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Class III FOMC - Internal (FR)

Part 2

May 2, 2007

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

May 2, 2007

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
The incoming data suggest that economic activity is continuing to expand at a belowtrend pace. Payroll employment has continued to post solid gains, and manufacturing
production stepped up in March after exhibiting considerable softness over the preceding
several months. However, housing construction remains under pressure from weak
demand and outsized inventories of unsold homes, and consumer spending appears to
have moved onto a slower growth track in recent months. In addition, business fixed
investment has remained subdued, although the exceptional weakness in some key
categories of equipment spending may be starting to dissipate. Total PCE inflation was
pushed up in March by rising energy prices, while the twelve-month change in core PCE
prices stood at 2.1 percent, just a tenth above the reading for the preceding year.
Labor Market Developments
Labor demand decelerated in the first quarter but remained relatively strong. Private
nonfarm payroll employment increased an average of 124,000 per month, about 40,000
below the average pace recorded in the fourth quarter of 2006. The gains in private
employment, in combination with a relatively stable average workweek, contributed to a
1.5 percent (annual rate) increase in aggregate hours in the first quarter.
In the household survey, the unemployment rate edged down 0.1 percentage point in
March, to 4.4 percent, and the labor force participation rate held steady at 66.2 percent.
The number of job losers unemployed less than five weeks as a percentage of
employment—a proxy for the layoff rate—fell in March after having spiked around the
turn of the year.
Other indicators of labor demand have remained in a range consistent with moderate
employment growth. The four-week moving average of initial claims for unemployment
insurance stood at 332,000 for the week ending April 21, just a bit above its fourthquarter average. Layoff announcements, as measured by Challenger, Gray, and
Christmas, have stayed relatively low. According to Manpower and the National
Federation of Independent Businesses (NFIB), hiring plans have moved down recently
but continue to occupy the favorable range that has prevailed since 2004. Similarly, job
openings and new hires, as reported by the Bureau of Labor Statistics, edged down in
February but remain at high levels.
Measures of labor market tightness suggest that little has changed lately. The percentage
of firms reporting to the NFIB that they had a hard-to-fill position was about flat in
March and was about equal to the average level in 2006. According to the Conference
II-1

II-2

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

2006

2007
Q4

Jan.

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

Feb.

Mar.

Monthly change

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

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

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

152
124
3
-9
10
2
29
3
2
4
12
-2
69
27
109

162
136
1
-1
34
-6
34
5
-2
2
12
0
57
26
31

113
80
5
-11
-61
7
17
-3
12
11
32
-6
71
33
-38

180
157
3
-16
56
5
36
6
-5
0
-7
-1
79
23
335

2.5
33.8
41.1

1.4
33.8
41.3

2.0
33.9
41.1

1.5
33.8
41.0

-.2
33.8
40.9

.0
33.8
40.9

.6
33.9
41.1

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

Changes in Private
Payroll Employment

Aggregate Hours and Workweek of
Production or Nonsupervisory Workers
Thousands
400

400

Hours
35.0

2002 = 100
108

3-month moving average
300

300

200

100

Mar.

0
-100

34.5

100
0

106

Aggregate
hours
(right scale)

104

Mar.
34.0

100

-100

-200

-300

98
33.5

Workweek
(left scale)

-300

-400

1999 2000 2001 2002 2003 2004 2005 2006 2007

-400

102

96
94

33.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

2007

2006

Jan.

Feb.

Mar.

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

4.6
15.4
8.2
3.5
3.7

4.7
16.1
8.3
3.5
3.8

4.5
15.1
8.3
3.3
3.5

4.5
14.8
7.7
3.6
3.5

4.6
15.0
8.1
3.6
3.6

4.5
14.9
7.4
3.7
3.5

4.4
14.5
7.6
3.5
3.4

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

66.2
43.6
74.6
75.5
59.6

66.2
43.5
74.9
75.4
59.9

66.3
43.4
75.0
75.7
59.8

66.2
42.2
75.1
75.7
59.6

66.3
42.8
75.2
75.7
59.7

66.2
42.2
74.8
75.7
59.6

66.2
41.6
75.3
75.7
59.6

Labor Force Participation Rate
and Unemployment Rate

Percent
67.6
67.4

Percent
7.0
6.5

Participation rate (left scale)

67.2

6.0

67.0
66.8

5.5

Unemployment rate (right scale)

66.6

5.0

66.4

4.5

66.2

Mar.

4.0

66.0

3.5

65.8
65.6

2000

2001

2002

Job Losers Unemployed
Less Than 5 Weeks

2003

2004

2005

2006

2007

3.0

Unemployed Due to Job Loss
Percent
1.4

(as a percent of the labor force)

Percent
4.0
3.5

3.0

(as a percent of household employment)

4.0
3.5

1.4

3.0

2.5

3-month moving average (thick line)
1.2

1.2

1.0

1.0
Mar.

0.8

Mar.

2.0
1.5

0.6

2.0

0.8

2000

2001

2002

2003

2004

2005

2006

2007

0.6

1.0

1.5

2000

2001

2002

2003

2004

2005

2006

2007

1.0

II-4

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

Layoff Announcements

Insured unemployment
(left scale)

3.6

500

3.2

Thousands
250

200

150

450

2.8

250

150

Thousands
550

400
Apr. 14
Initial claims
(right scale)

2.4
2.0
1.6

100

Apr.

350
50

300

Apr. 21
1999 2000 2001 2002 2003 2004 2005 2006 2007

250

100

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

Hiring
Job Openings and Hires
Net Hiring Plans
Percent
30

4.5

4.0

3.5

3.0

2.5

Percent of private employment
4.5

2.0

1.5

Manpower, Inc.
25
20
Q2

4.0

Hires
Feb.

3.5

Mar.
10
5
0

Job openings

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

2.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

1.5

Source. Job Openings and Labor Turnover Survey.

Labor Market Tightness
Exhaustion Rate

Job Availability and Hard-to-Fill Positions
Percent
45

Index
150

Percent
50

50
3-month moving average

130
45
Job availability*
(right scale)

110
Apr.

90
Mar.

25
20

70
Hard-to-fill**
(left scale)

35
Mar.

50
30

15
10

10
1999 2000 2001 2002 2003 2004 2005 2006 2007
*Proportion of households believing jobs are plentiful, minus
the proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least
1 "hard-to-fill" job opening.
Source. For job availability, Conference Board; for hardto-fill, National Federation of Independent Business.

30
25

1999 2000 2001 2002 2003 2004 2005 2006 2007
Note. The exhaustion rate is calculated as the number of
individuals who were receiving unemployment insurance
benefits but reached the end of their potential eligibility
expressed as a percent of all individuals who began
receiving such benefits 6 months earlier.

II-5

Board, households’ assessments of job availability have not moved much in recent
months. Similarly, the number of individuals who remain on unemployment insurance
rolls until their benefits expire (the exhaustion rate) has changed little.
The staff estimates that productivity in the nonfarm business sector rose at an annual rate
of 1.5 percent in the first quarter. This modest gain would leave the rate of increase over
the past four quarters at 1 percent, 1 percentage point lower than the pace recorded during
the preceding four quarters.

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

Sector
Nonfarm business
All persons
All employees2
Nonfinancial corporations3

2004:Q4 2005:Q4
to
to
2005:Q4 2006:Q4
2.1
1.6
1.8

1.51
1.71
n.a.

2006
Q1

3.5
4.5
10.4

1.2
.9
-4.4

-.5
-.2
4.1

1.91
1.71
n.a.

1. Staff estimates.
2. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of employees.
3. All corporations doing business in the United States except banks, stock and commodity brokers,
and finance and insurance companies. The sector accounts for about two-thirds of business employment.
Nonfinancial corporate output is calculated as an income-side measure.
n.a. Not available.

Industrial Production
Total industrial production (IP) rose 1.4 percent (annual rate) in the first quarter after a
similarly sized decline in the fourth quarter. The flattening out of production over the
past two quarters reflected inventory-related adjustments in a variety of industries,
including light motor vehicles, construction supplies, and several upstream materials
industries, such as steel and semiconductors. Although indicators of the inventory
situation have been mixed, the bulk of the evidence suggests that businesses have
significantly reduced—though probably not eliminated—the overhangs that cropped up
in late 2006.
In March, IP declined 0.2 percent after a considerable rise in February; the change in IP
in March was reduced ¾ percentage point by a steep drop in utilities output because of a
sizable swing in weather conditions from unseasonably cold temperatures in February to

II-6

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

Component

(percent)

2006

2007

20061

2007

Jan.

Annual rate
Total
Previous

Feb.

Mar.

Monthly rate

100.0
100.0

3.5
3.5

-1.5
-1.2

1.4
...

-.4
-.3

.8
1.0

-.2
...

81.9
76.3
71.5

3.4
3.9
2.5

-1.7
-1.5
-3.2

1.2
2.0
1.2

-.6
-.2
-.3

.1
-.1
-.1

.7
.7
.5

Mining
Utilities

8.6
9.6

8.0
.3

3.0
-3.6

-1.1
5.0

-1.6
2.4

.3
7.6

.1
-7.0

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.8
1.2
1.1
2.6

24.6
12.1
14.8
34.8

24.7
24.4
9.6
31.1

12.3
34.4
30.0
-3.1

.3
2.4
1.8
-1.3

.8
3.4
3.7
-1.7

3.2
3.5
2.2
3.5

Motor vehicles and parts

5.5

-3.8

-4.0

-8.5

-5.8

2.2

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

20.9
4.0
16.9

1.8
-1.9
2.7

2.0
-7.6
4.4

2.8
-3.3
4.2

-.3
-1.1
-.1

.3
-.6
.5

.5
.2
.6

Business equipment
Defense and space equipment

7.8
1.7

10.2
2.0

4.0
-3.5

-2.1
-.7

-2.3
1.2

-.1
-.6

.8
-2.2

Construction supplies
Business supplies

4.5
7.9

-2.2
1.0

-9.1
-1.8

-.3
-1.8

-1.0
-.8

-.8
-.3

1.1
.6

26.1
14.5
11.6

2.3
2.0
2.6

-7.0
-9.3
-4.2

1.3
3.7
-1.7

-.2
.8
-1.3

.0
-.1
.2

.6
.6
.6

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

Materials
Durables
Nondurables

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

Capacity Utilization
(Percent of capacity)
19722006
average

199495
high

200102
low

Feb.

Mar.

Total industry

81.0

85.1

73.6

82.3

81.5

81.4

81.6

81.4

Manufacturing
Ex. motor veh. and parts
Mining
Utilities

79.8
79.9
87.4
86.7

84.6
84.3
88.9
93.7

71.6
71.4
84.8
83.8

80.9
81.4
90.9
86.4

80.1
80.5
91.3
85.0

79.9
80.4
90.8
85.6

79.7
80.2
90.9
89.8

80.1
80.5
90.9
83.5

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.5
82.2
77.8

89.5
88.2
80.5

82.0
74.6
70.0

89.4
84.1
77.9

89.1
82.3
78.2

88.2
82.1
78.3

88.2
82.7
78.3

88.3
81.8
78.7

Sector

2006

2007

II-7

Indicators of Industrial Activity

Utilities Output

Motor Vehicle Assemblies
Millions of units

2002 = 100
116

116

112

Electricity

Apr.
+

112

108

104

100

Medium and heavy trucks
(left scale)

0.5

100

Millions of units
14

0.6

Mar.

92
88

12
+

0.3

0.2

Apr.

92
88

Natural gas

0.4

Autos and light trucks
(right scale)

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

0.0

2007

115

130
125

Days’ supply (left scale)

111
Mar.

56
107
54

2002 = 100, ratio scale

2002 = 100

60
58

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

IP: Business Equipment and
Defense and Space Equipment

Construction Supplies
Days

0.1

120
115

Mar.
110

Defense and space equipment

103
52

105
99

Business equipment

100

IP index (right scale)
48

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

2002

2003

2004

2005

2006

2007

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

Weekly Production Index excluding Motor
Vehicles and Electricity Generation
Index

Percent
8.5

Monthly aggregate of weekly index
Weekly index

8.0

Diffusion index

4
3

90
ISM (right scale)

2
7.5

60
Apr.

7.0
-1
6.5

-2

Mar.
RADGO (left scale)

-3
6.0
Apr. July Oct. Jan. Apr. July Oct. Jan. Apr.
2005
2006
2007
Note. One index point equals 1 percent of 2002 total industrial
output.

-4

40
30
20

2002
2003
2004
2005
2006
2007
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.

II-8

Indicators of High-Tech Manufacturing Activity

Rate of Change in Semiconductor
Industrial Production

FRB Chip Inventory Index
Percent

1995 = 100
8

3-month moving average

130
Q1

6
4

120

110
100
90

Mar.

0
-2
-4

-2

1996

1998

2000

2002

2004

-4

2006

1996
1998
2000
2002
2004
2006
Note. The staff’s chip inventory index is a sales-weighted
chain-type index constructed from financial data for 10 major
chip manufacturers. Q1 value is based on limited data.

MPU Shipments and Intel Revenue

U.S. Personal Computer and Server Sales

Billions of dollars, ratio scale

Millions of units, ratio scale
11
10

0.9

0.8

0.7

0.6

Millions of units, ratio scale

1.0

0.5

Intel revenue

17
Q1

16
15
14
13

PCs (right scale)

Q1
12
11
10

Servers (left scale)
Worldwide MPU shipments
2000 2001 2002 2003 2004 2005 2006 2007
Note. FRB seasonals. Q2 Intel revenue is the range of the
company’s guidance as of April 17, 2007.
Source. Intel and Semiconductor Industry Association.

0.4

2000 2001 2002
Note. FRB seasonals.
Source. Gartner.

2003

2004

2005

2006

Capital Expenditures by Selected
Telecommunications Service Providers

IP: Communications Equipment
2002 = 100, ratio scale
Mar.

Billions of dollars, ratio scale
200
180

100
90

Annual average
2007 guidance

160

140

120
100

2000

2001

2002

2003

2004

2005

2006

2007

50
Q4

2000 2001 2002 2003 2004 2005 2006 2007
Note. FRB seasonals. Includes AT&T, Verizon, Sprint Nextel,
and companies related by merger, acquisition, and spin-off.
Source. SEC filings.

II-9

unseasonably mild temperatures in March. In the manufacturing sector, production
increased 0.7 percent in March after having declined, on balance, over the previous six
months. The gains in manufacturing IP in March were spread widely and pushed up the
factory operating rate 0.4 percentage point, to 80.1 percent, a level 0.3 percentage point
above its 1972–2006 average.
The limited weekly information on IP for April suggests that the total index was likely
boosted by an increase in electricity output and the scheduled pickup in motor vehicle
assemblies; weekly data on output in other industries—principally crude oil, petroleum
refining, steel, and meat products—appear likely to have been a small drag on balance.
The output of high-tech industries rose more than 3 percent in March after several months
of sluggish gains. Much of the weakness earlier in the quarter reflected declining
semiconductor production as manufacturers moved to correct inventory imbalances that
arose when cell phone sales softened unexpectedly and as the accumulation of chips
needed for the roll-out of computers running the new Microsoft Vista operating system
ran its course.1 Although semiconductor inventories appear to have remained elevated
throughout the quarter, production turned up in March. Intel’s latest revenue guidance
points to a moderate increase in microprocessor production in the second quarter.
Elsewhere in the high-tech sector, production accelerated during the first quarter. Gartner
reports that faster gains in the production of computers were related to the release of the
consumer version of Microsoft Vista, which had led some buyers to delay purchases until
this year. On the business side, sales of small servers moved up smartly, but production
of large servers decelerated, a move that Gartner attributes to a nearly completed
replacement cycle. The output of communications equipment rose 30 percent (annual
rate) in the first quarter, a marked step-up from the second half of last year. However,
this rate of increase in production is not likely to continue for much longer in light of the
relatively moderate increase in capital expenditures planned by telecommunication
service providers (TSPs) this year.2

Microsoft Vista requires a more complex, and more expensive, mix of hardware, particularly
semiconductors.
2
TSPs account for less than 20 percent of domestic production of communications equipment, but
because TSP spending is volatile, it accounts for a relatively large share of changes in investment in, and
production of, communications equipment.

II-10
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2006

2007

Item

Feb.

Mar.

Apr.

May

U.S. production1
Autos
Light trucks

10.5
4.3
6.2

10.5
4.4
6.1

10.2
3.9
6.2

11.1
4.1
6.9

10.3
3.9
6.4

10.3
3.7
6.6

11.2
4.0
7.2

11.1
4.2
6.9

Days’ supply2
Autos
Light trucks

70
54
82

70
60
77

66
61
69

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

64
62
66

67
62
71

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

Inventories3
Autos
Light trucks

2.95
.95
1.99

2.84
1.03
1.81

2.70
1.03
1.67

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

2.68
1.02
1.66

2.70
1.03
1.67

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

Memo: U.S. production,
total motor vehicles4

11.0

10.5

11.4

10.7

10.6

11.5

11.4

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

Inventories of Light Vehicles
Millions of units
3.4
3.2
3.0
2.8
Mar.
2.6
2.4
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2.2

Days’ Supply of Light Vehicles
Days
90
80
Mar.

70
60
50
40

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

II-11

The production of motor vehicles and parts fell 8½ percent in the first quarter, as
assemblies sank to their lowest level since the third quarter of 1993. However, with
inventories back down to desirable levels at the end of the quarter, assemblies of light
vehicles are estimated to have picked up to an annual rate of about 11 million units in
April and are scheduled to remain at about this level in May and June. Despite the
sizable increase in production, days’ supply of light vehicles should remain in check this
quarter if sales remain close to the first-quarter pace.3 Meanwhile, production of medium
and heavy trucks has continued to move lower in response to a falloff in demand after the
new EPA regulations went into effect earlier this year.
Excluding energy, motor vehicles and parts, and high-tech products, output rose in March
in nearly all of the major market groups. The production of consumer goods increased
½ percent: Continued strength in nondurables accompanied a small gain in durables that
followed weak production earlier in the quarter. The output of business equipment rose
0.8 percent in March, thereby partly reversing declines over the previous two months.
The production of construction supplies popped up in March, though it remained well
below levels observed from late 2005 to mid-2006; the March gain was likely due, at
least in part, to unseasonably warm weather. The output of materials rose 0.6 percent, a
move that likely reflects the recent rise in construction supplies and the upturn in motor
vehicle assemblies in April. The only major market group that declined in March was
defense and space equipment, which was pulled down by a one-month strike at a
Northrop Grumman shipyard in Pascagoula, Mississippi.
Near-term indicators suggest modest production gains in coming months. In April, the
new orders diffusion index from the Institute for Supply Management (ISM) jumped,
while the corresponding indexes from the various regional surveys were little changed on
balance. In addition, a variety of materials-related industries—such as primary metals
and plastics and rubber products—should benefit from the scheduled step-up in motor
vehicle assemblies this quarter. However, the staff’s series on real adjusted durable
goods orders has declined, on balance, since the end of last summer.

Given net imports of about 5½ million units and sales of about 16½ million units, replacement-level
production—the amount of production needed to keep inventories unchanged—would be about 11 million
units, a level roughly in line with industry schedules for the second quarter. In the past three quarters,
production was far below replacement levels, and inventories declined.

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

2006

Total

2007
Q4

Feb.

Mar.

Apr.

16.5

16.6

16.3

16.5

16.6

16.3

16.2

7.8
8.7

7.9
8.7

7.6
8.7

7.6
8.9

7.4
9.1

7.6
8.7

7.3
8.9

North American1
Autos
Light trucks

12.8
5.4
7.4

12.4
5.2
7.2

12.6
5.1
7.5

12.8
5.1
7.7

12.3
5.1
7.2

12.5
5.0
7.5

Foreign-produced
Autos
Light trucks

3.7
2.3
1.3

3.7
2.5
1.3

3.8
2.4
1.5

3.9
2.4
1.5

3.8
2.4
1.4

3.9
2.5
1.4

3.7
2.3
1.4

53.7

52.8

52.3

52.1

53.5

51.7

53.7

Autos
Light trucks

Memo:
Big Three domestic
market share (percent)2

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

Market Share
Percent

Content redacted.

Percent

30
Big Three domestic
vehicles (left scale)

20
Other domestic
vehicles (right scale)

15
Q1

2000

2001

2002

2003

2004

2005

2006

2007

Average Value of Incentives on Light Vehicles

Car-Buying Attitudes

Current dollars per vehicle, ratio scale

Index

Percent
3800
3400

80
64

2500

200

180
Appraisal of car-buying conditions (right scale)
160

56
48

140

40
1600

32
24
16

Apr. 22

Apr.

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

80
Apr.
60

0
2002

2004

2006

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

700

-8

120

1996

1998

2000

2002

2004

2006

Source. Reuters/University of Michigan Survey.

2008

II-13

Light Motor Vehicles
Sales of automobiles and light trucks averaged an annual rate of 16½ million units in the
first quarter, a little above the pace in the fourth quarter of last year and the same as that
over 2006 as a whole.
.4 In April, sales declined a bit, mainly because of lower sales of
foreign-produced vehicles. As a result, the Big Three’s domestic market share moved
back up to its level of last year.
The Conference Board measure of new car purchases improved in April, while the
Reuters/University of Michigan index of car-buying attitudes remained in the neutral
range seen over the past several months. According to the Reuters/Michigan survey, high
gasoline prices are not as big a deterrent to car buying as they were in 2006, although
respondents to recent surveys have expressed concern about higher financing rates.
Manufacturers’ pricing incentives for light vehicles remained at a relatively low level in
April.
Consumer Spending
Real personal consumption expenditures increased at an annual rate of 3¾ percent in the
first quarter, but spending growth slowed over the course of the quarter, in part because
of swings in weather-related outlays on energy goods (such as fuel oil) and energy
services (such as natural gas and electricity). Real spending on goods other than motor
vehicles, which had shown exceptional vigor late last year, was little changed, on
balance, between December and March. However, real outlays on non-energy services
were reported to have posted solid gains, especially in March.
Consumer spending appears to have entered the second quarter on a soft note. Chain
store sales were up just a little, on balance, in recent weeks. In addition, the Conference
Board and the Reuters/Michigan surveys reported small declines in consumer confidence
in April, perhaps because of the run-up in gasoline prices. Even so, both sentiment
measures remain consistent with modest gains in spending in the near term.
With regard to the fundamentals, real disposable personal income rose at an annual rate
of 4½ percent in the first quarter. Although roughly half of this gain reflects an estimate
by the Bureau of Economic Analysis (BEA) of unusually large bonus payments and stock
option exercises in January, wages and salaries increased solidly, on average, over
4

II-14
Real Personal Consumption Expenditures
(Percent change from the preceding period)
2006
Q3
Q4
Annual rate

2007
Jan.
Feb.
Mar.
Monthly rate

Category

2006

Total real PCE
Durable goods
Motor vehicles
Excluding motor vehicles
Nondurable goods
Gasoline and motor oil
Fuel oil and coal
Other
Services
Energy
Other
Memo:
Real PCE goods ex. motor vehicles

3.2
5.0
-1.2
9.8
3.7
-.4
-8.1
4.4
2.6
-2.5
2.8

2.8
6.4
8.6
4.9
1.5
6.9
-18.4
1.0
2.8
21.9
2.1

4.2
4.4
-4.4
11.1
5.9
-.4
24.4
6.6
3.4
5.3
3.3

3.8
7.3
11.4
4.5
2.9
5.8
60.3
2.1
3.7
10.1
3.4

.4
1.2
1.9
.8
.0
.2
9.4
-.1
.5
6.7
.2

.3
-.4
.6
-1.2
.0
1.3
32.5
-.5
.6
9.6
.3

-.2
.1
-.5
.6
-.1
-1.3
-19.3
.3
-.3
-14.4
.4

4.8

1.9

7.0

3.2

-.2

Change in Real PCE Goods
2.0

Percent
2.0

6-month

1.5

Change in Real PCE Services
1.0

Percent
1.0

6-month

0.8

0.6

0.4

1.0

0.5

0.2

0.0

-0.0

-0.5

-0.2

Mar.

-2.0

1-month
2005

-0.2

1-month

-0.4

-0.6

-0.8

-2.0

-1.0

2004

-0.0

-1.5

-1.0
-1.5

0.2
Mar.

2006

2007

2004

2005

2006

2007

-1.0

Personal Saving Rate
5

Percent
5

-1

-1
Mar.

-2
-3
-4

-2
-3

2000

2001

2002

2003

2004

2005

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

2006

-4

II-15

Fundamentals of Household Spending

Changes in Nominal Wages and Salaries, Real Personal Income, and Real DPI
Percent, annual rate
18
Nominal wage and salary disbursements (white)
Real personal income (black)
Real DPI (striped)

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

2006

2006:Q3

2006:Q4

2007:Q1

Change in Real DPI

January

February

March

Household Net Worth and Wilshire 5000
Index

4-quarter percent change
7

14200

Ratio

16200

7.0

Apr.

Wilshire 5000
(left scale)

12200
6.0
10200

5.5
8200

6200

4200

1998

2000

2002

2004

2006

Q1**

2008

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

Consumer Confidence

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

2000

5.0

2002

2004

2006

2008

4.5

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

Federal Funds Rate and 10-Year Treasury Yield

1985 = 100
180

1966 = 100
140

Percent
7

130

160
Conference Board
(left scale)

140

6.5

6
Treasury
yield

120

Apr. 30

110
120

4
100

100
80

Apr.

Reuters/
Michigan
(right scale)

Apr.

60
40

Federal
funds
rate

70
1998

2000

2002

2004

2006

2008

1998

2000

2002

2004

2006

2008

II-16

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

2006

Jan.

Feb.

Mar.

1.80
1.84

1.71
1.71

1.56
1.56

1.47
1.56

1.40
1.57

1.51
1.53

1.52
1.56

1.47
1.38
1.41
.133

1.40
1.28
1.31
.137

1.23
1.17
1.19
.133

1.18
1.12
1.14
.131

1.12
1.12
1.14
.140

1.19
1.10
1.12
.137

1.22
1.13
1.17
.131

1.05
6.33

1.01
6.76

.99
6.58

.86
7.60

.87
7.37

.84
7.81

.86
7.62

5.68
6.36

5.50
6.98

5.50
6.91

5.62
7.04

5.67
6.87

5.88
6.78

5.32
7.45

.336
.457
.062

.313
.433
.067

.325
.394
.062

.297
.438
.073

.280
.447
.069

.312
.433
.072

.300
.433
.073

.117

.107

.097

.094

.093

.801

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

.789

.759

.769

.800

n.a.
.790

n.a.
.800

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

Private Housing Starts and Permits
(Seasonally adjusted annual rate)

Millions of units
2.0

2.0
1.8

1.8
Single-family starts

1.6

1.4

1.4
Mar.

1.2

Single-family adjusted permits
1.0

1.0

.6
Multifamily starts

.4
Mar.

.2
.0

.2
1999

2000

2001

2002

2003

2004

2005

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

2006

2007

II-17

February and March. Consumer spending has also continued to draw support from the
increases in household wealth that have occurred over the past two years, although the
boost to spending from wealth has likely been offset to some extent by the lagged effects
of the upward trend in borrowing costs since 2004. In the first quarter of this year, the
wealth-income ratio likely ticked down, as the stock market rose only a little and house
prices remained soft. However, much of the lost ground has probably since been made
up as a result of the surge in stock prices in April.
The personal saving rate averaged negative 1 percent in the first quarter after having been
in the vicinity of negative 1¼ percent to negative 1½ percent over the preceding three
quarters. All else being equal, this year’s annual retail sales revision implies a small
downward adjustment to consumer spending and a small upward adjustment to the saving
rate in recent years. The revision is expected to raise the saving rate in the first quarter
about ¼ percentage point, but it is not expected to significantly alter its pattern over the
past few quarters.
Housing
Residential construction activity remains soft overall as builders attempt to work off an
elevated inventory of unsold new homes. Recent readings on home sales suggest that
housing demand has continued to weaken, and the tightening of lending standards for
nonprime borrowers that began in February will likely further restrain home sales in the
coming months.
Single-family housing starts rose 2 percent in March, and adjusted permit issuance in this
sector increased. Unusually warm and dry weather almost certainly boosted the level of
single-family starts in March; it may have raised permit issuance as well. Although the
correlation between permit issuance and weather patterns is not typically strong, the only
increases in the number of permits issued since September 2005 have been in January
2006, December 2006, and March 2007—all months that were unseasonably warm.
The incoming data on home sales are sending mixed signals about the current tenor of
housing demand. Although existing home sales declined in March, that drop followed
sizable increases in January and February, and the level of sales in March was only
slightly below the steady pace that prevailed in the second half of 2006. New home sales
present a considerably less sanguine view of demand: They fell sharply in the first two
months of the year and recovered only a bit in March, developments that left their level
about 14 percent below the average of the second half of last year.

II-18

Indicators of Single-Family Housing
Homebuying Indicators

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

Thousands of units
7500
7000

1300

6500

1200

Index
550

Index
160
MBA purchase index (right scale)
140

450
Apr. 27

6000

1100

5500

120

350

Mar.
1000

5000

900

4500

800

4000

Mar.

700

2000

2002

2004

2006

2008

3500

100

250
Pending home sales index (left scale)

2000

2002

2004

2006

2008

150

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

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

Content partially redacted.

New Home Sales
Months’ Supply

Mortgage Rates
Months
8

Mar.

Percent
9

9
30-year FRM
8

6
Months’ supply (right scale)

5
4
3

Apr.

2
1
2000

2002

2004

2006

2008

4
3

Prices of Existing Homes

2000

2002

2004

2006

2008

Prices of New Homes

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

25
20

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

15
Mar.

10
5

Mar.
Feb.

-5

-5
2000

2002

2004

2006

-10

Note. The April readings are based on data
through April 25, 2007.
Source. Freddie Mac.

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

1-year ARM

2008

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

-10

-5

2000

2002

2004

2006

2008

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

-5

II-19

The recent tightening of lending standards may have exerted some restraint on new home
sales in March, and it will likely show up in the existing home sales statistics (which are
based on closings) in the second quarter. The decline in the pending home sales index in
March may partly reflect reduced sales to nonprime borrowers. The four-week moving
average of the MBA index of mortgage purchase applications has also slipped a little
since the end of February.5 However, in contrast to the difficulties faced by nonprime
borrowers and lenders, relatively low mortgage rates should help to support housing
demand among prime borrowers: The average rate for thirty-year fixed-rate mortgages is
currently about 60 basis points below the level of last July, while average rates for oneyear adjustable-rate mortgages are about 30 basis points lower.
Combined with a large remaining inventory of new homes for sale, the contraction in
new home sales has noticeably raised the months’ supply of new homes for sale.
Relative to the three-month average pace of sales, the months’ supply in March was more
than 60 percent above the high end of the relatively narrow range it occupied from 1997
to 2005. Moreover, these published figures probably understate the true inventory
overhang in this sector because they do not account for last year’s surge in canceled sales,
which return homes to the unsold inventory but are not incorporated in the official
statistics. High inventories and low sales in March suggest that homebuilders may have
to reduce their construction plans even further to work off their excess inventories of
unsold homes.
House-price appreciation continues to slow. On a constant-quality basis, the average
price of new homes was 5 percent above year-earlier levels in the first quarter, compared
with an average annual increase of nearly 7 percent in the preceding three years.
Furthermore, these figures may understate the actual deceleration in the cost to
purchasers of new homes because homebuilders have reportedly stepped up their use of
nonprice measures—such as granting more-favorable mortgage terms, paying closing
costs, and including optional upgrades at no cost—to bolster sales and unload inventory.
For existing homes, the Case-Shiller home-price index—which uses a methodology
similar to that of the OFHEO index but is limited to sales in ten large U.S. cities—has
decelerated substantially since last summer, slipping further in the first two months of
this year, and pointing to some further deceleration in the OFHEO index in the first
5

Although the sample used to calculate the MBA index does not include a large fraction of the
institutions that deal with subprime borrowers, the reduced housing demand of this group may still affect
the index by making it more difficult for all current homeowners to sell their homes when they want to
move.

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

2007

Jan.

Feb.

Annual rate

Mar.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

-4.0
-4.0
-36.0
-7.4
1.3

-9.4
-10.2
21.9
2.2
-14.7

-2.3
-3.1
-1.3
5.7
-4.1

-.9
-.1
2.8
5.1
-1.0

.9
.6
-8.7
-2.9
2.3

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

5.3
-4.2
-31.1
-26.3
2.4

-20.7
-15.6
17.5
-2.6
-20.0

-20.2
-6.2
-3.7
-13.6
-5.7

9.6
-2.4
2.4
-.2
-3.3

11.8
4.8
-2.9
3.3
6.0

Memo:
Shipments of complete aircraft1

33.2

n.a.

58.3

42.1

n.a.

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

Non-High-Tech,
Nontransportation Equipment

Communications Equipment
20
17
14

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

20
17
14

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

57
52

47
Mar.

Mar.

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

Computers and Peripherals
220
190

2000 = 100

Medium and Heavy Trucks

Billions of chained (2000) dollars

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

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

Mar.

22
19

170

150

Thousands of units, ratio scale

1100
920
800

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

1100
920
800

440

560

110

680

560
130

680

Mar.
320

2000

2002

2004

2006

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

200

320

2000

2002

2004

2006

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

200

II-21

quarter. Meanwhile, the average price of existing homes sold—which does not adjust for
changes in the quality of homes—moved down in March to a level that was 1.1 percent
below that of a year earlier.
Equipment and Software
Real spending on equipment and software (E&S) rose at an annual rate of less than
2 percent last quarter after having fallen 4¾ percent in the fourth quarter. Spending on
high-tech equipment posted a substantial increase in the first quarter. But spending on
transportation equipment was dragged down by a plunge in purchases of medium and
heavy trucks. Outlays outside these categories continued to contract steeply, though the
upturn in shipments and orders in March may be a signal that equipment spending is
starting to improve as we move into the second quarter.
To be sure, the fundamental determinants of equipment spending have turned less
supportive in recent quarters in light of the sharp deceleration in business output. But
with robust corporate cash reserves and with the user cost of high-tech goods continuing
to decline, the fundamentals in the aggregate are still consistent with a faster underlying
pace of equipment spending than has been seen in recent quarters. In addition, the
deterioration in surveys of business conditions that was evident in 2006 appears to have
ended; in fact, the ISM index has rebounded lately.
Real spending on high-tech E&S expanded at an annual rate of 20 percent last quarter,
and sharp gains were observed in all major categories. Real outlays on computers rose at
an annual rate of more than 50 percent, in part because of the retail release of Microsoft
Vista in January. As noted, the IP index for computers—the major input into the BEA
estimate of computer spending—increased significantly in the first quarter, and
shipments and imports also posted solid gains.6 The BEA advance estimate of spending
on software, which is based in part on outlays for computers, also showed a substantial
increase—in fact, anecdotal reports on company earnings point to an even larger number
than the BEA estimate. In addition, purchases of communications equipment—which
tend to be volatile quarter to quarter—sped up after a fourth-quarter dip.

Note that the BEA estimate of business investment in computers last quarter was biased upward
because the BEA uses the overall IP index for computers, which includes both business spending and
consumer spending, while the Vista-related surge in sales of computers was primarily associated with
consumer purchases.

II-22

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change
8

4
Q1

-2

-4

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-4

User Cost of Capital
High-Tech

Non-High-Tech
4-quarter percent change

4-quarter percent change

-3

-6

-9

-12

-15

-3
-6

1990
1990

1995
1994

1998 2000 2002

2005
2006

Real Corporate Cash Flow

1990
1990

1995
1994

1998 2000 2002

2005
2006

-15

Business Conditions
Index

4-quarter percent change
25

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

Index

Q4
10

20
10

Apr.
50

5
0

-5

-10

5
-20

1990
1990

1995
1994

1998 2000 2002

2005
2006

-40
-60

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

2007

-80

II-23

Real business outlays on transportation equipment declined at an annual rate of
13½ percent last quarter. Although domestic spending on aircraft jumped after three
weak quarters, spending on motor vehicles contracted significantly as the tightening of
emissions standards that took effect in January led to a dramatic drop in purchases of
medium and heavy trucks. Another sharp decline in truck orders in March suggests that
these purchases will fall further in the second quarter.
Business investment in equipment other than high-tech and transportation dropped at an
annual rate of 8 percent in the first quarter after a fall of nearly 5 percent in the previous
quarter. The weakness in this broad category appears to have been especially pronounced
around the turn of the year and to have lessened somewhat over the course of the quarter.
In March, shipments of construction and motor-vehicle-related equipment (such as
metalworking machinery and construction machinery), which had played a major role in
the earlier weakness, continued to decrease. Orders for these items rose sharply as a
result of a surprising jump in bookings for construction machinery. That said, reports
from our contacts suggest that demand for construction-related machinery and supplies
remains weak. Outside of construction and motor vehicles, orders and shipments both
posted widespread—albeit modest—gains in March.
Nonresidential Construction
Real outlays for nonresidential construction excluding drilling and mining regained some
steam in the first quarter after having hit a lull in late 2006: After incorporating data on
construction spending in March, we estimate that they rose at an annual rate of
12 percent.7 The fundamentals in this sector remain solid and point to further increases in
the near term, although they will likely be smaller than that recorded in the first quarter of
this year. Vacancy rates in the industrial and office categories have moved down over the
past few years. In the retail sector, the vacancy rate has drifted up since the end of 2005
but remains well below its peak in 2002. Furthermore, the architectural billings index—
which is correlated with changes in nonresidential construction about six months hence—
rebounded in the second half of last year.8
Real drilling and mining investment dropped sharply in the first quarter; this decrease
continued a deceleration in activity that began in the second half of last year and may

The advance NIPA estimate, which did not include data on construction spending in March, showed
an increase of 7½ percent for these outlays.
8
About 88 percent of the construction projects covered by the architectural billings index are
nonresidential.

II-24

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

Total Structures

Office, Commercial, and Other

290

Billions of chained (2000) dollars
290

270

250

230

210

250

Billions of chained (2000) dollars
80
Mar.
70

Other
Mar.

Mar.

Commercial

40
Mar.

Office
190
170

190

2000

2002

2004

170

2006

2000

2002

2004

2006

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

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

70
60

Architectural Billings and
Nonresidential Construction Employment
Percent
3.0

Diffusion index
60

2.5

Power & communication

60
2.0

Billings (right scale)

Mar.

1.5

1.0
0.5

Mar.
30

Manufacturing

Mar.

-0.5
20

Change in
employment (left scale)

20
-1.0

2000

2002

2004

2006

0.0

-1.5

2000

2002

2004

2006

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

Vacancy Rates

Drilling Rigs in Operation
Percent
18

18
15

Office

15
12
Q1
Q1

Apr.

1400
1200

Industrial

Number
1600

1600

Retail
6

1200
Natural gas

1000

800

600

400

2000

2002

2004

2006

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

1400

400
Petroleum

Apr.

200
0

2000

2002

2004

2006

Note. The April readings are based on data
through April 27, 2007.
Source. DOE/Baker Hughes.

200
0

II-25

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

2007

53.3
-.8
54.2

20.0
-19.7
39.7

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

45.2
10.1
25.7
9.4

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

87.0
37.2
36.6
13.1

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

Jan.

Feb.

Mar.

8.1 e
-19.3 e
27.4 e

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

24.6
8.4
6.5
9.7

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

10.4 e
2.4 e
6.7
1.3

39.9e
-3.3 e
20.4
22.7

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

46.5
14.4
17.5
14.6

n.a.
4.4
n.a.
n.a.

23.2
-.3
18.9
4.6

67.1
1.9
34.3
30.8

n.a.
11.4
n.a.
n.a.

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

ISM Customer Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.8

1.9

Index

1.9

1.8

Staff flow-of-goods system

1.7

1.6

1.6
Mar.

1.5

1.4

1.3
Census book-value data

Feb.

1.2
1.1

1.4

1.3

Apr.
45

1.2

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

1.1

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

II-26

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

March
Function or source

2006

2007

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

249.8
.3
15.5
234.0

262.8
.1
15.8
246.8

Receipts
Payment timing
Adjusted receipts

164.6
.0
164.6

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

2006

2007

5.2
...
...
5.5

2579.9
-1.7
15.2
2566.4

2693.6
-14.3
-5.8
2713.7

4.4
...
...
5.7

166.5
.0
166.5

1.2
...
1.2

2251.9
.0
2251.9

2489.9
-6.0
2495.9

10.6
...
10.8

-85.3

-96.3

...

-327.9

-203.7

...

234.0
19.4
214.6
48.4
46.2
32.4
15.6
38.6
1.7
31.8

246.8
21.1
225.7
49.6
48.9
34.3
17.1
39.4
.6
35.7

5.5
8.8
5.2
2.5
5.9
6.0
9.7
2.2
...
12.4

2566.4
205.5
2360.9
506.9
538.0
314.5
181.4
349.7
32.2
438.1

2713.7
229.4
2484.3
545.8
570.2
361.2
185.3
362.2
24.7
434.9

5.7
11.6
5.2
7.7
6.0
14.9
2.2
3.6
-23.4
-.8

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

164.6

166.5

1.2

2251.9

2495.9

10.8

110.0
150.2
12.0
52.2
35.9
39.2
3.2
18.6

110.8
154.9
11.4
55.5
40.2
44.0
3.8
15.5

.7
3.2
-5.0
6.4
11.8
12.4
18.1
-16.8

1730.5
1545.7
379.2
194.4
308.7
337.4
28.7
212.7

1905.2
1646.6
450.0
195.7
377.7
403.8
26.1
213.0

10.1
6.5
18.7
.7
22.3
19.7
-9.0
.1

Adjusted surplus or deficit (-)

-69.5

-80.3

...

-314.4

-217.8

...

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 3 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. In addition,
defense outlays for retiree health care have been converted from an annual to a monthly basis.
... Not applicable.
Source. Monthly Treasury Statement.

II-27

partly reflect the net decline in energy prices since last summer. In April, the total
number of drilling rigs in operation was flat, suggesting that drilling and mining
investment did not change significantly early in the second quarter.
Business Inventories
After factoring in the most recent information on manufacturing inventories, we estimate
that real nonfarm inventory investment excluding motor vehicles increased at an annual
rate of $27 billion in the first quarter, $13 billion less than in the fourth quarter of 2006.9
The apparent downshift in inventory investment has helped to reduce the overhangs that
emerged in late 2006, although the available measures provide conflicting signals on how
much progress has been made to date. The ratio of book-value inventories to sales in the
manufacturing and trade sector (excluding motor vehicles) was little changed between
September and February, and the ratio for the manufacturing sector remained elevated in
March. In contrast, information from the staff’s flow-of-goods inventory system suggests
that the run-up in days’ supply was reversed by the end of March, largely eliminating the
overhangs. In addition, the ISM customers’ inventories index remained below 50 for a
second month in April, indicating that the net number of firms who view the level of their
customers’ inventories as too high has dropped back from its elevated readings over the
previous two quarters.
Federal Government Sector
Incoming data suggest that the federal unified budget deficit continues to narrow, but that
revenue growth may be moderating a bit from the fast pace of recent years. The
moderation in revenues has primarily been concentrated in corporate payments, which
appear to have decelerated after a period of very rapid increases. Indeed, the 12 percent
rise in corporate receipts in March was only about half the size of the gains seen over the
past year.10 And according to daily Treasury data, corporate receipts in April, which are
essentially the first quarterly estimates on 2007 liabilities, were no higher than they were
in April 2006, consistent with an easing in profits growth. In contrast, individual income
tax and social insurance collections remained strong in the first quarter. In addition, daily
Treasury data point to another solid increase in withheld individual and social insurance
taxes in April. Nonwithheld individual income tax payments in April and early May—
9

This estimate is $3 billion smaller than the BEA advance estimate because it incorporates data for
manufacturing inventories in March, which were unavailable at the time of the advance release of firstquarter GDP.
10
The March collections are largely final payments on 2006 liability. When they are combined with
earlier payments, they indicate that corporate income tax liabilities rose about 20 percent in 2006, the same
as the NIPA measure of taxable book profits.

II-28

State and Local Indicators

Real Spending on Consumption & Investment

Net Change in Employment

Percent change, annual rate
12
10

Thousands of jobs, monthly average
12

Spending
4-quarter moving average

Q1
4

-2

-4

1998

2000

2002

2004

-4

2006

0
-10

Mar.
2000

2002

2004

0
-10

2006

Note. 2007:Q1 is a staff estimate.

Real Construction

Net Saving

Billions of chained (2000) dollars
200

Percent of nominal GDP
200

1.0

180

0.5

160

0.0

Annual rate

Q4
140

120

140

1998

2000

2002

2004

120

2006

-0.5

-1.0

-0.5

1990

1995

2000

2005

-1.0

Note. Nominal CPIP deflated by BEA prices.

State Revenues

Local Revenues

Percent change from year earlier
20

Percent change from year earlier
20
15

15
10

4-quarter moving average

Q4
5

-10
-15

Individual and
corporate income
taxes
1998

2000

2002

Source. Census Bureau.

2004

2006

-15

10
Property taxes

-10

-5

Total revenues

4-quarter moving average

8
Q4

6
4
2

Total revenues
1998

2000

2002

Source. Census Bureau.

2004

2006

II-29

which are largely net final payments on 2006 liabilities—were running around 15 percent
higher than a year earlier.
Federal outlays in March were 5½ percent above their year-earlier level as defense
spending continued to fall short of expectations. The level of defense spending in recent
months has been low compared with fiscal-year projections by the Administration; it has
also been below projections from the Congressional Budget Office that assume
enactment of an additional $100 billion in budget authority for defense in fiscal 2007. In
the NIPA, real federal spending fell at an annual rate of 3 percent in the first quarter, as a
6½ percent (annual rate) drop in real defense expenditures more than offset a moderate
increase in nondefense purchases.
On the legislative front, the Congress passed a $124 billion supplemental near the end of
April, of which about $100 billion was for the Department of Defense. It was vetoed by
President Bush, and a revised bill is currently in the works. We believe that the weakness
in defense outlays in the first quarter reflects the usual volatility of these purchases and is
not attributable to the delay in enacting the supplemental. Nonetheless, some reports
have suggested that spending may be constrained in the second quarter if these additional
funds are not enacted soon.
State and Local Government Sector
Consistent with the sector’s generally favorable financial situation, near-term indicators
suggest brisk growth in the state and local government sector in the first quarter of this
year. Real construction outlays rose at an annual rate of about 10 percent, and
employment increased 25,000 per month, on average—similar to the relatively strong
pace of hiring in 2006. After factoring in the March construction data, we estimate that
real state and local purchases increased at an annual rate of 4 percent in the first quarter,
compared with a rise of 3¼ percent in the advance NIPA release.
State and local revenue inflows have remained fairly robust but have decelerated a bit
from the torrid pace in 2005. According to the Census Bureau, state tax revenues posted
another sizable increase in the fourth quarter of 2006, and the National Conference of
State Legislators reported that revenues are coming in above expectations in many states.
At the local level, property tax receipts have continued to rise rapidly despite the
deceleration in house values and the increasing political pressure to reduce property
taxes; in 2006, twenty-two states moved to reduce property tax collections, and virtually
all ballot measures for property tax relief were approved by voters. The continued

II-30

Price Measures
(Percent change)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Mar.
2006

Mar.
2007

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

3.4
2.6
17.3
2.1
.3
2.8
2.5
3.3
3.1
2.1

2.8
3.3
4.4
2.5
-.3
3.6
4.0
3.0
2.5
2.1

.2
.6
-11.5
1.6
-2.5
3.3
4.3
2.1
...
...

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

2.9
2.4
17.0
2.0
-.3
3.0
2.8
3.1
1.6
3.9

2.4
3.2
3.6
2.1
-.4
3.2
4.1
2.8
2.0
2.8

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

3.6
-1.2
15.6
1.7
1.8
1.5
7.2
4.7
4.7
13.9

3.2
7.8
2.8
1.7
1.5
2.0
3.5
3.5
15.6
24.6

Measures

Dec.
2006

Mar.
2007

Feb.
2007

Mar.
2007

4.7
7.3
22.9
2.3
.4
2.9
2.5
3.2
...
...

.4
.8
.9
.2
.1
.3
.3
.3
...
...

.6
.3
5.9
.1
-.1
.1
.0
.2
...
...

.4
.7
-11.8
1.4
-2.0
2.8
4.2
2.3
1.1
2.4

4.2
6.9
23.4
2.4
.4
3.3
3.1
3.3
2.4
2.5

.4
.7
.8
.3
.1
.4
.3
.5
.4
.2

.4
.3
6.2
.0
-.2
.2
.2
.2
.0
.2

3.5
3.6
6.6
2.3
1.7
2.7
.7
-1.0
29.0
-7.0

6.9
18.7
9.4
2.3
3.1
1.9
6.0
1.7
23.5
59.8

1.3
1.9
3.5
.4
.5
.3
1.1
.2
8.9
2.7

1.0
1.4
3.6
.0
.1
-.1
1.0
.2
3.2
7.7

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

II-31

strength in property tax revenue likely reflects the fact that many localities are subject to
state limits on the annual increases in total property tax payments and property value
assessments; thus, they may continue to experience rising revenues from property taxes
for another few years as tax bills catch up to the earlier increases in market prices.
Prices
The total PCE price index rose 0.4 percent in March after a similar increase in February.
The March increase was driven largely by an increase of more than 6 percent in the price
of energy, while the February increase was more broadly distributed across categories.
On a twelve-month-change basis, PCE price inflation was 2.4 percent in March, down
0.5 percentage point from a year earlier; a deceleration in energy prices more than
accounted for the reduction.
Core PCE prices were unchanged in March after a 0.3 percent increase in February; over
the past three months, these prices have risen at an annual pace of 2.4 percent. The low
March reading was largely the result of flat prices for medical services, which had
increased sharply in the previous two months, and a decline in the prices for apparel,
which tend to be especially volatile this time of year. On balance, price increases in other
categories were also a touch lower than in other recent months, most notably in lodging
away from home, tobacco, and various non-motor-vehicle-related durable goods.
Smoothing through the high-frequency movements, the twelve-month change in the core
PCE price index was 2.1 percent in March, just a touch higher than the increase over the
year-earlier period.
Over the twelve months ending in March, the core CPI accelerated noticeably more than
the core PCE price measure. Accelerations in the costs of housing and medical services
have pushed up both measures over the past year. Taking account of the relative weights
in the two series, housing costs have had an especially large effect on the CPI, while
medical costs have had an especially large effect on the PCE measure. However, the
acceleration in core PCE price has been muted by a deceleration in its nonmarket
portion—in fact, market-based core PCE price inflation has increased nearly as much as
core CPI inflation over the past year.
The energy component of the PCE price index increased substantially in March after a
much smaller rise in February. The twelve-month change in energy prices was
3½ percent, appreciably less than the 17 percent rise during the preceding twelve months.
The March increase in energy prices was driven by a 10½ percent jump in the price for

II-32

Consumer Prices
(12-month change except as noted)

PCE Prices

CPI and PCE ex. Food and Energy
Percent

Percent
4

Total PCE

CPI
Mar.

Mar.
2

2
PCE

Core PCE

2000

2001

2002

2003

2004

2005

2006

2007

PCE excluding Food and Energy

CPI
chained

2000

2001

2002

2003

2004

2005

2006

2007

PCE Goods and Services
Percent

Percent
3

4
Mar.

3
Mar.

Services ex. energy

0
1

1
Market-based components

2001

2002

2003

2004

2005

2006

2007

0
Mar.

-1
-2

2000

-3

PCE excluding Food and Energy

-1
Goods ex.
food and energy

2000

2001

-2

2002

2003

2004

2005

2006

2007

-3

CPI excluding Food and Energy
Percent

Percent
5

3-month change, annual rate

3
2

4
3-month change, annual rate

3
Mar.

-1

2000

2001

2002

2003

2004

2005

2006

2007

2000

2001

2002

2003

2004

2005

2006

2007

-1

II-33

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

Total Gasoline Margin
180

Gasoline Price Decomposition
Cents per gallon

Retail price less average spot crude price*

160

180

160

Cents per gallon

350
300

Rack price
Retail price*

Apr. 30

250

140

120

250

140

120

Apr. 30
200
150

100

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

200
150

100
50

Gasoline Inventories

Average spot crude price**

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

Ethanol Prices
Millions of barrels

245
235

100

245
Excluding ethanol
Adjusted for ethanol use*

235

Cents per gallon

500
450

Near-futures price, daily
Monthly futures, May 1

500
450

400
225

215

205

195

195
Apr. 27

185

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

185

400

350

300

250

200

225

200

150

100

Natural Gas Prices

2005
2006
Source. Chicago Board of Trade.

100

2007

Natural Gas Inventories
Dollars per million BTU

Billions of cubic feet

4000

3500

3000

2500

May 1

10
2000

2006

2007

1500

1000

2
2001
2002
2003
2004
2005
Note. National average spot price.
Source. Bloomberg.

1500

2
0

2000
Apr. 20

500

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

II-34

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

2004

2005

2006

2007

Product prices
GDP price index
Less food and energy

2.3
2.1

3.1
3.1

3.1
2.9

2.7
2.6

Nonfarm business chain price index

1.6

3.1

3.0

2.0

Expenditure prices
Gross domestic purchases price index
Less food and energy

2.2
2.1

3.4
3.0

3.5
2.7

2.5
2.6

PCE price index
Less food and energy

2.0
1.8

2.7
2.2

3.0
2.0

2.2
2.2

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

1.7
1.3

2.5
1.8

2.9
1.6

2.0
2.1

CPI
Less food and energy

1.8
1.3

3.0
2.3

3.7
2.1

2.4
2.6

Chained CPI
Less food and energy

1.7
1.2

2.6
2.1

3.2
1.9

2.2
2.3

Median CPI
Trimmed mean CPI

2.0
1.7

2.4
2.3

2.5
2.6

3.6
2.7

Trimmed mean PCE

1.9

2.4

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

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10 years) 4

2005:Q2
Q3
Q4

2.9
3.8
3.7

3.9
4.3
4.6

3.2
3.5
3.7

3.3
3.5
3.5

2.9
2.9
3.1

2.5
2.5
2.5

2006:Q1
Q2
Q3
Q4

3.6
4.0
3.3
1.9

3.7
4.5
4.0
3.5

3.0
3.5
3.4
3.0

3.3
3.6
3.3
3.5

2.9
3.1
3.0
3.0

2.5
2.5
2.5
2.5

2007:Q1

2.4

3.6

3.0

3.4

2.9

2.4

2006:Dec.
2007:Jan.
Feb.
Mar.
Apr.

2.5
2.1
2.4
2.8
n.a.

3.5
3.6
3.6
3.6
4.0

2.9
3.0
3.0
3.0
3.3

3.4
3.5
3.3
3.3
3.6

3.0
3.0
2.9
2.9
3.1

...
...
2.4
...
...

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-35

motor fuel, although prices for natural gas and heating fuel also rose noticeably.
Inventories of gasoline have tumbled since the early part of the year because of high
demand and both scheduled and unscheduled refinery outages. In response to the
inventory declines, gasoline margins have increased significantly over the past few
months. In part for this reason, available survey data point to a continued increase in
motor fuel prices during April.
The PCE price index for food and beverages rose 0.3 percent in March after much more
rapid increases in the previous two months. Compared with twelve months earlier, food
prices were up 3¼ percent, a step-up from the 2½ percent increase over the preceding
twelve-month period. Prices for meat have risen appreciably in recent months, likely
because of higher costs for feed, most notably corn. Since the end of March, however,
corn prices have retreated somewhat on news of a considerable increase in acreage
intended for planting. However, freeze damage affecting winter wheat and some fruit
crops in the South may boost food prices in the next few months.
Broader measures of inflation show a slowing of inflation relative to four quarters ago.
Despite the small increase in core PCE price inflation, the price index for GDP less food
and energy decelerated, reflecting slower rates of increase in the prices for other
components of final demand, especially construction.
As measured by the Reuters/Michigan index, the median expectation for year-ahead
inflation moved up ¼ percentage point in April, to 3.3 percent. This step-up is consistent
with the larger, energy-driven increases in overall consumer prices of late. Median fiveto ten-year expectations have moved up 0.2 percentage point, to 3.1 percent, but this level
is still in the narrow range seen over the past few years. Inflation compensation from
TIPS is about 0.1 percentage point higher than at the time of the March Greenbook.
At earlier stages of processing, the producer price index (PPI) for core intermediate goods
increased just 0.2 percent for a second month in March. Over the twelve months ending
in March, the index for core intermediate materials increased 3½ percent, 1¼ percentage
points less than the year-earlier increase. Part of this slowdown reflected a deceleration
in the prices for a number of energy-intensive goods, such as industrial chemicals and
plastics.
Commodity prices continue to trend upward. The Commodity Research Bureau’s spot
index of industrial materials is up 3¾ percent since the March Greenbook, and the

II-36

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

Percent

Percent
12

Quarterly

Monthly

4
Apr.

Median, 5 to 10 years ahead

4
Q1

Median, 12 months ahead

0
1971

1975
1976

1985
1986

1990
1991

1995
1996

2000
2001

Inputs to Models of Inflation
12

2005
2006

1980
1981

2005

Percent

Quarterly

2007

Percent

2006

Quarterly

8
3

FRB/US long-run expectations measure
for CPI inflation*

Q1
Q2
2

4
Distributed lag of
core CPI inflation**

Q1
Q2

0
0
0
0
1975
1980
1985
1990
1995
2000
2005
2005
2006
2007
1971
1976
1981
1986
1991
1996
2001
2006
* For 1991 forward, the median projection for CPI inflation over the next 10 years from the Survey of Professional Forecasters;
for 1981 to 1991, a related survey conducted by Richard Hoey; and for the period preceding 1981, a model-based estimate constructed
by Board staff.
** Derived from one of the reduced-form Phillips curves used by Board staff.

Inflation Compensation from TIPS
5

Percent

Percent
5

Quarterly

Weekly

4
3

5 to 10 years ahead

May 1

3
Q1

Next 5 years

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

II-37

Commodity Price Indexes
Journal of Commerce
1996 = 100
220

220

200

180

180
Metals

160

May 1

140

160
140

120

120
Industrials

100

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

Commodity Research Bureau
1967 = 100
500

500

450

450
May 1

400

400
Spot industrials

350

300

250

250
Futures

200
150

200

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

Selected Commodity Price Indexes
(Percent change)

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

2006 1

12/19/06
to
3/13/07 2

3/13/07 2
to
5/1/07

52-week
change to
5/1/07

11.0
38.9
26.9
13.0
15.0

3.2
9.0
1.9
8.2
1.1

3.5
2.3
3.7
4.6
1.0

10.1
27.8
19.5
22.8
4.5

1. From the last week of the preceding year to the last week of the year indicated.
2. March 13, 2007, is the Tuesday preceding publication of the March Greenbook.

150

II-38

Change in Employment Cost Index of Hourly Compensation
for Private-Industry Workers
2006
Measure

Mar.

June

2.8
2.8
2.0

Total hourly compensation
Wages and salaries
Benefits

3.2
3.2
2.8

2007

Sept.
Dec.
Quarterly change
(compound annual rate) 1
3.6
3.2
4.0

Mar.

3.2
3.2
3.6

2.3
4.3
-1.2

3.2
3.2
3.1

3.2
3.6
2.2

12-month change
Total hourly compensation
Wages and salaries
Benefits

2.6
2.4
3.0

2.8
2.8
2.7

3.0
3.0
2.8

1. Seasonally adjusted by the Bureau of Labor Statistics.

Change in ECI Benefits (confidential)
(Private-industry workers; 12-month change)
Health Insurance

Nonproduction Bonuses

Percent
20

10
Mar.

-5

0
-5

-10

Mar.

0
-5

-10

1990

1995

2000

-5

2005

-15

Retirement and Savings

1990

1995

2000

-15

2005

Workers’ Compensation Insurance

Percent
30

0
Mar.

-5
-10

-5
1990

1995

2000

2005

-10

Percent
20

0
Mar.

-5
-10

-5

1990

1995

2000

2005

-10

II-39

Journal of Commerce index of industrial materials has risen 3½ percent. Strong
international demand has helped drive up metals prices, which continue to contribute to
the rise in both indexes.
Labor Costs
Measures of hourly compensation have been heavily influenced by special factors—as
well as by a good deal of noise—in recent quarters. But smoothing through the volatility
in the data, the underlying pace of compensation gains seems to have picked up
somewhat. To be sure, the employment cost index (ECI) for private industry workers
rose at an annual rate of just 2¼ percent over the three months ending in March.
However, the low reading stemmed largely from a sharp drop in contributions to
retirement plans as the strong performance of the stock market in 2006, along with a high
level of employer contributions over the past several years, boosted the funding levels of
defined-benefit plans and allowed firms to lower their payments to these plans in early
2007. Even with the very small increase for the three months ending in March, the
twelve-month change in the ECI moved up to 3¼ percent, ½ percentage point more than
the increase over the preceding twelve months.
In contrast to the performance of benefits, the wages and salaries component of the ECI
picked up noticeably in March. The three-month increase in wages—which was at an
annual rate of 4¼ percent—was the largest in several years, and it lifted the twelve-month
change in this series to 3½ percent, 1¼ percentage points more than the increase over the
year-earlier period. Average hourly earnings for production or nonsupervisory workers
have also accelerated over the past couple of years, although the rate of increase shows
some signs of leveling out in recent months: Over the twelve months ending in March,
average hourly earnings increased 4 percent, ½ percentage point more than a year earlier.
Like the ECI, hourly compensation in the nonfarm business as measured in the
Productivity and Costs (P&C) release appears to have moved up only a little in the first
quarter—indeed, using the most recent NIPA data, we estimate that this measure rose at
an annual rate of just 1¾ percent after an increase of more than 8 percent in the fourth
quarter of 2006. This pattern reflects the BEA’s incorporation of an assumed $50 billion
in bonus payments and stock options into its estimate of wage and salary accruals in the

II-40

Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2004:Q4 2005:Q4
to
to
2005:Q4 2006:Q4e

Category

2006
Q1

Q4 e

Compensation per hour
Nonfarm business

3.7

4.9

12.9

-1.4

8.2

Unit labor costs
Nonfarm business

1.5

3.3

9.1

-2.5

1.1

6.2

e Staff estimate.

Compensation per Hour

Unit Labor Costs

(Percent change from year-earlier period)

(Percent change from year-earlier period)
Percent

Percent
8

-1

-2

Productivity and costs*

6
Q4

5
4

ECI

1996

1998

2000

2002

2004

2006

* Value for 2006:Q4 is a staff estimate.

4
Q4

1996

1998

2000

2002

2004

-2

2006

Note. Value for 2006:Q4 is a staff estimate.

Average Hourly Earnings

Markup, Nonfarm Business

(Percent change from year-earlier period)
Percent
4.5

4.5

4.0

1.64

3.5

1.62

3.0

1.60

2.5

1.58

2.0

1.56

1.5

1.54

1.0

1.52

Ratio

1.66

Mar.

1996

1998

2000

2002

2004

2006

1.66
1.64

1.62
1.60
1.58

Average,
1968-present

1.56
1.54

1996

1998

2000

2002

2004

2006

Note. The markup is the ratio of output price to unit
labor costs. Value for 2006:Q4 is a staff estimate.

1.52

II-41

fourth quarter and the subsequent unwinding of these one-time payments in the first
quarter.11 Smoothing through the large spikes in early 2006 and 2007, we estimate that
P&C hourly compensation rose at an annual rate of 4 percent over the six quarters since
mid-2005—about the same pace as during the preceding three years.

Last Page of Domestic Nonfinancial Developments

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

Domestic Financial
Developments

III-T-1

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

2006

Change to May 1 from
selected dates (percentage points)

2007

Instrument
June 28

June 29

Mar. 20

May 1

2004
June 28

2006
June 29

2007
Mar. 20

1.00

5.25

4.25

.00

1.36
1.74

4.88
5.06

4.92
4.91

4.76
4.81

3.40
3.07

-.12
-.25

-.16
-.10

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

1.28
1.45

5.27
5.37

5.24
5.23

3.96
3.78

-.03
-.14

.00
.00

Large negotiable CDs1
3-month
6-month

1.53
1.82

5.47
5.59

5.30
5.30

5.31
5.31

3.78
3.49

-.16
-.28

.01
.01

Eurodollar deposits3
1-month
3-month

1.29
1.51

5.33
5.49

5.32
5.34

5.32
5.35

4.03
3.84

-.01
-.14

.00
.01

Bank prime rate

4.00

8.25

4.25

.00

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

2.88
3.97
4.90

5.26
5.15
5.28

4.64
4.45
4.64

4.68
4.50
4.71

1.80
.53
-.19

-.58
-.65
-.57

.04
.05
.07

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

1.56
2.25

2.49
2.61

2.03
2.19

2.03
2.23

.47
-.02

-.46
-.38

.00
.04

Municipal general obligations (Bond Buyer)5

5.01

4.71

4.13

4.26

-.75

-.45

.13

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

5.21
5.38
5.60
6.25
8.41

5.81
5.59
6.20
6.74
8.74

5.08
4.93
5.56
6.01
8.11

5.21
5.01
5.61
6.09
7.97

.00
-.37
.01
-.16
-.44

-.60
-.58
-.59
-.65
-.77

.13
.08
.05
.08
-.14

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

6.21
4.19

6.78
5.82

6.16
5.40

6.16
5.43

-.05
1.24

-.62
-.39

.00
.03

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

Record high

2006

Change to May 1
from selected dates (percent)

2007

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

Date

June 29

Mar. 20

May 1

Record
high

2006
June 29

2007
Mar. 20

13,136
1,527
5,049
834
15,110

5-1-07
3-24-00
3-10-00
4-26-07
4-25-07

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

12,288
1,411
2,408
794
14,302

13,136
1,486
2,532
816
14,984

.00
-2.69
-49.86
-2.10
-.84

17.38
16.77
16.43
14.27
16.64

6.90
5.34
5.12
2.85
4.77

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Most recent Thursday quote.
6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
8. Home mortgage rates for May 1, 2007, are for the week ending April 26, 2007.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the most recent policy tightening began.
June 29, 2006, is the day the most recent policy tightening ended.
March 20, 2007, is the day before the most recent FOMC announcement.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Implied Rates on Eurodollar Futures Contracts
March
FOMC

New Chairman’s
home testimony
sales

Employment
report

Percent
FOMC
minutes

New Personal
home income
ISM
sales

CPI
December 2007

5.3
5.2
5.1
5.0

May
1

4.9
4.8

December 2008
4.7
4.6
4.5
Mar. 21

Mar. 26

Mar. 29

Apr. 3

Apr. 6

Apr. 11

Apr. 16

Apr. 19

Apr. 24

Apr. 27

Note. 5-minute intervals. No adjustment made for term premiums.

Expected Federal Funds Rate

Percent
5.50

Implied Distribution of Federal Funds Rate
about 6 Months Ahead
Percent
40

May 1, 2007 (bars)
March 20, 2007 (dashed line)

5.25

35
30

5.00

May 1, 2007

4.75

20
15

4.50

March 20, 2007

4.25

5
0

4.00
May

Oct.
2007

Mar.

Aug.
2008

Jan.

3.75 4.00

May
2009

4.25 4.50 4.75 5.00 5.25 5.50

Target rate

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

Note. Based on the distribution of the 3-month Eurodollar
rate 5 months ahead (adjusted for a term premium) as implied
by options on Eurodollar futures contracts.

Nominal Treasury Yields

Inflation Compensation

Percent
6

Daily

March
FOMC

10-year

Daily

Percent
3.0
March
FOMC

5 to 10
years ahead

2.8
2.6

4
2.4

2-year

5-year

2.2

2
Mar.

July
Nov.
2005

Mar.

July
2006

Nov.

Mar.
2007

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

2.0
Mar.

July
Nov.
2005

Mar.

July
2006

Nov.

Mar.
2007

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

Domestic Financial Developments
Overview
Over the intermeeting period, financial markets largely recovered from the turbulence
that preceded the March meeting of the FOMC. On net, investors pushed up somewhat
the expected path of monetary policy beyond the near term. Market participants now
expect between 75 basis points and 100 basis points of easing by the end of 2008, a little
less than at the time of the March FOMC meeting. On balance, nominal Treasury yields
edged up slightly along the term structure. Inflation compensation based on Treasury
inflation-protected securities (TIPS) were little changed even as oil prices rose markedly.
Equity prices climbed steeply amid solid earnings reports and improved sentiment, more
than reversing the declines in the previous intermeeting period. Risk spreads on
investment-grade corporate bonds were about unchanged, while spreads on speculativegrade corporate bonds narrowed somewhat. Delinquency rates on subprime variable-rate
home mortgages remained elevated, but rates for the much larger group of prime
borrowers stayed low.
Policy Expectations and Interest Rates
Market participants largely anticipated the FOMC’s decision at its March meeting to
leave the target federal funds rate unchanged. Nevertheless, the expected path for
monetary policy moved lower on the announcement, as investors apparently were
surprised by the somewhat softer tone of the description of economic conditions in the
accompanying statement, and by the replacement of the reference to “additional firming”
with language that was interpreted as more balanced. However, data releases, sent mixed
signals and short-term interest rates rose a little, as subsequent FOMC communications—
including the Chairman’s testimony before the Joint Economic Committee, speeches by
various FOMC members, and the minutes of the March meeting—were seen as
emphasizing the Committee’s concern about upside risks to inflation. Market
participants attach only a small probability to a cut in the target federal funds rate at the
May FOMC meeting. Beyond the near term, investors pushed up somewhat the expected
path of monetary policy. Market participants now seem to anticipate between 75 basis
points and 100 basis points of policy easing by the end of 2008, a little less than at the
time of the March FOMC meeting.
Option-implied measures of market uncertainty about the path of policy were little
changed over the intermeeting period and remained within recent historical ranges.
Implied probability distributions for the target funds rate between six and twelve months
ahead remained skewed toward lower rates.

III-1

III-2

Corporate Yields, Risk Spreads, and Stock Prices
Wilshire 5000

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

Mar. 21, 2007 = 100
Daily

Monthly

105
May
1

100
95

(Trend earnings) / P*

90
85

March
FOMC

May
1

2005

2006

2007

Long-run real Treasury yield

70
2004

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

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Percent
50

Daily

Percent
9.5

Daily
March
FOMC

March
FOMC

8.5

11
10-year high-yield
(left scale)

7.5

30
9

6.5
May
1

20
7
May
1

5.5

10-year BBB
(right scale)

10
5

2002

2003

2004

2005

2006

2007

4.5
2002

2003

2004

2005

2006

2007

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

Corporate Bond Spreads

Investment Bank Bond Spreads

Basis points
1000

Basis points

Basis points
375

Daily

250

Daily

March
FOMC

800

March
FOMC

10-year high-yield
(left scale)

200

300

600

150

Average of bond spreads*

225
400

200

100
May
1

10-year BBB
(right scale)

Apr.
30

150

75
2002

2003

2004

2005

2006

2007

Note. Measured relative to comparable-maturity Treasuries.

0
2001

2002

2003

2004

2005

2006

2007

Source. Merrill Lynch.
* Spreads measured relative to comparable-maturity Treasuries for
bonds with 3-7 years in remaining maturity for Merrill Lynch, Bear
Stearns, Goldman Sachs, Morgan Stanley, and Lehman Brothers.

III-3

Over the intermeeting period, yields on nominal Treasury securities edged up at all
maturities. On net, TIPS-based measures of inflation compensation over the next 5 years
and 5 to 10 years ahead were little changed despite a significant rise in oil prices.
Stock Prices and Corporate Interest Rates
Over the intermeeting period, broad stock price indexes climbed about 5 percent. The
rise was driven by solid first-quarter earnings reports, which mostly exceeded
expectations. Overall market sentiment also seemed to improve some because of reduced
anxiety about spillovers from problems in the subprime mortgage market. Equity prices
rose in most industries, although energy firms outperformed the broader market. Implied
volatility on the S&P 500 generally trended lower and is now only a little above the
historically low levels that prevailed early this year. The spread between the twelvemonth forward trend earnings-price ratio for S&P 500 firms and a real long-run Treasury
yield—a rough gauge of the equity risk premium—narrowed a touch but remained within
its range over the past few years.
Over the intermeeting period, yields on investment-grade corporate bonds rose in line
with those on comparable-maturity Treasury securities, and so their spreads were little
changed at fairly low levels. Meanwhile, spreads on speculative-grade corporate bonds
narrowed about 25 basis points. Spreads on bonds for five investment banks with
reported exposure to the subprime mortgage market—all of which carry an investmentgrade rating—remained slightly above the levels that prevailed earlier this year.
Corporate Earnings and Credit Quality
On the basis of reports from more than 300 companies, earnings per share for firms in the
S&P 500 are estimated to have increased 9 percent through the year ending in the first
quarter—the first single-digit rate of increase since 2003. A further deceleration in
corporate earnings had been widely anticipated, and, indeed, more than the usual share of
company reports exceeded analysts’ forecasts. Through mid-April, analysts seem to have
made just small revisions to forecasts of year-ahead earnings for the S&P 500 as a whole.
Overall, the credit quality of nonfinancial firms continued to be solid. Balance sheet
liquidity ticked up from an already elevated level in the fourth quarter, while aggregate
corporate leverage remained low. In March, the volume of bond upgrades significantly
outpaced that of downgrades, and the realized six-month trailing bond default rate stayed
near zero. In the fourth quarter of last year, the delinquency rate on C&I loans at
commercial banks was the lowest in more than a decade. The near-term outlook for

III-4

Corporate Earnings and Credit Quality
Corporate Earnings Growth

S&P 500 EPS Revisions Index
Percent

Percent
40

Change from 4 quarters earlier

Monthly

30
20

2
1

0
MidApr.

-1

-10

-2

-20

S&P 500 EPS
NIPA, economic
profits before tax

-3

-30
1989

1992

1995

1998

2001

2004

2007

Source. I/B/E/S for S&P 500 earnings per share.

2003

2004

2005

Ratio

2007

Bond Ratings Changes of Nonfinancial Companies
Percent of outstandings

Ratio
Liquid assets over
total assets
(left scale)

Annual*

2006

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

Financial Ratios for Nonfinancial Corporations
0.12

-4
2002

0.35

Annual rate
Upgrades

Mar.

0.09

0.30

Jan.
-Feb.

20
0

0.06

Debt over
total assets
(right scale)

0.25

20
40

Downgrades

0.03

0.20
1990

1994

1998

2002

2006

60
1991 1993 1995 1997 1999 2001 2003 2005 2007

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

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

Selected Default and Delinquency Rates

Expected Year-Ahead Defaults

Percent of outstandings

Percent of liabilities
7

2.0

Monthly

6
1.5

5
C&I loan delinquency rate
(Call Report)

1.0

3
2
Q4

Bond default rate*

Mar.

1991

1995

1999

2003

2007

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

0.5
Mar.

0.0

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

III-5

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

2007

4.6
1.7
2.8

5.2
1.9
3.3

4.1
1.7
2.4

5.9
1.3
4.6

3.0
1.8
1.3

22.7
8.2
9.7
4.9

19.1
8.4
6.4
4.3

30.3
14.4
8.4
7.6

29.5
11.6
7.6
10.4

31.4
13.0
13.0
5.4

26.0
9.0
11.0
6.0

1.5

-.4

3.4

4.4

-.1

-6.9

-7.7

3.2

9.9

14.5

11.0

7.0

9.1

6.6
111.1

Financial corporations
Stocks1
Bonds2

5.4
1.6
3.8

-3.4

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

2005

31.6
15.9
11.3
4.3

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

2004

3.7
.4
3.3

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

Apr. p

2003

6.9
139.3

5.0
176.3

4.4
190.2

6.2
185.3

8.7
200.3

9.0
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 commercial bank credit data.
p Preliminary.

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
H1

Total

H2
Q1

Apr.

Public issuance
Private issuance
Repurchases
Cash mergers

40
Q1

Total

30
20
10

-10
-20

-30
-10

-40

-20

-50
-60

-30

-70

-40
2003

2004

2005

* Seasonally adjusted, period-end basis.
p Preliminary.

2006

2007

-80
2003
e Staff estimate.

2004

2005

2006

2007

III-6

Commercial Real Estate
Commercial Mortgage Debt

Gross Issuance of CMBS

Percent change from year earlier

Billions of dollars
18

Quarterly

100

Quarterly

16
Q4

10
8

6
4

0
1996

1998

2000

2002

2004

2006

1996

1998

2000

2002

2004

2006

* As of Apr. 27, 2007.
** Staff estimate for Q2.
Source. Commercial Mortgage Alert.

Investment-Grade CMBS Spreads

Leverage on Newly Securitized Mortgages
Basis points

Percent
300

Weekly

Percent
40

3-month moving average

35
250

Mar.

75
200

BBB

Mortgage payment-income
ratio* (left scale)

20
Mar.

150
AAA

Apr. 25

2001

2002

2003

2004

2005

2006

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

65
100

50
2000

2007

15
10
5
0

2001

2002

2003

2004

2005

2006

2007

* Defined as the ratio of scheduled mortgage payments
to property income.
Source. Real Capital Analytics.

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

Delinquency Rates on Commercial Mortgages

Commercial Real Estate Valuation

Percent

Percent
4

Quarterly

9
3

At commercial
banks

8
7

2
6

Ratio of net operating income to price*

CMBS

At life
insurance
companies

Mar.
Q4

Long-run real Treasury yield**

3
2

1996

1998

2000

2002

2004

Source. Citigroup, Call Report, ACLI.

2006

1986 1989 1992 1995 1998 2001 2004 2007
* Staff calculation from NCREIF data, annual rate.
** Yield on synthetic Treasury perpetuity minus
Philadelphia Fed 10-year expected inflation.

III-7

corporate credit quality also remains good, as the aggregate year-ahead default rate based
on the KMV model stayed low in March.
Business Finance
Gross bond issuance by nonfinancial corporations slowed in April from its torrid firstquarter pace. Acquisition-related financing has continued to fuel the issuance of both
investment- and speculative-grade corporate bonds. Commercial paper outstanding
declined last month, but C&I loans accelerated, a pattern broadly consistent with the
easing of some terms on such loans that was reported in the April Senior Loan Officer
Opinion Survey. Overall, net debt financing in April was well below the volume in the
first quarter.
Gross public equity issuance by nonfinancial corporations was tepid again in April. The
calendar of planned offerings suggests that the pace of IPOs will pick up in coming
months. Private equity issuance is estimated to have increased a bit in the first quarter, as
leveraged buyout activity continued to climb. Even so, given that estimated share
repurchases and actual retirements from cash-financed mergers and acquisitions
continued at near-record levels, equity retirements likely dwarfed total issuance again in
the first quarter.
Commercial Real Estate
Total commercial mortgage borrowing has likely remained robust so far this year, as
indicated by the pace of commercial-mortgage-backed securities (CMBS) issuance.
Gross CMBS issuance was quite strong in the first quarter, and the issuance calendar
points to a similar pace in the current quarter.
Spreads on BBB-rated CMBS have soared since late February, reportedly in part because
of reduced demand for collateralized debt obligations, which, in recent years, have been
large purchasers of these tranches of CMBS. Rising leverage in pools of commercial
mortgages underlying CMBS may also have been a factor in the recent widening in
spreads. The share of newly securitized commercial mortgages with loan-to-value ratios
at or above 0.8 has increased significantly over the past several months. In response,
rating agencies recently announced plans to increase the level of credit support required
for CMBS. Despite the greater leverage, increases in commercial property rents have
kept the ratio of mortgage payments to rental income on newly securitized commercial
mortgages within its range of the past several years. In March, delinquency rates on
CMBS remained very low.

III-8

Household Liabilities
Mortgage Rates

Mortgage Debt and Consumer Credit
Percent

Percent change from year earlier
9

Weekly

16
Mortgage

12
30-year
FRM

6
5

Apr.
25
1-year
ARM

Feb.

6
4

Consumer
4

3
1996

1998

2000

2002

2004

2006

2008

1996

1998

2000

2002

2004

2006

Source. Freddie Mac.

Delinquencies on Consumer Loans

Delinquencies on Mortgages
Percent

Percent of loans
6

Mar.

Monthly

Credit card loans
at commercial banks

Fixed-rate
Variable-rate

12
10

8
Nonrevolving
consumer loans at
commercial banks

Subprime
Mar.

Feb.
Q4

Prime

Auto loans at captive
finance companies

Feb.
1

1996

1998

2000

2002

2004

2006

2001

2002

2003

2004

2005

2006

2007

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

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

Number of New Foreclosures

Subprime Mortgage CDS Index Spreads

Thousands, annual rate

Basis points

1400
Prime
Subprime
Other (FHA/VA)

2000

Daily, by rating

1200
1500

1000
800
600

BBB-

Apr.
30

500

400
A

200
2003

2004

2005

Source. Staff estimates based on data from
the Mortgage Bankers Association.

Q3 Q4
2006

1000

0
Aug.

Oct.
Dec.
Feb.
Apr.
2006
2007
Note. Measured relative to libor. Each index
corresponds to pools of mortgages securitized in 2006:H1.
Source. JP Morgan.

III-9

Increases in commercial property prices in the first quarter led to a further decline in the
ratio of net operating income to property prices. The spread of this ratio over the real
perpetuity Treasury yield—a rough measure of the risk premium on commercial real
estate assets—declined in the first quarter to its lowest level since 1992.
Household Finance
Over the intermeeting period, interest rates available to prime borrowers for thirty-year
fixed-rate and one-year adjustable-rate mortgages increased slightly, and for both, the
spreads over Treasuries were little changed. The growth of home mortgage debt likely
slowed a bit further in the first quarter, as home price appreciation appears to have
remained sluggish. Growth of consumer credit continued to be moderate early in the
year.
The most recent data continued to show very low delinquency rates on prime and
subprime fixed-rate mortgages. However, in March, delinquencies on subprime variablerate mortgages were roughly unchanged at high levels. Foreclosures started on properties
climbed in the fourth quarter; all told, we estimate that about 1 million properties began
the foreclosure process in 2006. A substantial increase in the subprime segment has
accounted for most of the increase in new foreclosures overall.
Respondents to the April Senior Loan Officer Opinion Survey reported having tightened
standards on residential mortgages over the past three months, particularly for
nontraditional and subprime loans. Spreads on indexes of subprime mortgage credit
default swaps remained in the elevated range that has prevailed since late February.
Spreads for newly issued securities used to fund subprime mortgage pools also stayed
elevated as investors continue to scrutinize pools more closely.
The handful of monthly indicators of home prices available for the first quarter suggest a
very small aggregate price increase. The trajectory of expected home prices in ten of the
largest metropolitan markets, derived from futures quotes on the S&P/Case-Shiller homeprice index, was essentially unchanged over the intermeeting period and continues to
imply an expectation of moderate price declines in these markets over 2007. On balance,
the combination of solid stock market returns and sluggish home-price appreciation has
left the ratio of household net worth to disposable personal income at a relatively high
level in recent quarters. Propelled by strong inflows to both equity and bond funds, net
inflows to long-term mutual funds have been approaching record levels so far this year.

III-10

Household Assets
House Prices

S&P/Case-Shiller House Price Futures
Percent change from year earlier

Feb. 2007 = 100
14

Quarterly

May 1, 2007
Mar. 21, 2007

120
Feb.
2007
110

10
8

100
6
OFHEO purchase-only index

2
0
1996

1998

2000

2002

2004

2006

80
Jan.

Source. Office of Federal Housing Enterprise Oversight.

July
2005

Jan.

July
2006

Jan.

July
2007

Jan.

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

Stock Prices

Net Worth
Percent change from year earlier

Ratio to disposable income
60

Quarterly, end of period

6.5

Quarterly, end of period, s.a.

6.0
e
Q1

Q1
0

5.5

-30

5.0

Wilshire 5000
-60
1996

1998

2000

2002

2004

2006

4.5
1996

1998

2000

2002

2004

2006

e Staff estimate.

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

2004

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

2005

16.0
11.3
2.5
8.7
2.1
2.6
-1.3
3.5
0.4

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

2006

18.9
13.3
0.9
12.4
0.6
5.0
-0.2
4.0
1.3

2006
Q4

Mar.

2007
Apr.e

Assets
Mar.

9.2
4.1
-3.6
7.7
0.3
4.8
0.4
3.3
1.0

21.6
11.2
-0.9
12.1
1.8
8.6
0.5
6.3
1.8

25.4
8.2
1.6
6.6
2.7
14.6
0.4
11.4
2.8

37.5
18.5
5.8
12.8
3.3
15.7
1.1
12.5
2.0

8,330
6,104
4,703
1,401
666
1,561
162
1,023
375

III-11
Treasury and Agency Finance
Foreign Custody Holdings

Foreign Participation in Treasury Auctions

Billions of dollars

Percent of
total issue

1400

Weekly average

Indirect
bids

1200

Treasury
Apr.
25

Apr.
30

1000

800
600
Agency

Feb.
28

Actual foreign
allotment

2004

2005

200
2003

400

2006

2000

Average Daily Trading Volume

’06

’07
’06

’06

2003

2004

2005

2006

2007

Cents per
$100 face value
0.88

250

Monthly average

0.86

200

’07

’05

2002

Bid-Ask Spread

Billions of dollars
’07

2001

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

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

’06

2-year on-the-run
Treasury notes

150

’06
’07p

’05

0.84

100

0.82
50

Nov.
Dec.
Jan.
Feb.
Mar.
Apr.
Note. Monthly average of daily trading volume in 2-, 5-, and
10-year on-the-run coupon securities in interdealer market.
p Preliminary.
Source. BrokerTec Interdealer Market Data.

GSE Stock Prices

June Aug.
Oct.
Dec.
2006
Source. BrokerTec Interdealer Market Data.

March
FOMC May

Fannie Mae
Freddie Mac

Apr.

10-Year GSE Yield Spreads

Jan. 3, 2006 = 100

Daily

0.80
Feb.

Feb.
Apr.
2007

Basis points

130

40
Daily

March
FOMC

Fannie Mae
Freddie Mac

120

35
May
1

110

May
1

100
25
90

Jan.

Mar.

May

July
2006

Oct.

Dec.

Feb.
Apr.
2007

Jan.

Mar.

May

July
2006

Oct.

Dec.

Note. GSE yields based on senior unsecured debt.

Feb.
Apr.
2007

III-12

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

2006
Type of security

Apr. p

38.4
34.1
15.5
18.7
4.2

32.9
30.0
9.7
20.3
2.8

39.4
34.9
11.4
23.4
4.5

37.6
35.7
17.7
18.0
1.9

23.2
22.6
8.8
13.8
.6

2.1

2.8

2.3

1.2

2004

2005

37.9
32.0
10.0
22.1
5.8

34.7
29.8
10.8
19.0
4.9

3.5

2.0

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

2007

2003

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.
p Based on preliminary data through April 26, 2007.

Ratings Changes
Number of ratings changes
4000

Annual rate

Upgrades

3200
2400

1600
800

Apr.

0
800
1600

Downgrades

2400
1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

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

Municipal Bond Yields
General Obligation

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
8

Weekly

Ratio

Weekly

1.0

20-year

6
5
0.9

Apr.
26

May
1

1-year

Apr.
26

0.8

2
1
0

1995

1998

2001

2004

Source. Municipal Market Advisors and Bond Buyer.

2007

0.7
1995

1998

Source. Bond Buyer.

2001

2004

2007

III-13

Treasury and Agency Finance
Nonwithheld federal receipts have been very strong this tax season, and the Treasury
scaled back regular issuance of bill and coupon securities in anticipation of further strong
revenues. During the intermeeting period, the Treasury auctioned two- and five-year
nominal securities as well as five-year TIPS and reopened January’s ten-year TIPS
offering; most issues were well received. At its mid-quarter refunding, the Treasury
announced that it was discontinuing issuance of the three-year nominal note—a move
that most primary dealers reportedly had anticipated. The proportion of the issues
awarded to indirect bidders—a rough gauge of interest by foreign investors—was
somewhat below recent values, while custody holdings by the Federal Reserve Bank of
New York on behalf of foreign official institutions edged up over the intermeeting period.
Although secondary-market volumes were subdued last month, bid-ask spreads were in
normal range, and markets functioned well.
Fannie Mae’s and Freddie Mac’s stock prices rose over the intermeeting period even as
the Office of Federal Housing Enterprise Oversight continued to express concerns over
internal controls at the government-sponsored enterprises (GSEs) and as regulatoryreform legislation moved ahead in the Congress. However, yields on long-term agency
debt fell slightly relative to those on Treasury securities of comparable maturity, and GSE
credit default swap spreads held steady.
State and Local Government Finance
Gross issuance of long-term municipal bonds slowed in April from the rapid first-quarter
pace. Advance refundings, which surged in March because of a drop in interest rates,
decelerated last month. New capital issuance also moderated in April; the bulk of the
proceeds were targeted to support spending on education and transportation. Short-term
issuance was negligible last month, a development consistent with healthy state and local
budgets and the typical seasonal pattern. The credit quality of municipal bonds remained
solid, as the number of bond-rating upgrades continued to outpace the number of
downgrades. The ratio of municipal bond yields to those on comparable Treasury
securities remained at the low end of its range over the past decade.
Money and Bank Credit
M2 accelerated to an average annual growth rate of 9 percent during March and April.
The acceleration was due primarily to faster growth in liquid deposits, which were likely
boosted in April by tax-related flows. Retail money market funds surged at the beginning
of March after the turbulence in financial markets in late February, but flows slowed in

III-14

M2 Monetary Aggregate
(Based on seasonally adjusted data)
1

Percent change (annual rate)

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

2005

2006

4.1

Aggregate and components

2006
Q4

2007
Mar.

5.0

6.9

8.0

3.6
2.0
18.8
-.2

3.6
.8
19.3
12.9

3.0
3.2
16.6
17.1

4.9
3.5

15.8
3.1

21.1
2.4

Level
(billions
of dollars),

Apr.
(e)

9.3

8.7

7,222

1.7
7.1
8.6
18.1

2.1
8.7
6.1
23.5

3.5
10.3
6.8
7.4

753
4,427
1,188
848

11.0
1.7

26.0
2.3

33.6
3.5

1,410
816

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

III-15

April. In both March and April, small time deposits expanded moderately, while
currency continued to grow slowly, largely because of soft foreign demand.
Growth of commercial bank credit continued to be solid during March and April but was
down a bit from earlier in the year. The slowdown primarily reflected reduced lending to
households, most notably a contraction in residential real estate loans on banks’ books.
However, the runoff in residential real estate loans was attributable, in part, to sales of
such loans to nonbank institutions—transactions that frequently cause large swings in this
category of loans. Adjusted for securitizations, consumer loans have also slowed of late.
The pace of lending to businesses picked up a bit, on balance, as C&I loans accelerated
and commercial real estate loans continued to expand briskly.

III-16

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

Total
Loans2
Total
To businesses
Commercial and industrial
Commercial real estate
To households
Residential real estate
Revolving home equity
Other
Consumer
Originated3
Other4
Securities
Total
Treasury and agency
Other5

Level,1
Apr. 2007e

2005

2006

Q4
2006

Q1
2007

Mar.
2007

Apr.
2007e

10.5

9.2

3.2

7.3

6.4

6.0

8,070

11.6

10.4

6.4

8.0

2.8

6.7

6,048

13.2
16.9

16.4
13.5

10.2
7.0

6.3
9.0

7.9
9.0

8.4
9.3

1,195
1,480

12.0
13.3
11.5
3.1
.7
8.6

6.4
1.4
8.3
5.1
6.3
11.1

2.5
1.3
3.0
.3
4.7
14.4

5.5
2.9
6.4
6.9
7.5
15.1

-6.8
6.6
-11.3
-5.0
2.4
11.7

-3.6
-4.5
-3.3
10.4
2.5
17.6

1,756
454
1,303
745
1,142
871

7.6
.0
13.5

5.8
4.9
12.4

-6.3
-3.0
7.1

4.9
-.9
8.1

17.2
7.6
23.0

4.1
-27.0
44.7

2,022
1,182
1,032

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

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices
The April 2007 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. In light of recent developments in the subprime
mortgage market, banks were queried separately about standards on and demand for
prime, nontraditional, and subprime residential mortgages. This appendix is based on
responses from fifty-one domestic banks and nineteen foreign banking institutions.
Overall, the respondent banks reported mixed changes in lending standards and terms
over the past three months and somewhat weaker demand for most loan types.
Domestic and foreign institutions indicated that they had eased terms on commercial
and industrial (C&I) loans over the past three months and that credit standards on such
loans had changed little. Domestic respondents reported that they had tightened credit
standards on commercial real estate loans over the previous three months. Demand for
both C&I and commercial real estate loans at domestic banks was reportedly weaker, on
net, in the April survey. By contrast, foreign institutions noted that the demand for both
C&I and commercial real estate loans had changed little over the survey period.
With regard to loans to households, a relatively small net fraction of respondents
reported having tightened lending standards on prime residential mortgages over the
past three months, while considerable net fractions of respondents indicated that they
had tightened lending standards on nontraditional and subprime mortgage loans. The
banks reported that demand for subprime residential mortgages was little changed, on
net, whereas significant net fractions of respondents reported that they had seen weaker
demand for both prime and nontraditional residential mortgages over the past three
months. A significant net percentage of institutions also reported weaker demand for
consumer loans over the same period.
Business Lending
In the April survey, domestic institutions reported that lending standards on C&I loans
to large and middle-market firms were about unchanged, on net, over the past three
months. The respondents noted, however, that they had further eased some terms on
C&I loans to such firms over the same period. About half of respondents—a slightly
larger net fraction than in the January survey—indicated that they had trimmed spreads
of loan rates over their cost of funds over the previous three months, and smaller net
fractions reported that they had reduced the costs of credit lines and eased loan
covenants.

III-A-2

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

Loans to large and medium-sized firms
Loans to small firms

-20
1990

1992

1994

1996

1998

2000

2002

2004

2006

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

1992

1994

1996

1998

2000

2002

2004

2006

Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans
Percent
60
40
20
0
-20
-40
-60
1990

1992

1994

1996

1998

2000

2002

2004

2006

III-A-3

Measures of Supply and Demand for Commercial Real Estate Loans
Net Percentage of Domestic Respondents Tightening Standards for Commercial Real Estate Loans
Percent
80

-20

1990

1992

1994

1996

1998

2000

2002

2004

2006

Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial Real Estate Loans
Percent
60

-20

-40

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

III-A-4
Measures of Supply and Demand for Loans to Households

Net Percentage of Domestic Respondents Tightening Standards for Consumer Loans
Percent
60
Credit card loans

50
40
30
20
10

Other consumer loans

0
-10
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

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

✧
❍
❏

Residential mortgages*

Prime
Nontraditional
Subprime

80
60
40
20

❏
❍
✧

0
-20
-40

Consumer loans

-60
-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

Net Percentage of Domestic Respondents Tightening Standards for Mortgages to Individuals*
Percent
50

✧
❍
❏

❍
❏
Prime
Nontraditional
Subprime

40
30
20

✧
10
0
-10
-20
1990

1992

1994

1996

1998

2000

2002

2004

2006

* The questions on residential mortgages were separated into three questions (for prime, nontraditional, and subprime mortgages) in the latest
survey. Responses to the new questions are shown separately. For the lines, values for 2007:Q2 have been constructed using weights based
on answers to questions in the July 2006 Senior Loan Officer Opinion Survey (see text note for details).

III-A-5
Credit standards on C&I loans to small firms were also reportedly unchanged, on
balance, in the April survey. Nonetheless, about one-third of the domestic banks, on
net, indicated that they had trimmed spreads of loan rates over their cost of funds over
the past three months, and smaller net fractions reported that they had reduced the cost
of credit lines and reduced premiums charged on riskier loans.
As they did in previous surveys, U.S. branches and agencies of foreign banks reported
that their standards on C&I loans were essentially unchanged. However, significant net
fractions of these institutions indicated that they had eased loan covenants, increased
the maximum size of credit lines, and narrowed spreads of loan rates over their cost of
funds.
In the April survey, nearly all domestic banks and all U.S. branches and agencies of
foreign banks that reported having eased their lending standards and terms pointed to
more-aggressive competition from other banks or nonbank lenders as the most
important reason for having done so. Considerable fractions of domestic and foreign
institutions also cited increased liquidity in the secondary market for these loans as a
reason for their move toward less-stringent business lending policies.
On net, about one-fifth of the domestic respondents noted that they had experienced
weaker demand for C&I loans from large and middle-market firms and from small
firms. Among domestic respondents that saw weaker demand for such loans, about
four-fifths attributed the softening in part to borrowers’ decreased need to finance
investment in plant or equipment, and about two-thirds pointed to borrowers' increased
use of internally generated funds. The U.S. branches and agencies of foreign banks
reported that demand for C&I loans was about unchanged, on net, over the past three
months.
Regarding future business, 12 percent of domestic respondents, on net, reported that the
number of inquiries from potential business borrowers had decreased over the previous
three months, a somewhat larger net percentage than in the January survey. By
contrast, foreign respondents indicated that the number of inquiries from potential
business borrowers was little changed in the April survey.
About one-third of domestic institutions—a larger net fraction than in the previous
survey—indicated that they had tightened lending standards on commercial real estate
loans over the past three months. As in the January survey, about 40 percent of
domestic respondents noted that they had experienced weaker demand for such loans
over the same period. By contrast, the vast majority of foreign respondents reported
that lending standards on commercial real estate loans had remained basically

III-A-6
unchanged in the April survey. Demand for such loans at these institutions was also
said to be about unchanged over the past three months.
Household Lending
In order to track developments regarding the major categories of residential real estate
loans, the April survey asked banks to report changes in standards on and demand for
prime, nontraditional, and subprime residential mortgages.1 A large majority of
respondents indicated that standards on prime residential mortgages had remained
basically unchanged over the past three months, with about 15 percent reporting
somewhat tighter standards. Of the forty-two domestic institutions that originated
nontraditional residential mortgages, about 45 percent noted a tightening of standards
on such loans, whereas the rest reported that their standards had remained basically
unchanged. Similarly, of the sixteen institutions that indicated they had originated
subprime residential mortgages, about 45 percent, on net, reported that they had
tightened standards on such loans.2
A tightening of standards for subprime and nontraditional mortgage loans did not
appear to prompt a move toward more-stringent lending policies for prime mortgages.
Indeed, of the nine institutions that reported having tightened standards on subprime
residential mortgages, only one indicated that it had also tightened standards on prime
residential mortgages. Five of the nineteen institutions that reported tightening
standards on nontraditional mortgages also tightened standards on prime mortgages.
On net, about one-fifth of domestic institutions indicated that they had seen weaker
demand for prime and nontraditional residential mortgages over the past three months,
while the demand for subprime mortgages was reportedly little changed.
On balance, 10 percent of domestic respondents indicated that their willingness to make
consumer installment loans had increased in the April survey. A small fraction of
1

Special questions in the July 2006 Senior Loan Officer Opinion Survey on Bank Lending
Practices addressed domestic banks’ holdings of subprime and nontraditional residential
mortgages. The answers to these questions can be used to calculate estimates of the average
shares of subprime and nontraditional residential mortgages in total residential mortgages for the
survey respondents as of June 30, 2006. These estimates suggest that subprime mortgages
accounted for about 7 percent of all residential mortgages for the survey respondents, and
nontraditional residential mortgages accounted for about 15 percent of all residential mortgages.
In the third exhibit, these shares are used as weights to construct the net percentage of domestic
respondents reporting stronger demand (middle panel) and tighter standards (lower panel) on all
residential mortgage products taken together for 2007:Q2.
2
These sixteen institutions accounted for 45 percent of residential mortgage loans on the books
of all commercial banks as of December 31, 2006.

III-A-7
institutions reported that they had eased lending standards on credit card loans;
standards and terms on non-credit-card loans were reportedly little changed over the
past three months. About one-fourth of domestic institutions indicated that they had
experienced weaker demand for consumer loans, a somewhat smaller net percentage
than in the January survey.
Last Page of Domestic Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
In February, the trade deficit narrowed to $58.4 billion from $58.9 billion in January
(revised). The narrowing of the deficit reflected a steep decline in imports, which more
than offset a sizable decline in exports. The value of exports of goods and services fell
2.2 percent, following a 1.2 percent increase in January. The lion’s share of the February
decline was in exports of capital goods. Within capital goods, exports of aircraft, hightech goods, and other capital goods all moved lower. There were smaller declines in
exports of industrial supplies (particularly fuels), consumer goods, and services.
Automotive exports rose in February after falling in January.
Trade in Goods and Services
2006
Nominal BOP
Exports
Imports
Real NIPA
Exports
Imports
Nominal BOP
Net exports
Goods, net
Services, net

Annual rate
Monthly rate
2006
2007
2006
2007
Q3
Q4
Q1e
Dec.
Jan.
Feb.
Percent change

12.8
5.0

11.7
13.6

9.4
3.3

6.8
5.6

-765.3
-836.0
70.7

-805.6
-875.6
70.0

9.7
-9.7

.4
2.1

1.2
-.6

-2.2
-1.7

10.6
-1.2
...
-2.6
2.3
...
Billions of dollars

...
...

-58.9
-65.2
6.3

-58.4
-64.5
6.0

-714.4
-791.8
77.4

2.9
.1

-703.9
-777.8
74.0

-61.5
-68.1
6.6

e. BOP data are two months at an annual rate; NIPA data are BEA’s advance estimate.
Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census.
n.a. Not available. ... Not applicable.

The average value of exports in January and February increased 2.9 percent (a.r.) from
the fourth quarter. Strong exports of consumer goods pulled up the growth rate, while
exports of services, industrial supplies, capital goods, and automotive products were all
close to their fourth-quarter levels. In the advance NIPA release for the first quarter, real
exports of goods and services were reported to have fallen at an annual rate of
1.2 percent.

IV-1

IV-2

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

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

Percentage points, a.r.

0
-100

2.0
1.5

-200

1.0

-300

0.5

-400
0.0
-500
-0.5

-600

Feb

-1.0

-700

-1.5

-800

2000

2002

2004

2006

-900

Selected Exports

2000

2002

2004

2006

-2.0

Selected Imports
Billions of dollars, a.r.

Billions of dollars, a.r.

450

500

450

400

400
Capital goods
ex. aircraft

350
Capital goods
350
300
300
250

200
Industrial
supplies

250

Industrial
supplies

Consumer
goods

200
150
150

Consumer
goods

100
100
Oil
50

Aircraft

2000

2002

2004

2006

2000

2002

2004

2006

IV-3

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

Exports of G&S
Goods exports
Gold
Other goods

Levels
Change1
2006 2007
2007
2006 2007
2007
Q4
Q1e
Jan.
Feb.
Q4
Q1e
Jan.
Feb.
1493.9 1504.7 1521.4 1488.0
34.1
10.8
17.9 -33.5
1066.5 1077.0 1092.6 1061.3
9.0
7.3
7.3
7.4
1057.5 1069.7 1085.3 1054.0

21.4
-.6
22.0

10.5
-1.7
12.2

20.1
-2.3
22.4

-31.3
.1
-31.4

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

432.2
83.4
48.2
50.3
250.3

433.8
89.2
47.0
49.1
248.5

446.7
92.1
48.9
50.2
255.5

420.8
86.2
45.0
48.0
241.6

16.3
12.1
.9
-3.3
6.6

1.5
5.8
-1.2
-1.2
-1.8

12.6
8.2
2.8
1.8
-.1

-25.9
-5.9
-3.9
-2.2
-13.9

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

108.9
265.5
135.8
74.7
40.5

108.8
265.2
141.6
79.5
40.9

106.8
268.7
143.6
79.2
40.4

110.8
261.7
139.5
79.8
41.4

-2.0
1.6
4.6
-.5
2.0

-.1
-.3
5.8
4.8
.4

-7.6
7.1
6.2
2.9
7.6

4.0
-6.9
-4.1
.6
1.0

427.4

427.7

428.8

426.6

12.7

-2.2

Imports of G&S

2208.3 2208.6 2227.9 2189.2

-57.1

-13.0

-38.7

Goods imports
Oil
Gold
Other goods

1858.3 1854.8 1874.6 1835.0
265.5 271.0 293.4 248.7
5.1
4.2
4.6
3.9
1587.7 1579.5 1576.6 1582.4

-62.4
-72.1
-.4
10.1

-3.5
5.6
-.9
-8.1

-14.5
14.9
-.6
-28.8

-39.6
-44.7
-.7
5.8

Services exports

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

426.3
31.0
100.8
27.0
267.5

437.6
32.5
110.3
27.4
267.4

440.3
32.9
112.9
27.5
267.1

434.9
32.1
107.8
27.4
267.6

-2.7
3.5
-3.5
-1.5
-1.3

11.3
1.5
9.5
.4
-.1

15.2
.2
14.7
.9
-.6

-5.4
-.7
-5.1
-.1
.5

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

258.2
291.1
468.4
77.1
66.5

252.5
276.5
468.7
79.1
65.1

252.9
277.0
462.1
78.9
65.3

252.1
276.0
475.2
79.3
64.9

5.1
-15.5
19.8
1.0
2.3

-5.7
-14.6
.3
2.0
-1.4

-19.5
-10.1
-15.1
1.6
-.9

-.8
-1.0
13.1
.4
-.4

350.0

353.8

353.3

354.2

5.3

3.8

1.5

13.09
55.55

13.93
53.27

15.02
53.49

12.83
-.76
53.05 -11.21

.83
-2.26

1.34
-2.25

-2.19
-.44

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

The value of imported goods and services fell 1.7 percent in February, after falling
0.6 percent in January. Oil imports plunged, reflecting declines in both prices and
quantities. Imports of industrial supplies, capital goods, and automotive products also
fell. These declines were partially offset by a sizable increase in imports of consumer
goods.
The average value of imports in January and February was flat relative to the fourth
quarter. Imports of capital goods, services, and petroleum were all above their fourthquarter levels, but these increases were offset by lower imports of industrial supplies and
automotive products. In the advance NIPA release for the first quarter, real imports of
goods and services were reported to have increased 2.3 percent at an annual rate.
Prices of Internationally Traded Goods
Non-oil imports. In March, import prices for both non-oil goods and core goods rose
0.3 percent. Prices for imported material-intensive goods rose 0.7 percent, in large part
reflecting higher prices for imported metals. Prices for imported finished goods were up
almost 0.2 percent in March. Within finished goods, consumer goods experienced the
largest price increase, rising 0.2 percent. Outside of core imports, the price for imported
natural gas rose 4.7 percent in March. Prices for imported computers and semiconductors
fell 0.8 and 0.1 percent, respectively.
In the first quarter, as reported in the advance NIPA release, import prices increased
1.3 percent at an annual rate, as lower prices for imported oil, computers, and
semiconductors tempered higher prices for imported services, natural gas, and core
goods. Prices of imported core goods increased 2.8 percent, largely on account of higher
prices for material-intensive goods.
Oil. The BLS price index of imported oil rose 9 percent in March, following little change
in February. The spot price of West Texas Intermediate (WTI) crude oil increased to a
similar extent over the two months, but the timing differed; spot WTI rose 9 percent in
February and 2 percent in March. In April, the spot price averaged about $64 per barrel,
up about $3.50 per barrel from the March average, and it closed at $64.41 per barrel on
May 1. The rise in oil prices since February reflects OPEC production restraint,
production problems in Iraq and Nigeria, and increased concern about a possible
disruption of exports from Iran. Strong oil demand in the United States, owing in part to
below-normal temperatures in February and early March, has also supported oil prices.

IV-5

Prices of U.S. Imports and Exports
Merchandise Imports

Categories of Core Imports
12-month percent change

12-month percent change

8
6

Core goods

20
15

Material-intensive
goods

4
2

10
Finished goods

0
-2

2000

2002

2004

2006

-5

-4

Non-oil goods

-10

-6

2000

Oil

2002

2004

2006

-15

Natural Gas
Dollars per barrel

85
75

300

2000=100
Import price
index
(left scale)

250

65
55
45
Spot WTI

15
2002

2004

30
25

200

150

100

Import unit value

2000

Dollars per million BTU

2006

Merchandise Exports

50
0

Spot Henry Hub
(right scale)
2000

2002

2004

2006

5
0

Categories of Core Exports
12-month percent change

12-month percent change

8
6
4

Core goods

20
15

Material-intensive
goods

10
Finished goods

-2

-5

-4

-10

Total goods

2000

2002

2004

2006

-6

2000

2002

2004

2006

-15

IV-6

Prices of U.S. Imports and Exports
(Percentage change from previous period)
Annual rate
2006
2007
Q3
Q4
Q1
Merchandise imports
Oil
Non-oil
Core goods1
Finished goods
Cap. goods ex. comp. & semi.
Automotive products
Consumer goods
Material-intensive goods
Foods, feeds, beverages
Industrial supplies ex. fuels
Computers
Semiconductors
Natural gas
Merchandise exports
Core goods2
Finished goods
Cap. goods ex. comp. & semi.
Automotive products
Consumer goods
Material-intensive goods
Agricultural products
Industrial supples ex. ag.
Computers
Semiconductors

Monthly rate
2007
Jan.
Feb.
Mar.

----------------------- BLS prices --------------------4.2 -11.9
1.5
-1.1
.1
1.7
7.0 -51.9
-5.5
-6.6
.6
9.0
3.4
1.8
2.8
-.1
.1
.3
4.2

1.9

3.4

2.5
2.9
1.4
3.0

1.2
1.2
.8
1.5

1.9
2.7
.6
2.0

.2
.6
.0
.2

.1
-.1
.2
.0

.2
.1
.1
.2

9.7
8.5
10.0

3.6
6.5
1.8

6.6
9.6
4.1

.7
1.5
.5

-.1
.2
-.3

.7
-.1
.8

-5.2
3.2
-12.5

-2.5
2.2
7.6

-8.3
-4.9
30.5

-1.1
-.6
-13.2

-1.1
-.4
4.0

-.8
-.1
4.7

5.2

7.0

6.6

8.6

2.5
2.4
1.5
3.0

1.9
3.0
.9
.3

3.4
4.0
1.7
3.5

.7
.7
.2
.9

-.0
.0
.1
-.1

.1
.2
.1
.0

12.7
18.8
11.3

-.7
20.9
-5.7

16.9
28.2
14.0

.6
.7
.5

2.1
2.8
2.0

2.0
2.1
1.9

-3.1
-10.8

-3.4
-3.3

-12.2
-3.3

-1.7
-.4

-.7
.0

-.8
-.7

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

5.4
3.3
4.3

-8.6
1.0
1.2

1.3
2.3
2.8

...
...
...

Exports of goods & services
Total merchandise
Core goods2

4.5
5.3
5.8

-.9
.0
.3

3.6
3.9
5.9

...
...
...

1. Excludes computers, semiconductors, and natural gas.
2. Excludes computers and semiconductors.
n.a. Not available. ... Not applicable.

IV-7

Exports. In March, export prices for core goods rose 0.8 percent, the same rate of
increase as in February. Prices for exported nonagricultural industrial supplies rose
1.9 percent, owing to higher prices for exported metals, chemicals, and fuels. Prices for
agricultural products also shot up in March, with higher prices for corn, vegetables, meat,
and wheat all contributing to the increase. Prices for finished goods were little changed
in March for the second consecutive month, after rising robustly in January.
In the advance NIPA release for the first quarter, exports prices climbed 3.6 percent at an
annual rate, as higher prices for exports of core goods and services more than offset steep
declines in prices of exported computers and semiconductors. Core export prices
increased 5.9 percent, boosted by a sharp increase in prices for exports of industrial
supplies and agricultural goods.
U.S. International Financial Transactions
Foreign official flows into the United States (line 1 of the Summary of U.S. International
Transactions table) moved up noticeably in the first three months of the year, continuing
the upward trend that began in early 2005. Most of these inflows came from countries
other than the G10 and OPEC (line 1c),
.
The chart on Foreign Official Financial Flows provides a broader perspective on these
data. The G-10 countries have fluctuated between small inflows to and outflows from the
United States in recent months, with the trend remaining a modest net outflow. Although
inflows attributed to OPEC countries have tapered off in recent months, the June 2006
survey data on foreign holdings of U.S. securities indicate that inflows from OPEC have
been stronger than recorded in these monthly data. Securities acquired by OPEC through
financial centers are assigned to those financial centers in the Treasury International
Capital data, but often can be reclassified with aid of the survey data. Inflows from
countries other than the G-10 and OPEC have been growing over the past few years, with
quite strong inflows in recent months.
Private foreign net purchases of U.S. securities (line 4 of the table and the top panels of
the chart on Private Securities Flows) in the first quarter of this year are near the pace
recorded in 2006. Demand for Treasuries (line 4a) and equities (line 4d) strengthened
from an already healthy level set in the fourth quarter, with purchases of Treasuries in
March exceeding all those registered in 2006. However, purchases of corporate bonds

IV-8

(line 4c) moderated a tad and private foreigners sold agencies (line 4b), on net. Most
transactions took place through the financial centers of the United Kingdom and the
Cayman Islands.
U.S. acquisitions of foreign securities (line 5 of the table and the bottom panels of the
chart on Private Securities Flows) remained strong in the first quarter of this year. Net
acquisitions of bonds (line 5a) jumped up in March, pulling the quarter up in line with the
pace recorded in 2006 and in line with new issuance by foreign firms. Purchases of
foreign stocks (line 5b), although slowing slightly from the strong pace set in the fourth
quarter, remained elevated.
Flows recorded by the banking sector (line 3) tend to be volatile. They recorded net
inflows for 2006 as a whole, and a modest outflow for the first quarter of this year.

IV-9
Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)
2005

2006

2006
Q3
81.1

Q4
70.3

Q1
117.7

2007
Feb
50.2

Mar
30.4

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

213.6

310.8

Q2
81.4

199.5
-21.3
7.5
213.4

308.4
-33.2
33.2
308.4

82.0
-16.8
16.5
82.3

80.1
-5.2
12.1
73.1

68.9
-4.3
-7.8
81.0

117.8
-4.8
9.9
112.6

50.3
-5.9
-0.9
57.1

30.5
0.2
3.6
26.6

2. Change in U.S. official reserve
assets (decrease, +)

14.1

2.4

-0.6

1.0

1.4

-0.1

571.9

408.3

72.2

148.6

94.3

n.a.

...

15.4

107.6

-3.6

55.0

6.2

-5.5

31.6

-27.6

616.7
178.1
72.3
274.3
92.0

695.2
34.6
97.2
414.6
148.7

169.3
16.0
27.6
105.7
20.0

153.3
-8.9
26.6
99.7
35.9

172.3
29.2
2.0
112.4
28.7

190.0
56.6
-15.7
99.0
50.1

36.2
11.7
-19.9
31.1
13.2

79.3
35.3
-3.9
34.4
13.5

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

-197.0
-53.1
-139.9
-4.0

-284.5
-147.8
-120.0
-16.8

-58.5
-35.3
-20.9
-2.4

-53.8
-44.4
-9.3
0.0

-114.9
-53.6
-50.9
-10.4

-84.9
-43.4
-39.8
-1.8

-21.5
-5.1
-16.4
0.0

-42.0
-32.8
-9.2
0.0

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

-9.1
109.8
19.4
16.7

-248.9
183.6
12.6
-57.1

-47.4
46.8
1.1
-35.6

-65.4
61.6
1.1
-3.3

-74.2
29.4
8.4
67.1

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

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

-791.5
-4.4
10.4

-856.7
-3.9
141.4

-217.7
-1.0
65.1

-229.4
-0.6
0.2

-195.8
-0.6
31.8

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

...
...
...

Private financial flows
Banks
3. Change in net foreign positions
of banking offices in the U.S. 1
Securities 2
4. Foreign net purchases (+) of U.S.
securities
a. Treasury securities
b. Agency bonds
c. Corporate and municipal bonds
d. Corporate stocks 3

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

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

IV-10
Foreign Official Financial Flows Through March 2007 (increase, +)
($ Billions, monthly, not seasonally adjusted)
Total

G-10 + ECB
60

-10

6-month moving average

2003

2004

2005

2006

-20

OPEC

2003

2004

2005

2006

-20

All other countries
60

-10

2006

2005

2004

2003

-10

-20

2003

2004

2005

2006

-20

IV-11
Private Securities Flows Through March 2007
($ Billions, monthly, not seasonally adjusted)

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

120

Treasury Securities

120

Agency Bonds

120

100

-20

Corporate and Municipal Bonds

100

2003 2004 2005 2006

100

-20

-40

120

2003 2004 2005 2006

Corporate Stocks

-40

120

100

-20
2003 2004 2005 2006

2003 2004 2005 2006

-20

-40

2003 2004 2005 2006

-40

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

Bonds

Stock Purchases & Swaps

-20

-40

-60

-80

2003 2004 2005 2006

-80

-100

2003 2004 2005 2006

-100

2003 2004 2005 2006

-100

IV-12

Foreign Financial Markets
The trade-weighted index of the exchange value of the dollar against the major foreign
currencies fell 2 percent over the intermeeting period, with the dollar depreciating against
all currencies in the index except against the yen. On a bilateral basis, the dollar
depreciated about 4 percent against the Canadian dollar and 2 percent against the euro
and sterling, but it appreciated 2 percent against the Japanese yen. Much of the yen’s
depreciation against the dollar occurred in early April, reportedly on the re-establishment
of yen-funded carry trades after the beginning of the new Japanese fiscal year. The
appreciation of the euro, the Canadian dollar, and sterling over the intermeeting period
was in part due to economic data releases in Europe and Canada that exceeded market
expectations. In particular, German employment growth in February, French GDP
growth for the fourth quarter of 2006, U.K. and Canadian consumer price inflation in
February and March, and Canadian employment growth in March were higher than had
been expected. Governor King was required to write an open letter to the Chancellor of
the Exchequer because 12-month inflation rose to 3.1 percent in March, more than one
percentage point higher than the Bank of England’s target. The letter had to explain what
the Bank of England would do to redress this situation.
Over the intermeeting period, headline equity indexes rose 3 to 7 percent on net in the
euro area, United Kingdom, Canada, and United States, but they were little changed in
Japan. Market participants attributed the increases in Europe and North America to better
than expected economic data and quarterly earnings reports. Japan’s lagging stock index
performance was linked to indications that inflation and activity are not expected to
accelerate.
There were no monetary policy changes in major foreign industrial countries over the
intermeeting period. Inflation compensation, as implied by the difference between
long-term nominal yields and yields on inflation-indexed notes, were little changed.
Option-implied volatilities on both the dollar-yen and dollar-euro exchange rates declined
over the intermeeting period. The euro-dollar implied volatility remains at very low
levels, and the dollar-yen implied volatility retraced previous upswings, possibly
signaling an end to the late-February/early-March “flight to quality” episode. Realized
volatility of stock market indexes and ten-year government bonds in Japan, Europe, and
the United States was little changed over the intermeeting period.

IV-13

Towards the end of the intermeeting period, the Turkish lira depreciated 7 percent over
two days and the Istanbul headline equity index declined 4 percent on growing tensions
over the Islamist AK Party’s presidential candidate, Abdullah Gul. On Saturday,
April 28, the Turkish military released a statement warning the AK Party government that
it would protect the secular state; the secular opposition requested an annulment of
Friday’s first-round parliamentary vote, and approximately 700,000 civilians
demonstrated against the ruling party on Sunday April 29. On May 1, Turkey’s
Constitutional Court issued a ruling in favor of the opposition by stating that a quorum
was not achieved in the first presidential vote on Friday. On May 2, the likelihood of an
escalation of the political crisis decreased further after Prime Minister Erdogan
announced his intention to call early parliamentary elections and to change the
constitution so the president is elected directly by popular vote. Since May 1 the lira has
appreciated about 1 percent, the Istanbul headline index has increased almost 2 percent,
and Turkey's EMBI+ spread narrowed 4 bps to 205 bps. Other emerging market
currencies, exchange indices and the EMBI+ spread were relatively stable over this
episode, showing no signs of spillovers so far.
The dollar depreciated about 2 percent against the Brazilian real, 1-1/3 percent against
the Mexican peso, about 1 percent against the Korean won and only 0.4 percent against
the renminbi over the intermeeting period. The overall EMBI+ spread declined 16 basis
points, on balance. The Mexican and Brazilian EMBI+ spreads narrowed 18 and 33 basis
points, respectively, while the Argentina EMBI+ spread rose 55 basis points on news that
April’s inflation data will not reflect the actual rise in consumer prices because of
government alterations to the index. Latin American and emerging Asia equity indexes
rose 6 to 10 percent, and the Shanghai Composite index soared 25 percent. The outsized
equity index gain in China coincided with the report of higher than expected GDP growth
data in 2007 Q1. The People’s Bank of China raised the deposits to required reserves
ratio twice by 50 basis points over the intermeeting period to 11 percent, and it raised the
benchmark one-year lending and deposit rates by 27 basis points.

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

IV-14

Exchange Value of the Dollar and Stock Market Indexes

Percent change since
March FOMC

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

1.3593
120.1
1.9907
1.1085

-2.2
1.9
-2.0
-4.3

Nominal dollar indexes*
Broad index
Major currencies index
OITP index

104.8
79.2
131.4

-1.4
-2.0
-0.8

427.0
1704.2
6447.5
1486.6

6.8
-0.2
3.0
5.4

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

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

Exchange Value of the Dollar
Weekly

January 5, 2004 = 100
Major Currencies Index
Euro
Yen

120

Daily

Mar. 21, 2007 = 100
104
FOMC
102

110
100
100
98

2004

2005

2006

Jan

Feb

Mar

Apr

Stock Market Indexes
Weekly

January 5, 2004 = 100

DJ Euro Stoxx
TOPIX
S&P 500

180

Daily

Mar. 21, 2007 = 100
110
FOMC

160
105

140
120

100

100
2004

2005

2006

Jan

Feb

Mar

Apr

IV-15

Industrial Countries: Nominal and Real Interest Rates

Percent

3-month LIBOR
Latest
Change since
March FOMC

10-year nominal
Latest
Change since
March FOMC

10-year indexed
Latest
Change since
March FOMC

Germany

4.02

0.13

4.19

0.26

2.06

0.21

Japan

0.67

-0.05

1.63

0.04

1.11

-0.01

United Kingdom

5.73

0.17

5.08

0.25

1.97

0.26

Canada

4.28

0.01

4.18

0.09

...

United States

5.36

0.01

4.64

0.08

2.23

0.04

Nominal 10-Year Government Bond Yields
3

Weekly
Germany
Japan (left axis)
United States

Percent

Daily

2004

2005

2006

FOMC

Jan

Feb

Mar

Apr

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

Percent

Daily

FOMC

2004

2005

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

2006

Jan

Feb

Mar

Apr

IV-16

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

Daily

Percent

FOMC

1-month
3-month

11
6

9
7
2004

2005

2006

Jan

Feb

Mar

Apr

*Derived from at-the-money options.

Yen-Dollar Options-Implied Volatility*
Weekly

Percent

1-month
3-month

Daily

FOMC

9
10
8
8

2004

2005

2006

7
Jan

Feb

Mar

Apr

*Derived from at-the-money options.

Realized Stock Market Volatility*
Weekly

Percent
DJ Euro Stoxx
TOPIX
S&P 500

Daily

FOMC

30
15
20
10
10

2004

2005

2006

Jan

Feb

Mar

Apr

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

Realized 10-Year Bond Volatility*
Weekly

Percent
Germany
Japan
U.S.

Daily

FOMC

5
10
4
5
3

2004

2005

2006

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

Jan

Feb

Mar

Apr

IV-17

Emerging Markets: Exchange Rates and Stock Market Indexes

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

10.9340
2.0295
2144.60
7.7039
7.8222
929.9
33.33
1.5259
32.75

Stock market index
Latest
Percent change since
March FOMC

-1.3
-2.1
0.0
-0.4
0.1
-0.8
0.7
0.2
2.7

28997
49108
43363
3841
20388
1553
7903
930
705

5.8
10.7
-10.4
25.6
4.5
7.7
1.9
9.4
5.4

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

Exchange Value of the Dollar
Weekly

Mexico
Brazil
Korea
China

January 5, 2004 = 100

120

Daily

Mar. 21, 2007 = 100
FOMC

104

102
100
100
80
98

2004

2005

2006

Jan

Feb

Mar

Apr

Stock Market Indexes
Weekly

January 5, 2004 = 100
Mexico
Brazil
Korea
Hong Kong

350

Daily

Mar. 21, 2007 = 100
FOMC

300

115

110

250
105
200
100
150
95

100

2004

2005

2006

Jan

Feb

Mar

Apr

IV-18
Emerging Markets: Short-Term Interest Rates and Dollar-Denominated Bond Spreads

Percent

Short-term
interest rates*
Change since
March FOMC

Latest
Mexico
Brazil
Argentina
China
Korea
Taiwan
Singapore
Hong Kong

7.30
12.20
9.06
...
5.00
1.93
3.50
4.19

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

0.22
-0.35
-0.31
...
0.35
0.07
0.00
0.05

0.84
1.51
2.73
0.54
...
...
...
...

-0.18
-0.33
0.55
-0.01
...
...
...
...

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

EMBI+ Spreads
Weekly

Percent

Daily

FOMC

Overall
Mexico
Brazil
6

2
4
1
2

2004

2005

2006

Jan

Feb

Mar

Apr

EMBI Global Spreads
Weekly

Percent
China
Malaysia
Indonesia*

Daily

FOMC

4
2
3

2
1
1

2004
*Begins May 2004.

2005

2006

Jan

Feb

Mar

Apr

IV-19

Developments in Advanced Foreign Economies
The advanced foreign economies appear to be growing at a steady rate. Canadian growth
seems to have rebounded from a disappointing fourth quarter. Renewed household
demand in Japan points toward further strong growth in the first quarter, while
investment demand seems to be underpinning growth in the United Kingdom. Although
euro-area exports have slowed from the rapid pace set in the fourth quarter and the hike
in the German value added tax appears to have had a noticeable impact on purchases of
consumer durables at the start of the year, overall economic conditions remain quite
good.
The inflation picture has been much more mixed by comparison. Inflation in the euro
area has remained steady at just below 2 percent since the end of last year, but inflation in
the United Kingdom rose more than 1 percentage point above the Bank of England’s
target for the first time since that Bank was granted independence while in Canada
twelve-month inflation jumped 90 basis points to over 2 percent. In stark contrast,
consumer prices fell back into deflation in Japan, and there are indications that a return to
positive rates of inflation may be several months off. Central bank officials held their
policy rates constant in the intervening period, although markets expect each of the four
major foreign central banks to raise rates later this year.
Japanese consumer prices returned to deflation in February after ten months of positive
twelve-month inflation rates. As of March, the headline CPI had declined 0.1 percent
from a year ago and the core (which excludes fresh food only) CPI declined 0.3 percent.
Rising food and energy prices caused the Tokyo headline CPI to increase over the month
of April, but consumer prices excluding fresh food and energy were unchanged,
indicating that a return to positive nationwide inflation may not occur for several months.
There appears to be little inflationary impulse from wages despite a strong labor market;
nominal wages fell 1.8 percent in February compared with a year earlier. In more
positive news, it was reported that average land prices rose last year for the first time
since 1990. Residential land prices rose 0.1 percent and commercial land prices rose
2.3 percent.
Measures of activity in the first-quarter are encouraging. Real expenditures by
households and retail sales both rose over the first quarter, indicating that some of the
strength in household demand witnessed in the fourth quarter has carried over into the

IV-20

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

Quarterly
5
4
3
2
1
0
1997

1998

1999

2000

2001

2002

2003

2004

2005

-1

2006

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

CPI Inflation
12-month percent change
Monthly

Japan
Euro Area
Canada
United Kingdom

1997

1998

1999

2000

2001

2002

2003

2004

2005

-2

2006

Official or Targeted Interest Rates
Percent

8
7

Japan
Euro Area
Canada
United Kingdom

6
5
4
3
2
1
0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-1

IV-21

Japan
Economic Activity

Real Trade
2000 = 100

2000 = 100

115

160

110
105

Tertiary services

130

100

Real imports

100
Real exports

Industrial production

1998

2000

2002

2004

2006

1998

Labor Market

2000

2002

2004

2006

Consumer Price Inflation

Ratio

Percent

Percent, 12-month basis

1.6
1.4

Unemployment rate
(right scale)

CPI
5

1.2
Core*

1.0

0
4

Job openings
to applications
(left scale)

0.8

-1

0.6
0.4

1998

2000

2002

2004

2006

1998

2000

2002

2004

*Excludes fresh food.

Economic Indicators

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

2006
Q3
Q4

Indicator

Housing starts

2007
Q1

2006
Dec.

Jan.

2007
Feb.

Mar.

-2.5

Machinery orders

3.4

-4.6

-2.2

-3.6

-4.3

8.8

-11.0

2.0

n.a.

-0.7

3.9

-5.2

n.a.

Household expenditures

-2.0

1.6

1.0

-0.6

1.4

0.2

-0.8

New car registrations

-3.8

-1.7

-1.1

-3.1

1.2

1.5

-3.9

6.0

8.0

...

3.5

2.6

1.9

2.5

2.1

1.7

2.0

Business sentiment
3

Wholesale prices

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

2006

-2

IV-22

current year. Household wealth rose a further 2.5 percent in the fourth quarter of last
year, and both high levels of wealth and the strong labor market seem to be driving the
resurgence in private consumption. The external sector also appears poised to contribute
further to growth; the trade surplus rose to $23.7 billion in the first quarter, its highest
level in two years, spurred by the weak value of the yen and rising exports to Europe.
In contrast, core machinery orders fell in February, and shipments of investment goods
and public works orders fell in both January and February, pointing to a potential cooling
of investment and government spending after surprisingly strong growth in the fourth
quarter. The Tankan diffusion index of business confidence remained steady in March,
suggesting that the cooling of investment may only be temporary. Although the diffusion
index for large manufacturers declined for the first time in a year, those firms
nevertheless reported plans to boost spending on plant and equipment in fiscal 2007 by
2.9 percent, topping the amount reported a year ago for fiscal 2006, and they also
indicated plans to further increase employment.
Incoming data suggest that external demand in the euro area has slowed after the
surprising strength shown in the fourth quarter, when net exports accounted for most of
GDP growth. Merchandise exports rose 1.3 percent on average over January and
February from the fourth-quarter level, substantially less than the 4 percent quarterly
growth rate registered in the three months to December. Furthermore, merchandise
imports accelerated in the first two months of the year. In contrast, domestic economic
conditions have improved in the intermeeting period. According to the European
Commission, industrial confidence rose to record levels, and consumer confidence,
buoyed by improving labor market prospects, rose to its highest level since mid-2001.
The survey evidence has been confirmed by incoming production data for the first
quarter. Euro-area industrial production averaged over January and February was
0.7 percent higher than the fourth-quarter level.
Germany’s IFO bounced back in March and April, suggesting that economic activity is
recovering quickly after a start-of-the-year moderation due to January’s increase in the
value-added tax. The effect of the VAT hike was mostly limited to the timing of German
purchases of consumer durables, automobiles in particular: car registrations soared
14 percent in the fourth quarter and then plunged 22 percent in the first three months of
2007. For the euro area as a whole, retail sales rebounded in February after dropping in
January and stand just slightly below the fourth-quarter level.

IV-23

Euro Area
Nominal Exports and Imports

Economic Sentiment
2000 = 100

Percent balance

160

10
5

140

0
Industrial confidence

120

Exports

-5
-10

100
Imports

-15
80
Consumer confidence
1998

2000

2002

2004

2006

1998

Unemployment Rate

2000

2002

2004

2006

-20
-25

Consumer Price Inflation
Percent

Percent, 12-month basis

2
CPI

1
Core*

1998

2000

2002

2004

2006

1998

2000

2002

2004

*Excludes energy and unprocessed food.

Economic Indicators

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

2006
Q3
Q4

Indicator
1

Retail sales volume

New car registrations
Employment
3

Producer prices
M3

2006
Dec.

Jan.

2007
Feb.

Mar.

0.9

0.6

n.a.

1.2

-0.5

0.5

n.a.

0.6

0.4

n.a.

0.5

-0.8

0.3

n.a.

-1.8

3.6

-2.2

1.1

-4.8

-0.7

4.5

0.3

Industrial production

2007
Q1

0.3

n.a.

...

5.4

4.1

n.a.

4.1

3.1

3.0

n.a.

8.4

9.8

10.9

9.8

9.9

10.0

10.9

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

2006

IV-24

The twelve-month rates of headline and core (excluding energy and unprocessed food)
consumer price inflation have converged in recent months. The twelve-month rate of
headline consumer price inflation edged down to 1.8 percent in April from 1.9 percent in
March. While no details are available, the April slowdown is likely to be entirely
attributable to base year effects. Although the euro-area unemployment rate declined to
7.2 percent in March, down more than a percentage point since the beginning of 2006,
there is thus far little evidence that the improved labor market is causing significant wage
pressure. Unit labor costs for the euro area fell over the second half of 2006, and ongoing
negotiations in Germany suggest that wage growth will pick up only slightly from the
modest pace registered over the past few years.
Headline inflation in the United Kingdom rose to 3.1 percent in March, its highest
reading since inflation targeting was instituted in 1997. As mandated when inflation is
more than a percentage point away from the official target of 2 percent, the Governor of
the Bank of England wrote an open letter to the Chancellor of the Exchequer on April 16.
In his letter, he indicated that around half of the pick up in inflation over the past year can
be accounted for by unexpected sharp increases in domestic energy prices and a rise in
food prices related to weather conditions. Although the Bank’s central projection has
inflation falling a little below target by the end of 2007, the Governor noted that capacity
pressures had increased, and that monthly inflation has recently been volatile.
The preliminary estimate of GDP growth in the first quarter was 2.6 percent, quite close
to the pace in the fourth quarter. GDP components for the first quarter are not yet
available, but whereas consumption showed signs of having softened, investment
activities most likely continued at a brisk pace. Retail sales grew 0.4 percent in the first
quarter, well below their average of 1.3 percent over the previous three quarters.
However, the Bank of England’s survey of U.K. private businesses suggests that
investment intentions in the service sector are at their highest since the survey began in
1997. Moreover, investment intentions in the manufacturing sector were at their highest
since January 1998 despite the recent appreciation of sterling.
The labor market showed signs of softening as both employment and the participation
rate fell slightly over the three months to February compared to a quarter earlier. The
claimant count and Labor Force Survey measures of the unemployment rate were both
unchanged. Average earnings rose 5.1 percent in the twelve months to February, their
largest increase in two years. However, growth in average earnings excluding bonuses

IV-25

United Kingdom
Retail Sales and Industrial Production
106

Jan. 2003=100

Consumer Price Inflation

12-month percent change

Percent, 12-month basis

Industrial production
(left scale)
104

102
6

100

CPI
4

98
96
94

1998

2000

Core*

Retail sales
(right scale)
2002

2004

2006

1998

2000

2002

2004

2006

-1

*Excludes energy and unprocessed food.

Unemployment Rates

Investment Intentions
Percent

Producer Price Index
Score*

8
Services

Percent, 12-month basis

4
3

20
15

Input
2

5
Output

Labor force
survey

Claimant
count
2

1998 2000 2002 2004 2006

-5

-2

Manufacturing

-1

-10

-3

1998 2000 2002 2004 2006

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

Economic Indicators

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

2006
Q3
Q4

Indicator

Real GDP

2007
Q1

Jan.

2007
Feb. Mar.

Apr.

2.7

PMI Services

2.7

2.6

...

57.2

59.9

58.1

59.2

57.4

57.6

n.a.

4.0

n.a.

4.7

5.1

n.a.

Business confidence

13.0

8.3

20.3

12.0

28.0

21.0

18.0

Consumer confidence

-6.0

-4.9

-6.2

-7.4

-6.2

-5.1

-6.6

-23.8

-23.4

n.a.

-7.8

-8.4

n.a.

Average earnings

Trade balance

1. 50+ indicates expansion. 2. Percent change from year earlier.
3. Level in billions of US Dollars.
n.a. Not available. ... Not applicable.

-15

IV-26

was more modest, at 3.6 percent, and unit labor costs in the manufacturing sector fell
over the same period, indicating that wage inflation has so far remained contained.
In Canada, the level of real GDP by industry averaged over January and February was
2.9 percent (a.r.) higher than in the fourth quarter. Goods-producing industries outpaced
services, with the utilities and oil and gas extraction sectors leading the way. The
average level of construction activity was also up compared to the fourth quarter.
Services were held down by poor retail trade figures, consistent with a dip in real retail
sales in both January and February. Overall business conditions remain strong. The
Purchasing Managers Index and the composite index of leading indicators both rose
sharply in the first quarter. The nominal merchandise trade balance averaged over
January and February was up compared to the fourth quarter; in volume terms, average
exports posted a healthy advance, while average imports declined about 1 percent.
The twelve-month rate of consumer price inflation rose sharply, hitting 2.2 percent in
March. A surge in gasoline prices put upward pressure on consumer prices, as prices at
the pump jumped nearly 13 percent between February and March and were up nearly
10 percent from a year earlier. The twelve-month rate of core inflation, which excludes
the eight most volatile components and the effects of indirect taxes, ticked down to
2.3 percent in March despite continued upward pressure from housing costs. The
twelve-month rate of new home price inflation remained elevated at 10 percent in
February, down just slightly from previous months. House prices increases over the past
year have been driven largely by the western provinces, especially the oil-producing
province of Alberta, where twelve-month house price inflation is still 40 percent even
after decelerating since the fall.
Employment continued to expand rapidly, growing 1 percent in the first quarter, the
largest quarterly gain in nearly five years. Full-time employment growth has been
especially strong, indicating that firms are confident that business conditions will remain
buoyant for some time. The strong market has attracted more job seekers (the labor force
rose 0.9 percent in the first quarter) and reduced the unemployment rate to a generational
low. This may result in greater pressure on wages. Twelve-month wage growth of
hourly manufacturing employees rose to 3 percent in January, although the wage growth
for salaried employees remained steady at 2.4 percent.

IV-27

Canada
Real GDP by Industry

Real Trade
Percent change from year earlier

1997 = 100

175

6
150

5
Real exports
4

125
3
Real imports
2

100

1
1998

2000

2002

2004

2006

1998

Unemployment Rate

2000

2002

2004

2006

Consumer Price Inflation
Percent

Percent, 12-month basis

6
5

4
8

CPI
3

7
2
6

Core*
1998

2000

2002

2004

2006

1998

2000

2002

2004

*Excludes 8 most volatile components

Economic Indicators

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

2006
Q3
Q4

Indicator

Industrial production

2007
Q1

2006
Dec.

Jan.

2007
Feb.

Mar.

-0.1

-1.1

n.a.

-0.1

0.0

1.3

n.a.

New manufacturing orders

0.8

1.0

n.a.

2.7

-2.1

1.9

n.a.

Retail sales

0.9

0.3

n.a.

2.0

-0.3

-0.7

n.a.

0.1

0.6

1.0

0.3

0.5

0.1

0.3

98.8

99.7

98.3

...

135.6 148.1 139.9

...

Employment
1

Consumer attitudes

Business confidence

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

2006

IV-28

Economic Situation in Other Countries
Economic activity in the emerging markets appears to have remained robust in the first
quarter. In Asia, performance was supported by surging growth in China and continued
strength, for the most part, elsewhere in the region. In Latin America, indicators point to
further lackluster growth in Mexico and some weakening in Argentina, but in other
countries, especially Brazil, conditions appear positive. Inflation has picked up in some
countries, notably China and India, but appears generally well contained for the emerging
market economies as a whole.
In China, activity accelerated significantly in the first quarter. Real GDP increased at a
blistering pace of more than 13½ percent (a.r.) according to staff estimates, primarily
supported by soaring investment and exports. Nominal growth of fixed asset investment
picked up to 26 percent in the first quarter (four-quarter change) from just over
20 percent in the previous two quarters. The pace of investment is now back to the very
high rate seen in the first half of 2006. A surge in exports in the first two months of the
year led to a $50 billion increase (a.r.) in the trade surplus in the first quarter, to
$264 billion (a.r.). The increase in exports was fairly broad-based and reflected the
continued strength of global demand for Chinese goods, with some tentative indications
that Europe and Latin America are accounting for a rising share of this demand. The
surge in exports in January and February was in part due to an acceleration of shipments
in anticipation of a curtailment of export rebates on the VAT for many goods. Indeed,
export growth slumped in March when some of the export rebates were removed,
narrowing the trade balance month-on-month.
Twelve-month consumer price inflation picked up a bit more in March, to about
3¼ percent. Much of the inflation stems from increases in food prices, which were up
more than 7½ percent (twelve-month change) in March. Non-food price inflation
remained in the neighborhood of 1 percent. Foreign exchange reserves surged
$140 billion in the first quarter to a level of more than $1.2 trillion. At most, half of the
surge can be accounted for by the change in the current account surplus and FDI inflows,
suggesting that “hot money” inflows have picked up again. The increase in foreign
currency reserves was mostly sterilized, and authorities raised benchmark interest rates in
March by 27 basis points and continued to boost the required reserve ratio (by a total of
100 basis points in April). However, money growth remained above 17 percent
year-over-year, still higher than desired by Chinese authorities.

IV-29

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

2005

2007

2006
Q4

Real GDP1
Industrial production
Consumer prices2
Merch. trade balance3

10.0
17.2
1.6
102.0

10.4
14.3
2.8
177.4

Jan.

Feb.

Mar.

10.5
2.2
2.1
214.8

13.7
4.1
2.8
264.0

...
1.4
2.1
217.3

...
-3.6
3.0
470.3

...
11.2
3.2
104.4

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.

In Hong Kong, recent indicators for the first quarter suggest continued strength. The
nominal merchandise trade deficit narrowed sharply. The expiration of export rebates in
China may have contributed to the increase in Hong Kong’s re-exports of Chinese goods
this quarter. Separate data on the quantity of exports for January and February suggest
that net exports may make a positive contribution to growth in the first quarter.
Twelve-month inflation fell in February, reflecting a one-month holiday on public
housing rent, but picked up again in March.
Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

Real GDP1
Unemployment rate2
Consumer prices3
Merch. trade balance4

7.8
5.7
1.4
-10.5

6.9
4.8
2.3
-17.9

Jan.

Feb.

Mar.

5.3
4.4
2.1
-22.8

n.a.
4.3
1.7
-13.0

...
4.4
2.5
-25.4

...
4.3
.3
-2.9

...
4.3
2.4
-10.6

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

IV-30

In Taiwan, indicators point to some moderation. Industrial production fell again in the
first quarter, with reductions in key sectors such as electronics and precision equipment.
The merchandise trade surplus narrowed, and export orders for electronic products
declined in the first quarter. After turning negative at the end of last year, four-quarter
consumer price inflation picked up to 1 percent in the first quarter. In late March, the
Taiwanese central bank raised its discount rate 12.5 basis points.

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

2005

2007

2006
Q4

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

6.4
4.1
4.6
2.2
7.8
16.0

4.0
3.9
5.0
.7
11.6
25.2

Jan.

Feb.

Mar.

4.6
3.9
-1.3
-.1
16.8
34.0

n.a.
3.9
-1.1
1.0
9.4
n.a.

...
3.9
.9
.3
-2.7
...

...
3.9
-3.6
1.7
14.1
...

...
3.9
4.6
.8
16.9
...

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

IV-31

IV-32

In Korea, first-quarter GDP growth was 3.6 percent, just a touch below that in the fourth
quarter. Domestic demand showed considerable strength, with both private consumption
and business investment rising sharply. Export growth was also robust but was
outweighed by outsized gains in non-oil imports, especially capital goods. Strong
imports of services helped generate a current account deficit in the first quarter. The
most recent production and spending indicators suggest continued moderate gains in
output. The unemployment rate edged down to 3.2 percent in the first quarter; and
twelve-month consumer price inflation ticked up to 2.5 percent in April, but remains low
relative to the Bank of Korea’s 2.5 percent to 3.5 percent target range. In early April,
Korean and U.S. negotiators concluded a bilateral free trade agreement. If ratified by the
legislatures of both countries, market participants expect the agreement to help support
Korean growth over the longer term.

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

2005

2007

2006
Q4

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

5.7
5.8
3.7
2.6
32.7
15.0

4.0
10.8
3.4
2.1
29.2
6.1

Feb.

Mar.

Apr.

3.8
2.7
3.4
2.1
37.9
24.6

3.6
-.6
3.2
2.0
30.1
-6.1

...

...
-.4
3.2
2.2
33.6
-17.9

...
n.a.
n.a.
2.5
n.a.
n.a.

.3
3.2
2.2
38.5
4.8

Indian economic indicators have remained robust. On average, industrial production
was up nearly 2 percent in January and February from the previous quarter. The trade
deficit narrowed in the first quarter as exports increased slightly and imports fell.
Inflation remains a concern, with the most recent twelve-month changes of the closely
watched wholesale price index and the CPI near or above 6 percent. At its April meeting,
the Reserve Bank of India left interest rates unchanged, after tightening in earlier months,
but announced its resolve to “condition policy and perceptions for inflation in the range
of 4 to 4½ percent over the medium term” compared to its previous “comfort range” for
wholesale price inflation of 5 to 5½ percent. The RBI also announced a series of
measures to encourage capital outflows (e.g. raising the cap on overseas investment by

IV-33

Indian companies) and discourage capital inflows (e.g. reducing interest rates on nonresident Indian deposits at Indian banks.)
Indian Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

2007

2006
Q4

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

9.3
7.9
5.6
4.4
-40.1
-7.8

8.6
10.5
6.5
5.7
-52.5
-9.1

Jan.

Feb.

Mar.

8.6
1.8
6.5
5.6
-70.5
-12.2

n.a.
n.a.
6.1
6.4
-64.3
n.a.

...
1.4
5.8
6.4
-66.9
...

...
-.5
6.6
6.3
-69.3
...

...
n.a.
5.8
6.5
-56.6
...

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

IV-34

IV-35

Economic indicators in the ASEAN region, on balance, suggest continued expansion in
the first quarter. In Singapore, the advance unofficial estimate (not shown) indicates that
first-quarter real GDP rose 7 percent, despite weaker industrial production, as domestic
demand, notably construction and services, supported activity. Industrial production
recovered in Thailand, but was generally down elsewhere in the region so far in the first
quarter. On the other hand, regional trade balances have remained strong in recent
months.
Outside of Indonesia and Singapore, twelve-month consumer price inflation across the
region continued to decline, owing to more subdued energy price inflation, and in some
countries, the unwinding of previous food prices increases and appreciation of the
exchange rate. In the Philippines and Malaysia, in particular, inflation dipped as the
effects of last year’s VAT increase in the Philippines and the reduction in domestic fuel
subsidies in Malaysia fell out of the calculations. Citing the moderation in inflation and
the need to stimulate domestic demand, Bank of Thailand cut interest rates ½ percentage
point in early April following two previous ¼ percentage point cuts in January and
February.

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

2005

2007

2006
Q4

Real GDP1
Indonesia
Malaysia
Philippines
Singapore
Thailand

4.9
5.2
5.5
8.2
4.4

6.0
5.7
4.8
6.5
4.2

7.1
4.8
3.4
7.9
2.7

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

Industrial
production2
Indonesia3
Malaysia
Philippines
Singapore
Thailand

1.3
4.0
2.2
9.5
9.1

-2.3
5.2
-9.9
11.9
7.4

1.8
.0
.0
2.3
.2

n.a.
n.a.
n.a.
-2.2
2.1

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

Jan.

Feb.

Mar.

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

-3.9
-2.3
-3.2
-5.3
2.0

-8.3
-3.0
-8.9
10.8
.2

n.a.
n.a.
n.a.
-9.3
.0

IV-36

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

2005

2007

2006
Q4

Indonesia
Malaysia
Philippines
Singapore
Thailand

28.0
26.4
-6.2
29.6
-8.5

39.7
29.5
-4.5
33.1
2.2

Jan.

Feb.

44.4
31.5
-8.2
32.7
5.4

45.2
n.a.
n.a.
42.3
18.3

35.4
26.9
5.6
58.8
19.0

48.9
29.6
-1.8
23.4
8.1

Mar.
51.2
n.a.
n.a.
44.5
27.9

n.a. Not available.

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

20051

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

17.0
3.3
6.7
1.3
5.8

2007

20061
6.7
3.1
4.3
.8
3.5

6.1
3.0
4.8
.6
3.3

Q1
6.3
2.6
2.9
.5
2.5

Feb.
6.3
3.1
2.6
.6
2.3

Mar.
6.4
1.5
2.2
.7
2.0

Apr.
6.3
n.a.
n.a.
n.a.
1.8

IV-37

IV-38

Recent indicators for Mexico point to further weakness in economic activity. Both
industrial production and the overall index of economic activity fell in January, as soft
performances in manufacturing, mining, and agriculture overwhelmed strength in the
construction industry and the utilities sectors. In February, industrial production declined
further as weakness continued in manufacturing, particularly automobiles, but also spread
to construction, a previous source of strength.
Twelve-month headline inflation was 4.2 percent in March, the seventh consecutive
month of inflation at or slightly above the upper limit of the central bank’s 2 to 4 percent
inflation target range. The Bank of Mexico (BOM) tightened policy in its late-April
meeting, with the overnight lending rate rising ¼ percentage point to 7.25 percent. The
Bank cited the need to prevent previous food price increases from spreading to other
sectors. Analysts had expected that the BOM would leave monetary policy unchanged,
as incoming data from the first half of April suggested inflation was beginning to recede.
This was the first time the BOM had tightened policy since March 2005.
Mexican Economic Indicators
(Percent change from previous period, s.a., except as noted)
2006
Indicator

2005

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

2007

2006

2.5

4.3

1.9

3.1
2.0
3.6
3.3
-7.6
221.8
214.2
-4.8

4.9
5.1
3.6
4.1
-6.1
256.1
250.0
-1.7

.7
.1
3.9
4.1
-8.5
260.2
251.7
-8.6

Q1
n.a.

Jan.

Feb.

Mar.

...

.2
-.5
3.9
4.1
-11.3
264.6
253.3
...

n.a.
n.a.
4.0
4.2
-10.9
263.1
252.2
...

n.a.
-.1
n.a.
-.7
3.9
3.8
4.1
4.0
-13.0 -16.7
263.9 263.8
250.9 247.1
n.a. . . .

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

In Brazil, data released since the last Greenbook provided some signs that economic
expansion in the first quarter continued. Industrial production in February did not
recover fully from its January decline, but capital goods imports in March rose further.
Retail sales in February were solid. Twelve-month inflation has been about 3 percent,

IV-39

well below the 4½ percent mid-point of the target range for this year and next. On
April 18, the central bank reduced its policy rate, the Selic Rate, ¼ percentage point to
12.5 percent, with three of the seven members having voted for a ½ percentage point
decline.
In late March, the government released a benchmark revision of national income and
product accounts. Real GDP growth from 2000 to 2005 was revised up ¾ percentage
point per year. For 2006, the revision was 1 percentage point, bringing real GDP growth
last year to 4.7 percent (Q4/Q4). On the production side, the major revision was an
increase to services output. In terms of demand components, private consumption was
revised up, but fixed investment was lowered a result of less investment in structures.
The upward revision to GDP also lowered the net debt-GDP ratio to 45 percent from
50 percent previously.

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

2005

2007

2006
Q4

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

3.1
3.1
9.8
5.7
44.8
14.0

4.7
2.8
10.0
3.1
46.1
13.3

Feb.

Mar.

Apr.

3.7
.9
9.6
3.1
50.8
13.0

n.a.
n.a.
9.7
3.0
40.4
6.8

...
.3
9.7
3.0
43.7
6.9

...
n.a.
9.5
3.0
33.1
9.8

...
n.a.
n.a.
n.a.
56.9
n.a.

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

Recent indicators for Argentina suggest economic growth moderated in the first quarter.
Industrial production grew just 0.3 percent in Q1, a sharp deceleration from the previous
quarter's performance. The index of economic activity, a monthly proxy of GDP, also
indicates that output growth weakened through February. In addition, the merchandise
trade surplus narrowed a bit in the first quarter. Labor market conditions, at least for the
fourth quarter, appear favorable, with the unemployment rate (n.s.a.) dipping into the
single digits for the first time since well before the crisis. Twelve-month inflation edged

IV-40

down in March, reflecting more subdued increases in the prices for food, clothing, and
education.

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

2005

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

8.9
8.0
11.6
12.2
11.7
5.6

2007

2006
8.6
8.3
10.2
9.8
12.3
8.1

7.5
2.7
8.7
10.1
13.1
10.2

Q1
n.a.
.3
n.a.
9.4
7.3
n.a.

Jan.

Feb.

Mar.

...
-2.5
...
9.6
5.7
...

...
2.9
...
9.6
9.2
...

...
.2
...
9.1
8.8
...

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, the few available indicators for the first quarter suggest continued growth
and high inflation. March auto sales were very strong and twelve-month CPI inflation
was close to 20 percent in April. The Chavez government further increased its control
over the oil sector in early May, when foreign oil companies ceded operational control of
heavy-oil projects, as previously agreed. Companies must come to agreement with the
government on the terms of the takeover by late June. The government has stated that
some companies might not be compensated and any compensation will be at most the
book value of the projects and not in cash. President Chavez also announced this week
that Venezuela will withdraw its membership in the IMF and World Bank.
In April, the government petroleum company (PDVSA) issued $7.5 billion of dollardenominated bonds to local investors in exchange for bolivares. The sale was widely
interpreted as an attempt to relieve some of the strong downward pressure on the bolivar.
The bolivar has been pegged at about 2,150 per dollar since 2005 but, before the issue
was announced, was trading in the parallel market at about 4,000 per dollar. The demand
for bonds far exceeded the supply at the government’s price, leading some investors to
resell their bonds on the parallel market for dollars at a profit. (The parallel market
exchange rate on May 1 stood at over 3,700 bolivares/dollar.)

IV-41

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

2005

2007

2006
Q4

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

10.9
12.2
14.4
-16.3
31.8
25.5

11.8
10.0
17.0
-25.5
33.0
27.2

Feb.

Mar.

Apr.

16.0
9.7
16.1
n.a.
n.a.
17.0

n.a.
9.8
19.1
n.a.
n.a.
n.a.

...
10.3
20.4
n.a.
n.a.
...

...
9.5
18.5
n.a.
n.a.
...

...
n.a.
19.4
n.a.
n.a.
...

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

IV-42

IV-43

In Turkey, economic activity continued to moderate, with GDP rising 5.2 percent over
the four quarters of last year, sustained by strong domestic demand. More recently,
average industrial production in January and February rose 0.6 percent from the previous
quarter. Large trade and current account deficits persisted in the first quarter. Despite
real interest rates of over 10 percent, consumer price inflation has risen recently, driven
by double-digit increases in food and energy prices.
Political tensions mounted between the Islamist and the secular parties at the start of the
presidential election cycle. In late April, Prime Minister Erdogan, of the Islamist AK
party, unexpectedly declined the Presidential nomination and named Foreign Minister
Abdullah Gul, subject to parliamentary approval. Gul failed to garner the necessary twothirds support, due to boycotts by the secular opposition. As a result, the Prime Minister
has called for full parliamentary elections in late June. Separately, the Turkish military
issued a statement warning the government to continue the secular tradition in
governance. The EU responded negatively to military involvement in Turkey’s domestic
politics, but was supportive of early elections.
Turkey Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2005

2006

2006
Q4

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

7.4
5.4
7.7
-43.3
-22.6
10.2

6.1
5.9
9.7
-52.7
-31.6
9.8

5.2
3.0
9.8
-48.5
-28.2
9.5

2007
Q1

Jan.

Feb.

Mar.

n.a. …
n.a.
-.7
10.3
9.9
-53.7 -60.4
n.a. -41.0
n.a. …

…
6.3
10.2
-54.6
-30.7
…

…
n.a.
10.9
-46.1
n.a.
…

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

In South Africa, recent indicators point to continued growth. Average manufacturing
production in January and February was up 1.3 percent from the fourth quarter. The
current account deficit rose to 6.4 percent of GDP in 2006. In the first quarter, however,
the merchandise trade deficit contracted, as purchases of foreign capital goods cooled and
exports increased across all categories. Twelve-month consumer prices rose to
5.5 percent in March, nearing the ceiling of the South African Reserve Banks’

IV-44

3 to 6 percent target range. A fuel price hike in March offset the effects of downward
trending food prices.
South African Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2005

2006

2006
Q4

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

4.9
3.6
1.3
3.9
-2.9
-9.1

5.2
4.8
-1.3
4.6
-9.4
-16.3

5.6
1.9
5.1
5.0
-13.2
-19.3

2007
Q1

Jan.

Feb.

Mar.

n.a.
n.a.
n.a.
5.2
-9.9
n.a.

…
-.4
-5.1
5.3
-15.8
…

…

…
n.a.
n.a.
5.5
-6.8
…

.3
3.0
4.9
-7.2
…

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

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Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 9, 2007 : Greenbook Part 2

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