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Confidential (FR) Class III FOMC

Part 2

November 3, 2004

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Confidential (FR) Class III FOMC

November 3, 2004

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
Overview
Overall economic activity continues to increase at a moderate pace despite headwinds
caused in large part by the sharp rise in oil prices. Consumer and business fixed
investment spending posted solid gains in the third quarter. Furthermore, activity in the
housing sector remains strong. Aside from the hurricane-related disruptions,
manufacturing production continues to expand but at a pace well below that registered in
the first half of the year. Likewise, the labor market has seen four months of subpar
hiring, after the surge in employment gains this spring. Consumer price inflation
continues to be moderate despite surging oil prices.
Labor Market Developments
Private nonfarm payroll employment rose 59,000 in September, the fourth consecutive
month of sluggish job gains. Over this period, private payrolls increased only 77,000 per
month on average, well below the 293,000 average increase posted from March through
May.1 The workweek stood at 33.8 hours throughout the third quarter; this slight increase
relative to the second-quarter level contributed to a gain of 3.2 percent at an annual rate
in aggregate hours of private production and nonsupervisory workers. The four
hurricanes that hit the southeastern states had little net effect on the aggregate labormarket data for August and September, according to the Bureau of Labor Statistics.
In the household survey, the unemployment rate held at 5.4 percent in September, and the
labor force participation rate edged down to 65.9 percent, about the same level as at the
beginning of this year. The employment-population ratio, which combines the
unemployment rate and the participation rate, fell for a second month in September and,
at 62.3 percent, stands well below its year 2000 peak and a little below its level in the
mid-1990s. In addition, the number of persons working part-time for economic reasons
as a share of total employment, although down from its recent peak, remained high in
September. On balance, we interpret these recent indicators from the household survey
as suggesting that some measurable slack remains in the labor market.
Other labor market indicators have shown mixed signals over the last few months. The
four-week moving average of initial claims for unemployment insurance was 343,000 in
the week ending October 23. The level of initial claims was elevated in October by the
aftereffects of the hurricanes; abstracting from this distortion, initial claims have
remained in a narrow range around 340,000 since the start of the year. Households’
perceptions of the job market, as measured in the Conference Board Survey, dimmed in
October. Moreover, households’ expectations of labor market conditions deteriorated a
bit in October, according to the Conference Board Survey, and have been flat since
August, according to the Michigan Survey.

The Bureau of Labor Statistics’ preliminary estimate of the benchmark revision to the level of payroll
employment in March 2004 is an upward revision of 236,000, or 0.2 percent, a bit smaller than the average
absolute revision seen over the past decade.

II-2

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

2003

July

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

Aug.

Sept.

Monthly change

-5
-1
-1
-48
7
-3
-5
-5
-10
6
23
15
34
-4
168

198
195
195
7
26
8
46
14
-2
7
26
8
59
3
-60

209
218
218
16
19
5
14
8
4
15
73
23
60
-8
244

103
65
...
-3
7
9
-11
5
-11
13
27
19
27
38
150

85
41
60
5
5
10
-17
8
-9
-5
33
11
5
44
629

128
96
120
4
11
6
-2
0
-11
19
15
13
54
32
21

96
59
...
-18
4
10
-15
7
-12
26
34
33
22
37
-201

-.8
33.7
40.4

2.3
33.8
41.0

2.2
33.7
40.9

3.2
33.8
40.8

.8
33.8
40.8

.1
33.8
40.9

.1
33.8
40.8

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

Changes in Private
Payroll Employment

Thousands
500

500

Aggregate Hours of Production or
Nonsupervisory Workers
106

2002 = 100
106

104

3-month moving average
400

400

300

200

102

102
Sept.

100

100
Sept.

0
-100

-100

-200

-300

-400

1997

1998

1999

2000

2001

2002

2003

2004

100

-400

1997

1998

1999

2000

2001

2002

2003

2004

II-3

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

2003

July

Aug.

Sept.

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

6.0
17.4
10.0
5.1
4.6

5.6
16.8
9.6
4.5
4.5

5.5
17.1
9.3
4.4
4.3

5.5
17.6
9.3
4.4
4.5

5.4
17.0
9.0
4.4
4.3

5.4
16.6
9.5
4.3
4.3

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

66.2
44.5
75.4
75.5
59.6

65.9
43.6
74.9
75.3
59.2

66.0
43.9
74.9
75.4
59.3

66.2
44.1
75.2
75.4
59.5

66.0
44.1
74.9
75.4
59.2

65.9
43.4
74.5
75.2
59.3

Labor Force Participation Rate
and Unemployment Rate

Percent
67.4

Percent
7.0

67.2

6.5

67.0

6.0
Participation rate (left scale)

66.8

5.5
66.6

Sept.

5.0

66.4
4.5

66.2
66.0
65.8

4.0

Unemployment rate (right scale)
1994

1995

1996

1997

1998

1999

2000

Percent
65.0

64.5

64.0

63.5

63.0

Sept.

63.0

62.5

62.0

61.5

61.0

1994

1996

1998

2000

2002

2004

61.0

2002

2003

(Percent of household employment)

4.0

3.5

2004

Persons Working Part-Time
for Economic Reasons

Employment-Population Ratio
65.0

2001

Percent
4.0

Sept.

3.5

3.0

2.5

2.0

1994

1996

1998

2000

2002

2004

2.0

II-4

Labor Market Indicators

Unemployment Insurance

Layoff Announcements

Millions
4.5
4-week moving average

Thousands
550

4.0

500
Oct. 16
Insured unemployment
(left scale)

3.5

250

Thousands
250

200

450
150

3.0

400

2.5

350

150
Oct.

100

Oct. 23
Initial claims
(right scale)

2.0
1.5

1992

1994

300

1996

1998

2000

2002

250

2004

2000

2001

2002

2003

2004

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

Expected Labor Market Conditions
Index
140

Exhaustion Rate
Index
120

Michigan SRC
(right scale)

120

100

40
35
Sept.

60
Conference Board
(left scale)

Percent
50

Oct.
80

1992

1994

1996

1998

2000

2002

2004

1992

1994

1996

1998

2000

2002

2004

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

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

Job Openings

Net Hiring Strength

3.6

Percent of private employment
3.6

3.4

3.2

3.0

2.8

Percent
30

30
Manpower, Inc.
25

Aug.

25
Q4

20
15

2.6

2.4

2.2

2.0

2.0
2001

2002

2003

2004

Source. Job Openings and Labor Turnover Survey.

1.8

20
15

Oct.
10

National Federation of
Independent Businesses

5
1.8

1992

1994

1996

1998

2000

2002

2004

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

II-5

On a brighter note, fewer individuals exhausted their unemployment insurance benefits
without finding a job in September, and the number of exhaustees was well below its
elevated levels of a year ago. Layoff announcements plunged in October to their lowest
level since 2000. In addition, the job openings series in the JOLTS survey edged up over
the summer, although it declined slightly in August. Finally, the Manpower survey of
firms’ hiring plans for the fourth quarter remained at its recent high, and the more volatile
NFIB survey edged up in October, retracing some of its September drop.
Industrial Production
Industrial production in September was restrained by the spate of hurricanes that occurred
that month. Total production was up just 0.1 percent as a surge in output at utilities was
nearly offset by a drop in manufacturing output. The limited data we have in hand
suggest that IP increased in October, and most near-term indicators suggest that activity
in the manufacturing sector will expand at a moderate pace in coming months.
Although the exact magnitude of the effect of the hurricanes is difficult to determine, we
believe that the change in total IP in September was reduced roughly ½ percentage point.
Sharp declines in oil and gas extraction, petroleum refining, and organic chemical
production are directly attributable to shutdowns in the affected areas. Other industries
for which a sizable share of shipments originates from hurricane-affected areas, such as
textile products, also saw outsized production declines. Utilization rates for many of the
affected industries––especially continuous processing industries such as petroleum
refining––were high before the hurricanes hit, limiting their capability to make up
production losses.2 In addition, damages to infrastructure have further limited the
recovery of energy producing industries in October.
Weekly data for October suggest that electricity generation moved up last month, likely
in part because of a rebound in electricity sales in areas that had hurricane-related power
outages in September. In addition, the latest data indicate that motor vehicle assemblies
rose to an annual rate of 12.2 million units last month, nearly ½ million units above the
pace in September. Accordingly, the production of motor vehicles and parts is expected
to directly contribute more than 0.1 percentage point to the change in total IP in October.
Excluding electricity and motor vehicles, output in industries for which we have weekly
physical product data—principally, crude oil and refinery products, iron and steel,
appliances, meat products, and lumber and plywood—was changed little in October.
The output of high-technology products decelerated sharply in the third quarter, because
of slower production of semiconductors. Indeed, capacity utilization for the
semiconductor industry fell to a level more than 5 percentage points below the rate in the
second quarter. Furthermore, industry contacts report that demand for semiconductors
was weaker than expected last quarter. With sales weak, Intel reports that inventories are
still above desired levels, and it hopes to trim the excess in the fourth quarter by slowing
2

Continuous processing industries employ small workforces, and thus their hurricane-related production
cutbacks likely had little effect on the aggregate labor market data for August and September.

II-6

Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2003

Component

20031

(percent)

2004

2004
July

Annual rate
Total
Previous

Aug.

Sept.

Monthly rate

100.0
100.0

1.5
1.5

5.8
5.7

2.9
...

.7
.6

-.1
.1

.1
...

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

82.3
75.6
70.7

1.9
1.7
.3

6.8
7.5
6.2

4.4
4.7
4.1

.9
1.0
1.0

.2
-.1
-.2

-.3
-.2
-.3

Mining
Utilities

7.6
10.1

.4
-.6

-2.1
3.7

-2.2
-5.4

1.4
-1.6

-.9
-2.3

-2.3
5.4

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.9
1.2
1.3
2.4

21.3
14.1
5.8
34.3

25.7
22.6
1.5
40.2

13.2
17.5
25.6
6.2

.6
1.5
2.7
-.8

.7
1.6
1.4
.0

1.0
1.4
-.3
1.5

Motor vehicles and parts

6.7

3.8

-.8

3.4

-.5

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

22.6
4.3
18.3

.2
1.1
.0

5.1
3.2
5.5

1.4
-2.6
2.3

.6
.6
.6

.1
-.4
.2

.0
-.5
.1

Business equipment
Defense and space equipment

7.3
1.9

1.0
4.8

12.7
4.5

11.1
12.4

3.0
2.6

-1.9
.1

.2
.6

Construction supplies
Business supplies

4.2
8.5

1.1
.2

5.0
7.9

2.8
3.8

.7
.6

.3
.0

-.4
-.6

24.8
13.6
11.2

-.3
-.1
-.5

5.2
6.0
4.3

4.8
6.2
3.2

.8
1.0
.6

.0
-.1
.1

-.3
-.2
-.3

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)
19722003
average

1982
low

19901991
low

Aug.

Sept.

Total industry

81.1

70.9

78.6

76.5

77.1

77.3

77.2

Manufacturing
High-tech industries
Excluding high-tech industries

80.0
78.8
80.1

68.7
75.4
68.2

77.2
74.5
77.3

75.1
69.1
76.1

76.1
69.6
77.2

76.5
68.0
77.9

76.6
68.0
78.0

76.3
67.4
77.8

Mining
Utilities

86.9
86.9

78.6
77.6

83.4
84.1

84.9
85.5

84.4
83.6

83.9
82.3

84.3
80.2

82.4
84.5

Sector

2004

II-7

Indicators of Manufacturing Activity

Weekly Production Index

Industrial Production Diffusion Index
Index

Index
Monthly aggregate of weekly index
Weekly index

Jan.

Apr.

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

21.6
21.4
21.2
21.0
20.8
20.6
20.4
20.2
20.0
19.8
19.6
19.4
19.2

75
70

75
3-month change

65
Sept.

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

25
2005

Industrial Production: Military and
Civilian Aircraft

Motor Vehicle Assemblies
Millions of units
15

1997=100
150

Annual rate
Military aircraft
14

130
110
Sept.

+Oct.

12
11

1999
2000
2001
2002
2003
2004
Note. October value is based on weekly data.

Civilian aircraft

10
2005

1999

New Orders: ISM and
FRB Philadelphia Surveys

2000

2001

2002

2003

2004

Change in Real Adjusted
Durable Goods Orders
Diffusion index

Percent
80
75
70

FRB Philadelphia survey
Oct.
Oct.

65
60

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

4
3-month moving average

2
Sept.

-1

-2

-3

-4

45
ISM

2002

2003

2004

-4

II-8

Indicators of High-Tech Manufacturing Activity

Microprocessor Unit (MPU) Shipments
and Intel Revenue

Capacity Utilization in the High-Tech Sector

Billions of dollars, ratio scale

Percent
110

9.5
9.0
Intel revenue

Semiconductors

100

8.5

8.0

7.5

Computers

7.0
6.5

Sept.

6.0
5.5

Worldwide MPU shipments
1999
2000
2001
2002
2003
2004
Note. Q4 is the range of Intel’s guidance as of Oct. 12, 2004.
FRB seasonals.
Source. Intel and Semiconductor Industry Association.

Communications equipment

5.0

1999

2000

2001

2002

2003

2004

Days’ Supply of Computers and Peripherals,
Communications Equipment, and Semiconductors

Intel Inventories-to-Shipments Ratio
Ratio
0.45

0.45

150

0.40

140

January 1999 = 100
150
Communications equipment

Q3
0.35

0.35

140

130

130
Semiconductors

120
0.30

0.30

0.25

0.20

0.15

1999
2000
2001
Note. FRB seasonals.

2002

2003

2004

Millions of units, ratio scale

110

100

Millions of units, ratio scale
Q3

PCs (right scale)

1999
2000
2001
2002
2003
Source. Board staff’s flow-of-goods system.

2004

Index
17

16
15
14

0.54

70
Oct.

0.48

0.42
0.36

Computers and peripherals

CIO Magazine Future Spending
Diffusion Index

0.66
0.60

120

110

U.S. Personal Computer and Server Sales
0.78
0.72

Sept.

55
Data networking equipment

Servers (left scale)

50
Computer hardware

0.30

1999
2000
2001
2002
2003
2004
Note. FRB seasonals. Q3 servers are a Gartner forecast.
Source. Gartner.

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

II-9

output growth. Indeed, Intel’s latest earnings forecast for the fourth quarter is consistent
with only small increases in real semiconductor output. Still, semiconductor
manufacturers plan to increase capacity, as evidenced by an increase in the book-to-bill
ratio in September of the producers of semiconductor equipment.
Production of computers and communications equipment posted solid gains in the third
quarter, but the forward-looking indicators of activity are mixed. In September, orders
for computer equipment rose, but orders for communications equipment fell.
Gartner’s forecast of fourth-quarter PC sales is consistent with a moderate gain in
production. Gartner reports that consumer demand has been sluggish, and they expect
the holiday shopping season to be a disappointing one, in part because PCs are currently
lacking any new "must-have" features. CIO Magazine diffusion indexes for future
spending on computer hardware and on networking equipment moved up in October after
having fallen in the previous month.
Outside of transportation and high-tech, production of business equipment jumped at an
annual rate of 11 percent in the third quarter, about the same pace as in the second
quarter. Within business equipment, gains were especially pronounced for electrical
equipment and farm, construction, and semiconductor machinery. The output of
consumer goods was up a bit in the third quarter, as a decrease in consumer durables was
more than offset by a gain in consumer nondurables. Construction supplies and business
supplies both posted moderate increases.
The forward-looking indicators of near-term production suggest that activity in the
industrial sector will continue to expand at a moderate pace in coming months. For
example, the ISM index of new orders in October was changed little from its elevated
level in the prior month, and the index of new export orders moved up. The various
regional diffusion indexes of new orders, some of which are available through October,
also point to further gains. Smoothing through the substantial volatility in the staff’s
series on real adjusted durable goods orders, the three-month moving average moved up
0.6 percent in September.
Motor Vehicles
Sales of new autos and light trucks rose in September to an annual rate of 17.4 million
units, fueled by a jump in incentives near the close of the month. For the third quarter as
a whole, sales were at a 17.1 million unit rate, about ½ million units stronger than the
pace in the first and second quarters. We estimate that the more generous level of
consumer incentives, which moved up $260 per vehicle on average in the third quarter,
explains about half the gain. Incentives fell back in October, and industry contacts
report, on a confidential basis, that the pace of light vehicle sales last month will likely
come in between 16½ and 17 million units.
The Michigan SRC index for motor-vehicle-buying conditions rose in September and in
October―an increase supported by the perception of low prices among survey
respondents. High gasoline prices remain a concern, though the percentage of

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

2003

Total

2004

July

Aug.

Sept.

16.6

16.5

17.1

17.2

16.6

17.4

7.6
9.0

7.4
9.1

7.5
9.1

7.3
9.7

7.5
9.7

7.2
9.4

7.3
10.1

North American1
Autos
Light trucks

13.3
5.5
7.8

13.3
5.4
7.8

13.1
5.3
7.9

13.8
5.3
8.5

13.9
5.5
8.4

13.4
5.2
8.2

14.1
5.3
8.9

Foreign-produced
Autos
Light trucks

3.3
2.1
1.2

3.3
2.0
1.2

3.4
2.2
1.2

3.3
2.0
1.2

3.3
2.0
1.3

3.2
2.0
1.2

3.3
2.1
1.2

.33

.40

.44

.45

Autos
Light trucks

Memo:
Medium and heavy trucks

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

Sales of Light Vehicles

Michigan Survey Index of Car-Buying Attitudes

Millions of units, annual rate

Index
19.0

165

18.5

160

18.0
Sept.

2002

2003

2004

Oct.

17.5

155
150

17.0

145

16.5

140

16.0

135

15.5

130

15.0

2000

2001

2002

2003

2004

125

Note. FRB seasonals. Adjusted for shifts in reporting
periods.

Average Value of Cash and Financing
Incentives for Vehicles with Incentives

Average Value of Incentives on Light Vehicles
Current dollars per vehicle

Current dollars

3000

4000

Customer cash rebate
Present value of interest rate reduction

2500

3500
Oct. 24

Oct. 24

3000
2500

2000

2000
1500

1500

Oct. 24

1000
500

2002

2003

2004

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

1000

2002

2003
Source. J.D. Power and Associates.

2004

II-11

respondents who cite gasoline prices as a reason that vehicle-buying conditions are poor
has declined substantially since June.
Production of Domestic Autos and Trucks
(Millions of units at an annual rate except as noted; FRB seasonals)
2004
Item
U.S. production
Autos
Trucks
Days’ supply2
Autos
Trucks
Inventories3
Autos
Trucks

2003

2004
Q41

Sept.

Oct.1

Nov.1

12.1
4.5
7.6

12.1
4.3
7.8

11.8
4.3
7.5

12.1
4.3
7.8

11.8
4.4
7.4

12.2
4.3
7.9

12.1
4.3
7.8

73
63
80

77
62
88

73
63
79

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

71
63
76

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

3.17
1.13
2.04

3.33
1.09
2.24

3.26
1.08
2.19

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

3.26
1.08
2.19

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

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

Because of the relatively strong sales of light motor vehicles in recent months, days’
supply fell in the third quarter to about 73 days, although this level was slightly above the
target range of manufacturers. Motor vehicle production declined in September, but the
latest estimates for October indicate that assemblies jumped to an annual rate of
12.2 million units last month, nearly ½ million units above the pace in September. For
the fourth quarter as a whole, the automakers’ production schedules call for a step-up in
the average pace of assemblies from their third-quarter level. However, General Motors
announced plans to take advantage of the winter holiday shutdown by closing several
plants for an additional week in the first quarter of 2005 in order to address any
remaining inventory overhang.
Consumer Spending
Real consumer spending rebounded strongly in the third quarter, rising at an annual rate
of 4.6 percent after having advanced only 1.6 percent in the second quarter. Excluding
motor vehicles, outlays increased at a 3.5 percent pace in the third quarter, after a
2.0 percent rise in the second quarter.
Total real PCE moved up 0.5 percent in September. Outlays for motor vehicles ramped
up last month, as did purchases of other goods. Spending on services jumped, in part
because outlays for electricity were boosted by unseasonably warm weather.

II-12

Real Personal Consumption Expenditures
(Percent change from the preceding period)
2004
H1

2004
H2
Q2
Annual rate

2.8
.9
-5.9
6.9
3.4
-7.9
4.7
3.0
-2.4
2.4
3.3

2.3
8.1
12.8
4.4
1.9
3.3
1.8
1.3
-3.2
.8
1.5

2.4

Expenditure
Total real PCE
Durable goods
Motor vehicles
Excluding motor vehicles
Nondurable goods
Energy
Other
Services
Energy
Transportation
Other
Memo:
Real disposable personal income

July

1.6
-.3
-6.0
4.6
.1
-13.2
1.8
2.7
-8.0
2.9
3.1

4.6
16.8
27.2
9.0
3.9
6.8
3.6
2.7
-6.3
1.6
3.1

1.2
6.2
12.5
1.4
.8
3.2
.6
.4
-.7
.3
.4

-.1
-1.5
-3.0
-.1
.2
1.9
.0
.1
-1.4
.4
.1

.5
1.5
1.8
1.3
.4
-.9
.6
.4
4.7
-.1
.2

2.4

1.4

Aug.
Sept.
Monthly rate

Real PCE Goods Excl. Motor Vehicles

Real PCE
Billions of chained (2000) dollars
7800

7800

2004

2960

Quarterly average
Sept.

7700

Billions of chained (2000) dollars
2960

Quarterly average

Sept.
7700

2900

7600

2840

7500

2780

7400

2720

7300

2660

7200

2600

7200

2003

2004

2003

2600

2004

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

10
8

Real wage and salary disbursements
Other components of real DPI
Real personal consumption

-2

-4

-4
H1

H2
2003

Q2
2004

II-13

Household Indicators

Household Net Worth and Wilshire 5000
Index
15000

Ratio
7.0

13000

6.5
Oct.
Wilshire 5000
(left scale)

11000

6.0
Q3*

9000

5.5

7000

5.0

Ratio of household net worth to DPI
(right scale)

5000
3000

4.5

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

4.0

2004

* 2004:Q3 is a staff estimate.

Personal Saving Rate
7

Percent
7

0
-1

Sept.
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

0
-1

2004

Consumer Confidence
1985 = 100
160

1966 = 100
120
Michigan SRC
(right scale)

140

110

120

100

Oct.

60
40

Conference Board (left scale)
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-14

Real disposable personal income increased 1.4 percent in the third quarter, down from the
2.4 percent pace of the second quarter. The hurricanes had a slightly negative effect on
income in the third quarter: The boost from additional insurance payouts from firms
nearly offset the loss of rental and proprietors’ income because of damage to uninsured
property. Even excluding hurricane effects, rental and proprietors’ income declined in
the third quarter. In contrast, real wage and salary disbursements stepped up last quarter
as a result of a larger increase in hours worked and an easing of consumer energy prices.
Government transfer payments were flat in the third quarter, held back by the BEA’s
assumption that the expiration on June 30 of the temporary increase in the federal share
of Medicaid costs enacted in 2003 would result in a sharp drop in payments to
individuals.
On net, the gain in income fell short of the increase in total spending in the third quarter,
and the personal saving rate dropped to 0.4 percent. Meanwhile, lower equity prices and
rising house prices have combined to hold the ratio of household wealth to income nearly
unchanged this year.
Both the Michigan SRC’s index of consumer sentiment and the Conference Board’s
index of consumer confidence moved down in October, damped by deteriorating
assessments of expected economic conditions. The levels of the indexes are roughly
consistent with the current configuration of economic fundamentals.
Housing Markets
Starts of single-family homes fell to an annual rate of 1.54 million units in September,
well below the average of the previous three months. However, permit issuance—
adjusted for activity in areas where permits are not required—remained strong at
1.60 million units. In addition, the permit backlog rose substantially, suggesting that
starts likely bounced back in October against a backdrop of relatively favorable mortgage
rates.3 In the multifamily sector, starts rose to an annual rate of 360,000 units in
September, somewhat higher than the average pace earlier this year. Permit issuance for
multifamily units also was strong, and the backlog of permits inched up.
Home sales remained robust in September. Sales of existing homes rose 3 percent in
September, to an annual rate of 6.75 million units, while sales of new homes were at an
annual rate of 1.21 million units for the month of September. Both sales figures for
September were somewhat above the average during the first eight months of this year,
though slightly below the record highs posted this last spring. Recent indicators point to
continued strong housing demand in the near term. Rates on thirty-year conventional
mortgages turned up briefly last spring but have since reversed most of the earlier
increase; the most recent reading, at 5.64 percent, is about 24 basis points less than the
average since the beginning of 2004. Partly in response to the drop in mortgage rates
3

The hurricanes that made landfall in the Gulf region in September—Frances, Ivan, and Jeanne—do not
appear to be responsible for the decline in starts in that month: The largest declines in September starts
were in the West and Northeast; starts in the South were essentially unchanged.

II-15

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

2003

July

Aug.

Sept.

1.85
1.89

1.94
1.93

1.92
2.02

1.97
2.01

1.99
2.07

2.02
1.97

1.90
2.01

1.50
1.46
1.50
.115
1.09
6.10

1.57
1.52
1.55
.123
1.20
6.20

1.60
1.57
1.60
.136
1.21
6.79

1.63
1.57
1.60
.144
1.16
6.67

1.66
1.59
1.61
.138
1.10
6.72

1.68
1.56
1.59
.127
1.17
6.55

1.54
1.56
1.60
.144
1.21
6.75

.35
.43
.060

.37
.42
.054

.32
.45
.058

.34
.45
.066

.32
.48
.065

.34
.41
.065

.36
.45
.066

.131

.126

.127

n.a.

.125

n.a.

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

Private Housing Starts
(Seasonally adjusted annual rate)
Millions of units
2.5

2.5

2.0

2.0
Sept.
Total

Sept.

1.5

Single-family

1.0

Multifamily

1.5

.5
Sept.

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-16

Indicators of Single-Family Housing
Existing Home Sales

Prices of Existing Homes

7500

Thousands of units
7500

7000

7000
Sept.
6500

6500

6000

5500

5000

Percent change from year earlier
14
Repeat transactions
Average price of homes sold
12
Q2
10
Sept.
8

10
8

4500

1998

1999

2000

2001

2002

2003

2004

5000

4500

1998

1999

2000

2001

2002

2003

2004

Source. Freddie Mac Conventional Mortgage Home
Price Index and National Association of Realtors.

Source. National Association of Realtors.

New Home Sales

Prices of New Homes
Thousands of units
1500

1500

Percent change from year earlier
25

Constant quality
Average price of home sales

20
1300

1300
Sept.

1100

900

10
Q3

Sept.

0
700

1998

1999

2000

2001

2002

2003

700

2004

-5

1998

1999

2000

2001

2002

2003

2004

5
0
-5

Source. Census Bureau.

Mortgage Rates

Homebuying Indicators
Percent
9

9
Fixed rate

Diffusion index
Index
550
120
MBA purchase index (right scale)
Michigan homebuying attitudes (left scale)
500
100
Oct. 29
450
80

400
Oct.

Oct.

300

Adjustable rate
4
3

Oct.
1998

1999

2000

2001

2002

2003

2004

Note. The October readings are based on data
through Oct. 27.
Source. Freddie Mac.

350

250
1998

1999

2000

2001

2002

2003

2004

2005

200

Note. MBA index is a 4-week moving average. Michigan
Survey data are not seasonally adjusted.
Source. Mortgage Bankers Association and Michigan Survey.

II-17

during the past few months, the four-week moving average of mortgage applications to
purchase homes has risen substantially over the same period. However, the Michigan
Survey’s gauge of homebuying attitudes dropped in October to the lowest level since
early 2003, in part because respondents saw less investment potential in homes and less
reason to buy in advance of rising mortgage rates.
Prices of existing homes have continued to post substantial increases, but the most recent
data suggest some moderation in prices of new homes. The average price of existing
homes purchased in September was up 9½ percent from a year earlier, similar to the yearover-year readings over the past few months. The twelve-month change in the average
price of new homes averaged 11¾ percent from June through August but was essentially
unchanged in September.4 The constant-quality price index for new homes, which
controls for changes in the geographic composition of sales, home size, and a few other
readily measurable attributes, was up 6¼ percent in the third quarter from a year earlier,
but down about 2 percentage points from the average pace earlier this year.
Equipment and Software
Real outlays for equipment and software are estimated to have expanded at an annual rate
of 15 percent in the third quarter, after a similar-sized gain in the second quarter.5 The
brisk third-quarter pace was consistent with the relatively favorable underlying
fundamentals of capital spending: Business output continues to post solid gains, the user
cost of capital is low, and corporate coffers are flush with liquid assets.
The partial-expensing provision of the current tax code should be encouraging businesses
to accelerate capital expenditures in order to take advantage of the tax incentive before it
expires at the end of the year. To date, the evidence suggests that the law is having an
effect, although the magnitude of the effect is uncertain. The most recent anecdotes
provide mixed signals about the strength of the effect: Although only about 12 percent of
the respondents to a special question in the Empire State Manufacturing Survey thought
partial expensing was encouraging more capital expenditures, about one-fourth of the
respondents to the Philadelphia Fed’s Business Outlook Survey gave a favorable
response to a similarly worded question. Further, about half of the respondents to a
NABE survey question indicated that the impending expiration of the partial-expensing
provision was having a small effect on the timing of capital expenditures, while another
10 percent indicated that it was having a significant effect.
Data on purchases of capital goods also lend support to the view that partial expensing
may be having some effect. The tax provision allows firms to boost the percentage of the
cost of a capital good that can be written off in the first year of service. This provision is
4

The twelve-month change in the average price of new homes in September was held down, in part, by a
jump in the average price of new homes in the previous September.
5
The staff’s third-quarter estimate of the increase in spending on equipment and software is about
0.2 percentage points more than the BEA’s advance estimate. The upward revision is based on revised
September data for shipments of capital goods, which became available after the NIPA report.

II-18

relatively advantageous for equipment that ordinarily would be depreciated slowly.
Indeed, nominal shipments of longer-lived equipment—which includes industrial and
metalworking machinery as well as electrical, medical, and certain transportation
equipment—accelerated of late, jumping at an annual rate of 15 percent in the third
quarter, while shipments of shorter-lived equipment—such as computers and
communications equipment—rose only modestly by previous standards. Of course,
because other factors besides partial expensing are also affecting business investment
decisions, comparisons of this sort do not provide definitive evidence about the
magnitude of the partial-expensing effect.
More broadly, real outlays for non-high-tech, non-transportation equipment soared in the
third quarter; the 21 percent (annual rate) gain was the largest increase in a decade.
Although, as noted above, the category’s strong performance is probably in part the result
of the partial-expensing tax provision, other forces are also likely driving investment in
this category. Nominal shipments of farm machinery and construction machinery have
recently been boosted by the vigorous pace of real activity in the agriculture and
residential construction sectors. Likewise, shipments of oilfield machinery have probably
benefited from high oil prices, and shipments of rail equipment are likely rising in
response to high levels of freight demand. Orders of non-high-tech, non-transportation
equipment have been above shipments for nearly a year, a trend that bodes well for
spending in this category in coming months.
Real business spending on transportation equipment rose at an annual rate of 29 percent
in the third quarter despite a sharp drop in domestic deliveries of aircraft. Businesssector demand for motor vehicles remains strong. In particular, sales of medium and
heavy trucks moved up to an annual rate of almost 450,000 units in September, a level
not seen since July 2000. Orders for these trucks ticked down in September but remained
near record levels. Industry sources report that the surge in orders for heavy trucks this
year reflects an overall rise in freight shipping as well as some pent-up demand for
equipment replacement after three years of weak purchases. Truck manufacturers also
report that the partial-expensing provision may be prompting some trucking firms to
accelerate the pace of purchases this quarter.
Real outlays for high-tech equipment and software expanded at an annual rate of
4¾ percent in the third quarter, a step-down from the second-quarter pace. The high-tech
slowdown last quarter reflected a sharp deceleration in real spending for computers,
software, and communications equipment.6

The third-quarter slowdown in spending by businesses on computer and communications equipment
contrasts with the pickup in production of this equipment.

II-19

Equipment and Software Investment Fundamentals

Real Business Output
Percent change, annual rate
12

6
Q3

-3

-6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-6

Real Corporate Cash Flow
Percent change, annual rate
72

-18
-36

0
-18

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-36

User Cost of Capital

(Includes the effects of the partial expensing tax incentive)
250

High-Tech

2000 = 100, ratio scale

250

194

158

122

86
Q3

1990

1992

1994

1996

1998

2000

2002

2004

108

Non-High-Tech

2000 = 100, ratio scale

104

100

84
50

108

Q3
1990

1992

1994

1996

1998

2000

2002

2004

84
80

II-20

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

July

Annual rate

Aug.

Sept.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

9.0
9.2
8.9
8.7
9.4

12.4
13.3
-.3
12.6
16.1

1.8
2.3
6.5
3.8
1.3

1.8
.9
-.8
7.1
.3

-1.4
-1.4
-5.2
-7.9
.2

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

15.1
7.8
36.9
13.5
2.4

21.6
10.2
-10.5
-10.4
17.8

9.3
.6
-5.1
5.2
1.1

-7.0
.7
.8
10.5
-.6

.8
2.8
4.5
-7.8
4.0

Memo:
Shipments of complete aircraft1

25.7

n.a.

27.0

29.3

n.a.

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

Computers and Peripherals

Communications Equipment

Billions of dollars, ratio scale

12
Shipments
Orders

12
11

9
Sept.

1999

2000

2001

2002

2003

2004

2005

Billions of dollars, ratio scale

21
18

Shipments
Orders

9
Sept.

1999

2000

680

Sept.

600

800

2002

2003

2004

2005

520
Sept.

Billions of dollars, ratio scale

51
Shipments
Orders

680
600

520
440

2001

Other Equipment

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

Medium and Heavy Trucks
800

21
18

51
48

Sept.
45

440

360

280

200

1999
2000
2001
2002
2003
2004
2005
Note. Annual rate, FRB seasonals.
Source. Ward’s Communications and ACT Research Co.

1999

2000

2001

2002

2003

2004

2005

II-21

Nonresidential Construction
We estimate that real business investment in nonresidential structures, which had turned
up in the second quarter, posted a small decline in the third quarter.7 Spending for
commercial structures, which include retail buildings and warehouses, advanced briskly
in both the second and the third quarters. Vacancy rates for retail buildings remained low
through the third quarter, and both rents and property values continued to rise. Property
values for warehouses also have trended up during the past few years, but rents turned up
only recently. In contrast to spending for commercial structures, spending for office
buildings has remained weak. The vacancy rate for office buildings has receded
somewhat during the past two quarters but remains at a high level; office rents have been
declining for some time, although property values recently posted a small increase.
Similarly, although outlays for manufacturing structures increased in the third quarter,
they remain depressed compared with the levels seen in 2000 and 2001. Spending on
drilling and mining structures has risen smartly in recent quarters on the strength of a
rising number of natural gas drilling rigs in operation; the number of petroleum rigs has
been flat since the beginning of 2002.
Business Inventories
We estimate that real holdings of nonfarm inventories excluding finished motor vehicles
increased at an annual rate of $68 billion in the third quarter after a $42 billion
accumulation in the second quarter. 8 The jump in non-auto stockbuilding is estimated to
have contributed 1 percentage point to the change in real GDP last quarter. The solid
pace of stockbuilding in the third quarter was accompanied by rising sales; accordingly,
both book-value ratios and NIPA inventories-sales ratios held fairly steady at low levels.
Data from the staff’s flow-of-goods inventory system indicate that overall days’ supply of
inventories edged down to a record low in September. Only a few industry groups,
including motor vehicles, semiconductors, paper, and chemicals excluding
pharmaceuticals, were estimated to have been holding elevated inventories.
Federal Government Sector
Since mid-September, two major tax bills and three appropriations bills have cleared the
Congress and have been signed into law by the President. In addition, the final Monthly
Treasury Statement for fiscal 2004 has been released. For the fiscal year as a whole, the
unified budget deficit was $413 billion, or about 3½ percent of GDP, the largest share of
GDP since 1993.
7

In the advance GDP estimate, which was released before the September construction data were available,
the BEA estimated that real outlays for nonresidential structures increased at an annual rate of 1¼ percent
in the third quarter. However, the September construction data were weaker than the BEA had assumed,
and the level of spending was revised down in the previous two months. The most recent data indicate that
real outlays for nonresidential structures declined at an annual rate of 1.1 percent in the third quarter.
8
Our third-quarter estimate is $2 billion less than the figure published by the BEA because we have
incorporated data on book-value inventories held by manufacturers; these data were not available in time
for the BEA’s advance report.

II-22

Nonresidential Construction
(Seasonally adjusted, annual rate)
Total Structures

Office

290

Billions of dollars, ratio scale
290

268

251

234

234
Sept.

217

200

Billions of dollars, ratio scale
65

1997 1998 1999 2000 2001 2002 2003 2004

200

Manufacturing

1997 1998 1999 2000 2001 2002 2003 2004

Commercial

Billions of dollars, ratio scale
47

17
Sept.

Sept.

217

1997 1998 1999 2000 2001 2002 2003 2004

Billions of dollars, ratio scale
70

66
Sept.

1997 1998 1999 2000 2001 2002 2003 2004

Note. Includes retail, wholesale, and "other" establishments.

Power and Communication

Other

Billions of dollars, ratio scale
65

Sept.

41
Sept.

Billions of dollars, ratio scale
80

1997 1998 1999 2000 2001 2002 2003 2004

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

II-23

Indicators of Nonresidential Construction
Office Rent and Property Values

Retail and Office Vacancy Rates

Percent change from previous period
10

10
Rent
Property values

-2

-4

-6

-8

-8
1996

1998

2000

2002

-10

2004

1992

1994

1996

1998

2000

2002

2004

Source. National Council of Real Estate Investment
Fiduciaries.

Warehouse Rent and Property Values

Retail Rent and Property Values
Percent change from previous period
5
Rent
Property values

Source. National Real Estate Index.

-2

1994

1992

Retail
Office

-10

Percent
20

Percent change from previous period
5

Rent
Property values

-1

-2

-3

-4

3
2
1

-4

1992

1994

1996

1998

2000

2002

2004

4
3

1992

1994

1996

1998

2000

Source. National Real Estate Index.

Drilling Rigs in Operation

Industrial Vacancy Rate
Number
1200

1200

2002

2004

-4

Percent
18

Oct.
1000

1000

800

800
Natural gas

600

400

400
Petroleum

200

200
Oct.

1992

1994

1996

1998

2000

2002

2004

Note. Oct. values are averages through Oct. 22.
Source. DOE/Baker Hughes.

1992

1994

1996

1998

2000

2002

2004

Source. National Council of Real Estate Investment
Fiduciaries.

II-24

Changes in Nonfarm Inventories
(Billions of chained (2000) dollars; annual rate)
2003
Sector

2004

Q3*

4.6

34.5

58.8

46.2

-5.0

6.8

41.6

68.4

-13.1

3.0

9.1

11.0

Merchant wholesalers

-2.1

3.9

15.1

30.1

Retail trade

10.3

6.9

12.8

9.7

Nonfarm inventory investment
Excluding finished
motor vehicles and parts
Manufacturing

* Staff estimate.

Book-Value Inventories Relative to Shipments and Sales
Ratio
1.700

1.700
Retail trade ex. motor vehicles and parts

1.525

1.525
Manufacturing
Aug.

1.350

Sept.
1.175

1.000

1.175

Wholesale trade ex. motor vehicles and parts

1992

1993

1994

1995

1996

Aug.

1997

1998

1999

2000

2001

2002

2003

2004

1.000
2005

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

Total

Total ex. motor vehicles and parts

52
Sept.

50
48
46

50
48

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

46
2005

II-25

For the month of September alone, the federal unified budget recorded a surplus, as it
typically does.9 Receipts in September rose 8 percent relative to the year-earlier level.
Corporate income tax payments were strong because of a sizable gain in taxable profits
over the period as well as an increase in the effective tax rate. For fiscal year 2004 as a
whole, receipts rose 5½ percent, only a bit slower than the rise in nominal GDP. Recent
tax cuts are estimated to have held down that figure 5 percentage points, and receipts
were 16¼ percent of GDP, near the bottom of the range that has prevailed during the
postwar period.
Outlays in September, adjusted for payment timing shifts and financial transactions, rose
only 1 percent over the year-earlier level; this is a sharp step-down from the pace of
spending growth seen earlier in the year and reflects a combination of economic and warrelated developments, policy actions, and one-time accounting changes. For the fiscal
year as a whole, total outlays rose about 6 percent. Outlays for defense, Medicare, and
Medicaid posted relatively large increases; outlays for debt service rose at a slow pace;
and outlays for income security actually fell, largely as a result of declining payments of
unemployment benefits. In fiscal 2004, outlays were 20 percent of GDP, about the same
proportion as in the preceding fiscal year.
In late September, the Working Families Tax Relief Act of 2004 was enacted. The key
provisions extend marriage penalty relief, the $1,000 child tax credit, and the expanded
10 percent individual income tax bracket through 2010. The act also extends AMT relief
and several expiring tax provisions, including the research and experimentation tax
credit, through 2005. The official ten-year overall budget cost of this bill is estimated to
be nearly $150 billion.
In late October, the American Jobs Creation Act of 2004 was signed into law. It contains
a smorgasbord of provisions that on balance were scored by the Joint Committee on
Taxation as revenue-neutral over ten years. Its main purpose is to repeal the exclusion
from U.S. taxable income of a certain percentage of income from the sale of domestically
produced goods abroad—so-called extraterritorial income—that the World Trade
Organization had ruled an illegal export subsidy. To compensate firms for this loss of tax
benefits, the legislation provides broad-based tax relief for domestic manufacturing firms
and U.S. multinationals. Key provisions include a phased-in reduction of 3 percentage
points in the effective tax rate on the profits of domestic manufacturers, broadly defined,
whether or not they are exporters; an extension of small-business expensing provisions
for two more years; a one-time, substantial reduction in the tax rate on repatriated foreign
earnings, which is estimated to induce a capital inflow of about $150 billion next year;
several tax breaks for the energy industry; and an extension of certain customs user fees.
Only four of the thirteen regular appropriations bills for fiscal 2005 have cleared the
Congress and been signed by the President. Among those signed are the military
construction bill that includes $14½ billion in disaster aid for victims of hurricanes and
9

In September, estimated payments are due from both individuals and corporations.

II-26

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

September
Function or source

2003

2004

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

168.2
.0
-12.9
181.1

183.0
.3
.0
182.7

Receipts
Payment timing
Adjusted receipts

191.6
-6.0
197.6

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
Adjusted receipts
Individual income and
payroll taxes
Withheld + FICA
Nonwithheld + SECA
Less: Refunds
Corporate
Gross
Less: Refunds
Other
Adjusted surplus or deficit (-)

Percent
change

2003

2004

8.8
...
...
.9

2159.2
-1.4
-.6
2161.2

2292.4
-1.9
-.1
2294.4

6.2
...
...
6.2

207.4
-6.0
213.4

8.2
...
8.0

1782.1
-6.0
1788.1

1879.8
.0
1879.8

5.5
...
5.1

23.4

24.4

...

-377.1

-412.6

...

181.1
4.9
176.2
38.4
39.9
22.3
13.7
23.8
1.6
36.4

182.7
4.7
178.0
40.5
41.4
23.6
14.9
22.6
-.1
35.1

.9
-4.0
1.0
5.6
3.7
5.7
8.2
-5.1
-105.2
-3.6

2161.2
154.7
2006.5
404.5
474.7
249.5
160.7
335.0
24.6
357.5

2294.4
160.5
2133.9
455.7
495.6
269.4
176.2
334.7
17.3
385.1

6.2
3.7
6.4
12.7
4.4
7.9
9.7
-.1
-29.5
7.7

197.6

213.4

8.0

1788.1

1879.8

5.1

144.9
105.8
43.5
4.4
36.3
40.5
4.1
16.3

149.1
110.3
42.8
3.9
48.3
51.6
3.3
15.9

2.9
4.3
-1.7
-9.5
32.8
27.4
-20.6
-2.5

1464.3
1368.8
289.0
193.4
137.8
200.5
62.7
186.0

1493.9
1397.0
284.5
187.6
189.4
230.6
41.2
196.5

2.0
2.1
-1.6
-3.0
37.4
15.0
-34.3
5.7

16.5

30.6

...

-373.1

-414.6

...

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

II-27

for ranchers and farmers affected by drought conditions. Congressional leaders have
indicated that their goal is to combine the remaining appropriations bills into a single
omnibus bill that would be enacted when the Congress reconvenes after the election. In
addition, the Congress will have to pass an increase in the debt ceiling because the legal
limit has been reached.
State and Local Governments
Real expenditures by state and local governments are estimated by the BEA to have
fallen at an annual rate of 0.5 percent in the third quarter after having risen nearly
2 percent in the second quarter. The entire decline was in construction spending.
Moreover, data on construction received after the GDP report suggest that construction
spending in the third quarter will be revised down. Much of the weakness in the third
quarter was in construction of highways and streets.
The election results for most of the citizen initiatives or legislative referenda affecting
taxes went in favor of higher taxes. Five of the seven measures to raise taxes passed.
However, all of these measures, including the three cigarette tax hikes, will likely have a
relatively minor effect on revenue collections. Both measures that sought to reduce or
limit taxes failed.
Prices
Consumer prices have continued to rise at a moderate pace. The overall CPI increased
0.2 percent in September and rose at an annual rate of just ½ percent over the JuneSeptember period, the result of a dip in consumer energy prices. During the twelve
months ending in September, consumer prices advanced 2½ percent, about ¼ percentage
point more than in the preceding year. The core CPI moved up 0.3 percent in September.
Over the twelve months ending in September, core prices increased 2 percent, about
¾ percentage point more than in the preceding year. Core PCE prices were flat in August
and rose 0.1 percent in September. The core PCE price index increased 1½ percent
during the twelve months ending in September, ½ percentage point more than in the
preceding year.
Consumer energy prices fell 0.4 percent in September, the third consecutive monthly
decline in this index, as gasoline margins plummeted from their levels at midyear.
However, the continued ascent of oil prices is now showing through to gasoline prices.
The downward pressure on gasoline markups over the summer, due in part to weak
vacation driving, disappeared in mid-September, as gasoline inventories declined from
plentiful to normal because of refinery shutdowns related to Hurricane Ivan. Surveys of
wholesale and retail gasoline prices point to a sharp upturn in prices in October. The
refinery shutdowns also led inventories of fuel oil to be drawn down to very low levels,
and, as a result, heating oil markups have risen. Moreover, the increasing prices for fuel
oil have spurred some industrial users to switch to natural gas, and this switch has pushed
up natural gas prices considerably. Over the twelve months ending in September, energy
prices in the CPI rose nearly 7 percent after having climbed 15 percent in the year-earlier
twelve-month period. The year-over-year jumps in the PPIs for finished and crude

II-28

energy prices are even larger than the rise in the CPI for energy―9 percent and
20 percent, respectively.
Consumer food prices were flat in September and inched up 0.1 percent in August. After
large gains earlier in the year, prices for meats and poultry have increased at a moderate
pace in recent months, and prices for dairy products have declined. Between September
2003 and September 2004, food prices rose 3¼ percent after their 2½ percent increase in
the previous twelve months.
Excluding food and energy, the CPI rose 0.3 percent in September after a 0.1 percent
uptick in August. September’s increase was led by a 3 percent spurt in the price index for
lodging away from home and a 2 percent jump in used-car prices. After its spike in the
spring, the annualized three-month change in the core CPI has held below 2 percent since
July. Since September 2003, the year-over-year change in the core CPI picked up from
1¼ percent to 2 percent.
Core PCE prices increased 1½ percent in the twelve months ending in September, about
½ percentage point less than the rise in the core CPI. The ½ percentage point
acceleration in core PCE prices compared with the year ending in September 2003 is a
touch less than the acceleration observed in the core CPI. The acceleration that occurred
in prices for shelter, particularly lodging away from home, receives less weight in the
PCE price index.
Broader measures of inflation, which had picked up in the first two quarters of this year
as energy prices ratcheted up, eased in the third quarter. Over the most recent four
quarters, GDP prices rose 2¼ percent, about ½ percentage point more than in the
preceding four quarters. Excluding food and energy, GDP prices increased 2 percent in
the past four quarters, also ½ percentage point more than in the previous year.
Expectations of near-term inflation, as measured by the Michigan Survey, rose in
October: Specifically, median year-ahead expected inflation reached 3.1 percent,
compared with 2.8 percent in September. This pickup is consistent with the increase in
consumer energy prices in October. Median expected inflation over the next five to ten
years, at 2.8 percent, remained within the relatively narrow range observed in the past
several years.
Recent readings on the core finished-goods PPI have also been moderate. Over the three
months ending in September, this index has increased at an average annual rate of
1.1 percent, substantially below its pace in the first half of the year. At earlier stages of
processing, core intermediate materials have continued to experience large price
increases (¾ percent in September) fueled by rising energy costs, higher import prices,
and the firming in capacity utilization during the first half of the year. Prices for core
crude materials declined 2½ percent in September but remain 25 percent higher than they
were a year earlier. Since the PPI’s September reporting date, prices for steel scrap have
jumped again, although prices for lumber and plywood have tumbled. The CRB spot

II-29

Measures of Inflation
(Percent)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Sept.
2003

Sept.
2004

June
2004

Sept.
2004

Aug.
2004

Sept.
2004

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

2.3
2.4
14.7
1.2
1.3
-2.4
2.7
1.9
.8

2.5
3.3
6.7
2.0
2.0
-.6
3.0
2.1
1.6

4.8
5.1
33.5
2.3
2.3
.3
3.0
...
...

.6
1.3
-9.8
1.8
1.8
-.9
3.0
...
...

.1
.1
-.3
.1
.0
-.1
.1
...
...

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

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

1.8
2.2
15.0
1.0
1.0
-2.6
2.5
1.0
1.0

2.0
3.0
7.2
1.5
1.5
-.6
2.4
1.4
1.9

3.1
4.1
32.7
1.3
1.3
.1
1.8
1.8
-1.2

.2
1.6
-9.3
.6
.5
-2.1
1.7
.7
.3

.0
.2
-.3
.0
.0
-.3
.1
.0
-.1

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

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

3.5
6.7
13.1
.1
.6
-.1
.4
3.7
1.6
21.5
11.2

3.3
2.8
9.2
1.9
1.9
1.9
1.7
8.4
7.8
14.2
25.5

4.7
8.5
6.4
2.9
3.1
2.3
3.5
11.7
9.9
23.2
-32.8

.3
-6.8
6.3
1.1
1.1
1.0
1.4
7.8
9.0
-18.8
50.3

-.1
-.2
.2
-.1
-.1
-.2
-.1
1.0
1.0
-.7
4.5

.1
.1
-.9
.3
.3
.4
.4
.1
.7
-4.2
-2.5

Measures

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

II-30

Energy Prices and Inventories

Total Gasoline Margin
110
105

Cents per gallon
110

Retail price less WTI spot price

105

100

Nov. 1

2001

2002

2003

2004

Note. Average of all grades (DOE) seasonally adjusted, less West Texas intermediate spot price.

Gasoline Price Decomposition
Cents per gallon
Nov. 1
195

195
Retail price*

155

115

Nov. 1

115

WTI spot price
75

2001

2002

2003

2004

* Average of all grades (DOE) seasonally adjusted.

Gasoline Inventories

Natural Gas Prices
Millions of barrels
235

235
Average historical range
Current year

230

225

220

215

210

205

200

195

190

190
J

2004
Note. Average historical range calculated by Energy
Information Administration.

13
12
11
10
9
8
7
6
5
4
3
2
1
2001

2002

Dollars per Million BTU
13
12
11
10
9
Nov. 1
8
7
6
5
4
3
2
1
2003
2004

II-31

Core Consumer Price Inflation
(12-month change except where noted)

CPI and PCE excluding Food and Energy

PCE excluding Food and Energy

Percent
3

CPI
Core PCE
2

Sept.

PCE
1

CPI
chained

Sept.

1
Market-based components

1999

2000

2001

2002

2003

2004

2005

CPI excluding Food and Energy

1999

2000

2001

2002

2003

2004

2005

CPI Services and Commodities
Percent

Percent
4

3-month change, annual rate
3

Services ex. energy

Sept.

2
Commodities ex. food and energy

Sept.
0

0
Sept.

1999

2000

2001

2002

2003

2004

2005

-1

-2

-3

1999

2000

2001

2002

2003

2004

2005

-3

II-32

Broad Measures of Inflation
(Percent change, Q3 to Q3)
Measure

2001

2002

2003

2004

Product prices
GDP price index
Less food and energy

2.4
2.1

1.5
1.9

1.8
1.5

2.2
2.0

Nonfarm business chain price index

1.9

1.0

1.1

1.7

Expenditure prices
Gross domestic purchases price index
Less food and energy

1.9
1.9

1.5
1.8

1.9
1.5

2.5
2.0

PCE price index
Less food and energy

2.0
2.0

1.6
1.9

1.7
1.1

2.2
1.5

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

1.9
1.8

1.2
1.5

1.8
1.1

2.3
1.4

CPI
Less food and energy

2.7
2.7

1.6
2.2

2.2
1.3

2.7
1.8

Chained CPI
Less food and energy

2.1
2.1

1.3
1.8

1.9
1.0

2.2
1.4

Median CPI
Trimmed mean CPI

3.7
2.7

3.3
2.1

2.0
1.8

2.5
2.1

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

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10-year) 4

2002:Q4

2.2

2.7

2.5

3.3

2.8

2.5

2003:Q1
Q2
Q3
Q4

2.9
2.1
2.2
1.9

3.2
2.6
2.8
3.0

2.8
2.2
2.3
2.6

3.0
3.1
3.1
3.1

2.7
2.7
2.7
2.8

2.5
2.5
2.5
2.5

2004:Q1
Q2
Q3

1.8
2.9
2.7

3.1
4.0
3.3

2.7
3.3
2.9

3.4
3.3
3.1

2.9
2.8
2.8

2.5
2.5
2.5

2004:July
Aug.
Sept.
Oct.

3.0
2.7
2.5
n.a.

3.5
3.1
3.2
3.6

3.0
2.8
2.8
3.1

3.1
3.1
3.1
3.2

2.8
2.7
2.8
2.8

...
...
2.5
...

Period

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

II-33

Commodity Price Measures
Total

Journal of Commerce Index
Ratio scale, 1996=100

Metals

120

130

116

120

112

Nov.
110

Sep
Oct
2004

108

100
Metals
90

132
128

Total

124

120
70

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

116
Sep
Oct
2004

112

CRB Spot Industrials
Ratio scale, 1967=100

360

CRB Industrials
Nov.

320

310
280
Sep
Oct
2004

300

240

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

200

CRB Futures
Ratio scale, 1967=100

290

Nov.
270

CRB Futures

250

280
270

230
210

290

Sep
Oct
2004

260

190

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

170

Note. Larger panels show monthly average of weekly data through last available week. Smaller panels show weekly data, Tuesdays. Vertical
lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost entirely on industrial commodities, with
a small weight given to energy commodities, and the Commodity Research Board (CRB) spot price index consists entirely of industrial commodities,
excluding energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly equally
among energy commodities, industrial commodities, and precious metals. Copyright for Journal of Commerce data is held by CIBCR, 1994.

II-34
Spot Prices of Selected Commodities
(Percent change except as noted)

Commodity

Current
price
(dollars)

2002 1

2003 1

12/30/03
to
9/14/04 2

9/14/04 2
to
11/2/04

Memo:
52-week
change to
11/2/04

Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)

1.380
246.333
.832

5.6
49.2
2.8

47.9
66.8
16.7

25.9
25.8
7.3

1.5
20.9
9.0

48.4
88.5
21.7

Precious metals
Gold (oz.)
Silver (oz.)

424.200
6.995

24.3
3.8

20.7
24.6

-2.6
5.2

4.7
11.4

12.3
40.2

Forest products 3
Lumber (m. bdft.)
Plywood (m. sqft.)

307.000
333.000

-8.9
.7

44.5
36.7

55.7
40.5

-31.8
-40.0

9.6
-39.6

Petroleum
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)

45.920
1.277
1.376

66.9
69.2
63.8

-7.4
12.5
6.3

40.7
31.6
33.2

10.2
1.8
12.4

64.9
57.0
79.5

Livestock
Steers (cwt.)
Hogs (cwt.)
Broilers (lb.)

85.440
53.750
.622

16.5
-13.2
6.5

4.1
18.3
10.9

10.2
50.0
-.3

3.4
.9
-5.9

-13.6
51.4
-.7

Farm crops
Corn (bu.)
Wheat (bu.)
Soybeans (bu.)
Cotton (lb.)

1.720
3.953
5.095
.434

18.1
37.7
32.2
52.1

1.7
-2.1
37.1
42.5

-14.6
-1.6
-29.3
-29.2

-13.8
-1.2
-6.2
-10.1

-21.5
8.2
-31.4
-40.1

Other foodstuffs
Coffee (lb.)

.703

1.1

23.1

25.5

2.3

33.9

111.800
124.200
281.060
315.220

16.8
9.7
24.4
13.7

22.3
38.1
9.1
24.0

13.9
11.9
6.9
3.7

-4.4
6.0
2.8
-1.4

9.6
35.6
14.0
6.0

Memo:
JOC Industrials
JOC Metals
CRB Futures
CRB Spot Industrials

1. Changes are from the last week of the preceding year to the last week of the year indicated.
2. September 14, 2004, is the Tuesday preceding publication of the September Greenbook.
3. Prices shown apply to the Friday before the date indicated.

II-35

industrials index (which excludes energy prices) has fallen 1½ percent since the last
Greenbook.
Labor Costs
The information on labor costs released since the September Greenbook points to
continued moderate gains in hourly compensation in the third quarter. The employment
cost index (ECI) in private industry rose at an annual rate of 3½ percent over the three
months ending in September—slightly less than the average pace over the past two years.
Wages and salaries increased at an annual rate of 3½ percent, somewhat above the pace
of the past few quarters but close to the average in 2003. Benefit costs moved up
4 percent over the three months ending in September, the smallest increase in benefit
costs in the last couple of years and well below the surge in the first three months of the
year, which resulted from a substantial run-up in retirement and savings costs as
employers replenished defined-benefit pension reserves. Although health insurance costs
continue to increase rapidly, the most recent twelve-month increase, at 7¼ percent, was
2¾ percentage points below the year-earlier increase and lower than any twelve-month
period in the past four years.

II-36

Change in Employment Cost Index of Hourly Compensation
for Private-Industry Workers
2003
Industry and occupational group

Total hourly compensation
Wages and salaries
Benefits
By industry
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services
By occupation
White collar
Blue collar
Service occupations
Memo:
State and local governments

2004

Sept.

Dec.

Mar.
June
Quarterly change
(compound annual rate) 1

Sept.

4.4
3.5
6.1

3.1
2.0
5.6

4.3
2.5
10.9

4.0
2.2
7.1

3.5
3.5
4.0

3.3
3.9

3.0
2.7

3.5
9.4

2.2
3.3

2.9
5.0

2.4
3.6
6.2
4.3
4.1

2.9
1.9
4.1
1.6
3.8

6.1
2.6
1.7
3.6
4.3

5.8
2.6
4.0
2.4
3.7

2.3
6.6
1.0
2.6
3.5

4.8
3.8
3.2

3.3
3.5
2.7

3.8
6.7
4.7

3.0
4.1
3.6

4.2
3.6
1.9

2.2

3.2

3.9

4.4

1.9

12-month change
Total hourly compensation
Excluding sales workers
Wages and salaries
Excluding sales workers
Benefits
By industry
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services
By occupation
White collar
Sales
Nonsales
Blue collar
Service occupations
Memo:
State and local governments
1. Seasonally adjusted by the BLS.

4.0
4.0
3.0
3.0
6.5

4.0
4.1
3.0
3.1
6.4

3.9
3.9
2.6
2.6
7.0

4.0
4.0
2.6
2.5
7.3

3.7
3.9
2.6
2.5
6.8

3.8
4.7

3.4
4.1

3.5
4.7

3.0
4.7

2.9
5.0

3.5
3.7
2.5
7.3
3.3

3.3
3.2
3.3
7.4
3.6

4.0
2.5
3.5
3.3
3.8

4.3
2.7
4.0
3.0
4.0

4.3
3.4
2.7
2.6
3.8

4.0
3.5
4.1
4.2
3.0

4.1
3.2
4.3
4.0
3.2

3.6
3.5
3.7
4.5
3.2

3.7
3.7
3.7
4.6
3.4

3.6
3.5
3.6
4.5
3.1

3.6

3.3

3.4

II-37

ECI Benefits Costs (confidential)
(Private-industry workers; 12-month change)

Insurance Costs

Supplemental Pay

Percent
20

Health

Percent
30

20
Nonproduction
bonuses

Total
10

-10

-5

-20

Total

Sept.

-5

1990

1995

2000

2005

Paid Leave

Sept.

-10

1990

1995

2000

2005

-20

Retirement and Savings

Percent
8

Percent
30

-10

Sept.

4
Sept.
2

1990

1995

2000

2005

Workers’ Compensation Insurance

Sept.

-5

1990

1995

2000

2005

-10

2005

Percent
25
Sept.

-5

-10

1995

State Unemployment Insurance
Percent
15

1990

-10

1990

1995

2000

2005

-10

Domestic Financial
Developments

III-T-1

Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2003

Change to Nov. 2 from
selected dates (percentage points)

2004

Instrument
Dec. 31

June 28

Sept. 20

Nov. 2

2003
Dec. 31

2004
June 28

2004
Sept. 20

Short-term
FOMC intended federal funds rate

1.00

1.50

1.75

.75

.25

Treasury bills 1
3-month
6-month

0.93
1.00

1.36
1.74

1.70
1.88

1.94
2.14

1.01
1.14

.58
.40

.24
.26

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

1.00
1.05

1.28
1.45

1.74
1.83

1.93
2.07

.93
1.02

.65
.62

.19
.24

Large negotiable CDs 1
1-month
3-month
6-month

1.06
1.09
1.16

1.30
1.53
1.82

1.78
1.86
2.02

2.00
2.14
2.29

.94
1.05
1.13

.70
.61
.47

.22
.28
.27

Eurodollar deposits 3
1-month
3-month

1.04
1.07

1.29
1.51

1.77
1.87

1.96
2.12

.92
1.05

.67
.61

.19
.25

Bank prime rate

4.00

4.50

4.75

.75

.25

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

1.83
4.40
5.22

2.88
4.90
5.55

2.43
4.21
4.96

2.60
4.23
4.92

.77
-.17
-.30

-.28
-.67
-.63

.17
.02
-.04

U.S. Treasury 10-year indexed note

2.00

2.23

1.80

1.64

-.36

-.59

-.16

Municipal revenue (Bond Buyer) 5

5.04

5.37

5.03

4.97

-.07

-.40

-.06

Private instruments
10-year swap
10-year FNMA6
10-year AA 7
10-year BBB 7
5-year high yield 7

4.66
4.72
5.05
5.74
7.94

5.21
5.30
5.59
6.18
8.30

4.51
4.55
4.86
5.44
7.66

4.53
4.57
4.86
5.41
7.39

-.13
-.15
-.19
-.33
-.55

-.68
-.73
-.73
-.77
-.91

.02
.02
.00
-.03
-.27

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

5.85
3.72

6.21
4.19

5.70
4.00

5.64
3.96

-.21
.24

-.57
-.23

-.06
-.04

Record high

Change to Nov. 2
from selected dates (percent)

2004

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

Level

Date

June 28

Sept. 20

Nov. 2

Record
high

2004
June 28

2004
Sept. 20

11,723
1,527
5,049
606
14,752

1-14-00
3-24-00
3-10-00
4-5-04
3-24-00

10,357
1,133
2,020
584
11,056

10,205
1,122
1,908
571
10,937

10,036
1,131
1,985
585
11,075

-14.39
-25.99
-60.69
-3.45
-24.92

-3.10
-.25
-1.73
.23
.18

-1.66
.74
4.02
2.58
1.26

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Most recent Thursday quote.
6. Constant maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
8. Home mortgage data for Nov 2, 2004, is from Oct 28, 2004.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the beginning of the current tightening period.
September 20, 2004, is the day before the most recent FOMC meeting.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Futures Contract Rates

September
employment
report

Percent
2.6

September August
FOMC FOMC minutes

2.5

Percent
3.5
3.4

2.4

3.3
December 2005 eurodollar (right scale)

2.3

3.2

2.2

3.1

2.1

3.0
January 2005 federal funds (left scale)

2.0

2.9

1.9

2.8
Sept. 20

Sept. 24

Sept. 30

Oct. 5

Oct. 8

Oct. 14

Oct. 19

Oct. 22

Oct. 27

Nov. 1

Note. 5-minute intervals.

Implied Federal Funds Futures Rate

Percent

4.0

Implied Distribution of Federal Funds Rate
about Six Months Ahead
Percent
November 2, 2004 (bars)
September 20, 2004 (dashed line)

November 2, 2004
September 20, 2004

3.5

25
20

3.0

15
10

2.5

5
0

2.0
1.50

Nov.
2004

Apr.

Sept.
2005

Feb.

July
2006

Treasury Yields

3.00

3.50

Note. Based on the distribution of the three-month Eurodollar
rate five months ahead (adjusted for a risk premium), implied
by options on Eurodollar futures contracts.

Inflation Compensation

Percent

Daily

6
10 year

2.50

Target rate

Dec.

Daily

2.00

June
FOMC

August
FOMC

Percent

3.8

September
FOMC

3.6
3.4
3.2

5
Nov.
2

2 year

Nov.
2

5 to 10 years
ahead

3.0
2.8
2.6

2.4

5 year

2.2

2.0

1
Jan.

Mar.

May

July
2004

Sept.

Nov.

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

1.8
May

June

July

Aug.
2004

Sept.

Oct.

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

Domestic Financial Developments
Overview
Investors paid particular attention to higher oil prices, comments by Federal Reserve
officials, and mixed economic data during the intermeeting period. While high oil prices
seemed to prompt concerns about the near-term prospects for inflation and, at least at
times, the outlook for economic activity, they did not appear to fundamentally shake the
market’s view that the economy remains on a path of moderate growth. On net, policy
expectations for the near future firmed somewhat and short-term nominal Treasury yields
moved higher, but longer-term yields were little changed. Equity prices, which were
buffeted by fluctuations in the oil market, edged up on balance. Corporate risk spreads
were little changed for investment-grade bonds but moved down somewhat for lowerrated debt.
Merger-related corporate borrowing picked up over the intermeeting period, but
corporate debt growth otherwise remained tepid. Household debt growth, although not as
robust as it was earlier this year, appears to have remained elevated, mostly because of
mortgage borrowing. M2 growth has generally been sluggish in recent months.
Policy Expectations and Interest Rates
The decision by the FOMC to raise the target federal funds rate 25 basis points at the
September meeting had been widely anticipated, and the accompanying statement
reportedly was also in line with expectations. The release of the minutes of the August
FOMC meeting two days later boosted the expected pace of monetary policy tightening,
as investors reportedly focused on the statement that “significant cumulative policy
tightening likely would be needed” to achieve the Committee’s objectives. Those
expectations, however, were subsequently damped by the weaker-than-expected
September payroll data. On net, near-term policy expectations firmed somewhat over the
intermeeting period, in part because comments by Federal Reserve officials suggested
that the economic expansion was likely to remain on track. Quotes on federal funds
futures imply that investors currently place a probability of more than 80 percent on a
hike of 25 basis points at the November meeting and smaller odds on a tightening at the
December meeting. Further out, policy expectations changed little, on net, as the higher
oil prices and the mixed data releases did not appear to fundamentally alter investors’
economic outlook.
The Treasury yield curve flattened somewhat over the intermeeting period, as the twoyear yield rose 17 basis points and the ten-year yield was about unchanged. TIPS
inflation compensation over the next five years climbed more than 35 basis points, partly
in response to rising oil prices and to higher-than-expected readings on core PPI and core
CPI for September. In addition, the size of the October five-year TIPS auction, which
was smaller than some market participants had reportedly expected, weighed on the fiveyear TIPS yield, thereby boosting near-term measured inflation compensation somewhat.
In contrast, inflation compensation over the five years starting five years hence was little
changed.

III-2

Corporate Yields, Risk Spreads, and Stock Prices
Yields for BBB and High-Yield Corporate Bonds
Percent
15

Corporate Bond Spreads to Similar Maturity Treasury

Percent

Basis points
10 1100

Daily
FOMC
meeting

900

5-year high yield
(left scale)

Basis points
450

Daily

350

5-year high yield
(left scale)

8
700

250
10-year BBB
(right scale)

500
6

10-year BBB
(right scale)

300
Nov.
2

4
2002

2003

Nov.
2

100

2004

150

50
1998

1999

2000

2001

2002

2003

2004

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

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

S&P 500 and Oil Futures Priced 24 Months Ahead
Basis points

Ratio scale, Sept. 21, 2004=100
110

Weekly Friday*

150

Dollars
45

Daily

FOMC
meeting

Oil futures price
(right scale)

120 105

Nov.
2

100
60

Nov.
2

30
95
25

S&P 500
(left scale)

0
90
1998

1999

2000

2001

2002

2003

2004

20
Jan.

Mar.

May

* Latest observation is for most recent business day.

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

July

Implied Volatility on the S&P 500 (VIX)
Percent

Percent
10

12-month forward
E/P ratio

+
Nov.
2

Monthly*

FOMC
meeting

+
Long-run real Treasury yield*

1998

2001

Nov.

2004

Monthly

1995

Sept.

Nov.
2

S&P 500

2
2004

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

10
1995

1998

2001

* Latest observation is for most recent business day.

2004

III-3

Corporate Yields, Risk Spreads, and Stock Prices
Yields on investment-grade corporate bonds moved about in line with those on
comparable-maturity Treasury securities over the intermeeting period, leaving risk
spreads about unchanged. Yields on speculative-grade bonds declined more than
30 basis points and risk spreads on those securities narrowed, reflecting continued
improvements in credit quality. The spread of top-rated commercial paper over lowerquality CP issues remained low, as the market has thus far shown little evidence of yearend pressures.
Broad equity indexes, which were buffeted by oil price fluctuations over the intermeeting
period, posted a small gain on net. Technology stocks rose somewhat more, but stocks of
insurance companies fell sharply after the announcement of an investigation by the New
York State attorney general into business practices by some brokers and insurers. The
gap between the twelve-month forward earnings-price ratio for S&P 500 firms and the
synthetic long-run real Treasury yield, a rough measure of the equity premium, was
virtually unchanged over the intermeeting period at a relatively high level. Implied
volatility of equity prices has risen slightly in recent weeks but remains low.
Corporate Earnings and Credit Quality
Earnings reports, on balance, had little discernible effect on stock prices. Based on
results from about 80 percent of S&P 500 firms, earnings per share in the third quarter
are now expected to be about 15 percent higher than they were a year earlier; this growth
rate implies that earnings are about unchanged from those of the second quarter on a
seasonally adjusted basis. Analysts’ revisions to year-ahead earnings were modestly
positive for the S&P 500 as a whole, as they were boosted by sizable upward revisions
for energy firms. For firms outside the energy sector, the revisions were slightly
negative, a result consistent with the typical pattern of downward adjustments by
analysts.
The credit quality of nonfinancial firms continued to improve, and corporate balance
sheets remained strong. Net upgrades of corporate bonds were sharply positive in the
third quarter, confirming the break from a long trend of net downgrades. Earnings
reports of large bank holding companies suggest that delinquency rates on C&I loans
continued to decline in the third quarter. Indeed, according to the most recent Senior
Loan Officer Opinion Survey, banks largely expect that business loan quality will remain
good or perhaps even improve somewhat over the next year. The six-month trailing
default rate on corporate bonds remained very low. The expected year-ahead default rate
derived from Moody’s KMV Corporation was little changed at the relatively low level
registered throughout 2004.
Business Finance
Commercial paper issuance surged in October, boosted nearly $15 billion by Cingular’s
short-term borrowing to complete its acquisition of AT&T Wireless. Excluding the
financing of that merger, which also accounted for a significant fraction of net issuance
of bonds by nonfinancial corporations, corporate borrowing has remained muted since the

III-4

Corporate Earnings and Credit Quality
Corporate Earnings Growth

S&P 500 Revisions Index*

Percent

Quarterly*

30
Q2

Percent

Monthly

0
Mid
Oct.

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

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

-20

-3

-30
1989

1992

1995

1998

2001

2002

Percent

Percent of outstandings
30

Annual

26
24

Upgrades
Q3
H1

Current debt
to assets*
(right scale)

2004

Bond Ratings Changes of
Nonfinancial Companies

Percent
9

2003

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

Financial Ratios
28

-4

2004

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

20
30

Downgrades

0
1992

Interest expense
to cash flow
(left scale)

1989

-1

1995

1998

2001

2004

* Note. Current debt includes short-term notes and long-term debt due
in one year.
Source. Compustat.

Bond Defaults and
C&I Loan Delinquency Rates

50
1990

1992

1994

1996

1998

2000

2002

2004

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

Expected Year-Ahead Defaults
Percent of outstandings

Percent of liabilities
2.0

Monthly

1.5

C&I loan delinquency rate
(Call Report)

1.0

3
Q2

0.5

Bond default rate*
Sept.

1990 1992 1994 1996 1998 2000 2002 2004
* 6-month moving average, from Moody’s Investors Service.

Sept.

0.0

0
1994

1996

1998

2000

2002

2004

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

III-5

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

Type of security

2000

2001

2002

2003

2004
Q3

Oct. e

9.9
4.4
5.5

6.5
2.1
4.4

5.2
0.7
4.4

3.7
0.4
3.2

5.7
0.8
4.9

4.6
2.0
2.6

4.0
2.0
2.0

22.7
13.2
4.7
4.9

39.8
27.5
8.9
3.4

24.8
15.7
4.8
4.2

31.6
16.0
11.3
4.3

22.7
8.2
10.5
4.0

19.6
9.8
6.3
3.6

18.0
9.0
5.0
4.0

4.5

-8.0

-6.3

-3.8

2.8

1.9

17.5

7.8

-5.8

-5.2

-7.9

-0.3

5.5

3.9

1.4
57.8

4.2
80.2

4.0
87.0

6.9
111.1

8.3
130.9

4.1
145.0

5.5
80.0

Nonfinancial corporations
Stocks 1
Initial public offerings
Seasoned offerings
Bonds 2
Investment grade
Speculative grade
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper 3
Change in C&I loans at
commercial banks 3,4
Financial corporations
Stocks 1
Bonds 2

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

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

50
Monthly rate, nonfinancial firms

Commercial paper*
C&I loans*
Bonds

Public issuance
Private issuance
Repurchases
Cash mergers

Total

20
H1

Oct.

-10

-20

-30
2000

2001

2002

* Seasonally adjusted, period-end basis.
e Staff estimate.

2003

2004

-30
2000
e Staff estimate.

2001

2002

2003

2004

III-6

Commercial Real Estate
Growth of Commercial Mortgage Debt

Gross Issuance of CMBS
Percent

Billions of dollars
18

Quarterly, s.a.a.r.

Quarterly

14
12

e 10
Q3
8

2
0
1996

1998

2000

2002

2004

1996
1998
2000
2002
* Through October 29.
** Staff estimate for Q4.
Source. Commercial Mortgage Alert.

Investment-Grade CMBS Yields

Investment-Grade CMBS
Spreads over 10-Year Treasuries

Percent
10

2004

Basis points

Weekly

Weekly
9
8
BBB

BBB
7
6
AAA

AAA

Oct. 27

5
4
3
2003

2004

Delinquency Rates on Commercial
Mortgages and CMBS

At commercial banks

300
275
250
225
200
175
150
125
100
75
50
25
0

Oct. 27

2000
2001
2002
Source. Morgan Stanley.

2003

2004

Commercial Real Estate Valuation
Percent

Index, 1990:Q1=4
4

Percent
7

Quarterly
Net operating income to price ratio*
(left scale)

CMBS
2

Sept.
4

1
At life
insurance
companies

3
Q2

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

2
1996

1998

2000

2002

Source. Call Report, ACLI, Morgan Stanley.

2004

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

III-7

last FOMC meeting, as firms have apparently continued to rely on their ample profits and
liquid assets. C&I loans advanced again, posting a small increase in October after
moving up more strongly in the third quarter.
Gross public equity issuance by nonfinancial firms was sluggish in October. Seasoned
equity offerings were down, in part because of the reduced demand for deleveraging by
energy firms, which had previously been significant issuers. In contrast, initial public
offerings in October maintained their improved third-quarter pace, reflecting a few large
deals as well as an increased number of smaller offerings. Meanwhile, equity retirements
from both merger-related activities and share repurchases have accelerated notably, and
net equity issuance is estimated to have dropped further into negative territory in the third
quarter. The newly passed corporate tax bill, which provides incentives for firms to
repatriate profits earned overseas, could prompt a further increase in equity retirements in
coming quarters.
Commercial Real Estate
Financing activity related to commercial real estate remains strong, as the debt increased
at an estimated 10 percent annual rate in the third quarter. Judging from the heavy
calendar of commercial-mortgage-backed securities (CMBS) issues, growth in
commercial real estate debt is likely to remain elevated in the current quarter.
Investment-grade CMBS yields tracked those on Treasuries and swaps closely over the
intermeeting period, leaving spreads little changed at low levels. Credit quality has
continued to improve, as delinquency rates on CMBS fell again in September. The cap
rate—the ratio of net operating income to property prices—declined further in the third
quarter. The spread of this ratio over the real perpetuity Treasury yield, a measure of the
risk premium on commercial real estate assets, has narrowed sharply from the peak
reached in 2001.
Household Finance
Mortgage rates declined modestly over the intermeeting period to the lowest levels since
April. Available information suggests that household mortgage debt rose in the third
quarter at an annual rate of around 10 percent, down slightly from the robust 12 percent
pace in the first half of the year.
Consumer credit is estimated to have increased at an annual rate of about 5 percent in the
third quarter, around the average pace of the past two years. Households have probably
continued to pay down high-interest-rate consumer loans with some of the proceeds of
cash-out mortgage refinancings, although the tempo of such transactions has moderated
substantially in recent quarters. Growth in consumer debt may have been held down
recently by increases in consumer loan interest rates, particularly those offered by auto
finance companies on new automobiles.
Household credit quality generally remains solid. Delinquencies on credit card loans in
securitized pools moved down further in August, while those on loans for new

III-8

Household Liabilities
Freddie Mac Mortgage Rates

Household Debt Growth
Percent

Percent
9

Weekly

Quarterly, s.a.a.r.
30-year
FRM

Mortgage
14

7
12
6
ARM

e
Q3

Oct. 27
4

8
6
4

Consumer credit

2
1996

1998

2000

2002

2004

1996
1998
e Staff estimate.

Cash-outs from Mortgage Refinancing

2000

2002

2004

Consumer Loan Interest Rates

Billions of dollars

Percent
100

Quarterly

Credit cards at commercial banks

14
Q3

Auto loans at captive
finance companies

8
Aug.

30
e
Q3

2000

0
1991
1994
1997
Source. MBA, HMDA.

2003

0
2000
2001
2002
Source. Federal Reserve.

Delinquency Rates

2003

2004

Cumulative Household Bankruptcy Filings
Percent

Per 100,000 households
6

Credit card loans
in securitized pools

5
Aug.

1200

Weekly

1996-2002
2003
2004*

1000
800
600

Auto loans at captive
finance companies
Residential mortgages
at commercial banks

3
400
Aug.

200

Q2
1

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

Jan.
Mar.
May
July
Sept.
Nov.
* Through October 23.
Source. Visa Bankruptcy Notification Service Statistics.

III-9

Household Assets

Asset Prices

1993:Q1 = 100
350

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

House prices*

1990

1992

1994

1996

1998

2000

2002

250

150

2004

e Staff estimate based on Census data on prices of new homes sold and National Association of Realtors data on prices
of existing homes sold.
* Source. Office of Federal Housing Enterprise Oversight (OFHEO)
p Period to date.

Assets Relative to Disposable Income

Ratio
8

Quarterly, period-end, s.a.

7
Q3

1990

1992

1994

1996

1998

2000

2002

2004

e Staff estimate.

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

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

2002

10.1
-2.3
-2.1
-0.2
0.7
11.7
0.9
9.4
1.4

2003

18.0
12.7
10.7
2.0
2.7
2.6
2.2
1.0
-0.6

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

2004
Q3

Sept.

Oct.e

Assets
Sept.

36.5
28.4
19.9
8.5
5.1
3.0
-1.4
4.2
0.2

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

11.7
6.9
3.8
3.1
2.8
2.0
0.5
2.0
-0.5

15.9
10.1
6.0
4.1
3.0
2.8
0.8
1.9
0.1

13.0
6.4
2.9
3.6
2.2
4.4
0.8
2.9
0.7

5,658
3,916
3,332
584
479
1,263
148
789
326

III-10

III-11

automobiles at captive finance companies were little changed. Weekly household
bankruptcy filings continue to come in around 5 percent lower than they were last year
but remain elevated when compared with levels of earlier years.
Working from data for new and existing home sales, we estimate that OFHEO’s repeattransactions index of home prices will show an annualized rise of roughly 7 percent in the
third quarter. Such a reading, along with slightly lower stock prices, would suggest that
the ratio of household assets to disposable income was about unchanged over the third
quarter. Mutual fund flows remained tepid in September and October, a development
roughly consistent with our models that link flows to asset returns.
Treasury and Agency Finance
The federal government’s debt reached the statutory ceiling of $7.4 trillion on October
14. As in past debt-limit episodes, the Treasury suspended issuance of state and local
government series (SLGS) securities and began using other extraordinary financing
devices to continue to fund government operations. These maneuvers should allow the
Treasury to operate until the Congress returns from recess in mid-November and can take
action to raise the debt ceiling. The Treasury’s auction schedule is not expected to be
interrupted, and the debt-ceiling announcement has reportedly had little effect on yields
on Treasury securities. Treasury auctions during the intermeeting period continued to
attract strong demand from indirect bidders—a rough proxy for demand from foreign
official institutions.
Early in the intermeeting period, OFHEO released a report critical of Fannie Mae’s
accounting practices, earnings management, and internal controls. Shortly thereafter, the
Justice Department and the SEC opened further investigations of Fannie Mae. Fannie
Mae’s equity price declined sharply after these announcements, but investors were
subsequently reassured somewhat by the agreement between Fannie Mae and OFHEO
that addressed some of the regulator’s concerns, by the testimony of Fannie Mae’s chief
executive officer at a House committee hearing, and by the SEC chairman’s remarks that
the controversy surrounding Fannie Mae’s accounting practices was “not black and
white.” On net, over the intermeeting period, Fannie Mae’s stock price declined about
6 percent. The spillover to Freddie Mac’s stock price was minimal, and spreads on
agency senior debt changed little.
State and Local Government Finance
Gross issuance of long-term municipal bonds for new capital projects picked up in
October, about matching the robust pace in the first half of the year. Short-term issuance
dropped back in October after having been boosted in the third quarter by the borrowing
needs of Texas and California; the weaker pace in October is consistent with a broader
trend of lessened reliance on such borrowing because of the improved budget conditions
in many states.
The credit quality of municipal bonds continued to improve over the intermeeting period,
as upgrades of municipal bonds far outpaced downgrades. Longer-term municipal bond

III-12

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

2004
Type of security

Sep.

Oct. e

37.9
32.0
10.0
22.1
5.8

35.5
31.7
11.2
20.5
3.8

33.9
25.6
9.7
16.0
8.3

33.7
24.5
11.2
13.4
9.1

33.1
30.9
11.3
19.7
2.2

3.5

2.5

1.2

1.1

1.6

2001

2002

2003

29.0
24.3
7.6
16.7
4.7

36.3
30.3
10.1
20.2
6.0

1.4

1.7

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

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.
e Staff estimate based on preliminary data through October 28.

Bond Rating Changes
Number of rating actions
July - Oct.**

Annual

Upgrades

2000
1500
1000

H1*

500
0
500

Downgrades

1000
1500

1990

1992

1994

1996

1998

2000

2002

2000

2004

* At an annual rate.
** Data through October 27 at an annual rate.
Source. S&P’s Credit Week Municipal and Ratings Direct.

Municipal Bond Yields
AA1 General Obligation

Municipal Bond Yield Ratio
Percent

AA1 General Obligation over Treasury
7

Weekly

Ratio
1.1

Weekly

20-year

1.0

20-year

4
Nov.
2

1-year

Nov.
2

3
2

0.9

0.8

1
1996

1998

Source. Bloomberg.

2000

2002

2004

1996

1998

Source. Bloomberg.

2000

2002

2004

0.7

III-13

yields declined a bit and, as yields on comparable-maturity Treasury securities were
about unchanged, the municipal bond yield ratio edged slightly lower.
Money and Bank Credit
Growth in M2 has generally been sluggish in recent months, in keeping with rising
opportunity costs in the wake of the recent policy tightenings and a moderate pace of
advance in nominal income. Growth in September was boosted some by an uptick in
mortgage refinancing, but this effect has since waned.
Bank credit expanded robustly in September but likely decelerated significantly in
October, a result of runoffs in both securities holdings and the volatile “other loans”
category. Business loans are on track for a sixth consecutive month of expansion in
October and conditions in that market appear generally favorable. Evidence from the
latest Senior Loan Officer Opinion Survey indicates that, on balance, domestic
commercial banks continue to see stronger demand for C&I loans from customers of all
sizes. Also, as has been the case for some time, the latest survey evidence shows that
banks have continued to ease standards and terms for these loans on net.

III-14
Monetary Aggregates
(Based on seasonally adjusted data)
2004
2003

Sept

Aggregate or component
Aggregate
1. M22
2. M33

Percent change (annual rate)1
9.7
2.5
5.6
10.8
2.5
4.0

5.3
4.6

3.5
6.1

5.9
13.8
-9.3
-11.6

2.8
10.4
-4.5
-19.4

4.0
17.4
-5.9
-7.2

9.3
4.5
.1
-11.3

3.1
3.6

11.7
28.9

12.9
27.3

-5.8
14.1
27.4

-7.8
13.7
33.7

6.0

3.1

Oct
(e)

Level
($ billions)
Oct
(e)

2.7
-2.2

6,344
9,295

7.0
8.3
5.0
-9.9

4.0
6.6
2.0
-19.9

694
4,126
797
719

2.5
15.6

.7
4.7

-12.6
15.5

2,950
1,030

2.5
6.1
19.4

-8.4
4.7
-2.2

-11.9
16.5
4.1

-32.1
-40.0
11.1

1,059
533
329

4.9

8.8

8.3

7.5

758

Components of M2
3. Currency
5
4. Liquid deposits
5. Small time deposits
6. Retail money market funds
Components of M3
6
7. M3 minus M2
7
8. Large time deposits, net
9. Institutional money market funds
10. RPs
11. Eurodollars
Memo
12. Monetary base

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

-1.5

15.4

20.6

15.0

-1.2

9.1

1,150

3.1

-16.6

-11.1

-9.0

3.1

-12.1

-0.4

2.4

0.0

-3.8

7.7

7.5

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

III-15

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices
The October 2004 Senior Loan Officer Opinion Survey on Bank Lending Practices
addressed changes in the supply of, and demand for, bank loans to businesses and
households over the past three months. The survey also contained additional questions
on recent changes in the degree of competition from alternative sources of funds in the
commercial and industrial (C&I) loan market and on banks= outlook for business loan
credit quality over the next year. This appendix is based on responses received from
fifty-six domestic and twenty foreign banking institutions.
Both domestic banks and U.S. branches and agencies of foreign banks further eased
lending standards and terms for C&I loans over the past three months. Banks that eased
standards or terms reported having done so in response to increased competition from
other U.S. banks as well as from a wide range of alternative sources of business credit.
A sizable net fraction of domestic and foreign institutions also reported an easing of
lending standards for commercial real estate loans. On balance, domestic and foreign
banks reported stronger demand for both C&I and commercial real estate loans.
Standards and terms on loans to households were little changed. Demand for residential
mortgages and consumer loans reportedly declined, on net.
C&I lending
In the October survey, both domestic banks and U.S. branches and agencies of foreign
banks reported a further net easing of credit standards on C&I loans. More than onefifth of domestic banks, on net, reported having eased their lending standards for large
and middle-market firms, about the same fraction as in the July survey. A similar
percentage of these institutions also indicated that they had eased their lending
standards for small firms, a noticeable increase from the 4 percent net easing in the
previous survey. The share of U.S. branches and agencies of foreign banks that
reported easier lending standards for C&I loans was 35 percent, little changed from the
July survey.
Both domestic and foreign institutions indicated that they had continued easing many
lending terms on C&I loans over the past three months. On net, about 50 percent of
domestic banks reported that they had narrowed spreads of loan rates over their cost of
funds for large and middle-market borrowers, and nearly 40 percent had done so for
small firms, up from about 30 percent in each case in the July survey. More than half of
the foreign institutions reported narrower spreads on their C&I loans in the latest
survey. In addition, roughly one-third of both domestic and foreign respondents
indicated that they had eased terms on credit lines by reducing the costs of these lines
and increasing their maximum size.
Almost all domestic and all foreign respondents cited more aggressive competition from
other banks or nonbank lenders as the most important reason for easing their lending
standards and terms over the previous three months. About three-quarters of domestic
banks that had eased their lending posture also cited a more favorable or less uncertain
economic outlook as a reason. Foreign institutions, on balance, were not as optimistic
about the economy, but 60 percent, on net, pointed to an increased tolerance for risk as
a reason for easing. The few domestic banks that tightened standards or terms over the

III-A-2
past three months said they were motivated to do so by a worsening of industry-specific
problems or reduced tolerance for risk.
Because respondent banks have consistently reported that they have eased standards or
terms in response to increased competition from other sources of business credit, this
survey included two special questions on the nature of this competition. Forty-two
domestic respondents and fifteen foreign respondents indicating that they had
experienced increased competition from other sources of credit this year reported that
the greatest increases came from the U.S. commercial banking sector. For domestic
institutions, and especially for the largest commercial banks in the sample, the secondmost-cited competitor was investment banks. At foreign institutions, the second biggest
increase in competitive pressure came from other foreign banks. Both domestic and
foreign institutions also indicated increased competitive pressure from a wide range of
other sources of business credit. The majority of those respondents expressing an
opinion indicated that the increased competitive pressure reflected a permanent, rather
than a temporary, change in the structure of the C&I loan market. However, one-half of
domestic respondents and about one-third of foreign bank respondents felt that the
nature of this shift was not clear at this point.
An additional question asked banks about their outlook for the credit quality of business
loans over the next year. A majority of the domestic and foreign respondents indicated
that loan quality is likely to stabilize around current levels if economic activity
progresses in line with consensus forecasts. On net, the remaining domestic and foreign
banks indicated that loan quality would likely continue to improve.
On net, 25 percent of domestic institutions reported an increase in demand for C&I
loans from large and middle-market firms, and 24 percent reported an increase in
demand from small firms, smaller fractions than in the July survey. In addition, 37
percent, on net, reported an increase in the number of inquiries from potential business
borrowers. In contrast, only 5 percent of foreign respondents, on net, indicated that
demand for C&I loans was stronger, while the number of inquiries from potential
borrowers at these institutions decreased.
As was the case in previous surveys, most of the domestic respondents that had
experienced stronger loan demand cited as an important reason borrowers= increased
financing needs for accounts receivable and inventories as well as for investment in
plant and equipment. Moreover, almost two-thirds of domestic respondents indicated
that customer borrowing had shifted to their banks from other banks or nonbank sources
of credit because these other sources had become less attractive. On the other hand, a
large majority of the domestic banks that reported weaker demand pointed to borrowers
leaving their banks for more attractive sources of credit as an important reason.
Additionally, these banks indicated that their customers’ investment activity had
declined and that internally generated funds had increased.
Commercial real estate lending
Almost one-fifth of domestic banks, on net, reported an easing of lending standards on
commercial real estate loans over the past three months, double the fraction in the
previous two surveys. The net percentage of domestic banks that had experienced an

III-A-3
increase in demand for this type of loan was about unchanged from July at 23 percent in
October. In addition, 15 percent of foreign institutions, on net, reported stronger
demand for commercial real estate loans over the past three months.
Lending to Households
In the October survey, credit standards on residential mortgage loans and other loans to
consumers were little changed, on net, at domestic banks. Terms on credit card and
other consumer loans were also little changed, on net, but a modest fraction of banks
reported an increased willingness to make consumer installment loans. Demand for
residential mortgages and consumer loans continued to weaken. About 23 percent of
banks, on net, reported weaker demand for mortgages to purchase homes, compared
with 8 percent in July. Nearly a third of domestic respondents reported weaker demand
for consumer loans, up from 12 percent in the previous survey.

III-A-4

Measures of Supply and Demand for C&I Loans,
by Size of Firm Seeking Loan
Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
Percent
80

60
Large and medium
Small

-20
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

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

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-60
2005

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

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

III-A-5

Measures of Supply and Demand for Loans to Households

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

50
40
30
20
10
Other consumer loans

0
1996

1997

1998

1999

2000

2001

2002

2003

2004

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

Residential mortgages

40
20
0
-20
-40

Consumer loans

-60

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-80
2005

Net Percentage of Domestic Respondents Tightening Standards for Mortgages to Individuals
Percent
40

-10

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit rose to $54 billion in August from $50.5 billion in
July (revised).
Net Trade in Goods and Services
(Billions of dollars, seasonally adjusted)
2003

Annual rate
2004
Q1
Q2
Q3e

Monthly rate
2004
June
July
Aug.

Real NIPA1
Net exports of G&S

-518.5

-550.1

-580.3

-598.0

...

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

-496.5
-547.6
51.0

-554.4
-603.1
48.7

-601.1
-654.3
53.2

-627.5
-673.2
45.7

-55.0
-59.1
4.1

-50.5
-54.8
4.2

-54.0
-57.4
3.4

1. Billions of chained (2000) dollars.
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.

In August, the value of exported goods and services ticked up 0.1 percent following a
robust 3 percent rise in July. A decline in agricultural exports was largely offset by a rise
in exports of consumer goods, particularly pharmaceuticals, and automotive products.
Exports of capital goods edged up as declines in high-tech goods were offset by stronger
exports of civilian aircraft and other capital goods. Exports of services edged up slightly.
At an annual rate, the average value of exported goods and services in July and August
was about 5 percent above the second-quarter level. The increase was widespread,
except for exports of agricultural products and consumer goods, both of which fell.
The value of imported goods and services jumped 2.5 percent in August, following a
1.1 percent fall in July. A large increase in the value of imported oil contributed slightly
less than half of the gain, reflecting both higher prices and quantities. Imports of non-oil
goods also moved higher, led by an increase in industrial supplies. Imports of capital
goods edged down entirely on account of decreased imports of aircraft. Imports of
computers and semiconductors were essentially unchanged. Services imports were
boosted by a one-time payment for the rights to broadcast the 2004 Summer Olympic
Games. At an annual rate, the average value of imported goods and services in July and
August was about 10 percent above the second-quarter level. The rise was fairly
widespread, with the main exception being consumer goods, which declined.

IV-2

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

Bil$, s.a.a.r.

Nominal
BOP basis

Contribution of Net Exports to Real GDP Growth
-50

Percentage points, s.a.a.r.

-100
-150
-200
-250

1996

-300

Real
NIPA basis
(2000$)

1998

2000

2002

-350

2004

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

-400

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

20
0

-450

-20

-500

-40

Net automotive trade
with Canada and Mexico

-550

1996

1998

2000

2002

2004

-60

-600

1996

1998

2000

2004 -650

2002

380

Selected Imports

Bil$, s.a.a.r.

360

Selected Exports

Bil$, s.a.a.r.

220

270

340

250

Consumer goods

Machinery 2/

200

320

180

300

160
140

290

230
210

280
190

Industrial
supplies 1/

260

170
240

120

Industrial
supplies 1/

150
220

Machinery 2/

100
80
60

Aircraft

1996

1998

130

200

Consumer goods

2000

2002

1. Excludes agriculture and gold.
2. Excludes computers and semiconductors.

2004

110

180

160

140

120

Automotive 3/
(overseas)

1996

1998

2000

2002

1. Excludes oil and gold.
2. Excludes computers and semiconductors.
3. Excludes Canada and Mexico.

70
2004

IV-3

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

Exports of G&S
Goods exports
Gold
Other goods

Levels
2004
2004
Q2
Q3e
July
Aug.
1137.2 1151.7 1151.0 1152.3

Change1
2004
2004
Q2
Q3e
July
Aug.
32.9
14.5
34.0
1.4

797.3
3.5
793.8

809.1
4.3
804.8

809.5
4.7
804.9

808.7
3.9
804.8

21.6
-0.9
22.5

11.9
0.8
73.8

33.4
1.4
32.0

-0.9
-0.8
-0.1

47.7
41.8
49.0
190.4

52.0
43.1
45.7
192.8

50.5
43.9
46.2
192.6

53.5
42.3
45.1
193.0

-2.2
-0.2
-1.1
9.0

4.3
1.2
-3.3
2.4

8.5
2.6
0.5
4.9

2.9
-1.6
-1.2
0.4

85.5
47.1
16.0
22.4

92.2
52.5
13.8
25.9

90.8
52.0
11.9
26.9

93.6
52.9
15.7
25.0

2.0
0.7
0.7
0.5

6.7
5.3
-2.2
3.6

7.0
5.4
-3.0
4.6

2.8
0.9
3.9
-1.9

62.8
183.6
102.2
30.8

59.1
188.6
101.0
30.4

62.0
188.6
99.0
31.3

56.2
188.7
103.0
29.4

-0.8
9.1
4.3
2.4

-3.7
5.0
-1.2
-0.4

2.0
10.0
-2.3
11.7

-5.7
0.1
4.1
-2.0

339.9

342.5

341.4

343.7

11.3

2.6

0.5

2.2

Imports of G&S

1738.3 1779.2 1757.6 1800.8

79.6

40.9

-19.7

43.3

Goods imports
Petroleum
Gold
Other goods

1451.6 1482.3 1466.7 1498.0
164.2 177.6 167.4 187.8
3.3
3.9
4.3
3.4
1284.1 1300.9 1294.9 1306.8

72.8
1.8
-0.8
71.8

30.8
13.4
0.6
16.8

-18.8
-14.7
1.1
-5.2

31.3
20.4
-0.9
11.9

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

Aircraft & parts
Computers & accessories
Semiconductors
Other capital goods

24.4
87.7
27.3
201.2

23.1
91.7
27.7
206.7

25.9
91.7
27.7
204.9

20.2
91.8
27.7
208.6

2.8
5.1
0.8
11.0

-1.4
4.0
0.4
5.5

-2.4
3.3
-0.2
-2.8

-5.7
0.1
0.0
3.8

Automotive
from Canada
from Mexico
from ROW

228.4
67.7
44.7
116.0

230.3
69.8
40.0
120.5

229.5
67.5
36.3
125.7

231.2
72.1
43.8
115.3

6.3
3.7
2.8
-0.2

1.9
2.1
-4.7
4.6

5.1
-0.3
-9.5
14.9

1.6
4.6
7.4
-10.4

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

224.0
374.6
62.5
54.0

239.7
365.7
61.5
54.3

235.3
365.8
61.7
52.4

244.2
365.7
61.2
56.2

25.2
16.6
2.3
1.8

15.8
-8.9
-1.0
0.4

-0.0
-5.7
-1.2
-1.1

8.9
-0.2
-0.5
3.8

286.7

296.9

290.9

302.8

6.8

10.1

-0.9

12.0

13.01
34.53

14.76
36.65

12.98
35.31

16.53
37.99

-1.38
3.64

1.74
2.13

-1.06
-0.21

3.55
2.68

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

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

IV-4

Prices of U.S. Imports and Exports
(Percentage change from previous period)
Annual rate
2004
Q1
Q2
Q3

Monthly rate
2004
July
Aug.
Sept.

----------------------- BLS prices --------------------11.5
7.4
7.2
0.4
1.4
0.2
68.1
43.2
49.0
2.2
8.3
0.6
5.9
3.0
1.5
0.0
0.3
0.1

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

7.1
2.6
1.7
2.6
10.0
25.3

4.3
0.0
1.4
-0.5
7.8
18.7

2.4
2.0
0.9
-0.1
3.2
8.9

0.1
0.4
0.0
0.0
0.6
0.1

0.4
0.2
0.0
0.0
0.0
1.7

0.1
0.0
0.3
0.0
0.8
0.1

Computers
Semiconductors

-1.7
-8.2

-8.6
-7.0

-8.2
-4.7

-0.7
-1.1

-0.8
0.1

-0.1
-0.3

7.4

6.0

-0.1

0.5

-0.5

0.4

Core goods*
Cap. goods ex comp & semi
Automotive products
Consumer goods
Agricultural products
Industrial supples ex ag

8.4
2.2
0.3
1.1
19.0
21.3

6.6
0.8
1.3
1.1
17.5
14.4

0.6
1.2
1.2
3.0
-31.5
14.9

0.6
0.2
0.2
0.6
-1.1
2.3

-0.5
0.1
0.1
0.2
-8.5
1.1

0.5
0.0
0.0
0.1
1.6
0.7

Computers
Semiconductors

1.2
-1.7

0.3
2.1

-6.9
-4.2

-0.5
-0.1

-0.1
-0.3

Merchandise exports

Chain price index
Imports of goods & services
Non-oil merchandise
Core goods*

--------------------9.6
6.4
5.6
2.8
6.4
4.0
5.7
6.4
7.9

Exports of goods & services
Total merchandise
Core goods*

4.6
5.3
5.8

NIPA prices --------------------5.5
...
...
...
1.4
...
...
...
2.3
...
...
...
2.0
1.6
2.2

...
...
...

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

Oil Prices
Dollars per barrel

Spot West Texas Intermediate

Import unit value
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

55
50
45
40
35
30
25
20
15
10
5

IV-5

Prices of Internationally Traded Goods
Non-oil imports. In September, the prices of U.S. imports of non-oil goods and of core
goods both increased 0.1 percent. Foods, feeds and beverages had the largest increase,
rising 0.8 percent, led by higher vegetable prices. Automotive products increased
0.3 percent, the largest monthly increase in this category since October 2003. After
increasing a revised 1.7 percent in August, the prices of imported non-oil industrial
supplies rose a modest 0.1 percent. The prices of capital goods and consumer goods were
unchanged in September. Import prices of both computers and semiconductors declined
in September, falling 0.1 and 0.3 percent, respectively.
For the third quarter, on a NIPA basis, the prices of imported core goods increased
2¼ percent at an annual rate. The rise was concentrated in non-oil industrial supplies
and, to a lesser extent, capital goods (excluding computers and semiconductors) and
foods.
Oil. The BLS price of imported oil rose 0.6 percent in September. In the second half of
September, the spot price of West Texas Intermediate (WTI) crude oil, a light, sweet
crude, climbed sharply as the extent of hurricane damage to U.S. oil production and
pipeline infrastructure in the Gulf of Mexico became evident. The spot price of WTI
averaged $53 per barrel in October, a nominal record, but the prices of heavier, more sour
(greater sulfur content) types of crude oil did not increase as much as that of WTI. The
sweet-sour price spread has widened considerably because production of sweet crude in
the Gulf of Mexico remains diminished, refiners faced with limited capacity prefer
sweeter crude, and because much of OPEC’s increased production is sour. Oil prices in
general remain elevated because of strong world oil demand and concerns about future
supply, particularly from Iraq, Nigeria, and Russia. Supply concerns are heightened
because of low inventories, particularly of heating oil, and meager OPEC spare
production capacity. After reaching record nominal dollar prices in October, the spot
price of WTI has edged down recently and, as of November 2, stood at $49.63 per barrel.
Exports. In September, the prices of U.S. exports of total goods and of core goods
increased 0.4 and 0.5 percent, respectively, a partial recovery from August=s declines.
Much of September=s increase was due to a 0.7 percent increase in industrial supplies that

IV-6

reflected higher prices for chemicals. In addition, after falling 8.5 percent in August, the
prices of agricultural exports increased 1.6 percent. Export prices of consumer goods,
automotive products, and capital goods (excluding computers and semiconductors)
showed little change. Export prices of computers and semiconductors fell 0.1 and
0.3 percent, respectively.
In the third quarter, on a NIPA basis, the prices of exported core goods increased
2¼ percent at an annual rate. A sharp decline in prices of exported agricultural products
offset much of the moderate increase in prices of industrial supplies and small increases
in other categories.
U.S. International Financial Transactions
Private foreign purchases of U.S. securities (line 4 of the Summary of U.S. International
Transactions table) slowed to $26 billion in August from the strong $59 billion inflow
recorded in July. For the two months taken together, private inflows continued at about
the same rate as in the first half of the year. The slowdown in private inflows in August
primarily reflected a shift from sizable net purchases to modest net sales of both Treasury
securities (line 4a) and equities (line 4d); for both types of securities, modest purchases
from Asia were more than offset by sales through European and Caribbean financial
centers. Private foreign demand for agency and corporate bonds (lines 4b and 4c)
remained strong.
Net foreign official inflows (line 1) were a robust $29 billion in August, reflecting sizable
inflows from Japan, China, and Thailand, which were only partially offset by outflows
from Norway and Taiwan. Partial data on confidential custody holdings at FRBNY
indicate that foreign official inflows slowed in September and October, bringing official
inflows for the third quarter to about $50 billion, a further moderation from the blistering
pace recorded in the first quarter of the year.
U.S. net purchases of foreign securities (line 5) eased a bit to $4 billion in August from
the $17 billion outflow recorded in July. U.S. investors made modest net purchases of
foreign bonds (line 5a) and acquired equities, primarily through a merger-related stockswap (line 5c). A series break in reported data on U.S. net purchases of foreign bonds
makes it difficult to compare the net purchases in recent months with the net sales
recorded in previous quarters. Reported U.S. net sales of foreign bonds in 2003 have
been revised down from $36 billion to the currently recorded $24 billion, and further
revisions are expected.

IV-7

The volatile banking sector (line 3) recorded a moderate inflow of $13 billion in August,
about offsetting the outflow recorded in July.
When the August TIC data were publicly released on October 18, financial market
participants appeared to interpret the data as showing weakness in foreign private
inflows. TIC data for September are expected in the first week of November and should
provide more perspective on the trend in financial flows. These data will be included in a
Greenbook supplement.

IV-8

Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)
2002
Official financial flows
1. Change in foreign official assets
in the U.S. (increase, +)
a. G-10 countries
b. OPEC countries
c. All other countries
2. Change in U.S. official reserve
assets (decrease, +)
Private financial flows
Banks
3. Change in net foreign positions
of banking offices in the U.S.1
Securities2
4. Foreign net purchases of U.S.
securities (+)
a. Treasury securities
b. Agency bonds
c. Corporate and municipal bonds
d. Corporate stocks3
5. U.S. net acquisitions (-) of foreign
securities
a. Bonds
b. Stock purchases
c. Stock swaps3
Other flows (quarterly data, s.a.)
6. U.S. direct investment (-) abroad
7. Foreign direct investment in U.S.
8. Foreign holdings of U.S. currency
9. Other (inflow, + )4
U.S. current account balance (s.a.)
Capital account balance (s.a.)
Statistical discrepancy (s.a.)

2003

2004
Q2

113.0 246.5

50.1

85.1 129.4

74.5

13.2

28.8

116.7 245.0
30.7 114.7
-7.5
6.1
93.5 124.2

50.8
15.9
2.1
32.8

82.9 128.8
46.6 96.5
10.5
3.7
25.8 28.6

73.3
45.6
-2.6
30.3

12.7
3.4
.6
8.7

29.3
19.3
-1.3
11.3

-3.7

July

Aug.

1.5

-.6

2.2

1.1

-.5

457.2 299.3

75.9

83.5

9.3

72.3

…

116.8

22.3 100.7

-42.2

35.0

-9.2

13.5

92.3 128.9 120.2
8.8 65.8 30.4
2.2
6.7 36.0
57.6 51.4 51.1
23.6
5.1
2.7

59.2
15.3
10.7
23.5
9.7

26.5
-4.7
11.6
21.8
-2.1

-27.1
13.5
-27.9
-12.7

-17.2
-7.3
-9.9
.0

-3.8
-2.6
.2
-1.5

-134.8 -173.8 -45.2 -53.7 -47.6 -60.7
72.4 39.9
-2.8 10.7 10.2 32.7
21.5 16.6
2.8
7.5
-1.8
8.8
-24.4 56.3 60.1 -47.6 -20.0 -36.4
-473.9 -530.7 -131.6 -127.0 -147.2 -166.2

…
…
…
…
…

…

64.3

390.1 372.8
101.5 121.2
84.2 -14.8
145.7 226.1
58.8 40.3

65.5
46.7
-31.1
52.5
-2.5

15.5
33.5
-14.8
-3.2

-26.7
4.4
-31.1
.0

-1.3
-95.0

-76.9
24.2
-83.6
-17.4

-3.1
-12.0

-.8
6.4

-26.3
-7.0
-16.5
-2.8

-.3
-41.4

-18.3
3.1
-21.4
.0

-.4
8.9

-.3
19.7

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

IV-9

Foreign Financial Markets
On net, the dollar’s trade-weighted exchange value against the major foreign currencies
fell 4½ percent over the intermeeting period. The staff’s major currencies index is now at
its lowest level since mid-1995. The dollar depreciated against the currencies of several
emerging Asian economies, leading the dollar’s trade-weighted exchange value to slip
½ percent versus our other important trading partners.
Exchange Value of the Dollar
September 21, 2004 = 100
103
Daily

Sept.
FOMC

102

Broad
Major currencies

101
Other important
trading partners

100

Aug

Sep

Oct

Nov

The dollar moved down in response to several weaker-than-expected U.S. economic data
releases, particularly the employment report for September (released on October 8). The
dollar was also pressured by concerns over the financing of the U.S. current account
deficit. This issue attracted greater prominence following the releases in mid-October of
data showing a larger-than-expected U.S. trade deficit for August and of Treasury
International Capital data for the same month, which showed a decline from the previous
month in private net foreign purchases of U.S. securities. The increase in the price of
crude oil was also viewed by some market participants as a negative influence on the
dollar.
On a bilateral basis, the dollar depreciated against all of the currencies in the major
currencies index. The sharpest declines were 7 percent against the Australian dollar and

IV-10

6 percent versus the Canadian dollar. Australian export prospects were buoyed by
greater-than-expected Chinese economic growth in the third quarter. A 4 percent rise in
the dollar price of gold, a major Australian export, also supported the Australian dollar.
Robust Canadian economic data, including a stronger-than-expected purchasing
manager’s report for September, as well as a rate hike by the Bank of Canada, provided a
boost to the Canadian currency, which reached a 12-year high against the U.S. dollar.
Despite generally lackluster Japanese economic data, the dollar slipped 3¼ percent
relative to yen over the intermeeting period. With the yen within striking range of a
multi-year high against the dollar, Japanese financial officials began to express concern
over the move and left the door open for “taking action” should the yen continue to
appreciate. The dollar also depreciated 4¼ percent vis-à-vis the euro.

Financial Indicators in Major Industrial Countries

Country
Canada

Three-month rate
Percentage
Nov. 3
point
(Percent)
change

Ten-year yield
Percentage
Nov. 3
point
(Percent)
change

Equities
percent
change

2.66

.18

4.52

-.06

3.14

Euro area

2.16

.04

3.91

-.11

2.48

United Kingdom

4.78

-.07

4.81

-.10

2.34

.67

.05

2.49

-.14

-.99

Australia

5.44

.04

5.40

.05

5.41

United States

2.14

.25

4.12

.07

1.48

n.a.

Japan

Switzerland

Memo:
Weighted-average
foreign

NOTE. Change is from September 21 to November 3 (10 a.m. EDT).
n.a. Not available.

Three-month interest rates for the major industrial countries were little changed over the
period for the countries that did not change monetary policy. In addition to the FOMC,
the other central bank to adjust its stance was the Bank of Canada, which raised its key
policy interest rate 25 basis points, to 2.50 percent, on October 19. The BOC cited a need
to reduce stimulus to keep inflation within target. Despite concerns in the currency

IV-11

market that higher oil prices would weigh more heavily on the U.S. economy than on the
economies of our major trading partners, implied rates on the December 2005
three-month sterling and euro futures contracts have fallen 20 and 30 basis points,
respectively, since the September FOMC meeting, in contrast to little net change in the
comparable dollar rate. In addition, European bellwether bond yields declined over
10 basis points over the period, compared to a modest increase, on balance, in the yield
on the ten-year U.S. Treasury note.
The rise in oil prices weighed on the share prices of firms most sensitive to energy prices.
In Europe and Japan, automotive-sector sub-indexes fell 5 to 6 percent over the
intermeeting period. Companies in other heavy-manufacturing industries also felt a
strong negative impact from the higher energy prices. For the euro-area, losses in the
shares of energy-sensitive firms were offset by gains in the technology sector, leaving the
Euro Stoxx index slightly higher, on balance. Sharp price declines over the period in the
S&P 500 insurance and pharmaceutical sub-indexes were not matched overseas, as
market participants deemed the stumbles of several underperforming U.S. companies to
be firm specific.
In emerging Asia, the People’s Bank of China raised its one-year lending rate 27 basis
points, to 5.58 percent, on October 29. This was the first time this rate had been
increased since 1995. The 12-month Chinese yuan non-deliverable forward contract now
prices a 3½ percent appreciation versus the dollar, up from a 3 percent implied
appreciation at the beginning of the period. The Korean won and Singapore dollar each
reached four-year highs against the dollar, appreciating 3 percent and 1½ percent,
respectively, over the period. The Taiwan dollar also rose 1¼ percent against the dollar.
Market participants report that, for the past several years, the financial authorities of these
countries have intervened to keep the strength of their currencies in check. As their
export competitiveness vis-à-vis Japan has been a long-standing concern, the 3¼ percent
appreciation of the yen against the dollar may have led these authorities to be less
aggressive in their intervention operations. Higher energy prices weighed heavily on the
share prices of oil-importing emerging Asian economies. In contrast, share prices in
Indonesia, an oil exporter, rose 8 percent. The rise in the price of oil also helped the
Russian economy, as share prices rose 6 percent and Russia’s EMBI+ spread narrowed
40 basis points over the period.

IV-12

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

Short-term
interest rates1
Percentage
Nov.2/3
point
(Percent)
change

Dollar-denominated
bond spread2
Percentage
Nov.2/3
point
(Percent)
change

Equity
prices

Nov. 3

Percent
change

11.42

-.10

8.02

.72

1.76

.02

7.67

Brazil

2.84

-1.39

16.85

.73

4.48

-.15

2.51

Argentina

2.95

-1.73

51.57

-4.31

20.60

Chile

606.90

-1.09

2.18

.24

.62

.00

5.36

China

8.28

.00

n.a.

.57

-.11

-8.41

Korea

1116.00

-2.70

3.80

.00

...

.45

33.47

-1.36

1.33

.10

...

-1.45

Singapore

1.67

-1.42

1.25

-.13

...

.22

Hong Kong

7.78

-.24

.14

-.79

...

.70

Malaysia

3.79

-.26

2.82

-.01

.54

-.09

1.54

Thailand

41.18

-.28

1.85

.16

.60

.00

-2.97

9120.00

1.11

7.41

.01

1.24

-.36

8.07

Philippines

56.35

.23

6.50

-.06

4.84

.22

6.20

Russia

28.78

-1.48

n.a.

2.54

-.38

5.81

Economy
Mexico

Taiwan

Indonesia

Percent
change

NOTE. Change is from September 21 to November 2/3.
1. One month interbank interest rate, except Chile: 30-day deposit rate; Korea: 1-week call rate.
No reliable short-term interest rates exist for China or Russia.
2. Spread over similar maturity U.S. Treasury security yield. Mexico, Brazil, Argentina, Korea,
the Philippines and Russia: EMBI+ yield. Chile and China: Global bond yield. Malaysia: Eurobond
yield. Thailand and Indonesia: Yankee bond yield. Taiwan, Singapore, and Hong Kong do not have
outstanding sovereign bonds denominated in dollars.
n.a. Not available. ... Not applicable.

The Mexican central bank has tightened monetary policy twice since the September
FOMC meeting, citing inflation pressures. So far this year, the Mexican central bank has
raised its “corto” seven times. Despite these moves, Mexico’s stock market index hit a
record high during the period, rising almost 8 percent. The Brazilian central bank also
cited inflation pressures when it raised its key policy interest rate 50 basis points, to
16.75 percent, on October 20.

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

IV-13

Developments in Foreign Industrial Countries
Indicators of economic activity in the major foreign industrial economies generally
suggest a third-quarter slowdown in growth. While labor conditions continued to
gradually improve in Japan, monthly measures of industrial production and household
expenditure have either been flat or have fallen. Similarly, in the euro area the most
recent data on industrial production and retail sales were both below their second-quarter
levels. The preliminary estimate of third-quarter GDP for the United Kingdom showed
growth falling to less than half of its second-quarter rate. Incoming data for Canada have
been better, with retail sales and employment both posting gains. Real merchandise
export growth slowed from second-quarter rates in all of the major foreign industrial
countries, while import growth remained near second-quarter rates in all countries but
Canada.
Headline rates of consumer price inflation have edged down from their recent peaks.
Inflation in the euro area slowed to 2.1 percent in September, while Canadian inflation
fell to 1.9 percent, and inflation in the United Kingdom fell to 1.1 percent. Slight
deflation persisted in Japan despite rising oil and commodity prices.
On October 19, the Bank of Canada raised its key policy interest rate 25 basis points to
2.5 percent.
In Japan, indicators suggest anemic growth in the third quarter. Industrial production
fell 0.7 percent in September and was down 0.8 percent for the third quarter as a whole.
Workers’ household expenditures dropped nearly 4 percent in the third quarter. Real
exports were flat during the quarter, while real imports rose about 2 percent. Average
core machinery orders for July and August were down 8.3 percent from the secondquarter average.
On a more positive note, the Bank of Japan’s Tankan index of business conditions posted
a larger-than-expected gain in September, with the level of the aggregate diffusion index
for business sentiment among firms of all sizes and across all industries increasing to 2
from 0 in June. However, survey respondents project a slight decline in the index, back
to 0, for December. The index for large manufacturers increased to 26, from 22 in June;
the index is now at its highest level since 1991, although the comparison is complicated
by a break in the series. Improvements in confidence among other firms were more
modest.

IV-14

Labor conditions also continued to improve. The unemployment rate declined to 4.6
percent in September. The job-offers-to-applicants ratio, a leading indicator of
employment, rose to an eleven-year high. Nominal wages continued to fall through
September.
Japanese Economic Indicators
(Percent change from previous period, except as noted, s.a..)
Indicator
Industrial production1

2004
Q1

July

Aug.

Sept.

Oct.

2.7

-.8

-.7

n.a.

All-industries index

-.1

1.8

n.a.

-.6

0.2

n.a.

Housing starts

2.8

-4.4

n.a.

5.4

-5.5

n.a.

-5.6

10.3

n.a.

-11.3

3.1

n.a.

5.0

-1.6

-1.0

1.5

-2.5

n.a.

New car registrations

12.1

-8.2

8.7

4.4

1.4

2.6

n.a.

Unemployment rate4

4.9

4.6

4.8

4.9

4.8

4.6

n.a.

Job offers ratio5

.77

.80

.83

.84

n.a.

-5.0

2.0

…

-.2

-.1

-.2

-.1

-.3

1.0

1.7

1.6

1.7

1.8

n.a.

Machinery orders2
Machinery shipments3

Business sentiment6
CPI (Core, Tokyo area)7
Wholesale prices7

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

Core consumer goods prices in the Tokyo area (which exclude fresh food but include
energy) were unchanged in October from the previous month and were down 0.3 percent
from a year earlier. Higher commodity prices helped to push wholesale prices up 1.8
percent in September compared with the same month a year ago, the largest twelvemonth increase since 1990.

IV-15

In late October, the Bank of Japan (BOJ) released its semi-annual "Outlook and Risk
Assessment of the Economy and Prices." The BOJ expects growth in FY2004 (April
2004 to March 2005) to come in between 3.4 percent and 3.7 percent, and to moderate to
between 2.2 percent and 2.6 percent in FY2005. The report calls for core consumer price
inflation of -0.2 percent to -0.1 percent in FY2004. Notably, inflation is projected to be
between -0.1 percent and 0.2 percent in FY2005, with a median forecast of 0.1 percent.
This forecast of positive inflation fulfills one condition for ending the Bank's quantitative
easing policy. However, the report noted that "it is not certain whether or not the
occasion will arise during FY2005 to change the present monetary policy framework,"
suggesting that an exit from quantitative easing is not imminent.
Indicators of third-quarter activity in the euro area have generally been downbeat.
Industrial production fell in August in each of the five largest member countries, causing
the euro-area aggregate to register its biggest decline since May 2003. Euro-area retail
sales also fell in August, led by sharp declines in Italy and Spain. September data
showing a decline in French consumption of manufactured goods point toward further
weakness in household demand. Demand from the external sector appears to have
weakened as well: euro-area export growth slowed in July and August from its secondquarter rate, while import growth has remained high. German manufacturing orders fell
1.7 percent in August, led by a 2.1 percent decline in foreign orders.
Euro-area consumer confidence was flat and remained at a depressed level. In contrast,
business survey measures have been more positive. While remaining below the longterm average, surveys of euro-area business confidence rose over the period and now
stand at a level not seen since 2001. After falling for several months, the German IFO
survey of business conditions unexpectedly ticked up in October.
Labor market conditions remain weak in the euro area, with the unemployment rate
unchanged at 9 percent in August. The German unemployment rate remained steady in
October at 10.7 percent after rising slightly the previous month. Although German
employment rose slightly in July, the Manpower Employment Outlook Survey found that
only 5 percent of German employers plan to increase staff in the fourth quarter.
Likely reflecting the recent run-up in oil prices, the preliminary estimate of twelve-month
consumer price inflation in the euro area jumped to 2.5 percent in October, after
temporarily dipping to 2.1 percent the previous month. The ECB measure of twelve-

IV-16

month core inflation, excluding energy and unprocessed foods, was 2.1 percent in
September and has remained at or near this level for most of the year.
Euro-Area Economic Indicators
(Percent change from previous period, except as noted, s.a..)
Indicator

2004
Q1

July

Aug.

Sept.

Oct.

Industrial production1

n.a.

-.6

n.a

Retail sales volume2

-.3

n.a.

-1.3

n.a

Unemployment rate3

8.9

9.0

n.a.

9.0

n.a

Consumer confidence4

-14.3

-14.7

-13.7

-14.0

-13.0

-14.0

Industrial confidence4

-6.7

-4.7

-3.7

-4.0

-3.0

-2.0

Mfg. orders, Germany

1.8

n.a.

2.8

-1.7

n.a

1.7

2.3

2.2

2.3

2.1

2.5

2.0

n.a

2.9

3.1

n.a

6.2

5.3

6.0

5.6

6.0

n.a

CPI5
Producer prices5
M35

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

Real GDP in the United Kingdom rose a much lower-than-expected 1.5 percent in the
third quarter, according to the preliminary estimate. Industrial production is estimated to
have tumbled around 4½ percent, offset by an estimated rise in service sector activity of
just over 3 percent. Growth in the “distribution, hotels and restaurants” sector slowed to
just under 3 percent from over 4½ percent, consistent with recent retail sales data.
Indicators for the fourth quarter hint at a pick-up in activity. Business confidence, which
has been especially volatile of late, edged up in October, as did consumer confidence.
October's manufacturing PMI recovered somewhat after several months of declines and
the services PMI rose strongly. The leading survey of retail sales rebounded in October,
though it remained below its average level in recent years.

IV-17

One of the leading private indexes of housing prices fell 0.4 percent in October after tiny
increases in August and September. Household net mortgage borrowing declined again
in September, falling to the levels seen during the first half of 2003.
U.K. Economic Indicators
(Percent change from previous period, except as noted, s.a..)
Indicator

2004
Q1

July

Aug.

Sept.

Oct.

GDP*

2.7

3.6

1.5

…

Industrial production

-.4

1.2

n.a.

-.5

-.8

n.a.

Retail sales volume1

2.0

1.8

1.1

-.6

1.0

n.a.

Claims-based

2.9

2.8

2.7

n.a.

Labor force survey3

4.8

n.a.

4.7

n.a.

Business confidence4

16.7

16.3

12.3

6.0

19.0

12.0

14.0

Consumer confidence5

-2.3

-4.3

-4.0

-5.0

-3.0

-2.0

Consumer prices6

1.3

1.4

1.2

1.4

1.3

1.1

n.a.

Producer input prices7

-.4

3.8

5.2

3.7

4.6

7.3

n.a.

Average earnings7

5.2

4.3

n.a.

3.4

4.1

n.a.

Unemployment rate2

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

The labor market continued to be tight, as the official-claims-based measure of the
unemployment rate remained near its lowest point since 1975 and the labor-force-survey
measure stayed close to its nadir. The twelve-month rate of consumer price inflation
edged down to 1.1 percent in September, well below the Bank of England’s 2 percent
target.

IV-18

In Canada, indicators for the third quarter have been positive. Canadian real GDP by
industry rose a stronger-than-expected 0.5 percent in August. Manufacturing activity
recorded a 1 percent gain and industrial production moved up 0.9 percent. Wholesale and
retail trade also both advanced robustly. Residential and non-residential construction
activity, in contrast, experienced their fifth-straight monthly declines. In August, retail
sales posted the strongest monthly increase since the first quarter. Despite a second
consecutive month of declining exports, the merchandise trade surplus rose in August,
after narrowing in July, as imports declined sharply.
Canadian Economic Indicators
(Percent change from previous period, except as noted, s.a..)
2004

Indicator

June

July

Aug.

Sept.

GDP by industry

n.a.

Industrial production

1.4

n.a.

New mfg. orders

5.7

5.1

n.a.

1.9

1.5

-1.0

n.a.

Retail sales

1.9

n.a.

1.1

n.a.

7.4

7.3

7.2

7.3

7.2

7.1

2.2

2.0

2.5

2.3

1.9

1.8

1.2

1.3

1.2

1.4

1.5

1.1

Consumer attitudes4

122.9

115.1

123.0

…

Business confidence4

144.8

145.6

151.4

…

Employment
1

Unemployment rate
Consumer prices2

Core consumer prices2,3

1. Percent.
2. Percent change from year earlier, n.s.a.
3. Excluding food, energy, and indirect taxes.
4. Level of index, 1991 = 100.
n.a. Not available. … Not applicable.

Total employment grew by a robust 43,000 in September, following two months of little
change, and the unemployment rate eased to 7.1 percent. Overall, third-quarter
employment growth was in line with the pace of the first half of the year.
In September, the twelve-month rate of headline CPI inflation continued its recent easing,
falling to 1.8 percent from 1.9 percent in August, as gasoline prices declined moderately

IV-19

for the fourth consecutive month. The twelve-month rate of core inflation, excluding
food, energy, and indirect taxes, held steady at 1.1 percent in September.
On October 19, the Bank of Canada increased the target for the overnight rate, its key
policy rate, 25 basis points to 2.5 percent. The move follows a 25-basis-point increase in
September. The Bank stated that because the economy is near full capacity, “further
reduction of monetary stimulus will be required over time to keep inflation on target,
with the pace depending on the Bank’s continuing assessment of the prospects for factors
that affect pressures on capacity and, hence, inflation.”

IV-20

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

2004
Q1

July

Aug.

Sept.

Japan
Trade
Current account

120.4 116.4
184.1 171.7

103.0
n.a.

106.3
152.1

113.6
188.8

89.0
n.a.

Euro area
Trade
Current account

135.0 117.0
88.4 78.3

n.a.
n.a.

80.9
14.7

42.8
-5.9

n.a.
n.a.

201.6 203.2
110.5 112.5

n.a.
n.a.

187.4
63.7

173.9
53.6

n.a.
n.a.

Germany
Trade
Current account
France
Trade
Current account
Italy
Trade
Current account1
United Kingdom
Trade
Current Account

9.0
4.0

-6.5
-3.1

n.a.
n.a.

-6.8
-11.3

-35.9
-21.7

n.a.
n.a.

0.1
-20.7

-0.4
-30.0

n.a.
n.a.

-4.9
38.2

-8.5
18.6

n.a.
n.a.

-105.2 -105.1
-40.3 -46.5

n.a.
n.a.

-110.0 -114.0
…
…

n.a.
…

Canada
Trade
Current Account
1. Not seasonally adjusted.
n.a. Not available. … Not applicable.

48.9
25.0

57.7
30.6

n.a.
n.a.

55.8
…

67.8
…

n.a.
…

IV-21

Industrial Production in Selected Industrial Countries
Japan

1997=100

1997 1998 1999 2000 2001 2002 2003 2004

France

1997 1998 1999 2000 2001 2002 2003 2004

Italy

1997 1998 1999 2000 2001 2002 2003 2004

130

Germany

1997=100

130

120

110

100

130

1997 1998 1999 2000 2001 2002 2003 2004

United Kingdom

130

120

110

100

130

1997 1998 1999 2000 2001 2002 2003 2004

Canada

130

120

110

100

1997 1998 1999 2000 2001 2002 2003 2004

IV-22

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

Germany
Percent

1997 1998 1999 2000 2001 2002 2003 2004

Percent

-1

-2

France

1997 1998 1999 2000 2001 2002 2003 2004

-2

United Kingdom
Percent

1997 1998 1999 2000 2001 2002 2003 2004

Percent

-1

-2

Italy

1997 1998 1999 2000 2001 2002 2003 2004

-2

Canada
Percent

1997 1998 1999 2000 2001 2002 2003 2004

Percent

-1

-2

1997 1998 1999 2000 2001 2002 2003 2004

-2

IV-23

Economic Situation in Other Countries
Indications from emerging market economies are mixed but generally point to a slowing
of economic growth in the third quarter from the recent robust pace. China was a notable
exception, with real GDP growth rebounding sharply in the third quarter. Consumer
prices in emerging market economies have risen on average in recent months, partly due
to higher oil prices and to a lesser extent to higher food prices.
Chinese real GDP growth surprised on the upside in the third quarter, rebounding to
10.1 percent (staff estimate). The rate of investment growth, which led to the
administrative tightening earlier this year, appeared to pick up again slightly in the third
quarter. This is consistent with anecdotes indicating that investors have found ways
around the bank financing restrictions the government imposed. Other indicators,
however, point to slowing in the economy. Money (M2) and loan growth have both
decelerated significantly in recent months, and import growth has finally begun to taper
off. The slower pace of import growth coupled with continued rapid export growth
widened the trade surplus significantly in the third quarter. Twelve-month inflation eased
slightly in September to 5.2 percent. Food price inflation has come down from its peak,
as expected, but non-food prices have moved up recently and are now about 1 percent
above their year-ago levels. In response to falling real interest rates, at the end of
October, the central bank raised the benchmark one-year deposit and lending rates by
27 basis points, the first increase in about ten years.
Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production2
Consumer prices2
Trade balance3

2002

2003

2004
Q2

July

Aug.

Sept.

8.3

10.0

2.8

10.1

…

14.2

18.6

17.8

16.3

16.8

16.0

16.1

-.4

3.2

4.4

5.3

5.2

30.4

25.5

10.5

44.0

20.8

50.2

61.2

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

IV-24

Indicators for the Hong Kong economy remained positive in recent months, although
less so than during the first half of this year. Retail sales growth has slowed, after
booming earlier this year, and the unemployment rate decreased a touch in the third
quarter. Trade volumes are reaching new record highs almost every month, as trade with
China and other Asian economies soars, although the pace of this growth has eased a bit.
September consumer prices were up a little less than 1 percent on a twelve-month basis.
Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2002

2003

2004
Q2

July

Aug.

Sept.

Real GDP1

4.7

10.8

n.a.

…

Unemployment rate2

7.2

7.9

6.9

6.8

6.9

6.8

Consumer prices3

-1.6

-1.8

-.9

Trade balance4

-7.7

-8.5

-15.9

-13.4

-11.1

-14.6

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

Recent indicators of Taiwanese economic performance have been mixed. Industrial
production fell slightly in the third quarter, and production of high-tech goods was
roughly flat. New orders data, however, point to higher production in the coming
months. The unemployment rate moved down a bit in the third quarter. Both exports and
imports rose rapidly in the quarter, and the trade surplus widened slightly. Consumer
prices are up about 3 percent over the last twelve months, but recent increases in oil
prices have not yet completely passed through to Taiwanese consumer prices.

IV-25

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

2002

2003

2004
Q2

July

Aug.

Sept.

Real GDP1

4.3

5.6

-.6

n.a.

…

Unemployment rate2

5.2

5.0

4.6

4.4

4.5

4.4

Industrial production

7.9

7.1

2.5

-.3

-1.4

-.2

-.1

1.2

2.9

3.3

2.6

2.8

Trade balance4

18.1

16.9

10.5

11.6

19.5

6.1

9.2

Current account5

25.6

29.2

20.6

n.a.

…

Consumer prices3

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

Incoming data for Korea show few signs of a pickup in the recent sluggish pace of
activity. Industrial production was little changed in the third quarter, despite a traderelated jump in output in September. Consumer and business confidence remain at low
levels, and recent indicators of retail sales and service-sector demand have been mixed.
Twelve-month consumer price inflation was 3.8 percent in October, in part reflecting
higher food and fuel prices, and core inflation has been trending up. Despite rising oil
prices, the trade and current account surpluses remained at elevated levels in the third
quarter.

IV-26

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

2002

2003

2004
Q2

Aug.

Sept.

Oct.

Real GDP1

7.7

4.1

2.3

n.a.

…

Industrial production

8.3

5.0

1.2

-.2

-.6

2.3

n.a.

Unemployment rate2

3.1

3.4

3.5

3.6

3.5

n.a.

Consumer prices3

3.8

3.4

4.3

4.8

3.8

14.8

22.2

33.0

42.6

25.9

43.7

n.a.

5.4

12.3

28.1

28.6

12.7

34.3

n.a.

Trade balance4
Current account5

In the ASEAN region, recent performance has been mixed. In Singapore, real GDP
declined 2.3 percent in the third quarter according to the advance release, following
growth of 12 percent in the previous quarter. Industrial production also fell in recent
months, but the September PMI signaled expansion of production going forward.
Elsewhere in the region, recent data on industrial production have been mixed. Data and
anecdotes from the region’s high-tech sector generally point to a moderation of growth.
Recent trade data show the ASEAN economies running trade surpluses.
Consumer price inflation has generally risen across the region, partly in response to a
jump in food prices in some countries. The effects of the rise in fuel prices on consumer
prices have been somewhat mitigated by government subsidies in Indonesia, Malaysia,
the Philippines, and Thailand. The resulting strain on the government budget has
worsened already-serious fiscal problems in Indonesia and the Philippines. With growth
weakening, monetary policy has remained accommodative in both countries. In contrast,
the Thai central bank raised its policy rate 50 basis points in two moves since August to
1.75 percent.

IV-27

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

2002

2003

2004
Q2

July

Aug.

Sept.

Real GDP1

Indonesia

4.9

4.2

5.6

n.a.

…

Malaysia

5.5

6.6

7.9

n.a.

…

Philippines

5.5

4.8

2.9

n.a.

…

Singapore

2.8

4.9

11.9

-2.3

…

Thailand

6.0

7.8

3.1

n.a.

…

Indonesia3

-7.1

3.9

-7.7

n.a.

Malaysia

4.6

9.3

2.9

n.a.

-1.1

n.a.

Philippines

-6.1

2.4

n.a.

1.1

-5.8

n.a.

Singapore

8.4

3.0

5.2

-1.2

2.4

-1.3

-1.2

Thailand

8.5

12.3

-.4

1.5

-3.8

4.1

Industrial production2

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

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

2002

2003

2004
Q2

July

Aug.

Sept.

Indonesia

25.9

28.5

20.9

25.4

15.3

26.6

34.4

Malaysia

14.3

21.4

21.2

23.7

25.9

23.4

21.9

Philippines

-.2

-1.5

-.6

n.a.

-1.9

1.7

n.a.

Singapore

8.7

16.2

15.1

16.5

9.6

16.2

23.8

Thailand

2.7

3.8

-.3

1.2

6.2

-3.1

n.a. Not available.

IV-28

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

20021

20031

2004
Q2

Aug.

Sept.

Oct.

Indonesia

9.9

5.2

6.4

6.7

6.3

6.2

Malaysia

1.7

1.2

1.5

1.4

1.6

n.a.

Philippines

2.5

3.1

4.5

6.4

6.3

6.9

n.a.

Singapore

1.8

1.7

2.0

n.a.

Thailand

1.6

1.8

2.6

3.3

3.1

3.6

3.5

1. December/December.
n.a. Not available.

In Mexico, recent indications are that economic growth has stepped down a bit from the
rapid first-half pace. Industrial production was flat in August, and growth so far in the
third quarter is below the growth rates in the previous two quarters. Similarly,
manufacturing export growth slowed to a 1 percent annual rate in the third quarter,
following average gains of 18 percent during the previous three quarters. However,
domestic demand appears to have offset some of the slowing in external demand. Retail
sales in July and August rose at an 8½ percent annual rate, more than twice as fast as in
the previous three quarters, and construction activity strengthened further.
Consumer price inflation has continued to increase. Twelve-month inflation picked up to
5.4 percent in the first half of October, well above the 2 to 4 percent inflation target,
driven largely by higher energy and food (primarily vegetable) prices. Core inflation has
risen only to about 3-3/4 percent, but the Bank of Mexico has expressed concern that the
rise in headline inflation could feed into faster wage increases. Consequently, the Bank
of Mexico tightened monetary policy on October 22, the seventh tightening move this
year.

IV-29

Mexican Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1

2002

2003

2004
Q2

July

Aug.

Sept.

1.9

2.0

4.9

n.a.

…

1.4

1.9

n.a.

Industrial production

-.4

-.7

1.5

n.a.

1.0

n.a.

Unemployment rate2

2.7

3.3

3.7

3.9

3.7

4.0

3.9

Consumer prices3

5.7

4.0

4.3

4.8

4.5

4.8

5.0

-7.9

-5.6

-6.2

-8.3

-7.5

-10.8

-6.7

168.7

170.5

194.4

199.8

194.5

204.9

200.1

160.8

164.9

188.2

191.5

187.0

194.0

193.4

-13.7

-8.9

-2.0

n.a.

…

Overall economic activity

Trade balance4
Imports4
4

Exports

Current account

1. Annual rate. Annual figures 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 figures, which are Dec./Dec.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. … Not applicable.

In Brazil, data releases since the last Greenbook have largely pointed to continuing
expansion, although probably at a slower pace. Industrial production rose in both July
and August. However, August retail sales disappointed, with twelve-month growth
slowing to 7.5 percent, and September vehicle production declined. Brazil has continued
to record sizeable trade surpluses, reflecting strong export growth--over 22 percent on a
twelve-month basis.
Inflation remains a significant concern; headline consumer price inflation was 6.7 percent
over the twelve months ending in September, well above the 2005 inflation target of
5.1 percent that was set by the central bank in mid-September. The central bank has
raised its policy rate 75 basis points since August in two moves. The most recent change,
a 50 basis point increase in mid-October, exceeded expectations, reflecting the central
bank’s concerns that recent increases in domestic fuel prices are feeding into longer-term
inflation expectations. Twelve-month-ahead inflation as measured by the central bank’s
survey of forecasters has recently risen to over 6¼ percent.

IV-30

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

2002

2003

2004
Q2

July

Aug.

Sept.

Real GDP1

3.8

-.1

6.1

n.a.

…

Industrial production

2.7

-.1

3.3

n.a.

1.1

n.a.

Unemployment rate2

12.5

12.4

11.7

11.2

11.1

11.3

Consumer prices3

12.5

9.3

5.5

6.9

6.8

7.2

6.7

Trade balance4

13.1

24.8

33.0

36.7

40.8

39.5

29.8

Current account5

-7.6

4.1

11.2

21.3

21.8

21.1

20.9

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

In Argentina, the gradual economic recovery has continued. Industrial production grew
2 percent in the third quarter, after contracting in the previous quarter. The country has
continued to run sizable trade surpluses. Twelve-month consumer price inflation has
increased in recent months, and now stands at just under 6 percent.
There have also been some notable political and legal developments in recent weeks.
First, in mid-October the federal government announced that it had made progress in
securing the support of provincial governors for a reform of federal-provincial fiscal
relations set to take place next year. Second, in late October the country’s Supreme
Court ruled that the forced conversion of dollar-denominated deposits into pesos at a
disadvantageous exchange rate after the collapse of the currency board in 2002 was legal.
This decision is expected to reduce the threat of thousands of lawsuits that has hovered
over Argentina's banking system for more than two years. Third, the Argentine
government has made some progress on its debt restructuring, including reaching
agreements to ensure the participation of some domestic holders of its defaulted debt and
completing the regulatory requirements needed to conduct an exchange of defaulted debt
issued in the United States.

IV-31

Argentine Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1

2002

2003

2004
Q2

July

Aug.

Sept.

-3.3

12.1

2.0

n.a.

…

Industrial production

-10.7

16.2

-1.3

2.0

-.4

1.2

Unemployment rate2

22.5

17.3

14.8

n.a.

…

Consumer prices3

41.4

3.8

4.0

5.3

4.9

5.2

5.9

Trade balance4

16.7

15.7

15.6

11.7

12.7

12.6

12.1

9.1

7.5

6.7

n.a.

…

Current account5

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

In Venezuela, there have been few data releases since the last Greenbook. The policy
environment continues to be poor and inflation continues to be high, despite the fixed
exchange rate in place since early 2003. Oil production is still about 15 percent below
the level prevailing before the national strikes in late 2002.

IV-32

Venezuelan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1

2002

2003

2004
Q2

Aug.

Sept.

Oct.

-15.8

7.0

n.a.

…

Unemployment rate2

16.0

18.0

15.5

14.5

14.0

14.3

n.a.

Consumer prices3

31.2

27.1

22.4

21.5

21.9

20.8

19.7

Non-oil trade balance4

-8.1

-5.5

n.a.

Trade balance4

13.4

16.5

n.a.

7.6

11.5

13.5

n.a.

…

Current account5

1. Annual rate. Annual figures are Q4/Q4.
2. Percent.
3. Percent change from year-earlier period, except annual figures, 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.

Recent indicators for Russia have been mixed. Industrial production fell sharply in
August and September and indicators of domestic investment and construction have also
slowed. However, the unemployment rate has been declining recently. Consumer price
inflation jumped in the last two months, led by food prices. Both import and export
demand have been strong, and the August trade balance stood at $85 billion.
There were a number of important developments in the ongoing tax case between the
Kremlin and Yukos, the largest Russian oil exporter. On the basis of an appraisal of
Yukos’ main production facility by an independent accounting firm, government officials
said that they plan on auctioning shares of just over three-quarters of Yukos’ main
production facility to settle Yukos’ tax arrears. It is not clear whether the government
will entertain bids from foreigners or whether a state-owned company will ultimately take
possession of the production unit. Yukos hoped to avert the auction by making a
$3.5 billion payment to settle the remainder of its 2000 tax bill; however, on the same day
as the payment, the Russian government served Yukos with a $6.7 billion tax claim for
2002. Although a sale is increasingly likely, statements made by officials indicate that it
would likely not take place this month.

IV-33

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

2002

2003

2004
Q2

July

Aug.

Sept.

Real GDP1

5.9

7.5

8.2

n.a.

…

Industrial production

3.8

6.7

2.2

0.0

-.3

-2.1

-1.4

Unemployment rate2

8.0

8.5

8.3

7.7

7.5

7.8

7.7

Consumer prices3

15.3

12.1

10.1

11.0

10.3

11.3

11.4

Trade balance4

46.3

60.5

78.1

n.a.

78.4

84.7

n.a.

Current account4

28.9

36.0

42.6

n.a.

…

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 10, 2004 : Greenbook Part 2

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