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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Confidential (FR) Class IIFOMC __ Part 1 November , 2000 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Summary and Outlook Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Confidential (FR) Class II FOMC November 8, 2000 Summary and Outlook Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Domestic Developments Overview Initial readings on economic activity in the fourth quarter have provided further support for our view that the economy has moved onto a slower growth track. Our current estimate is that real GDP will rise at an annual rate of about 3-1/2 percent this quarter, well below the pace in the first half of the year. Activity in the interest-sensitive sectors appears to have responded to the policy tightenings of the past year and a half; the appreciation of the dollar is also taking a toll of domestic production, especially manufacturing, and corporate profits. Financial markets have punished firms not achieving their earnings expectations, particularly some high-tech companies where valuations had been lofty. These more sober assessments of corporate profitability (and, in some cases, long-run viability) have generated a further widening in private interest rate spreads on all but the most highly rated securities. Also, a sizable number of large commercial banks have reported additional firming in their standards and terms for C&I loans. In response to this less hospitable financial environment, we have trimmed our forecast of capital spending, especially for communications equipment. And with equity prices expected to run a bit below our previous projection, we have shaved a little off the growth of consumer spending. Nonetheless, we view the economy as relatively well positioned to weather the strains associated with the reduced pace of economic growth that now appears to be under way. The stepup of growth in household permanent incomes in recent years should continue to support consumer spending, even with our forecast of flat equity prices. Given further steady gains in technology, the rate of return to new investment is expected to remain high, which should limit the extent of the downshift in the growth of capital spending. This modest slowing remains a key element in our forecast. Alternative model simulations near the end of this section assess the macroeconomic consequences of a more pronounced deceleration in business investment. Headline inflation came in about as expected in the third quarter and is projected to drop back early next year as energy prices begin to reverse this year's rise. The indirect effects of energy price increases boost core inflation in the near term, though they are a moderating influence later on. Nonetheless, core inflation is projected to gradually move up further over the forecast period. Beyond the near term, the assumed depreciation of the dollar is expected to result in an ongoing acceleration in non-oil import prices, which puts steady upward pressure on inflation over the next two years. Moreover, employers' health insurance costs have been rising rapidly, and with the unemployment rate remaining below a sustainable level in our forecast, we anticipate that the rate of increase in labor costs will edge up further. Gains in structural productivity should relieve most of the pressures on labor costs, but with slightly less capital I-2 Part1: Summary and Outlook, November 8, 2000 deepening in this forecast, that offset is a touch smaller than in the September Greenbook. In contrast to the apparent view in financial markets, we continue to believe that a further increase in the nominal federal funds rate will be needed over the next two years to contain inflation in the long run. However, we now assume that an increase will not occur until 2002, and then it will just match the 1/2 percentage point increase in core inflation that we expect over the projection period. In our view, the policy actions that we have built into the baseline forecast should be sufficient to stabilize core inflation by 2003. We have included simulations of alternative funds rate paths at the end of this section. The Backdrop for the Forecast Financial market participants appear to have become more selective about providing financing to riskier business ventures. Movements in private interest rates since the time of the September Greenbook reflect this heightened concern regarding the financial vulnerability of some business borrowers. Although high-quality corporate bond yields have been nearly unchanged over the intermeeting period, yields on lower quality bonds have shot up, and bank lenders have tightened standards on C&I loans. We are assuming that corporate financial conditions deteriorate a little further and that private rates will drift up moderately over the forecast period. Equity prices are not expected to break out of their recent trading range over the next two years. Given our lackluster projection for profits, we think that stock prices will be in the lower portion of the range observed over the past year. With equity prices flat and income continuing to rise over the projection period, the wealth-income ratio reverses a noticeable portion of the run-up of recent years. Fiscal policy is expected to remain stimulative over the next two years. Regardless of the outcome of the election, we still believe that large, and growing, budget surpluses will tilt actions in the direction of greater stimulus. In the near term, we have responded to the inability of the President and the Congress to agree on a fiscal 2001 budget by eliminating $11 billion of assorted tax cuts that were built into the September Greenbook for fiscal 2001.1 However, we have retained our assumption of a $75 billion fiscal stimulus for fiscal 2002. Even with these policy actions, we project on-budget surpluses of $119 billion in fiscal 2001 and $143 billion in fiscal 2002. 1. We have, however, maintained the assumption of a $1 per hour hike in the minimum wage, with half coming into effect in January 2001 and the remainder coming in the following January. Domestic Developments I-3 Since the September Greenbook, the dollar has appreciated about 1-1/2 percent against a broad measure of currencies of our trading partners. We project that the real exchange value of the dollar, starting from this higher level, will depreciate about 2-3/4 percent each year in 2001 and 2002. This rate of real depreciation is a bit faster than we projected in the previous forecast, and it incorporates our view that the projected current account deficits will test foreign investors' appetite to hold ever-increasing quantities of dollar assets. The spot price of West Texas intermediate crude oil has fluctuated between $30 and $36 per barrel during the intermeeting period. Political events in October-the breakdown of the Israeli-Palestinian peace process, the terrorist attack on the USS Cole, and Iraq's demand to be paid in euros rather than dollars for its exports--raised market concerns about the possibility of a disruption of oil supplies from the Middle East. Beyond these supply concerns, low levels of observed inventories and strong demand suggest that the oil market will remain vulnerable to upward price spikes over the next several months. We project that the spot price of WTI crude will decline from around $33 per barrel in the current quarter to about $26 by the end of 2001 and fall to about $23 by the end of 2002, an endpoint that is about $1.50 per barrel below our previous projection. The outlook for economic activity abroad is essentially unchanged from that in the September Greenbook, with a projected growth rate of foreign GDP, weighted by shares of non-agricultural exports, close to 4 percent over the forecast period. Although the rate of increase in foreign output is dropping back from the exceptionally strong pace of the first half of this year, we expect continued solid growth in most countries going forward. At the same time, we expect core inflation rates to remain subdued in most foreign industrial and developing economies. We assume a modest further monetary tightening in some countries, which should be sufficient to prevent a sustained increase in inflationary pressures. Recent Developments and the Outlook for the Current Quarter We now anticipate real GDP growth in the current quarter of 3-1/2 percent at an annual rate, about 1/4 percentage point below the projection in the September Greenbook. The data available for the fourth quarter are limited at this point. The key indicator in hand is the labor market report for October, which, as expected, showed continued moderate payroll employment growth and nearly stagnant production-worker hours. Available indicators suggest little change in industrial production in October after a marked slowing in the third quarter. In the household sector, preliminary indications are that growth in real consumer spending in the current quarter will moderate a bit from the third-quarter pace. I-4 Part1: Summary and Outlook, November 8, 2000 Summary of the Near-Term Outlook (Percent change at annual rate except as noted) 2000:Q3 Measure Real GDP Private domestic final purchases Personal consumption expenditures Residential investment Business fixed investment Government outlays for consumption and investment 2000:Q4 Sept. GB BEA1 Nov. GB Sept. GB Nov. GB 3.0 4.9 4.7 -12.4 11.9 2.7 4.1 4.5 -9.2 6.9 2.6 4.2 4.5 -9.7 7.4 3.7 4.2 3.8 -4.3 9.1 3.5 3.9 3.6 -5.3 8.7 -3.6 -2.0 3.9 Contribution to growth, percentage points 3.9 -1.6 Inventory investment -.5 .1 -.5 -.5 -.6 Net exports -.5 -.3 -.2 -.1 .1 1. Advance release, published on October 27. Sales of light vehicles weakened in October despite continued high levels of incentives. In addition, sales reports from major retailers have been on the soft side, and consumer sentiment has ebbed a bit, albeit from historically high levels. The decline in mortgage rates over the summer has given a small boost to construction activity, and we expect housing starts to edge up to 1.56 million units in the current quarter. In the business sector, investment in equipment and software slowed sharply in the third quarter and is likely to grow only a bit more rapidly in the current quarter. Investment in computers continued to be quite robust through September, but growth in shipments of communications equipment slowed markedly in the third quarter despite a sizable backlog of orders. Taken together, we expect investment in high-tech equipment to grow at more moderate rates than in the first half of the year. Outside the high-tech area, sales of heavy trucks plummeted in September, and shipments of aircraft to domestic carriers are down from high levels. But orders for other types of capital equipment have picked up a bit, and a resumption of growth is likely in this category in the current quarter. Nonresidential construction activity increased at almost a double-digit pace in the third quarter, with large gains in office and industrial building and in drilling and mining, and we are anticipating further solid gains in the fourth quarter. Domestic Developments I-5 Slowing sales led to a large accumulation of stocks in the third quarter. As a result, aggregate inventory-sales ratios edged up to levels that may not be quite as lean as desired. This is particularly true in the motor vehicle industry, where the drop-off in sales has bloated inventories, and we foresee further cutbacks in production. We expect businesses to maintain tight control over their inventories and to bring stocks back down relatively quickly. Reflecting these efforts, nonfarm inventory investment pulls down GDP growth by almost 3/4 of a percentage point in the fourth quarter. After exerting a sizable drag in the third quarter, combined federal, state, and local government purchases are expected to boost growth in the fourth quarter. We expect federal spending to increase at an annual rate of 3-1/4 percent in the current quarter, after a large third-quarter decline. Swings in construction expenditures have caused spending by state and local governments to fluctuate over the last few quarters; we project growth in state and local expenditures to pick up a bit in the fourth quarter in a manner consistent with our forecast of longer-run trends in this sector. Surprisingly strong export data for both July and August have led us to revise upward our projection of real export growth in the second half of this year and to maintain the higher level of real exports throughout the forecast period. Incoming data have also led us to revise up our forecast for import growth for the second half of this year, but by much less than export growth. The employment cost index for hourly compensation of private industry workers increased 4-1/2 percent over the twelve months ending in September, in line with our previous projection. We expect the fourth-quarter increase in the ECI to be similar to that in the third quarter. The data on prices have also provided few surprises. The personal consumption expenditures price index is projected to increase at an annual rate of 2-1/4 percent in the fourth quarter, about the same rate as in the third quarter. October data suggest some easing of prices for gasoline and heating oil from September peaks, but we still expect PCE energy prices to increase at an annual rate of 4-1/2 percent in the fourth quarter. We are forecasting the PCE price index excluding food and energy to increase at an annual rate of 2-1/4 percent in the fourth quarter, the same rate as in the overall index. The Longer-Term Outlook for Aggregate Demand Our projection for real activity beyond the current quarter has real GDP rising 3-3/4 percent in 2001 and 4 percent in 2002. The waning influence of past stock market gains on household demand and the effects of previous increases in interest rates should restrain aggregate demand in 2001 and 2002. Working counter to these forces, a diminished drag from the external sector and increased I-6 Part1: Summary and Outlook, November 8, 2000 Projections of Real GDP (Percent change, Q4 to Q4, except as noted) Measure 2000 -H1 Real GDP Previous H2 2001 2002 5.2 5.0 3.1 3.3 3.7 4.0 4.0 4.3 5.3 5.2 3.6 3.8 3.8 4.1 4.0 4.3 PCE Previous 5.3 5.2 4.0 4.2 3.4 3.5 3.2 3.4 Residential investment Previous 2.2 2.1 -7.5 -8.5 -1.6 -3.6 -2.8 -2.1 17.7 17.7 8.1 10.5 10.1 11.3 10.1 11.3 1.8 1.8 0.9 1.1 3.7 3.7 3.6 3.6 Exports Previous 10.2 10.2 13.2 8.7 7.3 7.9 10.6 10.5 Imports Previous 15.2 15.2 10.1 8.6 8.9 8.3 8.9 9.3 Final sales Previous BFI Previous Government purchases Previous Contribution to growth, percentage points Inventory change Previous Net exports Previous .0 -.1 -.5 -.5 -.1 -.1 .1 .1 -1.0 -1.0 -.0 -.3 -.5 -.4 -.1 -.2 fiscal stimulus push spending growth back up in 2002, but only at the end of the projection period does growth of aggregate demand approach that of supply. As noted above, our GDP projection is weaker than that in the September Greenbook, with somewhat less favorable financial conditions restraining household and business spending. Household spending. Favorable fundamentals--including sizable real income gains and steady, albeit moderate, increases in employment--propel solid demand in the household sector. The diminishing influence of past equity market gains is the primary restraint that pulls household spending growth Domestic Developments I-7 below its brisk pace of the past few years. This effect should be most visible in durable goods, such as motor vehicles and appliances, where soaring wealth boosted households' desired stocks. The resulting investment boom, encouraged by generous incentives in the case of motor vehicles, now looks likely to ebb as stocks more fully adjust to desired levels. We project real PCE growth of about 3-1/2 percent in 2001 and 3-1/4 percent in 2002, a pace that is expected to produce an increase in the personal saving rate by 2002. Our projection of demand for new single-family houses is framed by the same influences of income and wealth as well as by the path for mortgage rates. The combination of the waning wealth effect and modest increases in mortgage rates is projected to nudge single-family starts down from the 1.27 million unit pace in 2000 to 1.25 million units in 2001 and 1.23 million units in 2002. Multifamily starts also are expected to edge down over the projection period. Business investment. The longer-term forecast for business spending balances the influences of a slowing economy, rising borrowing costs, and more stringent credit standards against the continued rapid pace of innovation in the high-tech field. On net, these considerations lead us to expect a modest slowing in investment growth from the breakneck pace of the past few years. Real business investment in equipment and software is expected to grow at an annual rate of about 12 percent over the next two years, the slowest pace since 1996. But this aggregate number masks significant differences in the expected behavior of particular components of equipment spending. We expect outlays for computer-related equipment to continue to race ahead, reflecting the sustained rate of technological innovation in this sector and accompanying price declines. Software investment should continue to ride the coattails of the hardware investment boom. In contrast, financial constraints and prospective declines in expected profitability--possibly resulting from the emergence of excess capacity--are likely to damp investment in communications equipment, and we now foresee considerably slower growth in this area. Growth in other more "traditional" equipment investment is also expected to slow somewhat in response to tighter financial conditions and the projected deceleration in output growth. Spending on nonresidential structures is expected to grow between 4 percent and 5 percent per year over the next two years, reflecting favorable fundamentals-including very low office vacancy rates and sizable rent increases--and few signs of overbuilding in most sectors. Our projection has inventory investment adjusting relatively promptly to the slowdown in final sales and the inventory-sales ratio extending its longer-run downward trend. We expect inventory investment over the next two years to be a roughly neutral factor in the GDP forecast. I-8 Part1: Summary and Outlook, November 8, 2000 Government. We have not changed our projection of real expenditures for consumption and investment at either the federal level or the state and local level. We expect combined spending by federal, state, and local governments to increase roughly in line with GDP in 2001 and a bit below that pace in 2002. Real federal spending is projected to increase about 2-1/2 percent in 2001 and 2002. Real defense spending is projected to increase 2 percent per year on average over the next two years, following general declines since the end of the Gulf War. After a 3 percent advance in state and local government purchases this year, we expect a pickup in the pace of spending to 4-1/4 percent in each of the next two years; this compares with an average annual rate of 3-1/2 percent for the previous four years. Underlying our forecast are the excellent fiscal positions that most governments enjoy. A recent survey of budgets submitted by governors indicates that states expect not only to cut taxes but also to boost spending in a number of areas, with a special emphasis on education--for both operational expenses and construction. Net exports. We are forecasting some dropoff in real export growth in 2001 from this year's extraordinary pace; however, with economic expansion abroad remaining robust and the dollar depreciating, export growth should bounce back in 2002. The appreciation of the dollar that has occurred over the past several months should help to sustain the growth of imports next year, despite a slowdown of domestic activity. All told, net exports subtract around 1/2 percentage point from growth of real GDP in 2001. This figure shrinks considerably in 2002, owing to the projected depreciation of the dollar. (The International Developments section provides a more detailed discussion of the outlook for the external sector.) Aggregate Supply, the Labor Market, and the Prospects for Inflation The moderation in the pace of capital accumulation implied by our forecast of business investment has caused us to trim our estimate of structural productivity growth slightly. We now estimate that structural productivity growth will be 3.4 percent in 2000 and 3.5 percent in 2001 and 2002; previously we had projected a gradual uptrend over the forecast period.2 Accordingly, potential GDP increases 4.5 percent in 2000 and then plateaus at 4.6 percent in 2001 and 2002. 2. In addition, since the last Greenbook we have received unpublished detail underlying the BLS multifactor productivity data. In light of this additional information, we have raised our estimate of trend MFP growth 0.1 percentage point and reduced the contribution to productivity growth resulting from capital deepening an equal amount. This change has no effect on our overall view of structural productivity growth but represents merely a minor refinement to our estimates of the contributing factors. Domestic Developments I-9 Decomposition of Structural Labor Productivity (Percent change, Q4 to Q4, except as noted) Measure 1998 1999 2000 2001 2002 Structural labor productivity Previous 2.9 2.9 3.2 3.2 3.4 3.5 3.5 3.6 3.5 3.7 Contributions1 Capital deepening 1.3 1.5 1.6 1.7 1.7 Previous Multifactor productivity Previous Labor quality 1.4 1.3 1.2 .3 1.6 1.4 1.3 .3 1.8 1.5 1.4 .3 1.9 1.5 1.4 .3 2.0 1.5 1.4 .3 1. Percentage points. Productivity, the labor market, and wages. We expect the downshift in the pace of economic expansion to restrain actual productivity growth over the next two years. Output per hour in the nonfarm business sector is projected to increase about 3 percent during 2001 before picking back up to its long-run pace of 3-1/2 percent by the end of 2002. With output growth below potential, the unemployment rate drifts up gradually. Nevertheless, with the unemployment rate standing at 4.6 percent at the end of 2002, labor markets remain tight throughout the projection period. Our projection of hourly compensation is little changed from the September Greenbook. Labor market tightness and the outlook for inflation are, as before, the two primary influences on our compensation projection. The reversal of the energy price surge lowers overall consumer price inflation, easing pressures for cost-of-living adjustments, but tight labor markets continue to exert upward pressure on wages. We expect the ECI to increase about 4-3/4 percent in both 2001 and 2002, a touch above the rate projected for this year. Underlying this nearly constant rate of increase is a modest slowing in benefits growth relative to 2000 and a corresponding pickup in the growth of wages and salaries. I-10 Part1: Summary and Outlook, November 8, 2000 The Outlook for the Labor Market (Percent change, Q4 to Q4, except as noted) Measure 1999 2000 2001 2002 Output per hour, nonfarm business Previous 4.1 4.1 3.4 3.3 2.9 3.1 3.4 3.7 Nonfarm payroll employment Previous 2.2 2.2 1.7 1.7 1.2 1.4 1.3 1.3 Household employment survey 1.5 1.1 0.8 0.8 1.5 0.9 1.0 0.9 Labor force participation rate1 Previous 67.0 67.0 67.1 67.1 67.1 67.1 67.1 67.1 Civilian unemployment rate1 4.1 4.0 4.4 4.6 4.1 4.1 4.3 4.5 Previous Previous 1. Percent, average for the fourth quarter. Prices. As in the September Greenbook, the contour of the top-line inflation forecast is dominated by swings in energy prices. After having posted doubledigit increases in both 1999 and 2000, PCE energy prices are expected to fall 4-1/2 percent during 2001 and another 2-1/2 percent in 2002 in large part because of the effects of lower crude oil prices on gasoline and fuel oil costs. We project that the PCE chain-weighted price index will increase about 2 percent in 2001 and 2002, below this year's 2-1/2 percent pace. The deceleration in the CPI is even more pronounced, with inflation expected to average 2-1/4 percent over the next two years after a 3-1/2 percent increase this year. Although energy prices are the dominant factor influencing top-line inflation, faster increases in non-oil import prices and continuing tightness in labor markets maintain the upward tilt to core inflation. The PCE chain-weighted price index excluding food and energy is projected to rise 2.1 percent in 2001, up from an expected increase of 1.8 percent this year and a 1.5 percent rise in 1999. The indirect effect of declining energy prices relieves some of the upward pressure on prices in 2002, and core inflation is expected to edge up only a tenth of a percentage point, to 2.2 percent, that year. The basic pattern for our projection of core CPI prices is the same, with increases of 2.7 percent and 2.8 percent in 2001 and 2002, respectively, after a rise of 2.6 percent in 2000 and 2.1 percent in 1999. Domestic Developments I-11 Inflation Projections (Percent change, Q4 to Q4, except as noted) Measure 1999 2000 2001 2002 PCE chain-weighted price index Previous 2.0 2.0 2.5 2.5 1.9 2.0 2.1 2.1 Excluding food and energy Previous 1.5 1.5 1.8 1.9 2.1 2.1 2.2 2.2 2.6 2.6 3.4 3.3 2.2 2.4 2.4 2.4 Food Previous 1.9 1.9 2.5 2.5 2.7 2.6 2.7 2.7 Energy Previous 11.2 11.2 14.7 13.9 -3.5 -1.5 -2.4 -2.5 2.1 2.1 2.6 2.6 2.7 2.7 2.8 2.8 GDP chain-weighted price index Previous 1.6 1.6 2.5 2.4 1.9 1.9 1.9 1.9 ECI for compensation of private industry workers1 Previous 3.4 3.4 4.7 4.7 4.8 4.9 4.8 4.9 NFB compensation per hour Previous 4.8 4.8 5.4 4.8 5.7 5.6 5.7 5.8 Prices of core non-oil merchandise imports Previous 0.4 0.4 1.4 2.0 2.5 3.0 2.9 2.5 Consumer price index Previous Excluding food and energy Previous 1. December to December. Financial Flows and Conditions Debt of the domestic nonfinancial sector is estimated to have decelerated in the third quarter. We anticipate that it will weaken a bit further in the current quarter largely because of paydowns of federal government debt. Debt growth of private borrowers appears to have slowed in the second half of this year, most notably in the business sector, as greater stock price volatility, elevated credit spreads on lower-rated bonds, and firmer standards and terms on loans at commercial banks have raised financing costs. Growth of nonfederal debt is expected to level out at an annual rate of about 7-1/2 percent over the next two years, down a couple of percentage points from the pace of the past few years. Even so, the expansion of nonfederal debt is projected to outstrip growth of nominal GDP. I-12 Part 1: Summary and Outlook, November 8, 2000 We anticipate that debt growth in the business sector will pick up in 2001 and 2002 from its recent slower pace. With corporate profit growth expected to be sluggish over the forecast period, firms will need to borrow substantial sums to finance continued high levels of capital expenditures and to fund still sizable mergers and acquisitions. We expect that interest burdens will move up relative to cash flow, leading to some further deterioration in the quality of corporate balance sheets. Riskier borrowers already are experiencing some difficulty in obtaining funding, and we would not be surprised to see a shake-out of weaker competitors. Nonetheless, we do not expect creditworthy firms to feel much of a pinch, and the overall effect of somewhat tighter credit supply conditions on investment spending should be limited. Household borrowing is projected to drift moderately lower over the projection period as growth in demand for consumer durables slows and housing activity softens. With debt expected to rise faster than disposable income and interest rates projected to move higher, debt service burdens increase, resulting in a slight pickup in delinquency and default rates. We expect lenders to tighten loan standards further, but this restraint likely will affect only marginal borrowers and not retard spending to a significant degree. In the state and local government sector, debt growth is expected to remain subdued. Although these governments likely will issue a considerable amount of debt to fund new capital projects, the anticipated rise in interest rates will continue to constrain offerings to advance-refund existing debt. Moreover, a large volume of previously refunded debt is scheduled to be retired in the next two years, which will hold down net borrowing. M2 growth moderated in October following its brisk expansion in August and September. We expect a slight pickup in this aggregate over the balance of the year, bringing its rate of expansion for 2000 as a whole to 6 percent. M2 growth is expected to be slower in 2001 and 2002, reflecting weaker growth in nominal GDP. Alternative Simulations Very rapid growth of high-tech investment (computers, software, and communications equipment) has helped fuel the extraordinary surge of aggregate demand and supply over recent years. The staff forecasts a modest slowing in the growth of such outlays over 2001 and 2002. Still, high-tech investment spending is expected to increase in excess of 20 percent per year, on average, over the next two years and provide an important contribution to the growth of actual and potential GDP. However, recent signs of financial stress in parts of the technology sector may have exposed a chink in the armor of the "New Economy," and developments in the high-tech sector may turn out to be distinctly less rosy than we are anticipating. A pair of simulations using the Domestic Developments I-13 staff FRB macroeconomic model explore this possibility; in both simulations we assume that the nominal federal funds rate follows the Greenbook baseline path. High-tech slowdown. In the first "domestic investment slowdown" simulation, the sharp deceleration in equipment and software spending in the third quarter of 2000 is assumed to represent the beginning of a pronounced slowdown. Equipment and software outlays increase at an annual rate of 7 percent through the end of 2002, about 5 percentage points slower than in the Greenbook baseline projection. Any number of factors--such as difficulties in arranging financing, lower-than-expected returns on new investment, or higher perceived risks associated with new investment--individually or together might underlie such a pullback in the growth of capital outlays. The effects of the less robust investment path are the mirror images of those of an investment-led productivity acceleration. Both aggregate supply and demand are affected. In the case of supply, the falloff in the pace of capital spending damps structural productivity growth and depresses the rate of advance of potential output by 0.1 percentage point in 2001 and 0.4 percentage point in 2002. The reduction in investment spending and associated multiplier effects also depress aggregate demand. In addition, the reductions in permanent income and wealth resulting from the slower growth in potential output restrain household and business spending. Alternative Simulations: Weaker Outlook for High-Tech Investment (Percent change, annual rate, from end of preceding period, except as noted) 2000 Measure Measur H I 2001 2002 1H2 HI1 1H2 H1i H2 Real GDP Baseline 5.2 3.1 3.6 3.8 4.0 4.1 Domestic investment slowdown Global high-tech slowdown 5.2 5.2 3.1 3.1 3.0 2.8 2.8 2.5 2.8 2.7 2.6 2.8 4.0 4.0 4.0 4.0 4.0 4.0 4.2 4.3 4.3 4.4 4.6 4.7 45 4.9 5.0 4.6 5.2 5.3 1.8 1.8 1.8 1.9 1.9 1.9 2.1 2.1 2.3 2.1 2.1 2.5 2.2 2.3 2.6 23 2.4 2.5 Civilian unemployment rate' Baseline Domestic investment slowdown Global high-tech slowdown PCE prices excludingfood and energy Baseline Domestic investment slowdown Global high-tech slowdown 1. Average for the final quarter of the half-year period. I-14 Part1: Summary and Outlook November 8, 2000 The total reduction in demand exceeds the response of aggregate supply. As a result, real GDP growth is significantly weaker than the baseline, averaging 2-3/4 percent over the next two years, and the unemployment rate rises to 5-1/4 percent by the end of 2002. The outlook for inflation is also somewhat less sanguine. The reduction in inflationary pressures from increased slack in labor and product markets is more than offset by the inflationary consequences of slower growth in structural labor productivity. The response of financial markets is concentrated in equity prices. The stock market falls 8 percent by the end of 2002, primarily because the slowdown in growth of potential output reduces the expected rate of increase in earnings. With domestic and foreign interest rates little changed in this simulation, the foreign exchange value of the dollar stays close to its baseline path of gradual depreciation. Ramifications of a global high-tech slowdown. The second simulation adds several financial market and foreign developments that could easily accompany and exacerbate a high-tech slowdown in the United States. First, in this "global high-tech slowdown" simulation, the circumstances that weaken the outlook for U.S. equipment investment also lead investors in financial markets to lower their risk-adjusted expected returns. We attempt to capture the macroeconomic effects of such a development by assuming that U.S. stock prices decline about 25 percent (relative to the baseline) and that the dollar depreciates 7 percent (relative to baseline), with both of these declines taking place over the first half of 2001. Second, we assume that high-tech sectors in other countries also slow, and we cut the growth rate of equipment and software spending in foreign industrial countries and technology-intensive developing economies by about 2-1/2 percentage points in 2001 and 2002. 3 The more muted decline in investment growth abroad relative to that in the United States reflects the smaller share of high-tech spending in those economies. As before, we assume that the federal funds rate follows the Greenbook baseline path.4 Under these circumstances, real GDP growth averages 2-3/4 percent per year over 2001 and 2002, about the same as in the first simulation. The additional spending restraint resulting from the weaker stock market and the slowdown in foreign growth is offset by the stimulative effect of the depreciation of the dollar on net exports. But the drop in the dollar exacerbates the outlook for inflation: 3. These technology-intensive developing economies are Hong Kong, Korea, Malaysia, Singapore, and Taiwan. 4. Monetary authorities in the foreign industrial countries are assumed to follow Taylor rules for setting short-term interest rates; Argentina and Hong Kong are assumed to maintain their pegs to the dollar; the other developing economies maintain a fixed exchange rate in terms of a basket of currencies. Domestic Developments I-15 Core PCE price inflation is about 1/4 percentage point higher than the Greenbook baseline in both 2001 and 2002. Additional simulations. The next set of scenarios updates two of the supplyside alternatives presented in the September Greenbook as well as four standard alternative scenarios for financial assumptions. 5 The "lower structural productivity" simulation assumes that trend productivity has increased at a constant 3 percent pace since 1998 and extends that lower rate for productivity growth through 2002. The "lower NAIRU" scenario assumes that the NAIRU has been 4 percent for several years and will remain at that level over the forecast period. The "flat funds rate" simulation eliminates the tightening included in the Greenbook forecast period. In the "tighter policy" simulation, the baseline rise in the funds rate is brought forward from 2002 to the first half of 2001; this policy keeps core PCE inflation at about 2 percent throughout the forecast period. The "stock market correction" scenario includes a 20 percent decline in stock prices in the first quarter of 2001 with no change thereafter. In the "continued stock market gains" simulation, the Wilshire 5000 index rises in line with nominal GDP over the next two years. 5. The supply-side alternative scenarios are described in the September Greenbook. 1-16 Part1: Summary and Outlook, November 8, 2000 Alternative Simulations: Productivity, the NAIRU, and Financial Assumptions (Percent change, annual rate, from end of preceding period, except as noted) Measure 2000 2001 2002 H1 H2 H1 H2 H1 Real GDP Baseline Lower structural productivity Lower NAIRU Flat funds rate Tighter policy Stock market correction Continued stock market gains 5.2 5.2 5.2 5.2 5.2 5.2 5.2 3.1 2.8 3.1 3.1 3.1 3.1 3.1 3.6 2.8 3.7 3.6 3.5 3.2 3.6 3.8 3.0 3.8 3.8 3.4 3.3 3.9 4.0 3.5 4.0 4.1 3.6 3.4 4.2 Civilian unemployment rate1 Baseline Lower structural productivity Lower NAIRU Flat funds rate Tighter policy Stock market correction Continued stock market gains 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 43 4.2 4.2 4.2 4.2 4.2 4.2 4.4 4.5 4.3 4.4 4.5 4.5 4.4 4.5 4.6 4.4 4.5 4.7 4.7 4.5 PCEprices excluding food and energy Baseline Lower structural productivity Lower NAIRU Flat funds rate Tighter policy Stock market correction Continued stock market gains 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.9 1.9 1.8 1.9 1.9 1.9 1.9 2.1 2.2 1.8 2.1 2.1 2.1 2.1 2.1 2.3 1.7 2.1 2.0 2.1 2.1 2.2 2.5 1.4 2.2 2.0 2.2 2.2 1. Average for the final quarter of the half-year period. H2 Strictly Class II Confidential FOMC <FR> November 8, STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, (Percent, annual rate) 2000 AD UNEMPLOYMENT 1998 1999 2000 2001 2002 QUARTERLY 1999 Q1 Q2 Q3 Q4 2000 Q1 Q2 Q3 Q4 2001 Q1 Q2 Q3 Q4 2002 Q1 Q2 03 04 TWO-QUARTER 3 1999 Q2 Q4 4.9 8.2 4.9 8.2 3.0 7.0 3.0 7.0 1.8 1.3 1.8 1.3 2.5 2.7 2.5 2.7 -0.1 -0.2 -0.1 -0.2 2000 Q2 Q4 8.3 5.3 8.2 5.3 5.0 3-3 5.2 3.1 3.0 1.9 2.8 2.1 3.8 2.8 4.0 2.9 -0.1 0.1 -0.1 0.0 2001 Q2 04 6.0 6.0 5.7 5.6 3.8 4.1 3.6 3.8 2.0 1.8 2.0 1.7 2.4 2.4 2.2 2.3 0.0 0.2 0.2 0.2 2002 Q2 QA4 6.4 6.2 6.0 6.0 4.3 4.3 4.0 4.1 2.0 1.8 2.0 1.8 2.4 2.5 2.4 2.5 0.1 0.1 0.1 0.1 5.9 6.5 6.8 6.0 6.3 5.9 6.5 6.7. 5.6 6.0 4.6 5.0 4.2 4.0 4.3 4.6 5.0 4.1 3.7 4.0 1.2 1.6 2.4 1.9 1.9 1.2 1.6 2.5 1.9 1.9 1.5 2.6 3.3 2.4 2.4 1.5 2.6 3.4 2.2 2.4 -0.3 -0.3 -0.0 0.2 0.2 -0.3 -0.3 -0.1 0.4 0.2 POUR-QUARTER 1998 1999 2000 2001 2002 1. 2. 3. 4. 04 Q4 Q4 Q4 Q4 4 For all urban consuers. Level, except as noted. for unemployment rate, change in percentage points. Percent change frvm two quarters earlier; Percent change from four quarters earlier; for une=loyment rate, change in percentage points. Strictly Class II Confidential <FR> FOMC REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES (Seasonally adjusted annual rate) November 8, ------- Item Units 1 2000 -Projected--------- 1994 1995 1996 1997 1998 1999 2000 2001 2002 7054.3 7347.7 7400.5 7543.8 7813.2 7813.2 8318.4 8159.5 8790.2 8515.7 9299.2 8875.8 9990.5 9337.4 10564.3 9674.9 11181.8 10054.3 4.1 4.3 3.2 4.3 2.2 1.7 2.9 3.2 4.1 4.3 3.9 4.4 4.3 5.0 3.9 5.1 4.6 5.7 4.6 6.4 5.0 5.9 4.8 6.1 4.1 4.5 4.5 5.5 3.7 4.1 3.8 4.3 4.0 4.0 4.0 4.1 3.6 6.4 4.1 2.7 2.8 3.7 2.5 2.7 3.1 5.0 3.2 2.7 4.1 8.8 2.5 3.9 5.0 12.6 5.0 3.4 5.6 11.1 5.9 4.2 4.7 6.4 4.4 4.5 3.4 4.4 3.1 3.4 3.2 3.8 3.0 3.2 Business fixed investment Equipment & Software Nonres. structures Residential structures 9.2 12.0 1.1 4.0 7.5 8.9 3.3 -1.5 12.1 11.8 12.8 5.6 11.8 13.7 6.5 3.5 12.9 15.8 4.9 10.3 10.1 14.1 -1.7 2.8 12.8 13.3 11.0 -2.8 10.1 11.8 4.8 -1.6 10.1 12.0 4.1 -2.8 Exports Imports 10.5 12.2 9.7 5.0 9.8 11.2 8.5 14.3 2-2 11.2 4.3 12.0 11.7 12.6 7.3 8.9 10.6 8.9 0.2 -3.7 -5.9 2.8 -0.8 -5.3 -4.7 2.1 2.7 2.0 0.8 3.0 2.4 0.1 -1.4 3.7 2.6 0-8 -1.0 3.6 4.4 4.8 4.6 4.2 1.4 -1.7 -3.9 3.0 3.7 2.6 2.1 4.2 3.6 2.5 2.0 4.2 66.8 53.6 -86.- 30.4 42.6 -78.4 30.0 22.1 -89.0 63.8 60.6 -113.3 80.2 78.7 -221.0 45.3 44.9 -322.4 57.8 52.8 -399.2 54.3 51.4 -452.8 48.2 46.8 -483.7 % change 6.2 4.3 6.0 6.2 5.9 6.5 6.7 5.6 6.0 Nonfarm payroll employment Unemployment rate *illions 114.1 6.1 117.2 5.6 119.6 5.4 122.7 4.9 125.8 4.5 128.8 4.2 Industrial prod. index rate - mfg. Capacity util. t change 6.4 82.5 3.5 82.6 5.3 81.5 6.8 82.4 2.9 80.9 4.2 79.8 Housing starts Light motor vehicle sales North Amer. produced Other Millions 1.46 15.01 12.88 2.13 1.35 14.77 12.87 1.90 1.48 15.05 13,34 1.70 1.47 15.06 13.12 1.93 1.62 15.45 13.43 2.02 Nominal GNP Nominal GNP Nominal personal income Real disposable income Personal saving rate Bill. $ % change 7071.1 6.2 5.1 2.9 6.1 7420,9 4,4 4.3 1.7 5.6 7831.2 5.9 5.9 2.6 4.8 8325.4 6.0 6.3 3.8 4.2 IVA & CCadj. Corp. profits, Profit share of GNP Excluding FR Banks % change 12.3 8.1 7.9 11.3 9.0 8.7 11.4 9.6 9.4 Federal surpl. /dficit State & local surpl./def. Ex. social ins. funds Bill. $ -212.3 8.6 4,.0 -192.0 15.3 11.4 16.3 4.3 16.9 5.1 EXPENDITURES Nominal GDP Real GDP Dill. Bill. Real GDP Gross domestic purchases Final sales purchases Priv. dom. final t Personal cons. Durables Nondurables Services Govt. cons. Federal $ Ch. $ change expenditures & investment Defense State & local Change in bus. Nonfarm Net exports inventories Nominal GDP EMPLOYMENT Bill. Oc. $ AND PRODUCTION 4 131.5 4.0 133.0 4.2 134.7 4.5 4.8 81.1 3.7 80.8 4.4 80.9 1.67 16.76 14.28 2.48 1.61 17.36 14.55 2.81 1.57 16.41 13.90 2.52 1.54 16.28 13.83 2.45 8786.7 5.7 6.3 4.6 4.2 9288.2 6.5 5.6 3.1 2.2 9979.9 6.7 6.0 2.7 -0.1 10538.9 5.5 6.1 4.2 0.3 11138.2 5.8 6.0 4.5 1.5 9.9 10.0 9.7 -5-8 9.3 9.0 11.2 9.2 8.9 -136.8 21.4 18.7 -53.3 31.0 29.9 49.0 41.7 41.3 124.4 50.0 50.4 17.2 5.7 18.0 6.7 18.8 7.5 18.5 6.8 INCOME AND SAVING saving rate Gross natl. Net natl. saving rate PRICES AND COSTS 2.1 1.8 1.2 2.1 1.4 0.8 PCE chn.-wt. price index ex. food and energy 2.1 2.3 1.5 1.7 1.1 1.6 CPI Ex. 2.6 2.8 1.9 2.2 1.5 2.4 3.1 3.4 3.5 s change GDP chn.-wt. price index Gross Domestic Purchases chn.-wt. price index ECI, food and energy hourly compensation 2 Nonfarm business sector Output per hour Compensation per Hour Unit labor cost 1. 2. 1.1 2.2 1.0 Changes are frcm fourth quarter to fourth quarter. private-industry workers. -0-0 9.2 9.0 0.9 8.7 8.5 254.3 59.1 59.6 291.2 57.3 57.4 291.7 52.0 51.8 18.4 6.7 18.7 6.8 9.0 9.6 9.4 19.2 7.2 Strictly Class II Confidential <FR> FOMC REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES (Seasonally adjusted, annual rate except as noted) 1998 Qi 1998 Q2 1998 Q3 1998 Q4 1999 Q1 1999 Q2 8634.7 8404.9 8722.0 8465.6 8829.1 8537.6 8974.9 8654.5 9104.5 8730.0 9191.5 8783.2 6.5 8.1 4.1 7.2 2.9 4.8 5.6 7.5 3.4 4.4 2.9 4.4 5.6 5.4 5.9 6.3 3.5 4-9 4.5 6.4 4.8 9.4 4.7 4.0 5.8 13.9 5.8 4.3 4.3 4.1 4.3 4.3 4.9 23.9 5.2 1.3 Business fixed investment Equipment & Software onres- structures Residential structures 20.1 24.6 7.9 9.6 15.6 16.1 14.1 12.6 3.5 6.5 -4.7 10.3 Exports mInports 1.0 14.2 -3.0 13.1 -1.0 -9.1 -17.7 3.8 November 8, 1 1999 Q3 2000 1999 Q4 2000 Q1 2000 Q2 9340.9 8905.8 9559.7 9084.1 9752.7 9191.8 9945.7 9318.9 2.5 3.8 4.0 6.2 5.7 6.6 4.5 5.6 8.3 8.4 6.4 6.2 4.8 5.6 6.7 9.3 5.6 6.5 3.9 4.7 5.7 8.6 7.8 4-1 5.6 15.0 3.8 4.6 5.0 8-0 4.9 4.5 5.9 13.0 7.4 3.8 7.6 23.6 6.0 5.2 3.1 -5.0 3.6 4.6 13.2 16-7 3.3 8.9 9.5 14.1 -3.4 8.2 9.6 15.2 -6.2 5.9 11.8 18.0 -6.2 -3.1 9.5 9.5 9.7 0.5 21.0 20.6 22.3 3.2 14.6 17.9 4.4 1.3 -3.2 5.5 15.1 12.2 -7.9 4.5 5.8 16.2 10.2 16.9 10.3 10.7 6.3 12.0 14.3 18.6 7.3 12.9 13.1 4.4 1.4 -3.2 5.8 4.0 2.8 3.7 -2.4 2.3 3.7 -2.2 -3.1 7.0 0.8 2.0 -2.3 0.1 4.8 6.9 12.3 3.7 8.5 13.2 12.6 6.1 -1.1 -14.2 -19.8 6.6 4.8 17.2 16.9 -1.1 117.3 109.7 -175.3 60.9 62.5 -219.8 73.1 79.2 -244.1 69.4 63.5 -244.9 48.1 49.2 -279.8 13.1 14.1 -314.6 39.1 43.5 -342.6 80.9 73.0 -352.5 36.6 33.0 -376.8 78.6 72.3 -403.4 % change 7.6 4.1 5.0 6.8 5.9 3.9 6.7 9.7 8.3 8.2 Bonfar payroll employment Unemployment rate Millions 124.7 4.7 125.5 4.4 126.2 4.5 127.0 4.4 127.8 4.3 128.4 4.3 129.1 4.2 129.8 4.1 130.6 4.1 131.6 4.0 Industrial prod. index Capacity util. rate - mfg. % change 2.4 82.0 3.0 81.0 2.9 80.3 3.3 80.2 2.0 79.6 4.7 79.6 4.8 79.7 5.3 80.3 6.5 80.8 8.2 81.5 Rousing starts Light motor vehicle sales North Amer. produced Other Millions 1.56 15.00 13.07 1.93 1.57 16.01 14.04 1.97 1.63 14.55 12.53 2.02 1.72 16.24 14.07 2.17 1.76 16.18 13.87 2.31 1.59 16.79 14.34 2.45 1.66 17.08 14.61 2.47 1.69 17.00 14.31 2.69 1.73 18.20 15.32 2.88 1.61 17.24 14.36 2.88 Naminal GP Nominal GNP Noinal personal income Real disposable income Personal saving rate Bill. $ ' change 8640.3 7.8 7.7 6.6 4.6 8725.0 4.0 6.2 4.5 4.3 8814.9 4.2 5.9 3.6 4.1 8966.6 7.1 5.7 3.6 3.8 9097.2 6.0 4.3 2.9 3.1 9181.8 3.8 5.4 2.8 2.5 9327.3 6.5 5.2 2.2 1.8 9546.3 9.7 7.6 4.5 1.5 9745.0 8.6 6.9 1.9 0.2 9937.4 8.1 6.9 3.7 0.3 Corp. profits, IVA & CCAdj. Profit share of GNP Excluding FR Banks % change -12.6 9.5 9.3 -5.0 9.3 9.0 2.0 9.3 9.0 -7.0 9.0 8.7 26.5 9.4 9.1 -6.9 9.1 8.8 2.5 9.0 8.8 26.6 9.4 9.1 20.7 9.6 9.3 12.2 9.7 9.4 Federal surpl./deficit State & local surpl./def. Ex. social ins. funds Bill. 25.9 38.1 37.5 41-9 33.4 32.9 71.9 37.5 37.2 56.4 57.7 57.6 89.7 47.9 48.1 117.5 38.0 38.3 147.3 47.4 47.9 143.3 66.6 67.2 235.8 52.0 52.5 240.9 60.1 60.6 18.9 7.7 18.7 7.4 19.0 7.6 18.7 7.2 18.9 7.3 18.4 6.7 18.4 6.5 18,3 6.6 18.2 6.6 18.6 6.9 1.6 3.3 2.4 Item Units EXPENDITURES Nominal GDP Real GDP Bill. Bill. Real GDP Gross domestic purchases Final sales Priv. dca. final purchases % change Personal consDurables Nondurables Services $ Ch. $ expenditures Gov't. cons. & investment Federal Defense State a local Change in bus. Nonfarm Net exports inventories Nominal GDP Bill. Ch. $ EMPLOYMENT AND PRODUCTION INCOME AND SAVI3G $ Gross natl. saving rate Net natl. saving rate PRICES AND COSTS GDP chn,-wt. price index Gross Doestic Purchases chn.-wt. price index % change 1.0 1.1 1.5 1.1 2.2 1.4 1.1 0.1 0.8 1.1 1.2 1.9 2.0 1.7 1.9 3.8 2.1 PCE chn.-wt. price index Ex. food and enery 0.4 1.2 1.2 1.8 1.4 1.8 1.5 1.7 1.7 1.8 2.3 1.3 1.9 1.3 2.2 1.7 3.5 2.2 2.1 1.4 CPI Ex. food and eneroy 1.0 2.8 1.7 2.3 1.7 2.3 1.7 2-1 1.7 1.8 3.2 2.1 2.4 2.1 2.9 2.3 4.3 2.5 3.6 2.9 3.0 3.3 4.4 2.6 1.7 4.3 3.7 4.0 5.9 4.4 4.5 6.1 1.5 1.6 5.3 3.6 1.8 5.2 3.3 3.6 4.5 0.8 2.6 4.5 1.8 0.6 5.0 4.3 5.2 5.5 0.3 8.0 4.2 -3.5 1.9 3.9 1.9 ECI, hourly copensation 1 Nonfarm business sector output per hour Copesation per hour Unit labor cost 1. Private-industry workers. 6.1 5.9 -0.2 Strictly Class II Confidential <FR> FOMC REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES (Seasonally adjusted, annual rate except as noted) - -------------- Projected November 8, 2000 ------------------ 2000 Q3 2000 Q4 2001 Q1 2001 Q2 2001 Q3 2001 Q4 2002 Q1 2002 Q2 2002 Q3 2002 Q4 10059.1 9378.5 10204.4 9460.4 10355,0 9544.1 10491.0 9628.9 10631.0 9716.7 10779.9 9810.0 10940.9 9904.1 11099.0 10002.7 11260.5 10103.1 11426.8 10207.0 2.6 2.7 3.1 4.2 3.5 3.3 3.9 3.6 4.3 3.3 4.1 3.6 4.3 3.5 4.3 3.7 4.1 3.9 4.4 3.9 3.5 4.7 4.3 3.9 4.2 3.8 4.2 4.0 4.2 3.8 4.1 4.1 4.1 3.9 4.0 4.2 3.6 4.6 4.1 4.5 7.5 4.9 3.8 3.6 1.4 3.2 4.2 3.6 4.5 3.2 3.7 3.4 4.1 3.1 3.5 3.4 4.8 3.1 3.2 3.3 4.0 3.1 3.2 3.2 4.1 3.0 3.2 3.2 3.9 3.0 3.2 3.2 3.7 3.0 3.2 3.2 3.8 3.0 3.2 Nonres. structures Residential structures 7.4 6.7 9.5 -9.7 8.7 8.8 8.6 -5.3 9.1 10.3 5.3 -5.0 9.9 115 4.8 0.6 10.9 12.9 4.6 -1.0 10.5 12 4.6 -0.8 10.2 12.1 4.3 -1.7 10.0 11.9 4.2 -3.1 10.0 11.8 3.9 -3.4 10.1 12.1 3.7 -3.0 Exports Imports 16.1 13.4 10.4 6.9 3.3 8.2 6.9 11.3 7.6 9.1 11.6 7.1 6.7 8.1 10.4 10.1 11.0 9.3 14.6 8.1 -2.0 -10.1 -10.2 2.5 3.9 3.2 1.3 4.2 3.4 1.8 1.7 4.2 3.5 2.2 2.2 4.2 3.5 2.0 2.0 4.2 4.3 4.5 2.8 4.2 3.6 2.4 1.9 4.2 3.7 2.7 2.1 4.2 3.5 2.3 2.1 4.1 66.6 61.6 -409.5 49.2 44.3 -406.9 58.0 54.0 -429.0 62.0 58.8 -452.9 58.2 55.5 -467.3 39.2 37.2 -462.2 43.1 41.4 -475.5 50.5 48.8 -486.2 54.5 53.3 -492.0 44.7 43.5 -481.1 % change 4.6 5.9 6.0 5.4 5.4 5.7 6.1 5.9 5.9 6.0 Nonfarm payroll employment Unemployment rate Millions 131.6 4.0 132.0 4.0 132.4 4.1 132.8 4.2 133.2 4.3 133.6 4.4 134.0 4.4 134.4 4.5 134.9 4.5 135.3 4.6 Industrial prod, index Capacity util. rate - N change 2.8 81.3 2.1 80.9 3.1 80.7 3.9 80.7 3.8 80.8 4.1 80.8 4.2 80.9 4.5 80.9 4.3 81.0 4.4 81.0 Millions 1.53 17.37 14.54 2.83 1.56 16.61 13.97 2.64 1.57 16.42 13.85 2.57 1.57 16.37 13.85 2.52 1.57 16.45 13.96 2.49 1.57 16.41 13.93 2.48 1-55 16.32 13.85 2.47 1.54 16.31 13.85 2.46 1.53 16.24 13.80 2.44 1.52 16.23 13.80 2.43 Nominal GNP Nominal GNP Nominal personal income Real disposable income Personal saving rate Bill. $ ' change 10048.5 4.5 5.4 2.4 -0.3 10188.6 5.7 5.0 2.8 -0.5 10334.0 5.8 7.3 6.4 0.2 10467.7 5.3 5.9 3.7 0.3 10604.6 5.3 5.6 3.4 0.3 10749.2 5.6 5.7 3.4 0.3 10904.5 5.9 6.5 8.4 1.5 11057.9 5.7 5.8 3.3 1.5 11213.9 5.8 5.7 3.2 1.5 11376.4 5.9 5-8 3.2 1.5 Corp. profits, IVA & CCAdj. Profit share of GNP Excluding FR Banks % change 4.0 9.7 9.4 0.1 9.6 9.3 -0.9 9.4 9.1 -1.5 9.2 9.0 -0.1 9.1 8.9 2.5 9.1 8.8 -1.6 8.9 8.6 1.0 8.8 8.5 1.4 8.7 8.5 2.7 8.6 8.4 Federal surpl./deficit State & local surpl./def. Ex. social ins. funds Bill. 266.9 60.7 61.1 273.6 63.7 64.0 264.5 59.6 59.8 283.0 58.2 58.3 306.2 54.8 54.8 311.2 56.7 56.6 253.4 56.9 56.7 280.1 53.1 52.8 307.6 50.5 50.2 325.8 47.7 47.4 18.5 6.7 18.4 6.5 18.6 6.7 18.7 6.8 18.8 6.9 18.8 6.9 19.0 7.0 19.2 7.2 19.3 7.3 19.4 7.4 Item Units EXPENDITURES Nominal GDP Bill. $ Bill. Ch. Real GDP Real GDP Gross domestic purchases Final sales Priv. dom. final purchases Personal cons. Durables Nondurables Services $ % change expenditures Business fixed investment Equipment & Software Gov't. cons. & investment Federal Defense State & local Change in bus. Nonfarm Net exports inventories Nominal GDP EMPLOYMENT AND Bill. Ch. $ 4.2 3.6 25. 1.9 4.2 PRODUCTION mfg. Housing starts Light motor vehicle sales North Amer. produced Other INCOME AND SAVING Gross natl. Net natl. $ saving rate saving rate PRICES AND COSTS GDP chn.-wt. price index Gross Domestic Purchases chn.-wt. price index 2.0 2.2 2.4 1.7 1.7 1.8 1.8 2.4 2.3 2.0 1.5 1.6 1.8 1.8 PCE chn.-wt. price index Ex. food and energy 2.2 1.5 2.3 2.2 1.8 2.1 1.8 2.1 1.9 2.1 2.1 2.2 2.1 2.3 CPI Ex. 3.1 2.5 2.8 2.7 2.2 2.7 2.1 2.7 2.3 2.7 2.4 2.8 2.5 2.9 4.1 4.2 4.7 4.8 4.8 4.9 4.8 2.7 5.7 2.9 3.0 5.6 2.6 3.4 5.7 2.4 3.4 5.7 2.3 ECI, N change food and energy hourly compensation 1 Nonfarm business sector Output per hour Compensation per hour Unit labor cost 1. Private-industry workers. 3.7 6.4 2.7 3.2 5.5 2.3 3-4 5.6 2.2 Strictly Confidential <FR> Class II FOMC CONTRIBUTION 1998 Item 03 1998 TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS 1999 Q4 1 1999 02 1999 03 1999 Q4 2000 Q0 0 00 Q2 November 8, 2000 03 2000 98Q4/ 99Q4/ 0Q4/ 9704 98S4 99Q4 3.4 4.5 5.6 5.5 3.5 5.0 2.5 3.8 5.7 6.8 8.3 8.6 4.8 5.8 5.6 6.7 2.6 2.8 4.6 5.8 5.0 6.0 4.1 4.6 2.9 1.7 3.8 5.3 4.4 5.3 3.9 5.2 4.5 4.7 6.5 5.2 6.6 7.9 3.9 4.0 3.0 3.6 4.6 5.3 4.8 5.1 4.4 4.7 2.8 3.3 3.7 3.7 3.4 0.3 1.7 0,7 1.1 0.6 4.1 1.0 5.0 1.0 2.1 -0.4 3.0 0.6 0.8 1.7 1.0 0.5 1.5 1.6 0.8 1.8 1.0 1.8 1.5 1.2 0.7 1.0 1.6 2.0 1.8 1.5 Business fixed investment Equipment & Software Monres. structures Residential structures 0.4 0.6 -0.2 0.4 1.6 1.5 0.1 0, 1.2 1.3 -0.1 0.3 1.2 1.4 -0.2 0.3 1.5 1.7 -0.2 -0.1 1,2 2.5 1.9 1.0 0.9 0.3 0.0 1.9 0.6 0.1 1.7 0.1 0.1 0.7 0.3 -0.4 1.3 1.3 -0.1 0.1 1.7 1.3 0.3 -0.1 Net exports Exports Imports -1.0 -0.4 -0.7 0.1 1.5 -1,5 -1.4 -0.9 -0.6 -1.4 0.6 -2.0 -1.1 1.1 -2.1 -0.4 1.1 -1.5 -0.9 0.7 -1.6 -1.0 1.5 -2.5 -0.2 1.7 -1.9 -1.1 0.5 -1.5 -0.5 1.3 -1.8 0.3 -0.2 0.2 -0.4 0.5 0.5 0.2 -0.1 0.3 0. 0.6 -0.1 -0.1 -0.0 0.8 0.1 0.1 -0.1 0.2 0.0 0.8 0.4 0.5 -0.1 0.4 1.5 0.8 0.5 0.3 0.7 -0.2 -0.9 -0.9 -0.1 0.B 0.9 1.0 0.6 0.4 -0.1 -0.4 -0.6 -0.4 -0.2 0.3 0.5 0.0 -0.0 0.1 0.4 0.8 0.3 0.2 0.1 0.5 0.2 -0.1 -0.2 0.1 0.3 0.6 0.8 -0.2 -0.2 -0.7 0.5 -0.9 -0.6 -0.3 -1.4 -1.4 0.0 1.2 1.3 -0.1 1.8 1.3 0.5 -1.8 -1.6 -0.2 1.7 1.6 0.1 -0.5 -0.4 -0.0 0.0 0.0 0.0 0.2 0.1 0.1 -0.3 -0.3 0.0 Real GDP Gross dom. purchases Final sales Priv. dom. tinal purchases Personal cons. expenditures Durables Nondurablas services Government cons. Federal & invest. Defense Nondafense State and local Change in bus. Nonfarm Farm Note. inventories Componants may not sum to totals because of rounding. CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS Strictly Confidential <FR> Class II FOMC 2001 Ql 2001 Q2 3.5 3.4 3.6 4.4 3.6 4.5 Priv, dom. final purchases 4.2 3.4 3.2 3.5 Personal cons. Durables Nondurables Services 2.4 0.1 0.6 1.6 Business fixed investment Equipment & Software Nonres. structures Residential struotures Net exports Exports Imports Item 7 Real GDP Gross dom. purchases Final sales expenditures Government cons. Federal Defense Nondefense 2000 Q4 2002 Q1 2002 02 2002 03 2002 Q0 OOQ4/ 9904 014/ 00o4 3.7 4.2 3.9 3.7 3.9 4.4 4.0 4.4 4.1 4.3 4.2 3.8 4.1 4.6 3.7 4.2 4.0 4.2 3.4 3.7 3.8 3.8 4.6 3.7 3.7 3.6 3.8 3.5 3.9 3.4 4.5 3.5 4.4 4.7 3.8 3.7 4.0 3.5 2.4 0.4 0.6 1.4 2.3 0.3 0.6 1.4 2.3 0.4 0.6 1.3 2.2 0.3 0.6 1.3 2.2 0.3 0.6 1.3 2.1 0.3 0.6 1.3 2.1 0.3 0.6 1.3 1.2 0.9 0.3 -0.2 1.2 1.1 0.2 -0.2 1.3 1.2 0.2 0.0 1.5 1.3 0.2 -0.0 1.5 1.3 0.2 -0.0 1.4 1.3 0.1 -0.1 1. 1.3 0.1 -0.1 1.4 1.3 0.1 -0.1 1.4 1.3 0.1 -0.1 0.1 1.1 -1.0 -0.0 0.4 -1.2 -0.9 0.8 -1.6 -0.5 0.8 -1.4 0.2 1.3 -1.1 -0.5 0.8 -1.2 -0.4 1.2 -1.5 -0.2 1.2 -1.4 0.4 1.7 -1.3 -0.5 1.3 -1.8 -0.5 0.8 -1.3 -0.1 1.2 -1.4 0.6 0.1 0.1 0.0 0.5 0.6 0.1 0.1 0.0 0.5 0.6 0.1 0.1 0.0 0.5 0.7 0.3 0.1 0.2 0.5 0.6 0.1 0.1 0.1 0.5 0.6 0.6 0.6 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.5 0.5 0.3 0.3 0.4 -0.0 0.2 0.2 -0.0 -0.1 -0.1 -0.0 -0.7 -0.7 -0.0 0.1 0.2 -0.0 0.3 State and local Change in bus. Nonfarm Farm inventories 2000 001 Q4 & invest. -0.6 -0.7 0.1 Note. Components may not sum to totals because of rounding, 200001 Q3 November 8, 0.2 0.2 -0.1 -0.2 -0.4 -0.3 0.3 0.2 -0.4 -0.3 0.0 -0.0 -0.0 0.0 02Q4/ 01Q0 Strictly Confidential (FR) Class II FOMC November 8,2000 Staff Projections of Federal Sector Accounts and Related Items (Billions of dollars except as noted) SFiscal year' Item 2000 2000 2001 2002 2001 Qla Q2B Q3P Q4 1 124 434 449 -15 -45 30 656 444 212 147 65 492 431 60 50 10 480 462 18 -29 47 476 474 2 -26 28 659 464 194 124 71 119 -18 211 60 18 1 1999a Unified budget Ql - Receipts 2 Outlays 2 2 Surplus/deficit On-budget Off-budget Surplus excluding deposit insurance Means of financing Borrowing Cash decrease Other 3 Cash operating balance, end of period 1827 1703 125 Q2 2002 Q3 Q4 Ql Q2 Q3 Q4 517 447 69 50 19 518 483 35 -15 50 485 475 10 -22 32 681 476 205 127 79 547 469 79 53 26 533 494 39 -16 54 194 69 35 9 205 78 38 Not seasonally adjusted -89 -18 -18 -223 4 -18 -266 8 -25 -338 0 9 -27 39 4 -190 -13 -10 -54 5 -12 -34 21 -5 9 2 -13 -167 -21 -7 -74 5 0 -60 20 5 -24 5 9 -158 -40 -7 -96 15 2 -62 20 3 56 53 45 45 45 57 53 32 29 50 45 25 20 60 45 25 2025 1803 488 320 168 1316 222 105 153 871 506 330 176 365 282 110 2230 1942 535 345 190 1406 288 115 2012 1776. 479 311 168 1297 236 101 2055 1814 499 326 173 1315 241 106 2093 1826 486 317 169 1340 267 107 2114 1841 494 322 172 1347 274 108 2136 1871 506 330 177 1365 264 109 2165 1882 510 332 178 1372 283 111 2196 1890 514 335 179 1376 306 112 2229 1918 521 337 184 1397 311 113 2196 1942 535 345 190 1407 253 114 2229 1949 540 348 192 1409 280 116 2264 1957 545 350 194 1412 308 117 2300 1974 549 353 196 1425 326 118 117 172 173 134 136 160 166 155 172 194 198 139 165 191 208 101 31 20 48 60 57 82 109 117 66 95 125 144 NIPA federal sector Seasonally adjusted annual rates Receipts Expenditures Consumption expenditures Defense Nondefense Other spending Current account surplus Gross investment Current and capital account surplus 4 Fiscal indicators High-employment (HEB) surplus/deficit Change in HEB, percent of potential GDP Fiscal impetus (Fl) percent, calendar year -68 10 77 -.8 -. 9 -. 7 -. 2 -1 ,t -.3 -.1 0 -2 -3 -.1 .5 -.3 -.3 -.2 5 2 3 9 -4 5 -2 2 .6 .6 .4 2 7 .5 .6 .5 1. Fiscal year data for the unified budget come from OMB; quarterly data come from the Monthly Treasury Statement and may not sum to OMB fiscal year totals. 2. OMB's Mid-Session Review baseline surplus estimates are $224 billion in FY2000, $239 billion in FY2001, and $279 billion in FY 2002. CBO's July 2000 baseline surplus estimates, assuming discretionary spending grows with inflation beginning in FY 2001 are $232 billion in FY2000, $268 billion in FY2001, and$312 billion in FY 2002. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus is excluded from the on-budget surplus and shown separately as off-budget, as classified undercurrent law. 3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities. 4. HEB is the NIPA current and capital account surplus in current dollars, with cyclically sensitive receipts and outlays adjusted to the level of potential output associated with an unemployment rate of 6 percent. Quarterly figures for change in HBB and FI are not at annual rates. The sign on Change in HEB,as a percent of nominal potential GDP, is reversed. FI is the weighted difference of discretionary changes in federal spending and taxes in chained (1996) dollars, scaled by real federal consumption plus investment. For Fl and the change in HEB, negative values indicate aggregate demand restraint, a--Actual p--Preliminary Change in Debt of the Domestic Nonfinancial Sectors (Percent) Strictly Confidential (FR) Class II FOMC November 8, 2000 Nonfederal Households Business State and local governments Memo: Nominal GDP 0.8 7.3 14.5 14.1 0.8 1.4 3.6 6.8 2,2 6.0 -4.0 -4.6 6.4 5.0 6.2 4.3 7.2 6.9 10.0 10.1 7.9 4,3 5.4 7.1 5.8 8.7 11.0 11.0 -0.6 5.3 7.2 4.4 6.0 6.2 5.9 6.5 8.9 7.6 6.8 9.1 8.6 8.1 8.2 4.6 3.1 10.0 8.6 8.9 1.5 1.4 1.3 6.7 5.6 6.0 9.5 8.0 8.2 9.6 8.4 8.1 7.5 7.4 7.3 7.2 10.7 8.6 7.2 10.5 9.0 8.6 8.5 8.4 8.3 8.2 5.5 7.8 10.0 9.0 6.8 6.0 5.4 4.6 4.3 3.9 10,5 9.9 10.4 12.1 8.6 7.6 7.9 7.9 8.9 8,8 4.3 2.7 0.3 2.0 1.7 2.1 1.4 1.4 1.4 1.4 6.7 9.7 8.3 8.2 4.6 5.9 6.0 5.4 5.4 5.7 Total 2 Federal government 3 Total 4 Year 1992 1993 1994 1995 4.6 4.9 4.5 5.5 10.9 8.3 4.7 4.1 2.6 3.7 4.4 6.0 4.5 5.3 7.6 7,9 1996 1997 1998 1999 5.3 5.6 6.8 6.9 4.0 0.6 -1.4 -1.9 5.8 7.3 9.6 9.5 2000 2001 2002 5.1 4.5 4.4 -8.3 -8.6 -11.0 Quarter 1999:3 4 2000:1 2 3 4 2001:1 2 3 4 6.9 6.4 5.4 5.6 5.1 3.9 5.5 4.1 4.6 3.7 -1.9 -0.9 -5.9 -11.4 -6.2 -10,7 -2.0 -9.6 -9.2 -14.8 Period 1 Home mortgages Consumer credit 5.3 4.4 5.9 5.7 7.3 6.5 8.8 9.2 8.7 7.5 7.3 9.5 8.4 8.4 10,0 7.9 7.4 7.2 7.1 7.5 7.4 Total Note. Quarterly data are at seasonally adjusted annual rates. 1. Data after 2000:Q2 are staff projections. Changes are measured from end of the preceding period to end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4. 2. On a monthly average basis, total debt is projected to grow 5.5 percent in 2000, 4.5 percent in 2001 and 4.4 percent in 2002. 3. On a monthly average basis, federal debt is projected to grow -6.8 percent in 2000, -8.3 percent in 2001 and -10.8 percent in 2002. 4. On a monthly average basis, nonfederal debt is projected to grow 8.8 percent in 2000, 7.5 percent in 2001 and 7.4 percent in 2002. 2.6.3 FOF Flow of Funds Projections: Highlights (Billions of dollars except as noted) Strictly Confidential (FR) Class II FOMC November 8, 2000 I Seasonally adjusted annual rates Calendar year 2000 1999 1999 2000 2001 2002 Q3 Q4 Net equity issuance Netdebt issuance 977.5 -143.5 1121.0 783.4 -109,0 892.4 771.0 -60.0 831.0 794.5 -44.0 838.5 1042.3 -128.4 1170,7 1040.5 -55.0 1095.5 1010.1 62.8 947,3 746.4 -248.0 994.4 827.6 -90.8 918.4 Borrowing sectors Nonfinancial business 4 Financing gap 5 Net equity issuance 6 Credit market borrowing 171.3 -143.5 596.5 210.4 -109.0 605.0 276.2 -60.0 572.3 347.5 -44.0 644.0 177.9 -128.4 601,3 206.3 -55.0 583.7 190.4 62.8 627.7 223.1 -248,0 747.9 Households 7 Net borrowing 2 Home mortgages 8 9 Consumer credit 10 Debt/DPI (percent) 3 543.4 411.2 94.4 93.4 573.2 409.0 116.8 96.5 533.4 420.2 71.3 98.5 516.8 428.2 50.8 98.9 588.5 458.5 76.2 94.1 509.6 377.3 109.5 94.5 531,4 322.6 143.1 95.2 State and local governments 11 Net borrowing 12 Current surplus 4 52.3 156.8 19.3 176.2 17.4 184,0 17.4 188.3 52.5 155.1 33.6 176.5 -71,2 -71.2 -158.3 -305.0 -305.0 -275.4 -292.0 -292.0 -300.7 -339.7 -339.7 -332.4 -71.4 -19.0 -30,1 Depository institutions 16 Funds supplied 404.3 498.6 303.3 295.9 Memo (percentage of GDP) 17 Domestic nonfinancial debt 5 18 Domestic nonfinancial borrowing Federal government 6 19 20 Nonfederal 181.4 12.1 -0.8 12.8 179.1 8.9 -3,1 12.0 177.5 7.9 -2.8 10.6 175.2 7.5 -3.0 10.5 Category I Q1 Q2 Q3 Q4 549.6 -160.0 709.6 943.8 -60.0 1003.8 697.0 -60.0 757.0 803.7 -60.0 863,7 639.6 -60.0 699.6 212,0 -90.8 546.8 215.9 -160.0 497.4 247.7 -60.0 523.6 272.4 -60.0 532.6 290.7 -60.0 612.6 294,0 -60.0 620.2 635.4 477.1 131.8 95.9 569.3 422,2 101.8 97.0 556.7 414.2 90.6 97.8 531.7 414.2 82.6 97.7 528.8 418.2 72.7 98.2 535.6 422.2 67.5 98.7 537.6 426.2 62.5 99.2 3.8 164,7 25.0 175.7 21,3 179.7 27.2 184.8 17.4 182.9 17.4 183.7 17.4 182.7 17.4 186.9 -31.5 48.3 20.6 -215.5 -27.5 15.0 -414.0 -189.6 -211.8 -219.0 -55.0 -60.5 -371.7 -34.3 -18.1 -68.9 9.2 -1.8 -321,8 -166.5 -194.5 -301.9 -74.4 -69.1 -475.6 -60.3 -35.2 535.0 587.6 467.2 598.3 480.2 448.9 304.3 300.8 301.8 306.4 182.1 12,5 -0,8 13.3 181.1 11.5 -0.3 11.8 180.1 9.7 -2.2 11.9 179.0 10.0 -4.2 14.2 179.4 9.1 -2.2 11.3 178.8 7.0 -3,6 10,6 178.3 9.7 -0.7 10.4 178.1 7.2 -3.1 10.3 177.7 8.1 -2.8 11.0 177.0 6.5 -4.4 10.9 I Ql Q2 Q3 Q4 I Netfunds raised by domestic nonfinancialsectors 1 Total 2 3 Federal government 13 Net borrowing 14 Net borrowing (quarterly, n.s.a.) 15 Unified deficit (quarterly, n.s.a.) Note. Data after 2000:Q2 are staff projections. 1. For corporations: Excess of capital expenditures over U.S. internal funds. 2. Includes change in liabilities not shown in lines 8 and 9. 3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income. 2.6.4 FOF 4. NIPA surplus less changes in retirement fund assets plus consumption of fixed capital. 5. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP. 6. Excludes government-insured mortgage pool securities. International Developments Overview Despite renewed volatility in global energy and equity markets during the intermeeting period, the outlook abroad remains generally favorable. Foreign economic growth appears to have eased somewhat from the unusually strong pace posted in the first half of this year, particularly in developing Asia, Mexico, and Japan. Nevertheless, growth is projected to stabilize at still solid rates in most regions. The primary exception to this benign outlook remains Japan, where we expect very slow growth over the forecast period. Summary of Staff Projections (Percent change from end of previous period) Projection 1999 2000 H1 Foreign output September GB Foreign CPI September GB 2001 2002 H2 4.5 5.7 4.1 4.0 3.9 4.5 5.7 4.1 4.0 3.9 2.6 1.9 4.0 3.4 3,2 2.6 1.9 4.0 3.4 3.3 The spot price of West Texas intermediate crude oil has fluctuated between $30 and $36 per barrel since the last FOMC meeting. We project that the spot price of WTI crude will decline from around $33 in the current quarter to about $26 by the end of 2001 and $23 by the end of 2002, roughly in line with futures prices. There are risks on both sides of this path. Upside risks arise from the potential for a Middle East supply disruption, low levels of observed inventories, and strong demand in the run-up to the winter heating season. A downside risk derives from the possibility that strong petroleum product demand reflects stockbuilding by wholesalers, retailers, and end-users that could quickly abate. Our forecast for the WTI spot price at the end of 2002 is about $1.50 per barrel below that of the September Greenbook. The rise in energy prices is boosting headline inflation around the world in the second half of this year. Next year, with the expected easing of oil prices, inflation should decline. We assume a modest further monetary tightening in some countries next year, which we believe will be sufficient to stabilize foreign percent rate through the end of the forecast period. inflation at a 3-1/4 percent Since the October FOMC meeting, the dollar has appreciated about 1-1/2 against the currencies of a broad group of our trading partners. We project that, starting from this higher level in the current quarter, the broad real exchange 1-28 Part 1: Summary and Outlook, November 8, 2000 value of the dollar will depreciate at an average rate of 2 2002. percent in 2001 and Stronger-than-expected export growth in recent months has led us to project narrower deficits for net exports and the current account for this year than in the previous Greenbook. In addition, we have extended this strength in projected exports through the end of the forecast period. However, the higher path for the dollar implies higher imports going forward than we forecast in September. On balance, net exports continue to make a negative arithmetic contribution to growth, and the current account deficit reaches nearly 5 percent of GDP by the end of 2002. Potential risks to our outlook for foreign activity include the possibilities of a global slowdown in high-tech investment spending (discussed in the Domestic Developments section above) and a worsening of the financial situation in Argentina. At the end of this section, we consider the implications for U.S. growth and inflation of a decline in investor confidence in Argentina that spreads to the rest of Latin America. Recent Developments International financial markets. Despite a 25-basis-point tightening in the European Central Bank's policy rates on October 5, the dollar reached new highs against the euro later in October. The dollar also rose against a wide range of other industrial country and emerging market currencies. Since the release of weaker-than-expected U.S. GDP data on October 27, the dollar has retreated. On balance, the dollar has appreciated 11/2 percent in terms of our broad index of trading-partner currencies. . The Desk did not intervene on behalf of the System or the Treasury. Short-term and long-term market interest rates have changed little in the foreign industrial countries since the last FOMC meeting. Among emerging markets, interest rate increases were confined chiefly to Latin America and the Philippines. Equity markets abroad have been volatile in recent weeks. Economic activity abroad. Economic growth in the foreign industrial countries appears to have slowed in the third quarter from the strong pace recorded in the first half of the year. According to available indicators, the sharpest slowdown occurred in Japan, where activity may have been flat in the InternationalDevelopments I-29 third quarter. Limited information points to some slowing of growth in the euro area as well. Activity in Canada appears to have expanded strongly, although it softened somewhat from the very rapid pace of the first half of the year. Thirdquarter GDP in the United Kingdom grew 2 percent from the previous period at an annual rate, about equal to the growth rate of the first half. Rising oil prices drove broad measures of inflation higher in September for many of the foreign industrial countries, but core consumer price inflation (excluding food and energy prices) remained subdued. Twelve-month headline inflation in the euro area reached 2 percent, well above the ECB's 2 percent target ceiling, but core inflation rose only modestly to 1-1/2 percent. Canadian consumer price inflation approached the ceiling of the Bank of Canada's 1 percent to 3 percent inflation target band, but core inflation declined to a 1-1/4 percent rate. In the United Kingdom, retail price inflation remained below the 2-1/2 percent target rate, while in Japan consumer price deflation deepened despite rising oil prices. Growth appears to have slowed in many developing countries during the third quarter from high rates registered earlier this year, but in most cases growth remains solid. Economic activity in both Brazil and Mexico likely expanded somewhat more slowly in the third quarter than in the first half of this year, while the Argentine economy continues to stagnate. The pace of expansion seems to have moderated in Korea, Hong Kong, and Taiwan, while political troubles threaten the outlook for the Philippines and, to a lesser extent, Indonesia and Thailand. A notable exception to the broad pattern is China, where GDP growth increased sharply in the third quarter. On average, inflation has remained remarkably restrained despite high oil prices. Prices of internationally traded goods. In late September, following the Clinton administration's decision to release 30 million barrels of oil from the Strategic Petroleum Reserve, the spot price of West Texas intermediate fell from $37 per barrel to near $30 per barrel. During October, however, oil prices moved higher as the deteriorating political situation in the Middle East raised the possibility that oil supplies from the region could be disrupted. An increase in OPEC's production targets of 500,000 b/d had little effect on oil prices as most OPEC countries appear to be producing at capacity. Spot WTI prices fluctuated between $33 and $35 per barrel during the latter half of October and are currently trading around $33 per barrel. The price of core goods imports (which exclude oil, computers, and percent at an annual rate in the third quarter, similar to semiconductors) rose 1-1/2 rates recorded in the past two quarters. The increase was attributable to industrial supplies and, to a much lesser extent, automotive products. The price indexes for imported machinery, consumer goods, and foods all declined in the 1-30 Part 1: Summary and Outlook, November 8, 2000 third quarter. The price of core goods exports (which exclude computers, semiconductors, and agricultural products) rose 1-1/4 percent at an annual rate in the third quarter, a somewhat smaller rise than that in the second quarter. Notable increases were recorded in prices of industrial supplies, machinery, and automotive products. U.S. international transactions. The U.S. trade deficit in goods and services averaged $367 billion at an annual rate in July and August, up from a rate of $357 billion in the second quarter. For July and August combined, the value of exports rose at about the same strong pace recorded in the second quarter (just over 14 percent at an annual rate), led by increases in machinery and industrial supplies. Over this period, imports increased at a slightly slower pace than during the second quarter (just under 14 percent at an annual rate). Import growth was spread across all major categories of trade. Outlook The dollar. The recent dollar appreciation has caused us to mark up the average value of the dollar this quarter relative to the September Greenbook, and some upward shift in the path persists throughout the forecast period. However, in response to the slightly weaker tone of the U.S. outlook, we have projected a marginally more rapid rate of depreciation for the dollar. As in the past, we expect that the dollar will decline against the major foreign currencies as U.S. economic growth is perceived to be slowing. Also, large and growing current account imbalances will weigh on foreign investors' appetites for dollar-denominated obligations. The real trade-weighted value of the dollar (as measured by our major currencies index) is projected to peak in the current quarter and then depreciate gradually during the forecast period. By the fourth quarter of 2002, we project that it will have fallen to a level nearly 6 percent below its average in the current quarter. Activity in foreign industrial countries. Export-weighted real GDP growth in foreign industrial countries is expected to average about 3-1/4 percent during the second half of this year and to remain near that pace over the following two years. Activity in Japan is projected to be about flat in the second half of this year, with declines in consumption spending and government investment. We forecast only a moderate improvement over the following two years, as a projected fiscal contraction offsets continued growth in private investment, particularly in high-tech equipment. Consumption spending is likely to improve only gradually over the forecast period, reflecting weak income growth and high unemployment rates. Judging from recent data on business and consumer confidence, second-half growth in the euro area is expected to have slowed a bit to a 3-1/4 percent annual InternationalDevelopments-31 rate. We project growth to remain near that pace in 2001 and 2002. The impact of recent and prospective monetary tightening should be offset in part by stimulus from fiscal policy and recent euro depreciation. We project U.K. growth to remain at a moderate 2-3/4 percent rate over the forecast period. Canadian economic growth is expected to slow from about a 4 percent rate in the second half to 3-1/2 percent by 2002. Monetary tightening and a slowing in U.S. demand are projected to restrain growth, but fiscal policy should provide considerable stimulus. Inflation. Headline consumer price inflation in the foreign industrial countries is projected to peak in the current quarter and to ease subsequently with oil prices. The decline in inflation should be limited, however, by a modest rise in core inflation rates associated with the diminishing economic slack in most countries. Japanese prices are expected to decline further, but at a somewhat slower rate than the 1 percent by which they declined over the past year. Interest rates. We expect the Bank of Japan to keep policy on hold through 2001 in light of anemic economic growth and to edge rates higher in 2002 as deflation wanes. The ECB is assumed to raise interest rates a further 50 basis points by mid-2001, taking its policy rate to 5-1/4 percent. We assume that the Bank of England will tighten policy an additional 25 basis points. The Bank of Canada is expected to raise interest rates 50 basis points in 2001 and another 50 basis points in 2002. Other countries. Real GDP growth in the major developing-country trading partners of the United States is expected to moderate to about 5 percent over the forecast period from the strong 7-1/2 percent pace recorded during the first half of this year. Cyclical expansions in the Asian developing countries are expected to slow as recoveries mature. Activity in Mexico is also projected to decelerate to a more sustainable pace following a rapid first-half expansion. In the forecast, we assume that Argentina muddles through its current financial difficulties and that its currency peg to the dollar holds while its interest rates retrace most of their recent increases by the end of this year. Inflation in the developing countries is expected to pick up only modestly. I-32 Part 1: Summary and Outlook, November 8, 2000 Selected Trade Prices (Percent change from end of previous period except as noted; seasonally adjusted) Projection 1999 2000 H1 2001 2002 H2 Exports Nonagricultural (core) Agricultural 1.7 -5.0 2.8 0.6 1.2 -2.1 0.6 6.1 0.9 3.8 0.4 1.6 1.1 2.5 2.9 22.08 26.15 30.50 24.60 21.28 Imports Non-oil (core) Oil (level, dollars per barrel) NOTE. Prices for exports and non-oil imports of goods, excluding computers and semiconductors, are on a NIPA chain-weighted basis. The price of imported oil for multi-quarter periods is the price for the final quarter of the period. Prices of internationally traded goods. Consistent with futures markets, we continue to project that oil prices will gradually decline as increases in production outpace the growth in demand over the forecast period. However, with inventories apparently relatively low, the volatile situation in the Middle East and the possibility of a severe winter pose risks that could spike oil prices over the next few months. Alternatively, if much of the current strength in demand is being driven by stockbuilding, demand pressures could ease as inventories are restored, perhaps leading to lower oil prices than we project. Core import price inflation is projected to rise from around 1 percent during the second half of this year to an average rate of 2-3/4 percent in 2001 and 2002, largely reflecting the outlook for the dollar. Prices of exported core goods are expected to decelerate in the second half of this year and into the first half of next year as the run-up in prices of industrial supplies (which include petroleum products and petrochemicals) slows; price increases are projected to move up toward a 1 percent rate by 2002. 1-33 InternationalDevelopments Summary of Staff Projections for Goods and Services (Percent change, seasonally adjusted annual rate) Projection 1999 Real Exports September GB Real Imports September GB 2000 2001 2002 H1 H2 4.3 10.2 13.2 7.3 10.6 4.3 10.2 8.6 7.9 10.5 12.0 15.2 10.1 8.9 8.9 12.0 15.2 8.6 8.3 9.3 NOTE. Changes for years are measured as Q4/Q4; for half-years, Q2/Q4 or Q4/Q2. U.S. international transactions. Real exports of goods and services, which grew at an average annual rate of 10 percent in the first half of this year, are projected to expand at a 13-1/4 percent pace in the second half of the year. This is a sharp increase over the second-half growth rate of 8-1/2 percent that was projected in the September Greenbook, and it is due to surprisingly strong growth of core exports during July and August. Given the higher year-end level of exports and the little-changed growth rates of exports in 2001 and 2002 relative to our previous forecast, the projected path for exports lies above that in the September Greenbook, reflecting our judgment that the recent strength in exports will persist despite the stronger dollar. As in our previous forecast, the growth rate of exports is projected to ease somewhat next year and pick up in 2002 in response to the path of the dollar. Growth of real imports of goods and services is estimated to have slowed sharply this year, from an annual rate of 15 percent in the first half to a 10 percent pace in the second half. Import growth is projected to decline further to a rate of about 9 percent in 2001 and 2002. This slowdown largely reflects the projected path of U.S. GDP. Relative prices, which have been boosting growth of core imports in recent quarters, will change to a slightly restraining factor as a result of the dollar's expected depreciation. The quantity of imported oil should expand moderately over the forecast period. We project that the contribution of exports to U.S. GDP growth will fall slightly in 2001 to percentage percentage point at an annual rate before rising to 1-1/4 points in 2002. Imports are expected to expand at a relatively steady pace, percentage points in 2001 and making a negative contribution of just under 1-1/2 2002. Overall, the negative arithmetic contribution of the foreign sector to GDP 1-34 Part 1: Summary and Outlook, November 8, 2000 growth diminishes over the forecast period, reaching one-tenth of a percentage point in 2002. The U.S. current account deficit is projected rise as a share of GDP, moving from 4-1/4 percent this year to 4 percent next year and nearly 5 percent by the end of 2002. Much of the projected change is in goods and services, but the net outflow of investment income also increases notably as large current account deficits translate into increases in the U.S. net liability position. Alternative Simulation Disappointing economic data and an uncertain political situation in Argentina recently have increased financial market concerns about the ability of Argentina to service its debts in the near term. The results presented below use the FRB/Global model to assess the implications of a 500 basis point increase in Argentine interest rates that persists over the forecast period, lowering Argentine GDP and spreading to other Latin American countries. In constructing this simulation, we have allowed for some spillover to the rest of Latin America; however, in the event of a full-blown crisis, financial market disruptions would be greater than we have specified, in particular, Argentina might be forced to abandon its currency peg. The simulation assumes that the risk premium demanded by investors on Argentine assets relative to U.S. assets rises in the first quarter of 2001 to generate the assumed change in the Argentine interest rate. Brazil is assumed to suffer a risk premium increase two-thirds the size of Argentina's, and the rest of Latin America, including Mexico, to experience a risk premium increase half as large. The simulation assumes that Argentina's exchange rate peg holds and that exchange rates in trade-weighted terms of other Latin American and developing countries stay on the baseline path in our forecast. The federal funds rate remains on the baseline path assumed in this Greenbook, and monetary authorities in other industrial countries follow a Taylor rule. These risk premium shocks reduce Argentina's GDP growth rate in 2001 from percent; Brazil's growth rate declines from 2-3/4 percent in the baseline to -3-1/4 3 percent to percent; and Mexico's growth rate declines from 5 percent to 3-1/2 percent. In 2002, the level of GDP remains significantly below baseline in all three countries. Despite these slowdowns in Latin America, the U.S. GDP growth rate is unchanged in 2001 and it declines only one-tenth of 1 percent relative to the baseline path in 2002. U.S. prices are essentially unaffected by this shock. A slight reduction in exports relative to baseline almost entirely accounts for the impact on the United States. Second-round effects on all other U.S. variables are negligible. InternationalDevelopments I-35 Impact of Alternative Assumptions (Percent change from previous period, annual rate) 2001 2002 H1 I H2 H1 H2 U.S. realGDP Baseline Latin American risk premium 3.6 3.6 3.8 3.8 4.0 3.9 4.1 4.0 U.S. PCEprices excl. food and energy Baseline Latin American risk premium 2.1 2.1 2.1 2.1 2.2 2.2 2.3 2.3 NOTE. H1 is Q2/Q4; H2 is Q4/Q2. All simulations assume federal funds rate unchanged from baseline. Strictly Confidential (FR) November 8, 2000 Class II FOMC OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES (Percent, Q4 to Q4) ----- Projected---Measure and country 1994 1995 1996 1997 1998 1999 2000 2001 2002 5.1 2.3 4.2 4.2 1.0 4.5 4.9 4.0 3.9 REAL GDP (1) Total foreign Industrial Countries of which: Canada Japan United Kingdom Euro-11 Germany 4.0 1.9 2.9 3.5 2.0 3.6 3.9 3.1 3.1 5.5 0.9 4.6 3.0 2.9 1.4 2.5 1.9 1.7 1.1 2.4 5.2 2.9 1.7 1.3 4.8 -0.5 3.5 3.1 1.6 3.2 -3.1 2.0 2.0 0.9 4.9 -0.2 2.9 3.2 2.4 4.4 3.6 2.9 3.3 3.5 3.6 1.1 2.6 3.3 3.2 3.5 1.5 2.7 3.1 3.3 Developing Countries Asia Korea China Latin America Mexico Brazil 6.8 8.8 9.2 16.3 5.4 5.2 10.0 3.0 7.2 7.4 12.6 -3.7 -7.1 -0.6 6.2 6.8 6.1 9.2 6.2 7.2 4.6 5.1 4.8 3.1 8.2 6.1 6.8 2.0 -0.3 -1.9 -4.6 9,5 1.1 2.7 -1.4 5.9 8.3 14.0 6.2 3.9 5.3 3.5 6.4 7.2 5.7 8.1 5.9 7.2 3.4 5.1 6.0 5.0 8.0 4.5 5.1 3.2 5.0 5.7 5.5 8.0 4.6 5.0 4.1 1.1 1.3 1.4 1.5 1.0 1,1 1.8 1.3 1.4 -0.0 0.8 2.2 NA 2.7 2.1 -0.8 2.9 NA 1.4 2.0 0.1 3.2 NA 1.3 1.0 2.0 2.7 1.5 1.5 1,1 0.8 2.5 0.8 0.3 2.4 -1.3 2.2 1.5 1.1 2.8 -0.8 2.3 2.5 2.2 1.9 -0.4 2.5 1.9 1.5 2.0 0.0 2.5 1.7 1.3 22.9 10.7 5.8 26.9 54.0 7.0 1196.9 16.9 6.3 4.4 11.0 42.1 48.9 21.5 11.1 4.8 5.0 6.8 25.9 28.2 9.6 6.8 2.8 5.0 0.9 15.6 17,2 4.7 9.1 4.5 5.9 -1.2 15.5 17.5 1.6 4.7 0.2 1.3 -0.9 12.6 13.6 8.3 4.6 2.2 3.3 1.0 8.7 9.1 6.4 6.3 4.5 4.1 4.8 9.4 9.9 5.3 5.8 4.5 4.2 5.4 7.9 8.2 4.9 CONSUMER PRICES (2) Industrial Countries of which: Canada Japan United Kingdom (3) Euro-11 (4) Germany Developing Countries Asia Korea China Latin America Mexico Brazil Foreign GDP aggregates calculated using shares of U.S. non-agricultural exports. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. CPI excluding mortgage interest payments, which is the targeted inflation rate. Harmonized CPI's, weighted by shares in final consumption of households converted to a common currency using estimated PPP exchange rates. November 8, 2000 Strictly Confidential (FR) Class II FOMC OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES (Percent changes) ----------------------- 2000 --------------------- Measure and country REAL GDP (1) Total foreign Q1 Q2 Projected -------------------------- 2001 Q3 - Q4 2002 l------------------- Q1 Q2 Q3 Q4 ------- Q1 ~1-----1------Q2 Q3 Q4 -------------------- Quarterly changes at an annual rate -----------------7.3 4.1 4.2 4.0 4.0 3.9 4.0 4.0 3.8 3.8 3.9 3.9 Industrial Countries of which: Canada Japan United Kingdom Euro-11 Germany 5.2 3.9 3.3 3.1 3.2 3.2 3.1 3.1 3.0 3.1 3.0 3.1 5.1 10.3 2.1 3.7 3.1 4.7 4.2 3.8 3.0 4.7 4.1 0.1 2.8 3.2 3.2 3.8 0.3 2.8 3.2 3.0 3.7 0.8 2.7 3.3 3.1 3.7 1.0 2.6 3.3 3.2 3.6 1.3 2.6 3.3 3.2 3.6 1.3 2.6 3.3 3.3 3.5 1.4 2.6 3.1 3.2 3.5 1.5 2.8 3.1 3.3 3.5 1.6 2.7 3.1 3.2 3.5 1.6 2.7 .3.1 3.4 Developing Countries Asia Korea China Latin America Mexico Brazil 10.4 12.5 7.2 9.5 9.2 12.0 5.6 4.5 4.2 4.6 1.9 4.5 5.4 2.1 5.4 5.7 6.0 11.0 5.4 6.6 3.0 5.3 6.5 5.0 10.0 4.5 5.1 3.0 5.1 5.9 5.0 7.0 4.5 5.1 3.0 5.1 5.9 5.0 7.0 4.5 5.1 3.0 5.2 6.1 5.0 9.0 4.5 5.1 3.0 5.2 6.1 5.0 9.0 4.6 5.1 3.7 5.0 5.7 5.0 7.0 4.6 5.0 4.3 4.9 5.6 5.5 7.0 4.6 5.0 4.0 5.0 5.8 5.5 9.0 4.6 5.0 4.0 5.1 5.8 6.0 9.0 4.6 5.0 4.0 CONSUMER PRICES (2) ------------------- Four-quarter changes -------------------------- -------------------------- Industrial Countries of which: Canada Japan United Kingdom (3) Euro-11 (4) Germany 1.5 1.4 1.6 1.8 1.7 1.7 1.4 1.3 1.3 1.4 1.4 1.4 2.7 -0.8 2.1 2.1 2.0 2.4 -1.0 2.1 2.1 1.7 2.7 -1.1 2.1 2.5 2.2 2.8 -0.8 2.3 2.5 2.2 2.9 -0.8 2.3 2.2 1.9 2.7 -0.4 2.4 2.1 1.8 1.9 -0.4 2.4 2.0 1.7 1.9 -0.4 2.5 1.9 1.5 1.8 -0.2 2.5 1.8 1.4 1.8 0.0 2.5 1.7 1.4 2.0 0.0 2.5 1.7 1.3 2.0 0.0 2.5 1.7 1.3 Developing Countries Asia Korea China Latin America Mexico Brazil 3.9 0.5 1.5 0.1 10.0 10.6 7.8 3.8 0.8 1.4 0.1 9.1 9.6 6.6 4.0 1.4 3.2 0.3 8.7 9.0 7.6 4.6 2.2 3.3 1.0 8.7 9.1 6.4 5.6 3.3 5.4 1.9 9.4 9.9 7.0 6.4 4.6 6.1 4.4 9.5 9.9 8.3 6.5 4.8 4.6 4.7 9.4 9.9 6.1 6.3 4.5 4.1 4.8 9.4 9.9 5.3 6.1 4.3 3.8 4.7 9.1 9.6 5.0 5.9 4.3 3.7 4.8 8.7 9.1 4.9 5.8 4.3 3.9 5.0 8.3 8.6 4.9 5.8 4.5 4.2 5.4 7.9 8.2 4.9 Foreign GDP aggregates calculated using shares of U.S. non-agricultural exports. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. CPI excluding mortgage interest payments, which is the targeted inflation rate. Harmonized CPI's, weighted by shares in final consumption of households converted to a common currency using estimated PPP exchange rates. Strictly Confidential (FR) Class II FOMC November 8, 2000 OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS ------ 1994 1995 1996 1997 1998 1999 Projected ------ 2000 2001 2002 NIPA REAL EXPORTS and IMPORTS Percentage point contribution to GDP growth, Q4/Q4 Net Goods & Services Exports of G&S Imports of G&S -0.3 1.0 -1.3 0.4 1.0 -0.6 -0.2 1.1 -1.3 -0.8 1.0 -1.7 -1.1 0.3 -1.4 -1.1 0.5 -1.5 -0.5 1.3 -1.8 -0.5 0.8 -1.3 -0,1 1.2 -1.4 Percentage change, Q4/Q4 Exports of G&S Services Agricultural Goods Computers Semiconductors Other Goods 1/ 10.5 8.2 16.3 27.4 66.9 6.9 9.7 8.8 -4.0 39.1 79.6 5.7 9.8 8.9 3.8 21.6 44.6 7.8 8.5 1.4 1.0 25.8 21.3 10.9 2.2 2.8 -0.3 7.0 9.3 1.3 4.3 0.2 -0.5 13.3 34.4 4.1 11.7 4.8 13.0 43.3 39.8 10.3 7.3 5,0 -6.4 37.3 41.2 3.3 10.6 7.23.5 36.0 41.2 6.0 Imports of G&S Services Oil Computers Semiconductors Other Goods 2/ 12.2 1.8 -0.2 39.0 54.5 12.3 5.0 5.5 2.4 35.0 92.4 -1.2 11.2 5.3 7.8 17.8 56.7 10.5 14.3 14.0 3.9 33.0 32.9 12.7 11,2 9.5 4.6 26.7 -7.3 11.6 12.0 2.1 -3.9 25.0 34.0 13.9 12.6 11.7 11.1 30.0 41.6 10,4 8.9 4.3 4.4 30.5 41.2 6.7 8.9 4.9 3.3 29.9 41.2 6.0 -221.0 1003.6 1224.6 -322.4 1033.0 1355.3 -399.2 1141.2 1540.4 -452.8 1238.7 1691.5 -483.7 1355.8 1839.6 Billions of chained 1996 dollars Net Goods & Services Exports of G&S Imports of G&S -86.5 732.8 819.4 -78.4 808.2 886.6 -89.0 874,2 963.1 -113.3 981.5 1094.8 Billions of dollars US CURRENT ACCOUNT BALANCE Current Acct as Percent of GDP -118.6 -1.7 -109.5 -1.5 -123.3 -1.6 -140.5 -1.7 -217.1 -2.5 -331.4 -3.6 -432.2 -4.3 -494.2 -4.7 -541.9 -4.8 Net Goods & Services (BOP) -97.0 -96.0 -102.1 -105.9 -166.9 -265.0 -359.9 -405.8 -434,2 Investment Income, Net Direct, Net Portfolio, Net 21.1 55.2 -34.1 25.0 64.9 -39.9 23.4 69.4 -46.0 11.1 71.9 -60.9 -1.0 67,7 -68.8 -13.1 62.7 -75.8 -14,9 72.5 -87.4 -29.7 72.7 -102.4 -47.9 78.4 -126.4 Other Income & Transfers,Net -42.7 -38.6 -44.6 -45.7 -49.2 -53.4 -57.4 -58.7 -59.7 2. Merchandise exports excluding agricultural products, computers, and semiconductors. 2. Merchandise imports excluding oil, computers, and semiconductors. Strictly Confidential Class II FOMC (FR) November 8, 2000 OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS 1997 ------------- Q1 Q2 1998 --I---- Q3 ------ Q4 1999 ~----~-------------------- Q1 Q2 Q3 -------------- I----------- Q4 Q1 Q2 Q3 Q4 0.1 1.5 -1.5 -1.4 -0.9 -0.6 -1.4 0.6 -2.0 -1.1 1.0 -2.1 -0.4 1.1 -1.4 NIPA REAL EXPORTS and IMPORTS Percentage point contribution to GDP growth Net Goods & Services Exports of G&S Imports of G&S -1.0 0,8 -1.8 -0.3 1.9 -2.2 -0.9 1.2 -2.1 -0.9 -0.1 -0.8 -1.6 0.1 -1.7 -1.9 -0,3 -1.6 -1.0 -0.4 -0.7 Percentage change from previous period, s.a.a.r. Exports of G&S Services Agricultural Goods Computers Semiconductors Other Goods 1/ Imports of G&S Services Oil Computers Semiconductors Other Goods 2/ 7.5 -5.8 -19.4 60.0 50.3 12.2 17.6 9.4 6.7 44.5 22.1 20.6 10.6 6.0 12.0 25.7 19.6 10.8 -0.8 -3.3 7.9 -14.0 -1.4 0.9 1.0 5.2 -2.7 -7.5 2.1 0.0 -3.0 6.4 -13.8 7.6 -13.6 -6.6 -3.2 -10.0 -12.5 14.7 18.9 -1.2 15.1 10.8 34.7 14.7 35.9 14.3 -7.9 -3.8 -33.4 5.2 38.7 -11.1 5.8 2.8 33.1 26,7 39.1 1.5 10.2 -2.538.0 22.2 37.8 11.9 10.3 4.6 -19.9 1.2 22.5 16.3 15.3 20.0 -7.5 46.6 78.1 11.6 18.8 5.6 36.8 45 8 26.0 17.2 17.3 23.1 5.7 32.4 31.6 14.8 6.4 8.3 -12.9 10.5 5.6 7.5 14.2 20.0 6.4 32.5 2.0 12.6 13.1 6.7 41.2 22.6 -22.9 14.0 5.5 9.8 2.1 10.6 0.1 4.5 12.2 2.2 -22.0 43.2 -6.1 15.6 4.5 -7.7 2.4 28.8 17.8 5.0 16.2 2.5 29.4 48.5 53.8 14.6 16.9 6.3 -5.8 14.8 24.1 21.5 10.7 8.2 -31.5 11.2 43.3 14.9 -244.9 1024.1 1269.0 -279.8 1003.3 1283.1 -314.6 1017.6 1332.2 -342.6 1042.6 1385.2 -352.5 1068.4 1420.9 Billions of chained 1996 dollars, s.a.a.r, Net Goods & Services Exports of G&S Imports of G&S -94.0 940.3 1034.3 -100.6 979.2 1079.8 -119.6 1004.2 1123.8 -139.2 1002.1 1141.2 -175.3 1004.5 1179.8 -219.7 996.8 1216.6 -244.1 988.8 1232.9 Billions of dollars, s.a.a.r. US CURRENT ACCOUNT BALANCE Current Account as % of GDP -137.5 -1.7 -119.9 -1.4 -133.6 -1.6 -171.1 -2.0 -169.6 -2.0 -205.9 -2.4 -245.2 -2.8 -247.7 -2.8 -266.5 -2.9 -315.9 -3.4 -358.6 -3.8 -384.9 -4.0 Net Goods & Services (BOP) -108.2 -94.3 -101.1 -120.1 -134.5 -166.4 -185.3 -181.4 -210.7 -253.2 -290.9 -305.1 Investment Income, Net Direct, Net Portfolio, Net 11.5 68.9 -57.4 16.3 76.6 -60.3 10.7 74.1 -63.4 5.7 68.1 -62.4 9.1 74.9 -65.7 6.0 72.4 -66.4 -12.1 59.0 -71.1 -7.3 64.7 -71.9 -7.1 64.1 -71,2 -11.3 58.8 -70.0 -16.8 62.8 -79.6 -17.3 65.1 -82.4 Other Inc. & Transfers, Net -40.8 -41.9 -43.2 -56.7 -44.3 -45.5 -47.8 -59.1 -48.7 -51,4 -50.9 -62.5 1. Merchandise exports excluding agricultural products, computers, and semiconductors. 2. Merchandise imports excluding oil, computers, and semiconductors. November 8, Strictly Confidential (FR) Class II FOMC 2000 OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS ----------------------------- Projected -------------------------------- 2000 ------------ '--------------- Q1 Q2 Q3 Q4 2001 2002 --------------------- Q1 Q2 l--- Q3 ------'------------------ Q4 Q1 Q2 Q3 Q4 0.2 1.3 -1.1 -0.5 0.8 -1.2 -0.4 1.2 -1.5 -0.2 1.2 -1.4 0.4 1.7 -1.3 NIPA REAL EXPORTS and IMPORTS Percentage point contribution to GDP growth Net Goods & Services Exports of G&S Imports of G&S -0,9 0.7 -1.6 -1.0 1.5 -2.5 -0.2 1.7 -1.9 0.1 1.1 -1.0 -0.8 0.4 -1.2 -0.9 0.8 -1.6 -0.5 0.8 -1.4 Percentage change from previous period, s.a.a.r. Exports of G&S Services Agricultural Goods Computers Semiconductors Other Goods 1/ 6.3 6.9 25.3 44.6 20.7 0.7 14,3 3.5 -2.0 44.9 71.2 14.9 16.1 5.0 43.0 41.1 33.5 16.2 10.4 3.9 -7.0 42.4 38.6 10.0 3.3 2.5 -5.5 38.6 41.2 -2.0 6.9 4.2 0.4 38.6 41.2 2.4 7.6 6.0 -7.7 36.0 41.2 3.4 11.6 7.4 -12.2 36.0 41.2 9.8 6.7 7.2 3.7 36.0 41.2 -0.4 10.4 7.2 3.5 36.0 41.2 5.7 11.0 7.2 3.5 36.0 41.2 6.4 14.6 7.2 3.6 36.0 41.2 12.8 Imports of G&S Services Oil Computers Semiconductors Other Goods 2/ 12.0 16.6 30.3 2.8 20.7 9.7 18.6 10.6 35.3 44.5 33.5 15.8 13.4 16.1 -3.4 38.7 63.1 11.0 6.9 3.9 -10.7 38.6 52.9 5.3 8.2 4.8 -9.5 31.1 41.2 7.6 11.3 4.3 36.0 31.1 41.2 6.9 9.1 3.7 13.0 29.9 41.2 6.2 7.1 4.2 -14.5 29.9 41.2 6.0 8.1 4.8 -5.1 29.9 41.2 6.0 10.1 4.9 25.8 29.9 41.2 5.9 9.3 4.8 9.2 29.9 41.2 6.0 8.1 4.9 -12.8 29.9 41.2 6.1 -462.2 1281.0 1743.2 -475.5 1302.0 1777.5 -486.2 1334.6 1820.8 -492.0 1369.7 1861.7 -481.1 1417.1 1898.3 Billions of chained 1996 dollars, s.a.a.r. Net Goods & Services Exports of G&S Imports of G&S -376.8 1084.8 1461.7 -403.4 1121.8 1525.2 -409.5 1164.6 1574.1 -406.9 1193.7 1600.6 -429.0 1203.5 1632.5 -452.9 1223.8 1676.6 -467.3 1246.4 1713.7 Billions of dollars, s.a.a.r. -406.0 -4.2 -424.6 -4.3 -440.1 -4.4 -458.0 -4.5 -466.6 -4.5 -489.5 -4.7 -505.9 -4.8 -514.7 -4.8 -522.6 -4.8 -538.1 -4.8 -550.3 -4.9 -556.5 -4.9 Net Goods & Services (BOP) -340.5 -357.1 -370.1 -371.8 -385.7 -405.7 -419.2 -412.6 -425.2 -435.6 -442.3 -433.7 -11.9 68.3 -80.2 -12.6 73.7 -86.3 -14.8 75.4 -90.3 -20.1 72.8 -92.8 -25.3 70.0 -95.3 -27.6 71.8 -99.4 -30.7 74.0 -104.7 -35.0 75.2 -110.2 -40.7 75.4 -116.1 -45.4 77.4 -122.8 -50.9 79.0 -129.9 -54.7 81.9 -136.6 Other Inc. & Transfers, Net -53.6 -55.0 -55.1 -66.1 -55.6 -56.1 -56.1 -67.1 -56.6 -57.1 -57.1 -68.1 US CURRENT ACCOUNT BALANCE Current Account as % of GDP Investment Income, Net Direct, Net Portfolio, Net 1. Merchandise exports excluding agricultural products, computers, and semiconductors. 2. Merchandise imports excluding oil, computers, and semiconductors.
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