-20

-30

-40
2001

2002

2003

* Seasonally adjusted, period-end basis.

2004

2005

-40
2001

2002

2003

2004

2005

III-6

Commercial Real Estate
Gross Issuance of CMBS

Growth of Commercial Mortgage Debt

Billions of dollars

Percent
18

Quarterly, s.a.a.r.

Quarterly
16

14
Q4

12
10

6
10
4
5

2
0
1996

1998

2000

2002

2004

1996
1998
2000
2002
Source. Commercial Mortgage Alert.

10-Year Commercial Mortgage Rates

2004

Investment-Grade CMBS Spreads
Percent

Basis points
10

Monthly

300

Weekly

250

200

BBB
7

150
6
Mar.

AAA

Apr. 20

100
50

4
3
2000

2001

2002

2003

2004

2005

2000
2001
2002
2003
2004
2005
Note. Measured relative to the 10-year Treasury yield.
Source. Morgan Stanley.

Source. Barron’s/Levy.

Delinquency Rates on Commercial
Mortgages and CMBS

Commercial Real Estate Valuation
Percent

Index, 1990:Q1=4
4

CMBS
At commercial
banks

Percent
7

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

Mar.
4

At life
insurance
companies

Q1
3

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

3
Q1

2
1996

1998

2000

2002

2004

Source. Call Report, ACLI, Morgan Stanley.

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 bond issuance by nonfinancial corporations remained subdued in March and April.
Speculative-grade issuance has been anemic in recent weeks as credit spreads in that
segment of the market widened appreciably. Net of retirements, bond issuance has been
negligible recently, in part because issuers have continued to use proceeds to refinance
existing debt rather than to fund expansion. By contrast, business loans and commercial
paper continued to expand notably over the intermeeting period.
Equity issuance by nonfinancial firms dwindled to a trickle over the intermeeting period.
However, filings with the SEC of impending IPOs remained plentiful, and issuance is
expected to pick up after the first-quarter earnings reporting season. Share repurchases in
the first quarter are estimated to have rivaled their torrid fourth-quarter pace, and
although completions of cash-financed mergers retreated somewhat in the first quarter,
new announcements pointed to robust M&A activity going forward.
Commercial Real Estate
Supported in part by low interest rates, the expansion of commercial mortgage debt likely
continued apace, as evidenced by heavy CMBS issuance in the first quarter and a full
calendar of offerings going forward. Investment-grade CMBS spreads widened slightly
over the intermeeting period—about in line with the widening of spreads for investmentgrade corporate bonds—even as delinquency rates on loans backing CMBS declined
further in March. The ratio of net operating income to prices for commercial
properties—an indicator of the rate of return in this sector—slipped further in the first
quarter. However, the difference between this ratio and the real Treasury perpetuity
yield, a rough gauge of the risk premium on commercial real estate assets, was little
changed in the first quarter, remaining in the lower part of the range observed over the
past decade.
Household Finance
The staff estimates that the growth of household mortgage debt moderated a bit in the
first quarter. In the absence of much actual data on mortgage flows, this assessment
reflects the less robust pace of house price appreciation recorded in the fourth quarter and
is consistent with the weakening of demand for residential mortgage loans over the past
three months reported in the April Senior Loan Officer Opinion Survey. After topping
6 percent in the second half of March, interest rates on thirty-year fixed-rate mortgages
dropped about ¼ percentage point, which spurred a slight lift in refinancing activity in the

III-8

Household Liabilities
Mortgage Debt Growth

30-year Fixed-Rate Mortgage Rate
Percent

Percent
18

Quarterly, s.a.a.r.

Weekly
16

14
12
e
Q1

10
8

6
Apr. 20

2
0
1996
1998
e Staff estimate.

2000

2002

2004

1996
1998
2000
Source. Freddie Mac.

2002

2004

Consumer Credit Growth

MBA Refinancing Index
March 16, 1990=100

Percent change from year earlier
12000

Weekly, s.a.

Monthly

14
12
8000
10
8
4000
6

Apr. 22
Feb.
0
1996

1998

2000

2002

2004

2
1996

Household Bankruptcies

1998

2000

2002

2004

Delinquency Rates

Filings per 100,000 persons

Percent
650

8-week moving average, s.a.a.r.
Apr. 23

600

Credit card loans in
securitized pools

5
550
Feb.

500
450

Auto loans at captive
finance companies

400
350

Residential mortgages
at commercial banks

2
Feb.
Q4

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

1
1996
1998
2000
2002
2004
Source. Moody’s, Call Report, Federal Reserve.

III-9

Household Assets

Asset Prices

1993:Q1 = 100
350

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

250

150

House prices*

1990

1992

1994

1996

1998

2000

2002

2004

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

Net Worth Relative to Disposable Income

Ratio
7

Quarterly, period-end, s.a.

6
Q4

4
1990

1992

1994

1996

1998

2000

2002

2004

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

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

2003

18.0
12.7
10.7
2.0
2.7
2.6
2.2
1.0
-0.6

2004

17.6
14.9
9.3
5.6
3.6
-0.9
-0.8
1.1
-1.1

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

2004
Q4

Q1 e

2005
Feb.

Mar.e

Assets
Feb.

11.7
6.9
3.8
3.1
2.8
2.0
0.5
2.0
-0.5

18.3
13.0
5.9
7.1
3.2
2.1
0.5
1.9
-0.3

22.3
15.4
4.8
10.6
4.5
2.4
-2.1
4.1
0.5

29.1
22.4
10.5
11.9
4.3
2.3
-0.1
1.6
0.7

18.0
13.9
2.1
11.7
3.9
0.3
-4.3
4.8
-0.2

6,250
4,416
3,687
730
529
1,304
157
817
331

III-10
Treasury Financing
(Billions of dollars)
Item

2004
Q3

2005
Feb.

Mar.

Total surplus, deficit (–)

-25.7

-85.7

-118.1

-176.6

-113.9

-71.2

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

40.7

83.4

102.1

164.7

79.5

65.0

6.2
34.5
-34.9
69.4

-5.2
88.6
14.3
74.3

2.4
99.7
43.6
56.0

20.8
99.7
55.7
88.2

-0.7
80.2
43.9
36.2

16.1
49.0
28.2
20.8

-23.3
8.3

8.3
-6.0

11.7
4.3

2.2
9.7

41.7
-7.2

-2.8
9.0

44.6

36.3

24.7

22.4

19.6

22.4

Other1
Memo:
Cash balance, end of period

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

GSE Market Developments
GSE Stock Prices
Daily

Fannie Mae
Freddie Mac

Mar.
FOMC

Ten-Year GSE Yield Spreads
to Treasury
Daily

Fannie Mae
Freddie Mac

Basis points
45
Mar.
FOMC

75
35
70

Apr. 27

30
65
25
60
Apr. 27

50
Aug.

Oct.
2004

Dec.

Feb.
2005

Apr.

15
Aug.

Oct.
2004

Dec.

Feb.
2005

Note. GSE yields based on senior unsecured debt.

Apr.

III-11

first part of April. Consumer credit continues to run moderately above its year-earlier
levels.
On April 20, the President signed into law bankruptcy reform legislation designed to
reduce incentives for individuals to file for bankruptcy. News of the legislation’s
impending passage appeared to have sparked a surge of personal bankruptcy filings in
March, which have continued apace in April. Despite this surge, other measures of
household credit quality, including a variety of delinquency rates, have continued to
improve modestly.
With broad stock price indexes down so far this year, the ratio of household net worth to
disposable personal income has likely edged lower. Flows to domestic equity mutual
funds softened in March and early April in line with declines in equity prices.
Treasury and Agency Finance
Over the intermeeting period, the Treasury auctioned five- and ten-year TIPS as well as
two- and five-year nominal coupon securities. The TIPS auctions were well received, but
the demand for nominal securities was only lukewarm: The bid-to-cover ratios and
indirect bids—a proxy for demand for Treasuries from foreign official institutions—were
below recent averages, consistent with the ebbing of this demand suggested by the
Treasury’s data on international capital flows. The same data, however, suggest that
private foreign demand for Treasuries has strengthened appreciably in recent months.
Late in the period, investors took note of remarks by Treasury Secretary Snow that
seemed to hint that the Treasury may be considering reintroducing sales of thirty-year
bonds.
Fannie Mae’s stock price ended the period down only slightly, on net, despite reports of
further violations of accounting rules and Chairman Greenspan’s and Secretary Snow’s
remarks supporting limits on the size of the investment portfolios of the housing GSEs.
Freddie Mac’s share price, by contrast, declined more after the company’s delayed 2004
earnings report showed a drop in net income of 41 percent. Spreads of yields on GSEs’
senior unsecured debt relative to those on comparable-maturity Treasuries have widened
10 basis points since the last FOMC meeting.

III-12

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

2005
2002

2003

2004

Jan.

Feb.

Mar.

Apr. e

36.3
30.3
10.1
20.2
6.0

Type of security

37.9
32.0
10.0
22.1
5.8

34.6
29.8
10.7
19.1
4.9

24.8
22.5
9.3
13.3
2.3

33.0
31.3
15.0
16.3
1.7

45.9
44.2
21.3
22.9
1.7

32.0
31.0
14.0
17.0
1.0

1.7

3.5

2.1

1.1

1.9

1.4

1.0

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

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.
e Staff estimate based on preliminary data through April 21.

Ratings Changes
Number of ratings actions
2400

Annual rate

H1*

Upgrades

1800
1200
600
0
600
1200
1800

Downgrades

1991

1993

1995

1997

1999

2001

2003

2005

2400

* Data through April 20 at an annual rate.
Source. S&P’s Credit Week Municipal and Ratings Direct.

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
7

Weekly

Ratio

Weekly

20-year

1.0
20-year

5
Apr.
21

Apr.
21

0.9

3
1-year

Apr.
27

0.8

1
1996

1999

2002

Source. Bloomberg and Bond Buyer.

2005

1996

1999

Source. Bond Buyer.

2002

2005

0.7

III-13

State and Local Government Finance
Gross issuance of long-term municipal bonds continued at a rapid pace in March and
April. Investments in transportation- and education-related projects fueled new capital
issuance, and still-low interest rates supported a spate of advance refunding issues. In
contrast, short-term issuance remained weak in the first quarter, likely a reflection of
improving budget situations in many states.
The downgrade of a portion of Michigan’s debt—related to the difficulties of Ford and
GM—cut into the ongoing improvement in overall municipal credit quality over the past
several quarters. This downgrade, which affected a multitude of small bonds issued by
nearly every school district in the state, accounts for almost all of the downgrades so far
in 2005 but amounts to only about $2 billion of outstanding debt. Long-term municipal
bond yields edged down in recent weeks, and the ratio of these yields to comparablematurity Treasury yields was about unchanged over the intermeeting period.
Money and Bank Credit
The growth of M2 is estimated to have slowed further in April from an already subdued
first-quarter pace. A contraction in liquid deposits—likely a consequence of their higher
opportunity cost—accounted for the bulk of deceleration. In contrast, small time
deposits, whose yields have kept pace with rising market interest rates, continued to grow
briskly. The prolonged runoff of retail money market mutual funds appears to have
slowed recently, as higher market interest rates have shown through to money fund
yields, boosting the relative attractiveness of this M2 component.
Bank credit growth slowed sharply in April, as banks’ holdings of securities contracted
after outsized increases in the first quarter. Loan growth also slowed but is estimated to
have remained brisk, and C&I and real estate loans continued to register large gains. The
robust expansion in commercial lending is consistent with the most recent Senior Loan
Officer Opinion Survey, which indicated a noticeable increase in the demand for C&I and
commercial real estate loans over the past three months. A significant proportion of
survey respondents also reported that, over the same period, they have eased their lending
standards and terms on these types of loans.

III-14

Monetary Aggregates
(Based on seasonally adjusted data)
2004

Aggregate or component
Aggregate
1. M22
2. M33
Components of M24
3. Currency
4. Liquid deposits5
5. Small time deposits
6. Retail money market funds
Components of M3
7. M3 minus M26
8. Large time deposits, net7
9. Institutional money
market funds
10. RPs
11. Eurodollars
Memo
12. Monetary base

2003

2004

2005

20 05

Mar.

Percent change (annual rate)1
5.7
3.6
3.6
3.7
4.2
2.6

Apr.
(e)

Level
(billions of
dollars),
Apr.
(e)

2.0
6.9

6,486
9,587

3.8

1.4

3.4
13.2
-6.4

2.3
19.8
-8.5

-2.2
21.6
4.4

705
4,203
866
704

-.4

5.7

17.1

3,101

20.9
-5.7

10.0
-12.2

35.0
-10.5

18.0
-5.4

52.7
14.8

1,212
1,048

14.1
29.3

.9
27.1

-18.0
34.4

-20.6
5.7

-19.1
-10.9

-46.9
-3.9

470
371

5.9

5.5

4.5

3.7

2.8

10.3

773

5.5
4.9

5.2
5.8

5.9

5.5

5.0

3.7

14.1
-9.3
-11.4

10.0
-.3
-11.8

8.5
5.5
-9.5

3.6

7.1

4.3
-5.6

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

-1.1

14.8

9.9

26.2

8.7

41.0

1,313

3.1

-10.4

-3.5

21.1

12.0

-57.9

-.3

1.9

13.7

8.0

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.
e Estimated.

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,
Apr. 2005e
($ billions)

2003

2004

Q4
2004

Q1
2005

Mar.
2005

Apr.e
2005

5.9
5.6

8.7
8.2

5.3
5.6

13.4
11.2

17.8
14.5

3.3
4.7

6,811
6,948

8.6
7.2
8.9
4.9

6.1
4.8
4.7
4.8

-.5
.8
-11.4
21.1

22.9
14.5
18.4
8.3

24.8
13.0
-.9
35.1

-14.0
-8.0
-25.0
18.3

1,840
1,978
1,184
794

4.9
-9.4
11.1
30.8
8.8
5.4
5.8
6.8

9.6
1.2
13.7
43.3
9.6
8.6
5.8
7.9

7.5
6.0
12.9
37.3
8.7
-1.9
2.3
-.6

9.9
15.1
12.6
18.2
11.6
7.1
4.1
-4.0

15.1
8.3
23.8
23.3
23.9
10.4
2.5
-3.9

9.9
16.7
12.3
11.6
12.5
5.8
-1.3
-4.8

4,971
940
2,666
419
2,247
689
1,048
676

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.
e Estimated.

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices
The April 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices
addressed changes in the supply of, and demand for, bank loans to businesses and
households over the past three months. The survey contained special questions on the
net changes in C&I lending standards and terms since 1996-97 and on the reasons for
those changes. This appendix reports the responses from fifty-four domestic banks and
nineteen foreign banking institutions.
As has been the case since the beginning of 2004, notable fractions of banking
institutions reported in the latest survey that they had eased lending standards and terms
for C&I loans over the past three months. Banks that eased standards or terms once
again reported having done so in large part because of increased competition from other
sources of business credit. A moderate net fraction of banks also reported having eased
lending standards for commercial real estate loans over the past three months.
Standards on residential mortgages were about unchanged over the past three months,
and a small net fraction of banks had eased standards for consumer loans. On the
demand side, domestic and, to a lesser degree, foreign banks reported an increase in
demand for C&I loans and for commercial real estate loans. Also, a noticeably smaller
net fraction of domestic banks reported weaker demand for residential mortgages and
consumer loans than had done so in the January survey.
In response to special questions on longer-term changes in lending standards and terms
on C&I loans, domestic and foreign banks reported that, on net, lending standards for
C&I loans were somewhat tighter relative to 1996-97. Both groups reported, however,
that many terms for C&I loans are somewhat easier, on net, than they had been in 1996
and 1997, a period thought to have been characterized by relatively accommodative
lending practices. Banks whose lending standards or terms currently are tighter cited
improved risk-management techniques as the primary influence on the evolution of
their credit policies, whereas banks whose lending standards or terms currently are
easier noted a significant increase in competition from other lenders as the primary
reason.
C&I Lending
In the April survey, domestic banks as well as branches and agencies of foreign banks
reported a further net easing of standards and terms on C&I loans. On net, nearly onefourth of domestic banks reported easing their standards for large and middle-market
firms over the past three months, about the same net percentage that has prevailed in
recent surveys. About 70 percent of domestic and of foreign banks narrowed spreads of
loan rates over their cost of funds for these borrowers in the three months ending with

III-A-2
April, up substantially from 45 percent in the January survey and the largest shares
reported since these questions were added to the survey in 1990. A large share of the
foreign branches and agencies, on net, also reported reduced premiums on riskier loans
and lower fees on credit lines. Many domestic respondents indicated that they had
eased other terms for large and middle-market firms as well: Of the respondents, 40
percent had reduced the costs of credit lines, and about one-fourth had eased covenant
restrictions, increased the maximum size of loans, or did both. For small firms, nearly
one-fourth of domestic banks had eased lending standards—up from 13 percent in
January—and more than half had trimmed spreads, on net.
All the domestic institutions that had eased their lending standards and terms over the
past three months cited more-aggressive competition from other banks or nonbank
lenders as a somewhat important or—much more commonly—a very important reason
for doing so. In addition, about half of those respondents cited a more-favorable or
less-uncertain economic outlook as a reason for their move toward a less-stringent
lending posture, although that figure was down from 60 percent in January. A notable
share of domestic respondents that had eased standards or terms also indicated that the
change reflected a higher tolerance for risk and greater liquidity in the secondary
market. Branches and agencies of foreign banks that had eased lending terms also
universally emphasized the importance of increased competition from other lenders, and
half of the foreign respondents, on net, noted increased liquidity in secondary loan
markets.
On net, 37 percent of domestic institutions—down from 45 percent in the January
survey—reported an increase in demand for C&I loans from large and middle-market
firms. The same net fraction of domestic respondents also indicated that demand from
small firms had increased—up a bit from the previous survey. The domestic
respondents experiencing stronger loan demand most frequently pointed to their
borrowers’ increased financing needs for investment in plant and equipment, accounts
receivable, and inventory financing as sources of increased demand. The survey results
for foreign banks suggest that demand was somewhat stronger, on net, and the banks
that reported an increase credited mainly merger and acquisition financing for the
change. About
40 percent of the domestic respondents, on net—down from nearly 50 percent in the
January survey—reported that inquiries from potential business borrowers had
increased over the past three months. At foreign banks, about one-fifth of branches and
agencies, on net—up from 10 percent in the previous survey—reported an increase in
inquiries from potential business borrowers over the past three months.

III-A-3
Longer-term changes in C&I lending conditions. Notable fractions of respondents to
this survey have been reporting an easing of standards or terms, on net, since the
beginning of 2004, and other sources suggest that C&I loan spreads have reached levels
near those prevailing before lending terms began to tighten in 1998. Against this
background, respondent banks were asked to compare their current standards and terms
on C&I loans with those that they offered on similar loans in 1996-97.
The results for lending standards point to a somewhat more-stringent lending posture.
A small net fraction of domestic banks reported that their standards for loans to large
and mid-sized firms were tighter than they had been in 1996 and 1997. The fraction of
domestic banks that viewed their current lending standards for loans to small firms as
tighter than they had been in 1996 and 1997 was nearly equal to the fraction that
indicated their standards were currently easier than they had been. Notably, the largest
banks in the sample reported tighter lending standards, on net, whereas smaller banks
indicated that their standards were easier now than they were in 1996 and 1997. At
foreign banks, nearly half the branches and agencies characterized their lending
standards as tighter than they were in 1996 and 1997, whereas only 16 percent
characterized them as easier.
Both foreign and domestic banks reported that, on balance, pricing terms were currently
easier than they were in 1996-97, but the net fractions reporting changes in nonprice
terms were small. Half of domestic banks, on net, reported that loan spreads for large
and middle-market firms were narrower than they were in the earlier period, and about
one-third, on net, noted that fees on credit lines were lower. Smaller net percentages of
foreign branches and agencies reported that pricing terms were easier than they were in
1996-97. Domestic banks suggested, on net, that loan covenants and collateral
requirements were little changed relative to conditions in 1996-97. The net percentage
of foreign banks that reported changes in loan covenants and collateral requirements
was also small, although a few of those institutions indicated that they had eased these
terms considerably over the period.
Not surprisingly, given the results of the most recent surveys, almost all the domestic
banks and all the foreign banks that said that their C&I loan standards and terms were
easier now than earlier reported that competition from other banks and nonbank lenders
was a very important reason for the change. A large majority also noted that improved
measurement and management of risk had increased their tolerance for risk. At the
same time, however, a substantial fraction of the domestic and foreign banks that
reported tighter current lending standards or terms indicated that improved
measurement and management of risk had reduced their tolerance for risk. Almost half
the domestic banks and two-thirds of the foreign banks that reported having tighter

III-A-4
lending conditions now than in the earlier period also noted increased concerns about
corporate governance and financial reporting.
Commercial Real Estate Lending
Almost one-fourth of the domestic respondents, on net, had eased lending standards on
commercial real estate loans over the past three months, about the same fraction as in
the January survey. All but one of the twelve foreign branches and agencies active in
commercial real estate lending reported unchanged standards. On net, 20 percent of the
domestic respondents reported stronger demand for these loans in the April survey,
nearly the same fraction as in the January survey. One-third of the foreign banks noted
that demand had increased somewhat over the past three months, up from 15 percent in
January.
Lending to Households
Credit standards on residential mortgages were largely unchanged, on net, in the April
survey, in contrast to a small net easing of standards in January. Though demand for
residential mortgage loans reportedly weakened again over the past three months, the
net fraction of banks reporting lower demand fell to 18 percent, compared with about
25 percent in the past two surveys.
As has been the case since the middle of 2003, about 15 percent of the domestic
respondents reported an increased willingness to make consumer installment loans.
About 10 percent of banks, on net, indicated that they had eased standards on credit
cards and non-credit-card consumer loans. Terms on consumer loans changed at only a
few banks, and the movements were mixed. On net, banks indicated that demand for
consumer loans weakened over the past three months, but the fraction doing so declined
to 20 percent from 26 percent in January and nearly 30 percent last October.

III-A-5

Measures of Supply and Demand for C&I Loans,
by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
Percent
80
60
Large and medium
Small

40
20
0
-20

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks’ Costs of Funds
Percent
80
60
40
20
0
-20
-40
-60
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans
Percent
60
40
20
0
-20
-40
-60
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

III-A-6
Measures of Supply and Demand for Loans to Households

Net Percentage of Domestic Respondents Tightening Standards on Consumer Loans
Percent
60
Credit cards

50
40
30
20
10

Other consumer loans

0
-10
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Net Percentage of Domestic Respondents Reporting Stronger Demand for Loans to Households
Percent
80
60

Residential mortgages

40
20
0
-20
-40

Consumer loans

-60
-80
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Net Percentage of Domestic Respondents Tightening Standards for Mortgages to Individuals
Percent
40
30
20
10
0
-10
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to $61 billion in February from $58.5 billion
in January (revised).
Net Trade in Goods and Services
(Billions of dollars, seasonally adjusted)
2004

Annual rate
2004
2005
Q3
Q4
Q1e

2004
Dec.

Monthly rate
2005
Jan.
Feb.

Real NIPA1
Net exports of G&S

-583.7

-583.2

-621.1

n.a.

...

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

-617.1
-665.5
48.4

-623.5
-668.1
44.6

-684.2
-734.2
50.0

-717.2
-763.2
46.0

-55.7
-59.9
4.1

-58.5
-62.5
4.0

-61.0
-64.7
3.7

1. Billions of chained (2000) dollars.
e. BOP data are two months at an annual rate.
Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census.
n.a. Not available. ... Not applicable.

In February, as in January, the value of exports of goods and services was flat. Strong
increases in exports of both industrial supplies and consumer goods in February were
offset by decreases in exports of automotive products and capital goods, with particularly
sharp declines in exports of computers and telecommunications products. Services
exports were little changed from January. Although exports of goods and services did
not increase in January or February, they maintained December’s strong level.
Consequently, nominal exports in January and February combined were 7.6 percent (a.r.)
above the fourth-quarter average.
The value of imported goods and services increased 1.6 percent in February following
1.8 percent growth in January. The value of imported oil jumped sharply, and imports of
non-oil goods and services also increased. Among non-oil goods, imports of industrial
supplies, consumer goods, and automotive products exhibited sizable gains, more than
offsetting a large decrease in imports of capital goods. Among consumer goods, imports
of pharmaceuticals and cotton apparel were particularly strong. Within capital goods,
imports of aircraft, semiconductors, and other capital goods fell sharply. In January and
February combined, imports of goods and services were more than 12 percent (a.r) above
their fourth-quarter level.

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

430

Selected Imports

Bil$, s.a.a.r.

310

410
220

390

270

370

250

180

Bil$, s.a.a.r.

290

200

Selected Exports

350

Machinery 2/
230
Consumer goods
160
140

330

210

310

190

290
Industrial
supplies 1/
Consumer goods

120
270
250

130

230

110

210

40
1997
1999
2001
2003
2005
1. Excludes agriculture and gold.
2. Excludes computers and semiconductors.

150
Machinery 2/

100
80

Aircraft

170
Industrial
supplies 1/

190

170

90
Automotive 3/
(overseas)

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

70
50

IV-3

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

Exports of G&S
Goods exports
Gold
Other goods

Levels
Change1
2004 2005
2005
2004 2005
2005
Q4
Q1e
Jan.
Feb.
Q4
Q1e
Jan.
Feb.
1183.5 1205.5 1205.2 1205.8
23.2
22.0
0.1
0.6
834.2
4.9
829.3

853.7
5.0
848.7

853.3
5.8
847.5

854.1
4.2
849.8

14.2
-0.0
14.2

19.4
0.1
82.1

-0.3
0.8
-1.1

0.8
-1.6
2.4

51.9
43.6
46.0
194.5

51.6
44.4
43.9
200.6

50.9
45.2
43.9
202.6

52.2
43.6
43.8
198.7

0.0
0.4
-0.4
1.2

-0.3
0.7
-2.1
6.1

-1.0
-0.5
-0.8
0.2

1.3
-1.6
-0.1
-3.9

91.9
50.7
16.3
25.0

95.4
52.4
14.6
28.3

96.9
53.8
14.1
29.0

93.8
51.0
15.2
27.6

-0.3
-1.4
1.7
-0.6

3.5
1.8
-1.6
3.3

3.2
-0.2
0.5
2.9

-3.1
-2.8
1.1
-1.5

62.8
200.1
108.1
30.4

61.6
207.5
112.5
31.2

61.6
204.1
110.7
31.6

61.6
211.0
114.2
30.9

1.6
9.6
5.3
-3.3

-1.2
7.4
4.4
0.8

-1.1
-0.9
-2.1
1.1

0.0
6.9
3.5
-0.7

349.3

351.8

351.9

351.7

9.0

2.5

0.4

-0.2

Imports of G&S

1867.7 1922.7 1907.2 1938.2

83.9

55.0

33.2

31.0

Goods imports
Petroleum
Gold
Other goods

1568.4 1616.9 1602.9 1630.9
217.3 208.6 198.4 218.8
4.8
3.7
3.5
3.8
1346.3 1404.6 1400.9 1408.3

80.3
38.2
0.8
41.2

48.5
-8.7
-1.1
58.3

31.0
-11.2
-2.0
44.1

28.1
20.4
0.3
7.4

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

28.0
91.9
25.5
213.8

25.8
91.3
25.1
223.6

27.8
91.3
25.8
225.5

23.8
91.3
24.4
221.6

3.7
0.3
-2.1
5.3

-2.2
-0.6
-0.4
9.8

-0.3
-2.2
1.8
8.4

-4.1
0.0
-1.3
-3.9

Automotive
from Canada
from Mexico
from ROW

230.4
70.5
44.1
115.9

238.2
72.1
39.0
127.1

237.3
69.7
35.9
131.7

239.1
74.5
42.2
122.5

-1.1
1.1
2.0
-4.2

7.8
1.6
-5.0
11.2

6.9
-1.1
-3.4
11.5

1.8
4.7
6.3
-9.2

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

246.6
390.4
65.0
54.7

259.4
417.1
66.9
57.2

255.8
413.0
66.8
57.6

263.1
421.1
66.9
56.9

5.8
24.2
4.1
1.1

12.8
26.7
1.9
2.5

5.0
21.4
0.0
3.1

7.3
8.1
0.1
-0.7

299.3

305.8

304.4

307.3

3.6

6.5

2.2

2.9

14.55
40.90

14.98
38.09

14.62
37.15

15.35
39.03

1.53
3.33

0.42
-2.81

-0.51
-0.70

0.73
1.88

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

1. Change from previous quarter or month. e. Average of two months.
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
2004
2005
Q3
Q4
Q1

Monthly rate
2005
Jan.
Feb.
Mar.

----------------------- BLS prices --------------------7.9
7.3
2.6
0.6
0.8
1.8
57.1
35.3
-6.1
2.3
4.6
10.6
1.5
3.2
4.2
0.3
0.1
0.3

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

2.4
1.6
1.7
-0.4
3.3
8.3

4.2
2.6
2.4
1.2
10.7
11.1

5.1
5.2
0.4
4.4
10.1
8.4

0.4
0.7
0.0
0.6
-0.2
0.1

0.2
0.2
0.0
0.5
1.0
-0.3

0.4
0.0
0.0
-0.4
3.4
1.1

Computers
Semiconductors

-9.0
-4.4

-7.3
-4.9

-6.2
-1.7

-0.7
-0.2

-0.7
-0.1

-0.7
0.1

-0.1

3.6

5.1

0.9

0.0

0.7

0.6
1.3
0.9
2.3
-31.0
14.5

4.8
3.3
1.2
0.1
-11.5
17.2

6.4
3.9
1.6
2.5
2.1
13.6

1.1
0.6
0.2
0.6
0.6
2.0

0.0
0.1
0.1
-0.2
-1.0
0.4

0.8
0.2
0.1
0.0
3.7
1.2

-7.6
-3.9

-9.2
-1.7

-8.5
-1.2

-1.1
-0.1

0.0
-0.3

-1.1
-0.3

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
7.7
1.3
3.2
2.3
4.3

Exports of goods & services
Total merchandise
Core goods*

1.6
1.2
1.8

3.9
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

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

IV-5

Prices of Internationally Traded Goods
Non-oil imports. In March, the prices of U.S. imports of non-oil goods and of core
goods rose 0.3 and 0.4 percent, respectively. The material-intensive categories of foods,
feeds, and beverages and non-oil industrial supplies were the main contributors to the
price increase. Prices for non-oil industrial supplies rose 1.1 percent in March, mainly on
higher prices for building materials, natural gas, and chemicals. Food prices rose
3.4 percent, reflecting higher vegetable prices. The categories of finished goods
experienced either unchanged prices or price declines in March. Prices for imported
consumer goods fell 0.4 percent. Within consumer goods, apparel prices fell 0.2 percent.
For both capital goods (excluding computers and semiconductors) and automotive
products, prices were unchanged. Prices for computers fell 0.7 percent in March, and
those for semiconductors edged up.
The average level of imported core goods prices in the first quarter was 5 percent at an
annual rate above the fourth-quarter level. All of the major categories, except automotive
products, registered substantial price gains. Due to price increases in the first two months
of the quarter, the inflation rates for both capital goods (excluding computers and
semiconductors) and consumer goods moved noticeably higher.
Oil. The BLS price of imported oil rose 10.6 percent in March. The spot price of West
Texas Intermediate crude oil rose 13 percent in March—averaging more than $54 per
barrel. The spot price rose to a new high of more than $57 per barrel on April 1, but has
retraced those gains in response to a rise in U.S. crude oil inventories, closing at
$54.21 per barrel on April 26. Oil prices remain elevated due to continued strong oil
demand and concerns about future supplies, particularly from Iran, Iraq, Nigeria, Russia,
and Venezuela.
Exports. In March, the prices of U.S. exports of total goods and of core goods rose
0.7 and 0.8 percent, respectively. As with imports, prices for material-intensive goods
were the main contributors. February’s 1 percent price decline for agricultural products
was more than reversed by a 3.7 percent gain in March, led by higher soybean prices.
Prices for industrial supplies rose 1.2 percent, as prices of fuels rose sharply. Within
finished goods, exported capital goods (excluding computers and semiconductors) had

IV-6

the largest price increase in March at 0.2 percent. Prices for automotive products edged
up, whereas prices for consumer goods were unchanged. Prices of both exported
computers and semiconductors declined.
The average level of exported core goods prices in the first quarter was 6½ percent at an
annual rate above the fourth-quarter level. All categories had price increases, with
industrial supplies having the largest gain.
U.S. International Financial Transactions
Private foreign purchases of U.S. securities (line 4 of the Summary of U.S. International
Transactions table) continued strong in February, at a record $67 billion. There were
substantial purchases of corporate bonds (line 4c) and Treasury securities (line 4a),
especially Treasury bonds. Purchases of corporate stocks (line 4d) also continued above
their recent trend, but purchases of agency bonds (line 4b) moderated from high levels.
Private inflows into U.S. securities in January and February combined are running
roughly 50 percent above the rate recorded in 2004.
Net foreign official inflows (line 1) reversed to a slight outflow in February for the first
time since April 2003. Most of the $17 billion swing from January to February was
accounted for by notably smaller inflows from China and by outflows from Norway,
where monthly data have been volatile. China's small net inflow reflected a significant
decline in holdings of short-term securities that was offset by an even larger increase in
holdings of long-term securities. The increase in holdings of long-term securities was
only partially captured by the TIC system, with the rest inferred from an increase in
custody holdings at the Federal Reserve Bank of New York (FRBNY). (In general, the
TIC system can only capture a subset of foreign official transactions in U.S. assets, in
large part because these transactions may involve intermediaries outside the United
States. Even when the TIC data are supplemented by confidential information on custody
holdings at FRBNY, our measurement of these flows may be incomplete.) Data from
FRBNY indicate relatively small net inflows from China in March and the first half of
April, and custody holdings for all countries indicate moderate net inflows for March and
small net outflows thus far in April.
U.S. investors made large net purchases of foreign securities (line 5) in February.
Consistent with recent monthly data indicating substantial flows into world equity mutual
funds, U.S. investors made large purchases of foreign stocks (line 5b). The majority of

IV-7

these transactions were recorded with the United Kingdom, and 20 percent were
concentrated in Japan. For the second month in row, U.S. investors sold a small amount
of foreign bonds (line 5a).
The volatile banking sector (line 3) registered a slight net inflow in February, reversing
only a small part of the substantial outflow in January.

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.)

2004

2004
Q2

250.1 361.2 137.1

69.2

71.1

83.8

20.0

248.6 358.4 136.5
114.7 162.7 96.7
6.1 12.1
3.5
127.8 183.6 36.3

68.1
46.2
-2.3
24.2

70.7
20.3
3.6
46.8

83.1
-.4
7.3
76.3

16.2
1.4
3.2
11.6

-.8
.8
-2.2
.6

3.8

1.7

57.6 100.0

…

5.3

-61.6

5.9

88.4 182.7
-.8 12.2
5.8 55.3
81.7 69.5
1.7 45.8

57.9
12.8
14.4
13.5
17.1

66.5
23.5
5.5
26.3
11.3

-18.7
-6.0
-35.1
22.4

-.3
5.8
-6.1
.0

-14.8
1.5
-16.3
.0

-173.8 -248.5 -48.0 -55.9 -43.3 -101.3
39.9 115.5 10.5 32.9 35.9 36.3
16.6 14.8
-1.8
8.8
2.6
5.3
80.4
-6.1
8.1 -50.3 45.8
-9.7
-530.7 -665.9 -147.5 -164.7 -165.9 -187.9

…
…
…
…
…

…
…

1.5

2005

2.8

1.1

295.6 254.3

1.4

95.4

-42.7

33.6

64.7

-26.9

361.8 512.1
116.7 117.3
-15.9 90.2
222.9 242.1
38.1 62.6
-94.1 -106.7
20.7 -19.8
-97.4 -96.0
-17.4
9.1

-3.1
-12.0

-1.5
51.9

89.1 151.8
41.5 64.4
-.8 29.9
42.9 48.0
5.5
9.6
-13.8
3.1
-16.8
.0

-0.4
9.4

-25.5
14.9
-27.7
-12.7

-0.3
0.5

-23.1

-48.8
-31.8
-16.4
-.6

-0.4
37.5

Jan.

-0.4
4.5

Feb.

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

IV-9

Foreign Financial Markets
On a trade-weighted basis, the exchange value of the dollar against major foreign
currencies rose 2¼ percent on net this intermeeting period. This increase largely reflects
broad-based dollar appreciation in the week following the March FOMC announcement.
During April, the major currencies index was somewhat volatile but changed little on net
as the dollar’s bilateral movements against currencies in the index were approximately
offsetting; the dollar rose strongly against the Canadian dollar during April but
depreciated against all other currencies in the index. The nominal broad index of the
dollar’s value rose 1 percent on balance over the intermeeting period.
Exchange Value of the Dollar
March 22, 2005 = 100
104
Daily

Mar.
FOMC
103
Major currencies
102

101
Broad

100
Other important
trading partners
99

98
Jan

Feb

Mar

Apr

Early in the period, the dollar was supported by expectations that the FOMC might be
more aggressive in raising rates in an effort to counter inflationary pressures, as well as
by higher-than-expected U.S. price data which helped reinforce these views. During
April, however, data on economic activity in the United States as well as in the euro area,
Canada, and Japan generally came in below expectations, and interest rates declined
globally. On balance, the dollar declined modestly in April against all currencies in the
major currencies index except the Canadian dollar, as U.S. benchmark bond yields
declined more than their foreign counterparts.

IV-10

The dollar gained over 4 percent against the Canadian dollar during the intermeeting
period. The decline in the Canadian dollar came amid a significant downward shift in the
expected path of short-term Canadian interest rates. Implied rates on Canadian dollar
interest rate futures maturing later this year fell 30 to 40 basis points, exceeding the yield
declines on comparable dollar, euro, and sterling instruments. Following Canadian
employment and GDP data that were somewhat below expectations early in the period,
the Bank of Canada revised down its forecast for 2005 economic growth, suggesting to
some investors that the Bank of Canada could put off further rate increases. As had been
widely expected, the Bank of Canada left its policy rate unchanged at 2.5 percent at its
meeting on April 12. The Canadian dollar may also have been weighed down by political
uncertainty associated with the possibility of early national elections due to a financial
scandal involving the ruling Liberal Party. Statements by Bank of Canada Governor
Dodge during the period referred to this political uncertainty as a possible contributing
factor to currency volatility.

Financial Indicators in Major Industrial Countries

Country
Canada

Three-month rate
Percentage
Apr. 28
point
(Percent)
change

Ten-year yield
Percentage
Apr. 28
point
(Percent)
change

Equities
percent
change

2.58

-.07

4.14

-.25

-3.82

.05

.00

1.24

-.17

-6.04

Euro area

2.13

-.01

3.40

-.29

-3.83

United Kingdom

4.84

-.05

4.55

-.25

-3.61

.71

.01

2.06

-.34

-.67

Australia

5.70

-.16

5.36

-.36

-5.92

United States

3.14

.14

4.21

-.42

-2.31

Memo:
Weighted-average
foreign

1.95

-.03

3.58

-.24

n.a.

Japan

Switzerland

NOTE. Change is from March 21/22 to April 28 (10 a.m. EDT).
n.a. Not available.

Yields on benchmark bonds declined 17 basis points in Japan and 25 to 29 basis points in
the euro area, the United Kingdom, and Canada. European and Japanese long-term yields
fell in response to domestic data which showed less strength in recent economic activity

IV-11

than had been expected, as well as disappointing U.S. data releases. On the morning of
April 28, the 10-year German government bond yield reached a new historic low of 3.40
percent. Inflation data from the euro area was, in contrast, generally a bit higher than had
been expected, but elicited little change in inflation compensation spreads for these
countries.
Foreign three-month spot interest rates were little changed or declined slightly on net,
reflecting relatively stable near-term policy expectations. As had been widely expected,
the European Central Bank and the Bank of England decided to leave their respective
policy rates unchanged in meetings this period. Euro yields declined slightly, however,
after ECB President Trichet noted in a press conference following the ECB rate
announcement that recent data from the euro area had been “mixed.”
Equity prices in Europe and Japan were generally little changed to modestly higher
through the first weeks of the period, but declined sharply in the second half of April.
Global share prices dropped in response to the U.S. March retail sales data and then fell
further following mixed earnings reports from the technology sector. Automobile sector
shares underperformed on concerns over accounting issues and union negotiations at GM.
The decline in broad European indexes was somewhat larger than that of U.S. markets.
Japanese shares underperformed substantially, reportedly weighed down by political
tensions with China as well as weak domestic data.
The dollar’s value against our other important trading partners declined slightly on net, as
a more than 7 percent depreciation in the dollar against the Brazilian real was nearly
offset by modest gains against the currencies of several emerging market economies in
Asia. The real rose against the dollar despite evidence of a slowdown in domestic
growth and a 9 percent decline in Brazil’s broad equity index. In contrast, the Brazilian
EMBI+ spread increased a modest 15 basis points on net. The gains in the real since
mid-March coincide with several institutional factors, including a relaxation of some
government restrictions on Brazil’s onshore currency market. In addition, since
March 17 Brazil’s central bank has not been offering hedging opportunities against future
real appreciation through currency swaps, as it had been doing during February and early
March. The real was also supported against the dollar late in the period by an
unexpected monetary policy tightening by Brazil’s central bank.

IV-12

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

Short-term
interest rates1
Percentage
Apr.27/28
point
(Percent)
change

Dollar-denominated
bond spread2
Percentage
Apr.27/28
point
(Percent)
change

Equity
prices

Apr. 28

Percent
change

11.13

-.84

9.50

.20

1.88

.11

-4.89

Brazil

2.52

-7.40

20.32

1.07

4.51

.15

-8.56

Argentina

2.90

-.58

n.a.

62.62

11.70

-4.11

Chile

581.75

-.73

3.78

.74

.71

.09

-1.86

China

8.28

.00

n.a.

.75

.19

-3.13

Korea

1002.50

-.68

3.55

.00

...

-6.39

31.42

.42

1.40

.00

...

-2.93

Singapore

1.65

.70

2.00

.13

...

-1.97

Hong Kong

7.80

-.01

1.94

-.31

...

.97

Malaysia

3.80

-.01

2.81

.01

.54

.06

-.54

Thailand

39.58

2.51

2.45

.01

.60

.18

-5.76

9575.00

1.91

7.65

.20

1.08

-.01

-9.91

Philippines

54.30

.55

3.50

-2.00

4.36

.20

-8.05

Russia

27.80

.83

n.a.

1.90

-.10

.68

Economy
Mexico

Taiwan

Indonesia

Percent
change

NOTE. Change is from March 21/22 to April 27/28.
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.

Argentina’s EMBI+ spread rose nearly 12 percentage points on balance. Market liquidity
on Argentinean sovereign debt has reportedly declined to a trickle as markets await the
outcome of U.S. judicial rulings regarding the government’s debt exchange.
The forward exchange value of the Chinese renminbi twelve months ahead was
somewhat volatile late in the period and increased modestly on net to 5.2 percent above
the current spot rate. Official commentary from several U.S. and foreign officials
regarding China’s currency regime, as well as heightened political pressure for trade
protection measures in Europe and the United States, reportedly prompted increased
speculation that the Chinese government will change its currency regime.

IV-13

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

IV-14

Developments in Foreign Industrial Countries
Recent economic indicators suggest that economic growth in the major foreign
economies slowed late in the first quarter following a pick up in the beginning of the
year. After rising briskly in January, Japan’s industrial production fell back some later in
the quarter. Similarly, the latest data indicate that the euro-area industrial sector erased
gains posted earlier in the year, while in the United Kingdom, industrial production
continued to lose ground. In contrast, the Canadian manufacturing sector showed signs
of improvement relative to its poor performance in the second half of last year.
Demand indicators posted modest increases in the first quarter, with the gains generally
waning as the quarter progressed. Retail sales in Japan and the United Kingdom receded
somewhat recently from their stronger pace at the start of the year and retail sales in the
euro area firmed.
Consumer price inflation remained subdued overall. In the euro area, core inflation
posted its slowest rate since early 2001, while in Canada consumer prices continued
rising at moderate rates. Even though the inflation rate in the United Kingdom moved up
recently, it continued to be slightly below the Bank of England’s 2 percent target. Mild
deflation persisted in Japan.
In Japan, monthly indicators during the first quarter have been volatile, mainly as a
result of a shift in the Lunar New Year to February this year from January last year.
Averaging through this shift, the data suggest some strengthening in economic activity in
the first quarter. Average industrial production for the first quarter was up 1.7 percent
from the fourth-quarter average, and inventories of high-tech goods have eased back from
recent highs. The all-industries index of output for January and February on average was
up nearly 2 percent from the fourth-quarter average. Workers' household expenditures
and retail sales fell in February and March but were still up for the first quarter as a whole
due to a spike in January. Real exports and imports both rose slightly in the first quarter.
Core machinery orders, a leading indicator of business investment, were roughly
unchanged in January and February compared with the fourth quarter.
The BOJ’s Tankan diffusion index of business conditions for firms of all sizes and
industries declined to -2 in March from 1 in December. Survey respondents projected
that the index would remain steady at this level in June. The headline index for large
manufacturers dropped to 14 in March from 22 in December, while indices for small- and

IV-15

medium-sized manufacturing firms fell slightly less. In contrast, confidence among firms
in the non-manufacturing sector showed a small improvement.
Labor markets have gradually improved, but deflation continued. In March, the
unemployment rate fell to 4.5 percent, returning to its lowest level since late 1998. The
job-offers-to-applicants ratio, a leading indicator of employment, remained at a thirteenyear high in March. Core consumer goods prices in the Tokyo area (which exclude fresh
food but include energy) were unchanged in April from the previous month, and were
down 0.5 percent from a year earlier. Wholesale price inflation ticked up to 1.4 percent
in March.
Japanese Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

Indicator

2005

Q3
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

Jan.

Feb.

Mar.

-.1
-.2
5.0
-8.4
-.7
10.2
4.8
.85
2.0
-.1
1.8

-.9
-.1
-3.9
6.0
-.8
1.2
4.6
.90
1.0
-.3
2.0

n.a.
n.a.
n.a.
n.a.
n.a.
-2.9
n.a.
.91
-2.0
-.5
1.3

3.2
2.3
9.9
-2.2
.9
-2.9
4.5
.91
…
-.5
1.4

-2.3
-1.1
-9.9
4.9
-3.5
-.7
4.7
.91
…
-.5
1.3

-0.3
n.a.
-0.6
n.a.
n.a.
-.5
4.5
.91
…
-.5
1.4

Apr.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
…
-.5
n.a.

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.

On April 1, the government limited deposit insurance on ordinary deposits at financial
institutions to ¥10 million per account. This limit has applied to time deposits (savings
accounts and CDs) since April 2002. Settlement-only accounts, such as checking
accounts, remain fully protected.

IV-16

Euro-area economic indicators generally point to a slowing of growth late in the first
quarter after a pickup early in the quarter. Euro-area industrial production declined 0.5
percent in February, following gains in the previous two months. Indicators of business
sentiment suggested a further weakening of activity in March. The manufacturing PMI
moved sharply lower in March, although the services PMI remained steady. The German
IFO index fell in March and April, and the European Commission’s index of euro-area
business sentiment declined for the fourth consecutive month in March to the lowest level
since December 2003. The index of euro-area consumer sentiment turned lower as well
in March, raising some concern that consumer spending, which supported GDP growth in
the fourth quarter, could be slowing. Euro-area retail sales gained 0.3 percent in
February, the same as in the previous month, but French household consumption of
manufactured products declined in February following a strong gain in the previous
month.
Euro-Area Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004
Q3
Industrial production1
Retail sales volume2
Unemployment rate3
Consumer confidence4
Industrial confidence4
Manufacturing orders, Germany
CPI5
Producer prices5
M35

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

2005

2004

Dec.

Jan.

Feb.

Mar.

-.3
n.a.
.3
.1
n.a.
.0
8.8
n.a.
8.8
-13.0 -13.3 -13.0
-3.3 -6.3
-4.0
1.6
n.a.
7.6
2.3
2.0
2.4
3.8
n.a.
3.5
6.6
6.5
6.6

.3
.3
8.8
-13.0
-5.0
-3.5
1.9
3.9
6.8

-.5
.3
8.9
-13.0
-6.0
-2.1
2.1
4.2
6.7

n.a.
n.a.
n.a.
-14.0
-8.0
n.a.
2.1
n.a.
6.5

2005

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.

Labor market conditions remained weak in the euro area, with the unemployment rate
rising a bit to 8.9 percent in February. In Germany, the unemployment rate rose further
to 12.0 percent in March, up from 10.8 percent 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.

IV-17

The twelve-month rate of consumer price inflation in the euro area remained at 2.1
percent in March. The rate of core inflation, excluding energy and unprocessed food,
held steady at 1.6 percent, the same as in February, which itself was the slowest rate since
early 2001.
Real GDP in the United Kingdom rose 2.2 percent in the first quarter, according to the
preliminary estimate. Service sector activity grew 3.3 percent while industrial production
fell slightly, both roughly in-line with their fourth-quarter pace. Construction output
grew by 2.6 percent, well below its fourth-quarter growth rate of 4.7 percent. Business
confidence has recovered, on balance, from its slump in the fourth quarter. Consumer
confidence, after remaining subdued through the fourth quarter and first part of this year,
increased above zero, its long-run average, in March. The PMI for services was
unchanged over the first quarter, although manufacturing and construction PMIs fell
slightly.
Depending on the survey consulted, house prices grew between 4 and 6 percent (a.r.) in
the first quarter, slightly higher than in the fourth quarter of 2004. Consistent with the
increase in house prices, household net mortgage borrowing rose somewhat faster over
January and February than in the fourth quarter. The growth rate of mortgage lending is
still well below its 2003 peak.
The twelve-month rate of consumer price inflation jumped to 1.9 percent in March from
1.6 percent in February, remaining just below the Bank of England’s 2 percent target.
Twelve-month consumer price inflation excluding energy also increased sharply to 1.5
percent in March, from 1.2 percent in February. 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.
The U.K. labor market remains very tight. Over the twelve months ending in March,
earnings grew 5.6 percent for the whole economy and rose 7.2 percent in the private
services sector. Producer input prices have also accelerated, growing nearly 12 percent
on a twelve-month basis in March.

IV-18

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

Indicator

2005

Q3
Preliminary GDP*
Industrial production
Retail sales volume1
Unemployment rate2
Claims-based
Labor force survey3
Business confidence4
Consumer confidence5
Consumer prices6
Producer input prices7
Average earnings7

Jan.

Feb.

Mar.

Apr.

2.3
-1.2
.9

3.0
-.1
.2

2.2
n.a.
n.a.

…
-.3
.7

…
-.4
.2

…
n.a.
n.a.

2.7
4.7
12.3
-3.3
1.2
5.6
3.8

2.7
4.7
4.3
-.7
1.4
6.8
4.3

2.6
n.a.
12.7
1.0
1.7
10.7
n.a.

2.6
4.8
10.0
.0
1.6
9.7
4.2

2.6
n.a.
19.0
.0
1.6
10.9
5.7

2.7
n.a.
9.0
3.0
1.9
11.5
n.a.

…
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

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

In Canada, incoming data point to a pickup in growth in the first quarter, after a
deceleration in the fourth quarter. In January, GDP by industry advanced 2.8 percent
(a.r.), lifted by surges in manufacturing and retail trade.
The manufacturing sector, which is heavily export-oriented and was hard hit during the
third and fourth quarters of 2004, turned up in January and February. Manufacturing
output was buoyed by solid demand for machinery and equipment, suggesting sustained
momentum from the fourth-quarter’s strong growth in business investment. Through the
first two months, manufacturing shipments, new orders, and unfilled orders all rose on
balance. In addition, the manufacturing sub-index in the composite index of leading
indicators suggests that manufacturing new orders may have surged again in March.
In February, the merchandise trade balance rebounded sharply, as exports across all
major categories increased and imports declined slightly. The recovery follows steep

IV-19

declines in the trade balance during the previous two months. In addition, while overall
imports fell, imports of machinery and equipment continued their recent strength, as
businesses seem to be taking advantage of the stronger currency to add to capacity.
Retail sales surged for the second consecutive month in February, and the composite
index of leading indicators advanced for the fourth straight month in March. Housing
starts remained strong in the first quarter, despite coming off a 17-year high in 2004.
Canadian Economic Indicators
(Percent change from previous period except as noted, s.a.)
2004

Indicator
Q3
GDP by industry
Industrial production
New manufacturing orders
Retail sales
Employment
Unemployment rate1
Consumer prices2
Core consumer prices2,3

2005
Q4

2004

Dec.

Jan.

Feb.

Mar.

.2
.4
.5
-1.3
.1
7.0
2.1
1.7

.2
.3
6.5
2.3
-.0
7.0
2.0
1.6

n.a.
n.a.
-4.3
1.7
.2
7.0
2.1
1.8

n.a.
n.a.
n.a.
n.a.
.0
6.9
2.3
1.8

…
…

.9
1.3
1.5
1.7
.3
7.1
2.0
1.7

.5
.3
-.7
.7
.4
7.1
2.3
1.6

n.a.
n.a.
n.a.
n.a.
.1
7.0
n.a.
n.a.

Consumer attitudes (1991 = 100)

122.8

123.7

Business confidence (1991 = 100)

151.4

139.8

n.a.

2005

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

Total employment was essentially unchanged in March, but the unemployment rate edged
down to 6.9 percent as fewer individuals were looking for work. The manufacturing
sector, which has shed about 2 percent of its workforce since the middle of 2004, also
saw virtually no change in employment in March, although it posted a sizable drop in
employment overall in the first quarter.
In March, the twelve-month rate of consumer price inflation moved up to 2.3 percent,
largely due to higher gasoline prices. The twelve-month rate of core inflation, excluding
the eight most volatile components, also edged up in March to 1.9 percent, from 1.8
percent in February.

IV-20

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

2004
Q3

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

2005

2005
Jan.

Feb

Mar

102.7 105.5 107.6 98.7 105.2 119.0
169.8 175.0
n.a. 175.4 190.0
n.a.
57.8
18.1

61.6
27.3

79.2
n.a.

n.a.
n.a.

183.2 194.9
100.5 83.7

n.a. 205.9 205.7
n.a. 174.4 128.1

n.a.
n.a.

-16.2
-12.2

-26.2
-16.9

n.a. -19.3
n.a. -61.7

-23.7
13.8

n.a.
n.a.

-1.1
-3.2

-8.6
-22.1

n.a. -4.8
n.a. -39.3

-8.2
-16.6

n.a.
n.a.

n.a. -114.4 -108.9
…
n.a. …

n.a.

…

n.a.
n.a.

…

-108.6 -114.5
-68.7 -37.7
51.0
25.6

50.8
20.7

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

n.a.
n.a.

78.4
50.4

42.0

46.9

…

n.a.

IV-21

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

Germany
Percent

Percent

4
3

-1

1998 1999 2000 2001 2002 2003 2004 2005

-1

-2

France

1998 1999 2000 2001 2002 2003 2004 2005

-2

United Kingdom
Percent

Percent

4
3

-1

1998 1999 2000 2001 2002 2003 2004 2005

-1

-2

Italy

1998 1999 2000 2001 2002 2003 2004 2005

-2

Canada
Percent

Percent

4
3

-1

1998 1999 2000 2001 2002 2003 2004 2005

-1

-2

1998 1999 2000 2001 2002 2003 2004 2005

-2

IV-22

Industrial Production in Selected Industrial Countries
Japan

1998=100

120

Germany

1998=100

120

110

100

1998 1999 2000 2001 2002 2003 2004 2005

France

110

100

120

1998 1999 2000 2001 2002 2003 2004 2005

United Kingdom

120

110

100

1998 1999 2000 2001 2002 2003 2004 2005

Italy

110

100

120

1998 1999 2000 2001 2002 2003 2004 2005

Canada

120

110

100

1998 1999 2000 2001 2002 2003 2004 2005

110

100

1998 1999 2000 2001 2002 2003 2004 2005

IV-23

Economic Situation in Other Countries
Recent data from the emerging market economies have been mixed and on average point
to a moderation of growth in the first quarter. The economies of China, Hong Kong,
Korea, Mexico, and Argentina have all shown signs of strength, while the economies of
Brazil, the ASEAN countries, and India appear to have moderated. Consumer price
inflation has moved up in general since the last Greenbook, reflecting higher oil prices.
Several countries have responded with monetary tightening.
Chinese real GDP surged 14 percent in the first quarter, led by strong growth in exports
and investment. The first-quarter growth figure is surprising in light of numerous other
indicators that point to slowing, including industrial production, imports, the money
supply, and bank lending. Moreover, consumer price inflation moved down a bit in the
first quarter, to less than 3 percent. The resurgence of investment growth, after three
quarters of weak performance, implies that additional tightening measures may be needed
in order to bring investment onto a more sustainable growth path. The trade surplus
widened significantly in the first quarter, as exports continued to soar and import growth
slowed considerably.
Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2005

Q4
Real GDP1
Industrial production
Consumer prices2
Trade balance3

10.0
18.6
3.2
25.5

9.5
14.5
2.6
32.1

Jan.

Feb.

Mar.

11.2
3.6
3.3
72.9

14.0
3.0
2.8
91.3

…
-2.5
2.3
96.0

…
6.6
3.3
79.5

…
1.0
2.8
98.4

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

Recent indicators from Hong Kong point to continued strength in the domestic economy.
The unemployment rate fell in the first quarter, retail sales growth picked up somewhat,
and consumer confidence rose. Trade volume, a good indicator of growth for the
entrepôt economy, edged down in the fourth quarter but has since stabilized. Consumer
price inflation inched up in the first quarter but remains quite low.

IV-24

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

2003

2004

2005

Q4
Real GDP1
Unemployment rate2
Consumer prices3
Trade balance4

4.6
7.9
-1.9
-8.5

6.9
6.9
.2
-12.0

Jan.

Feb.

Mar.

2.4
6.5
.2
-7.5

n.a.
6.1
.3
n.a.

…
6.4
-.3
-2.6

…
6.1
.5
-16.7

…
6.1
.8
n.a.

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

Recent indicators from Taiwan have been mixed. Industrial production fell in the first
quarter, but orders for high-tech goods rose and hit a new record high. The trade balance
returned to surplus in the first quarter, after a rare deficit in the previous quarter.
Consumer prices have picked up in recent months due to higher oil and gas prices.
Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2004
Q4

Real GDP1
Unemployment rate2
Industrial production
Consumer prices3
Trade balance4
Current account5

5.8
5.0
7.1
-.1
16.9
29.3

3.2
4.5
9.8
1.6
6.1
19.0

2.1
4.2
-.5
1.8
-6.6
8.7

2005
Q1
n.a.
4.2
-.4
1.6
6.9
n.a.

Jan.

Feb.

Mar.

…
4.2
.0
.5
-3.3
…

…
4.3
1.0
1.9
20.5
…

…
4.2
-1.6
2.3
3.5
…

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.

In Korea, incoming data suggest a modest improvement in domestic demand. Real GDP
expanded 3.8 percent in the fourth quarter, boosted by exports, inventory accumulation,
and the strongest growth in private consumption in more than two years. In the first
quarter, industrial production rose 1 percent, while retail sales and indicators of consumer
confidence and business expectations moved up noticeably. Averaging over the first two

IV-25

months of the year, the current account surplus has roughly matched that of the fourth
quarter, as the effects of the rising value of the won in foreign exchange markets and high
fuel prices have been offset by strong external demand. Both headline and core
consumer prices were unchanged in March, leaving twelve-month core inflation within
the government’s target range of 2.5-3.5 percent.
Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2005

Q4
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

4.1
4.9
3.4
3.4
22.0
11.9

3.0
10.2
3.5
3.0
38.2
27.6

Jan.

Feb.

Mar.

3.8
2.0
3.5
3.4
35.5
29.4

n.a.
1.0
3.5
3.1
n.a.
n.a.

…
3.1
3.6
3.1
58.0
46.4

…
-4.6
3.5
3.3
32.8
12.1

…
3.8
3.5
3.0
n.a.
n.a.

Incoming data from the ASEAN countries suggest that economic growth generally
moderated in the first quarter. In Singapore, the advance estimate of first-quarter real
GDP (unofficial) indicates a decline of almost 6 percent, mostly due to a sharp
contraction in the volatile biomedical sector. However, a strong electronics PMI reading
for the first quarter is more encouraging. Elsewhere in the region, recent data on
industrial production have been mixed. While production fell in Indonesia, the
Philippines, and Thailand, it was up in Malaysia. Recent data show the ASEAN
economies continuing, on average, to run trade surpluses. The exception is Thailand,
where higher oil prices have contributed to consecutive monthly trade deficits.
Consumer price inflation remained elevated across the region, partly reflecting higher
energy prices and the reduction of oil subsidies in some countries. Citing concerns over
higher inflation, the central banks in the Philippines and Indonesia raised interest rates
25 basis points in early April following a similar rate increase by the Thai central bank in
March.

IV-26

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

2003

2004

2005

Jan.

Feb.

Mar.

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

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
.9
13.9
6.4

2.5
1.3
.5
5.3
1.8

n.a. -14.8
n.a. -1.9
n.a. -1.6
-8.1
-6.8
n.a. -7.2

n.a.
4.7
-1.0
-10.6
-.4

n.a.
n.a.
n.a.
-1.7
n.a.

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

2003

2004

2005

Q4
Indonesia
Malaysia
Philippines
Singapore
Thailand

28.5
21.4
-1.3
16.2
3.8

n.a. Not available.

25.1
21.2
-.7
16.1
1.7

Jan.

30.4
18.3
-.5
18.3
3.6

n.a. 26.9
n.a. 25.4
n.a.
3.3
14.8
10.6
n.a. -11.4

Feb.
33.2
26.2
-.6
20.0
-13.1

Mar.
n.a.
n.a.
n.a.
13.9
n.a.

IV-27

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

20031 20041

2004

2005

Q4
Indonesia
Malaysia
Philippines
Singapore
Thailand

5.2
1.2
3.9
.7
1.8

6.4
2.1
8.6
1.3
2.9

6.3
2.1
8.1
1.7
3.2

Jan.

Feb.

Mar.

7.3
2.4
8.4
.4
2.7

7.2
2.4
8.5
.0
2.5

8.8
2.6
n.a.
.4
3.2

7.8
2.4
n.a.
.3
2.8

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

In India, economic growth appears to be moderating. After surging almost 20 percent
(a.r.) in the third quarter, real GDP was flat in the fourth quarter, and industrial
production in the first two months of this year was slightly below the fourth-quarter
average. The trade deficit widened further in the first quarter. Inflation continues to be
above market expectations, and the Indian central bank raised its benchmark short-term
interest rate to 5 percent in late April. The Indian government transitioned to a longawaited VAT tax regime at the beginning of April. The tax, adopted by two-thirds of
India’s states, is intended to promote growth by streamlining the tax system, reducing the
incidence of evasion, and unifying tax policies across states. Even with this tax,
however, the government’s proposed budget for the current fiscal year fails to reduce the
deficit to levels required by Indian law.
Indian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2004
Q4

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

11.0
6.6
3.7
5.8
-13.8
6.9

6.2
8.4
3.8
6.7
-21.7
-1.6

.5
4.3
4.2
7.2
-28.8
-21.9

2005
Q1

Jan.

Feb.

Mar.

n.a. …
n.a.
.3
n.a.
4.4
5.2
5.5
-32.9 -31.5
n.a. …

…
-1.4
4.2
5.0
-40.4
…

…
n.a.
n.a.
5.2
-26.7
…

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

IV-28

In Mexico, recent data releases point to a continued healthy pace of economic activity.
The country’s index of overall economic activity (a monthly proxy for real GDP) rose
6.2 percent in February from its year-earlier level, on the back of solid performances of
the service and industrial sectors. Average industrial production for January and
February was up 1 percent from the fourth-quarter average, boosted by strong
maquiladora production. Domestic demand has continued to be an important source of
growth, aided by increasing bank credit despite relatively high real interest rates.
In late March, the Bank of Mexico tightened monetary policy for the twelfth time in the
past year in an ongoing effort to tame inflation and signal its commitment to its inflation
target. The rate on 28-day peso-denominated bills, the Cetes, currently stands at about
9.6 percent, up from about 5 percent when tightening began early last year.
Twelve-month consumer price inflation stood at 4.4 percent in the first quarter, down
from 5.3 percent at the end of the fourth quarter of 2004, but still above the target range
of 2-4 percent.
Mexican Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2004
Q4

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

2.1

4.9

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

5.5

2005
Q1
n.a.

Jan.

Feb.

Mar.

…

1.3
n.a.
.2
.1
.8
n.a.
.4
.1
3.5
3.8
3.8
3.9
5.3
4.4
4.6
4.3
-12.1 -12.1 -16.4 -10.3
207.8 211.6 212.4 211.1
195.7 199.6 196.0 200.8
-18.2
n.a. …
…

n.a.
n.a.
3.8
4.4
-9.5
211.4
201.9
…

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 point to a softening of activity.
Industrial production declined 1.2 percent in February, bringing the January-February
average slightly below its fourth-quarter level. February retail sales were weak, and auto

IV-29

sales were down in the first quarter. The external sector was the bright spot, as the trade
surplus grew in the first quarter, with nominal exports up nearly 25 percent at an annual
rate. Headline consumer price inflation was 0.6 percent in March, bringing the
twelve-month increase to about 7½ percent, well above the central bank’s target of
5 percent for 2005. Monthly core inflation, which excludes food and administered prices,
has also been high, but slowed in March.
Since mid-March, the central bank has raised its policy rate, the Selic, 75 basis points, to
19.5 percent in a bid to reduce inflation. The latest hike of 25 basis points on April 20
surprised analysts, who had expected an end of the tightening that began last fall. The
central bank’s tight monetary policy has been increasingly controversial and is partly
responsible for efforts by some to remove Central Bank President Mereilles from his
post.
Brazilian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2005

Q4
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

.8
.1
12.3
9.3
24.8
4.0

4.8
8.3
11.5
7.6
33.7
11.8

Jan.

Feb.

Mar.

1.7
.4
9.7
7.2
34.0
8.0

n.a.
n.a.
10.5
7.4
39.8
10.8

…
-.6
9.7
7.4
37.7
9.8

…
-1.2
10.5
7.4
41.9
1.4

…
n.a.
11.2
7.5
39.8
21.1

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 fourth quarter of last year, with
real GDP expanding at an annual rate of over 11 percent. In the first quarter of 2005,
industrial production continued to expand briskly, with the first-quarter average 3 percent
above its fourth-quarter level. 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. Food price increases pushed twelve-month consumer
price inflation to over 9 percent in March, above the upper end of the central bank’s
unofficial target range of 5-8 percent for 2005.

IV-30

The final settlement of the Argentine government’s February debt exchange, originally
scheduled for April 1, has been delayed in response to legal action pursued by a group of
bondholders who did not accept the swap offer and who seek to freeze assets in the
United States owned by the Argentine government. The case is currently pending a
decision in U.S. courts. It remains to be seen how the Argentine government will
ultimately deal with investors holding almost $20 billion (about 25 percent) in defaulted
bonds who did not accept the government’s offer.
Argentine Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2003

2004

2004
Q4

Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Trade balance4
Current account5

12.1
16.1
17.3
3.7
15.7
7.4

8.4
10.7
13.6
6.1
12.1
3.0

11.4
2.5
12.1
5.8
10.4
1.9

2005
Q1
n.a.
3.0
n.a.
8.2
n.a.
n.a.

Jan.

Feb.

Mar.

…

…
-.8
…
8.2
8.5
…

…
4.1
…
9.2
n.a.
…

.7
…
7.2
12.6
…

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, there have been few data releases since the last Greenbook.
Unemployment declined in the first quarter but remained high, and monthly inflation
jumped to 1.2 percent in March (n.s.a.) in the wake of the March devaluation of the
bolivar. Fiscal policy continues to be expansionary, supported by the high price of oil.
International reserves stood at about $26 billion in mid-April, up a little since end-2004.
Oil production is still estimated to be below the level prevailing before the national
strikes of 2002.

IV-31

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

2003

2004

2004
Q4

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

6.6
18.0
27.1
-5.5
16.5
11.4

11.2
15.1
19.2
-10.5
22.1
14.6

8.2
14.1
19.5
-12.2
25.2
15.6

2005
Q1

Jan.

Feb.

Mar.

n.a.
13.3
17.0
n.a.
n.a.
n.a.

…
13.5
18.5
…
…
…

…
13.2
16.8
…
…
…

…
13.2
15.7
…
…
…

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

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 3, 2005 : Greenbook Part 2

FRASER