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Class III FOMC - Internal (FR)

Part 2

, 2009

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

(This page is intentionally blank.)

Class III FOMC - Internal (FR)

, 2009

Recent Developments

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

(This page is intentionally blank.)

Domestic Nonfinancial
Developments

(This page is intentionally blank.)

Domestic Nonfinancial Developments
On balance, the incoming data suggest that economic activity has continued to move up
in recent months. To be sure, the labor market weakened further in September, as job
losses remained sizable. Nonetheless, manufacturers increased production in September
for a third consecutive month. The gradual recovery in construction of single-family
homes from its extremely low level earlier in the year has continued, accompanied by an
increase in home sales. Although consumer spending on motor vehicles plummeted in
September after the expiration of the “cash for clunkers” program, other household
spending is estimated to have stepped up in August and September. And, while business
spending on nonresidential structures continued to decline, outlays for equipment and
software appear to have stabilized after slumping earlier in the year. Meanwhile, core
consumer price inflation has remained subdued in recent months.
Labor Market Developments
The labor market weakened further in September, although the pace of deterioration in
recent months has been considerably slower than in the first half of the year. In
September, private nonfarm payroll employment fell 210,000—about equal to the
average monthly decline in the third quarter as a whole—and employment losses
remained widespread across industries. The average workweek for production and
nonsupervisory workers ticked down to 33.0 hours in September, and aggregate hours
worked for this group fell 0.5 percent. While aggregate hours fell at an annual rate of
3 percent in the third quarter, the pace of decline was much slower than earlier in the
year.1
In the household survey, the unemployment rate edged up in September to 9.8 percent,
and the labor force participation rate dropped to 65.2 percent. The participation rate had
changed little, on net, from the beginning of the recession through the second quarter of
this year, but it has fallen about ¾ percentage point in recent months; this pronounced
drop presumably reflects, at least in part, potential workers’ responses to the scarcity of
employment opportunities. That said, the participation rate probably has received some
Note: An abbreviations list is available at the end of Part 2.
1

With the September employment report, the BLS issued preliminary estimates of the benchmark
revision to nonfarm payrolls in March 2009 that suggest the level of private payroll employment in that
month was 855,000 lower than the currently published estimates. (The benchmark information will not be
incorporated into the published estimates of employment until February 2010.) The BLS also has indicated
that much of this revision came in the first quarter of 2009. This revision implies that the level of nonfarm
business productivity in the first quarter of 2009 was around ½ percent above the currently published
estimates. Also, the benchmark revision for last March could lead to downward revisions to the published
changes in payrolls for later months; in the past, changes for later months have tended to be revised in the
same direction as the revision to employment in March.

II-1

II-2

Changes in Employment
(Thousands of employees; seasonally adjusted)
2009
Measure and sector

2008

Q1

Q2

Q3

July

Average monthly change
Nonfarm payroll employment
(establishment survey)
Private
Natural resources and mining
Manufacturing
Ex. motor vehicles
Construction
Residential
Nonresidential
Wholesale trade
Retail trade
Financial activities
Temporary help services
Nonbusiness services1
Total government
Federal government
Total employment (household survey)
Memo:
Aggregate hours of private production
workers (percent change)2
Average workweek (hours)3
Manufacturing (hours)

Aug.

Sept.

Monthly change

-257
-270
4
-73
-58
-57
-35
-22
-16
-44
-19
-44
19
14
3
-246

-691
-695
-12
-202
-176
-124
-53
-71
-36
-55
-51
-73
-25
4
10
-817

-428
-425
-11
-140
-117
-80
-26
-54
-20
-27
-35
-28
19
-3
3
-230

-256
-213
-4
-53
-58
-64
-18
-47
-10
-31
-16
-5
6
-43
0
-444

-304
-246
-6
-41
-73
-69
-20
-50
-14
-45
-14
-6
10
-58
9
-155

-201
-182
-6
-66
-52
-60
-20
-40
-13
-9
-25
-7
24
-19
-2
-392

-263
-210
-1
-51
-48
-64
-13
-51
-5
-39
-10
-2
-16
-53
-6
-785

-3.3
33.6
40.8

-8.9
33.2
39.6

-7.8
33.1
39.5

-3.0
33.1
39.9

.1
33.1
39.9

-.2
33.1
39.9

-.5
33.0
39.8

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

Changes in Private
Payroll Employment
400

Aggregate Hours and Workweek of
Production and Nonsupervisory Workers
Thousands

3-month moving average

200

400

200

35.0

2002 = 100

Hours
Aggregate
hours
(right scale)

34.5

110
108
106

0

0
34.0
Sept.

-200

104

Workweek
(left scale)

-200

102
33.5

-400

-600

-600

100

-400
98
33.0

Sept.
96

-800

2000

2002

2004

2006

2008

2010

-800

Source: U.S. Department of Labor, Bureau of Labor Statistics.

32.5

2000

2002

2004

2006

2008

2010

94

II-3

Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2009
Rate and group

2008

Q1

Q2

Q3

July

Aug.

Sept.

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

5.8
18.7
10.2
4.8
4.4

8.1
21.3
13.0
7.4
6.2

9.2
22.7
15.0
8.8
6.9

9.6
25.1
15.1
9.4
7.1

9.4
23.8
15.3
9.0
6.9

9.7
25.5
15.1
9.5
7.0

9.8
25.9
14.9
9.7
7.3

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

66.0
40.2
74.4
75.4
60.0

65.6
38.3
73.7
74.6
60.0

65.8
38.4
74.1
74.9
60.3

65.4
37.5
72.9
74.9
59.9

65.5
38.0
73.5
74.8
60.1

65.5
37.7
73.0
75.0
59.9

65.2
36.9
72.3
74.8
59.7

Unemployment Rate

Labor Force Participation Rate
Percent

11

Sept.

10

11
10

NBER peak
9

8

7

7

6

6

5

4

NBER peak

67.0

5

4

67.0

67.5

9

8

Percent

67.5

3

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

3

66.5

66.5

66.0

66.0

65.5

65.5

65.0
64.5

Note: Shaded bar indicates a period of business
recession as defined by the National Bureau of
Economic Research (NBER). The NBER peak is the
last business cycle peak as defined by the NBER.

Sept.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

65.0
64.5

Note: See the note to the figure "Unemployment Rate."

Persons Working Part Time
for Economic Reasons

Job Losers Unemployed
Less Than 5 Weeks

6.5

Percent of household employment
7.0
Sept.
6.5

6.0

6.0

5.5

5.5

5.0

5.0

4.5

4.5

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5

7.0

2.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: U.S. Department of Labor, Bureau of Labor Statistics.

2.0

1.8
1.6

Percent of household employment
3-month moving average (thick line)

1.8
1.6

1.4

1.4
Sept.

1.2

1.2

1.0

1.0

0.8

0.8

0.6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.6

II-4

Labor Market Indicators

Layoffs and Initial Claims

Insured Unemployment
Millions

10

Oct.
3

9
8

10

3.0

Percent of private employment

Thousands

9
8

7

650
600

2.5

Oct.
17

7

6

6

Incl. extended and
emergency benefits

5

Oct.
10

4

Aug.

5

3
Regular state programs

2
1

2.0

2000

2002

2004

2006

450
400
1.5

350
Initial claims
(right scale)

2
2008

2010

1

1.0

2000

2002

300

2004

2006

2008

2010

Note: 4-week moving averages.
Source: U.S. Dept. of Labor, Employment and Training
Administration.

Job Openings

Percent of private employment

Percent

5.0

Hires
(right scale)

25

110

Percent of private employment
plus job openings

Index, 1980=100

100
4.5

20

4.0

3.5

Job openings
(right scale)

3.0

70

10

2.5
Hiring plans*
(left scale, 3-month moving average)

5

Aug.

3.5

60

3.0
Sept.

-5

2000
2002
2004
2006
2008
2010
*Percent planning an increase in employment minus
percent planning a reduction. Seasonally adjusted by
FRB staff.
Source: For hires, Job Openings and Labor Turnover Survey;
for hiring plans, National Federation of Independent Business.

40

30

Sept.

2.5

20

Index

150

1.0
2000

2002

2004

2006

2008

Index

120
110

Conference Board

110

Oct.

5

70
50

Hard-to-fill**
(left scale, 3-month moving average)

0.5

120
110
100

Oct.

90
80

90
80

25

10

2010

100
Job availability*
(right scale)

90

15

1.5

*Index of staff composite help wanted advertising as a percent
of payroll employment.
Source: For job openings, Job Openings and Labor Turnover
Survey; for Help Wanted Index, Conference Board and staff
calculations.

130

20

2.0

Expected Labor Market Conditions

40
35

Aug.

30

Job Availability and Hard-to-Fill Positions
Percent

Composite
Help Wanted
Index* (left scale)

50

0

45

4.5
4.0

90
80

15

-10

250

Note: Data for initial claims are 4-week moving averages.
Source: For layoffs and discharges, Job Openings and
Labor Turnover Survey; for initial claims, U.S. Dept.
of Labor, Employment and Training Administration.

Hiring and Hiring Plans
30

550
500

Layoffs and discharges
(left scale)

4

3

700

Oct.
(p)

70
60

Reuters/Michigan

70
60

50
Sept.

2000
2002
2004
2006
2008
2010
*Proportion of households believing jobs are plentiful, minus
the proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one
"hard-to-fill" job opening. Seasonally adjusted by FRB staff.
Source: For job availability, Conference Board; for hardto-fill, National Federation of Independent Business.

30
10

50

40

40

30

2000

2002

2004

2006

2008

2010

Note: The proportion of households expecting labor
market conditions to improve, minus the proportion expecting
conditions to worsen, plus 100.
p Preliminary.
Source: Conference Board; Reuters/University of Michigan
Surveys of Consumers.

30

II-5

support over the past two years from the emergency unemployment compensation
program and the influence of losses in household wealth on some individuals’ labor
market decisions. Meanwhile, the fraction of employees working part time for economic
reasons—another manifestation of the underutilization of labor—edged up in September.
Other indicators of labor demand have been mixed. Initial claims for unemployment
insurance moved a little lower in October but still are at a level consistent with additional
declines in employment. While the number of persons receiving unemployment
insurance benefits through regular state programs continued to drift down, the total
number of individuals receiving unemployment insurance—including extended and
emergency benefits—remained extraordinarily high. The layoff rate as measured from
the Job Openings and Labor Turnover Survey (JOLTS) showed some improvement in
August, but the hiring rate measured from the JOLTS remained low. Furthermore, the
most recent readings for other measures of job openings and labor market slack indicate
continued weakness and showed no evidence of improvement. Looking forward, the
NFIB survey in September found that small firms pared back their expectations for hiring
in coming months. Likewise, household expectations of future labor market conditions
retreated a bit in both the Reuters/University of Michigan Surveys of Consumers and the
Conference Board survey in early October, but both measures remain above their lows
from the beginning of the year.
Industrial Production
Industrial production (IP) rose in September for the third consecutive month and
increased at an annual rate of 5¼ percent in the third quarter as a whole. More than onehalf of the gain in IP last quarter was directly attributable to a bounceback in motor
vehicle assemblies and related parts production from exceptionally low levels earlier this
year. Even so, gains in production were widespread across the industrial sector: The
diffusion index of three-month changes in IP jumped in September to its highest level
since 1997 and indicates that significantly more industries increased production last
month, relative to three months earlier, than reduced it. The rise last quarter in
manufacturing output other than motor vehicles and related parts likely reflected a
somewhat slower pace of inventory liquidation and a pickup in foreign demand, although
there also was some indirect boost in demand for materials by the motor vehicle sector.
However, it appears that domestic demand for U.S.-manufactured goods other than motor
vehicles has been relatively flat recently. Moreover, the degree of slack in the
manufacturing sector remains substantial, as the factory operating rate of 67.5 percent in
September was still only 2.4 percentage points above the post-1948 low recorded in June.

II-6
Selected Components of Industrial Production
(Percent change from preceding comparable period)

Component

Proportion
2008
(percent)

2009

20081
Q2

2009
Q3

July

Annual rate
Total
Previous

Aug.

Sept.

Monthly rate

100.0
100.0

-6.7
-6.7

-10.3
-10.5

5.2
...

.9
1.0

1.2
.8

.7
...

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

79.0
74.5
70.3

-8.7
-7.8
-7.8

-8.7
-8.7
-9.1

7.1
3.8
3.4

1.2
.5
.3

1.2
.9
1.0

.9
.5
.5

Mining
Utilities

10.6
10.4

.8
.3

-21.7
-11.2

3.7
-5.8

1.2
-1.5

1.1
1.9

.7
-.7

Selected industries
Energy

23.9

1.3

-14.4

-2.5

-.4

1.1

.5

High technology
Computers
Communications equipment
Semiconductors2

4.2
1.0
1.3
1.8

-6.9
-11.9
10.4
-15.0

-.1
-25.1
-4.1
22.3

10.7
-16.9
6.3
33.2

2.8
-1.2
.5
7.1

.0
-1.4
.3
.4

.0
-1.4
-1.1
1.8

Motor vehicles and parts

4.5

-23.3

-10.4

103.0

17.8

6.1

8.1

Aircraft and parts

2.3

-13.2

-18.5

4.7

2.0

-.7

1.8

65.1
20.7
3.5
17.1

-8.3
-4.2
-14.7
-1.8

-9.1
-4.9
-12.9
-3.3

3.6
1.4
1.6
1.4

.3
-.4
1.4
-.7

1.2
1.3
-.5
1.6

.3
.3
.2
.3

Business equipment
Defense and space equipment

6.6
1.1

-4.8
-2.1

-22.5
4.0

-.2
15.9

.3
2.0

1.4
1.3

-.2
1.2

Construction supplies
Business supplies

4.8
7.3

-11.8
-9.8

-10.7
-10.7

2.9
-1.2

.5
-.4

.4
.4

-.4
-.5

24.6
12.4
12.2

-11.7
-11.4
-12.0

-8.6
-24.0
7.7

8.0
7.7
8.3

.9
1.6
.3

1.4
1.4
1.4

.7
.7
.7

Total ex. selected industries
Consumer goods
Durables
Nondurables

Materials
Durables
Nondurables

1. From fourth quarter of preceding year to fourth quarter of year shown.
2. Includes related electronic components.
... Not applicable.
Source: Federal Reserve, G.17 Statistical Release, "Industrial Production and Capacity Utilization."

Capacity Utilization
(Percent of capacity)
19722008
average

199495
high

200102
low

Q1

Q2

Q3

Aug.

Sept.

Total industry

80.9

84.9

73.5

70.4

68.7

69.8

69.9

70.5

Manufacturing
Mining
Utilities

79.6
87.6
86.8

84.5
89.1
93.3

71.4
84.9
84.2

66.7
86.8
82.4

65.4
81.8
79.6

66.8
82.8
78.1

66.8
82.9
78.7

67.5
83.6
78.1

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.6
82.0
77.7

89.9
87.9
80.3

81.7
74.3
70.0

80.9
68.4
68.4

79.5
66.2
67.1

81.4
66.9
68.4

81.4
67.0
68.6

82.5
67.3
69.3

Sector

2009

Source: Federal Reserve, G.17 Statistical Release, "Industrial Production and Capacity Utilization."

II-7

Indicators of Industrial Activity

Motor Vehicle Assemblies

IP Diffusion Index

Millions of units

Index
100
90

0.8

70

0.7

60

0.6

50

0.5

40

Sept.

0.9

80

NBER
peak

Millions of units

1.0

0.4

30

0.0

8

+
Oct.

0.1

0

10

Autos and light trucks
(right scale)

0.2

10

12

0.3

20

14

1998
2000
2002
2004
2006
2008
2010
Note: The diffusion index equals the percentage of series
that increased relative to 3 months earlier plus one-half the
percentage that were unchanged.
Source: Federal Reserve, G.17 Statistical Release, "Industrial
Production and Capacity Utilization."

Medium and heavy trucks
(left scale)

+

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: October values are based on latest industry schedules.
Source: Ward’s Communications.

6
4
2
0

ISM New Orders Diffusion Index and
Change in Real Adjusted Durable Goods Orders

Manufacturing Capacity Utilization

Percent

Percent
90

Diffusion index

6

80
ISM (right scale)

NBER
peak

85
80

4

NBER
peak

2

70
Sept.

0

60
50

75
-2
70

40

RADGO (left scale)

-4

30

65

-6

20

60

-8

Sept.

1998
2000
2002
2004
2006
2008
2010
Note: Horizontal line is 1972-2008 average.
Source: Federal Reserve, G.17 Statistical Release, "Industrial
Production and Capacity Utilization."

2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: The measure for real adjusted durable goods orders
(RADGO) is a 3-month moving average.
Source: Institute for Supply Management (ISM). RADGO is
compiled by FRB staff based on data from the Bureau of Labor
Statistics and the U.S. Census Bureau.

10

Weekly Production Index
excluding Motor Vehicles

New Orders: Regional Survey Average
Index

Index
19.0

75
Monthly aggregate of weekly index
Weekly index
65

NBER
peak
Oct.

18.5
18.0
17.5

55

17.0
45

16.5
16.0

35

15.5
25
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: The regional average includes new orders indexes from the
Chicago, Dallas, Kansas City, New York (Empire State), Philadelphia,
and Richmond surveys.
Source: Federal Reserve.

Oct. Nov.Dec. Jan.Feb.Mar. Apr. MayJuneJuly Aug.Sept.Oct.
2008
2009
Note: One index point equals 1 percent of 2002 total industrial
output.
Source: Federal Reserve, G.17 Statistical Release, "Industrial
Production and Capacity Utilization."

15.0

II-8

Production of light motor vehicles continued to move up last month and rose to an annual
rate of 6.4 million units in the third quarter as a whole.2 Despite the increase in motor
vehicle output, inventories fell sharply last quarter—in large part because of the boost to
sales from the cash-for-clunkers program—and days’ supply slid to just 50 days.
Industry schedules currently call for assemblies to step up in the fourth quarter to a pace
of 6.8 million units. Elsewhere in the transportation sector, the production of civilian
aircraft moved sideways, on balance, in recent months. Production will likely move
down somewhat over the next several months, as Boeing recently postponed the
introduction of their updated 747-8 aircraft; the first deliveries of the new 787 airplanes,
as well as the 747-8 aircraft, are not expected to raise output noticeably until late next
year.3
High-tech output rose at an annual rate of almost 11 percent in the third quarter after
changing little in the second quarter. The output of semiconductors increased smartly last
quarter, reportedly reflecting inventory restocking and possibly some firming in demand
for chips used in consumer PCs, cell phones, and TVs. In contrast, computer production
declined last quarter, albeit at a slower pace than in the second quarter, partly a result of
weak business demand for servers. This decline in real production occurred despite an
increase in unit shipments of PCs last quarter because the mix of PCs produced continued
to shift toward lower-value machines. The output of communications equipment moved
up modestly in the third quarter after two consecutive quarterly declines.
Forward-looking indicators of high-tech production generally point to some additional
improvement this quarter. Intel is expecting a sharp increase in revenue in the fourth
quarter—a positive indicator for the output of semiconductors—and orders for circuit
boards suggest that output of those items in the coming months will be boosted by
upstream demand from the producers of high-tech equipment and other electronic
products. While orders and shipments of semiconductor manufacturing equipment are
well above the low levels seen during the second quarter, they remain subdued,
suggesting that semiconductor manufacturers are still cautious about expanding capacity.
For computers, a number of companies, including Dell and HP, have provided tentative
signals that the market for their products has bottomed out and may begin expanding
2

Although GM and Chrysler struggled to ramp up production after emerging from bankruptcy last
summer, both now appear to be producing closer to their desired assembly rates. However, Chrysler has
had some more-recent production disruptions because of difficulties with its parts suppliers. These
difficulties reportedly reflect challenges associated with Chrysler’s transition to new suppliers after having
lost some previous suppliers while in bankruptcy, as well as the reluctance by some smaller suppliers to
commit to new projects with Chrysler because of uncertainty about its future as part of Fiat.
3
Deliveries of finished aircraft jumped in September after having been held down in the previous two
months by some parts shortages at Boeing and by financing issues for some customers. The pace of
assemblies, however, appeared little affected, as the swings in deliveries were mostly offset by changes in
inventories.

II-9
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2009
Item

Q1

Q2

2009
Q3

Q4

June

July

Aug.

Sept.

U.S. production1
Autos
Light trucks

4.4
1.7
2.8

4.5
1.9
2.5

6.4
2.5
3.8

6.8
2.7
4.0

4.1
1.9
2.2

5.6
2.2
3.4

6.3
2.5
3.8

7.1
2.8
4.3

Days’ supply2
Autos
Light trucks

93
93
93

70
78
64

50
46
55

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

70
76
64

55
55
55

36
32
40

63
59
66

Inventories3
Autos
Light trucks

2.05
.92
1.13

1.63
.82
.81

1.38
.63
.75

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

1.63
.82
.81

1.50
.75
.75

1.20
.56
.64

1.38
.63
.75

4.6

4.6

6.5

7.0

4.2

5.7

6.5

7.3

Memo: U.S. production,
total motor vehicles4

Note: FRB seasonals. Components may not sum to totals because of rounding.
1. Production rates for the fourth quarter of 2009 reflect the latest industry schedules.
2. Quarterly values are calculated with end-of-period stocks and average reported sales.
3. End-of-period stocks.
4. Includes medium and heavy trucks.
n.a. Not available.
Source: Ward’s Communications.

Inventories of Light Vehicles
Millions of units
3.5
3.0
2.5
2.0
1.5

Sept.

1.0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.5

Source: Ward’s Communications. Adjusted using FRB seasonals.

Days’ Supply of Light Vehicles
Days
110
100
90
80
70
Sept.

60
50
40
30

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: Constructed from Ward’s Communications data. Adjusted using FRB seasonals.

2007

2008

2009

2010

20

II-10

Indicators of High-Tech Manufacturing Activity

Industrial Production in the High-Tech Sector

U.S. Personal Computer and Server Absorption

2002 = 100, ratio scale

Millions of units, ratio scale
350
300

Semiconductors

0.75

Millions of units, ratio scale

0.80

250

0.70

19.0
18.0

Servers (left scale)

17.0
Q3

Computers

Sept.

200
180
160

0.60
0.55

16.0

+

0.65

15.0

PCs (right scale)

14.0

140
120
Communications equipment

100
90
80
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Federal Reserve, G.17 Statistical Release, "Industrial
Production and Capacity Utilization."

13.0

0.50
0.45
0.40

2002 2003 2004 2005 2006 2007 2008 2009
Note: FRB seasonals. PC and server units represent the most
recent U.S. data available from IDC. Q3 PC units are from the
IDC Top 10 data release. Q3 server units are implied from the
IDC Top 10 data release.
Source: IDC.

12.0
11.5
11.0
10.5

Circuit Board Orders and Shipments

MPU Shipments and Intel Revenue

Billions of dollars

Billions of dollars, ratio scale

140

12.0
11.0
Q4
Aug.
Intel revenue

Worldwide MPU shipments

10.0
9.5
9.0
8.5
8.0
7.5
7.0

Orders
130
120
110
100
90
Shipments

6.5

Aug.

70

6.0
5.5
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals. MPU is a microprocessor unit. Q4 Intel
revenue is the midpoint of the range given by the company’s
guidance as of October 13, 2009. MPU shipments are a 3-month sum.
Source: Intel; Semiconductor Industry Association.

Bookings and Billings for Semiconductor
Manufacturing Equipment

80

2002 2003 2004 2005 2006 2007 2008 2009
Note: U.S. and Canadian orders and shipments of bare and
loaded circuit boards.
Source: Institute for Printed Circuits.

60

High-Tech Spending Plans

Billions of dollars
2.0

Diffusion index

1.8
Billings

90
80

1.6
1.4
1.2

Bookings

1.0

70
Q3
60

0.8
Sept.

0.6

50

0.4
0.2
0.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: FRB seasonals.
Source: Semiconductor Equipment and Materials International.

40
2003
2004
2005
2006
2007
2008
2009
Note: Based on survey question on firms’ plans to increase or
decrease their spending on high-tech equipment in the next 12 months.
Source: NABE Industry Survey.

II-11

soon. With regard to communications equipment, AT&T reported that it will ramp up
equipment spending sharply this quarter in order to reach its annual capital spending
target, and Verizon also indicated plans to increase its equipment spending. Finally, the
diffusion index of planned capital spending on high-tech equipment in the NABE’s
quarterly survey rose in the third quarter to a level that suggests a solid rebound in hightech spending in the next few quarters.
The output of energy increased in both August and September. Drilling activity rose for
a second consecutive month in September after plunging by more than one-half since late
last year, and oil extraction moved up for a third consecutive month. The boost to both
extraction and drilling activity was likely spurred by recent increases in oil prices.
Outside of the transportation, high-technology, and energy sectors, output increased for
the third consecutive month in September, bringing the increase for the third quarter as a
whole to about 3½ percent. The output of consumer goods edged up in the third quarter,
construction supplies rose at a moderate pace, and the index for materials turned up
noticeably. The rise in the production of construction supplies likely reflects the upturn
in housing starts and in state and local construction, while the increase in the output of
materials was likely boosted, in part, by demand from the motor vehicle sector. The
production of business equipment was little changed during the third quarter after
plummeting in the first half of the year.
Forward-looking indicators of manufacturing activity continue to suggest moderate gains
in production. The latest diffusion index of new orders from the national manufacturing
ISM survey points to solid near-term gains in factory output, and readings on orders for
October from the regional manufacturing surveys improved further, on balance, and are
consistent with moderate increases in manufacturing production. However, the staff’s
estimate of real adjusted durable goods orders in September was about flat, and the latest
weekly frequency product data that are used to construct IP suggest that output in these
industries will contribute little, on net, to the change in IP for October.
Motor Vehicles
Light vehicle sales surged in July and August in response to the cash-for-clunkers
program, but then tumbled in September to an annual rate of 9.2 million units after the
expiration of the program. Many of the clunker-related vehicle purchases in July and
August were probably pulled forward from sales that would have otherwise occurred in
subsequent months, as has often been the case for previous large sales-incentive
programs, and the steep drop in light vehicle sales in September was consistent with this

II-12
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2009
Category

2008

Total

Q1

Q2

Q3

July

Aug.

Sept.

13.1

9.5

9.6

11.5

11.2

14.1

9.2

Autos
Light trucks

6.7
6.4

4.8
4.7

4.9
4.7

6.4
5.1

6.2
5.1

8.0
6.1

5.0
4.2

North American1
Autos
Light trucks

9.8
4.5
5.3

6.8
3.1
3.7

7.1
3.2
3.9

8.4
4.2
4.2

8.3
4.2
4.2

10.2
5.3
4.9

6.7
3.3
3.5

Foreign-produced
Autos
Light trucks

3.3
2.2
1.1

2.7
1.7
1.0

2.4
1.6
.8

3.1
2.1
.9

2.9
2.0
.9

3.9
2.7
1.2

2.5
1.7
.8

48.3

44.1

46.8

43.1

44.8

41.3

43.7

Memo:
Detroit Three
market share (percent)2

Note: Components may not sum to totals because of rounding.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.
2. Includes domestic and foreign brands affiliated with the Detroit Three.
Source: Ward’s Communications. Adjusted using FRB seasonals.
Market Share of Small and Midsize Autos
Percent

55

Content redacted.

50
45
Sept.
40
35
30

2004

2005

2006

2007

2008

2009

2010

25

Note: As a share of total light vehicle sales.
Source: Ward’s Communications. Adjusted using FRB seasonals.

Car-Buying Attitudes
Percent
110
Appraisal of car-buying conditions (right scale)
100

Average Value of Incentives on Light Vehicles
Current dollars per vehicle, ratio scale

Index
180
160

90

3000
2600

140

80

Oct.
(p)

70

2200

120
Oct.
18

100
60

Good time to buy: low prices
(left scale)

Oct.
(p)

50

80
1400
60

40

40

30
20

1800

2002

2004

2006

2008

2010

20

p Preliminary.
Source: Reuters/University of Michigan Surveys of Consumers.

2004

2005

2006

2007

2008

2009

2010

1000

Note: Weekly weighted average of customer cash rebate
and the present value of interest rate reduction.
Source: J.D. Power and Associates. Adjusted using FRB seasonals.

II-13

expectation.4 Also, sales incentives were reduced in September, in part because some
incentives that had been offered in conjunction with the cash-for-clunkers rebates were
trimmed. Incentives in the first half of October were about unchanged, on average, from
their September level. The expiration of the cash-for-clunkers program and the reduction
in other sales incentives seem to have damped households’ car-buying attitudes as
measured in the Reuters/Michigan survey for September, and these sentiments continued
to be little changed in the preliminary October survey.
Consumer Spending
Real personal consumption expenditures (PCE) appear to have increased at a solid pace
in the third quarter. Based on our analysis of monthly retail sales data, we estimate that
real spending on goods other than motor vehicles increased further in September after
rising sharply in August. For the third quarter as a whole, real purchases of non-motorvehicle goods likely moved up at an annual rate of more than 4 percent, the largest
quarterly increase for this category of spending in more than two years. Moreover, these
recent gains in household spending have been widespread across categories of consumer
goods. The latest readings on consumer spending for services, which lag the indicators of
goods purchases by a month, also have stepped up; excluding the volatile energy
component, real spending on services increased 0.2 percent in both July and August.
Despite the apparent resuscitation in consumer spending, households still face substantial
headwinds. Reflecting the ongoing weakness in the labor market, wages and salaries
appear to have dropped further in the third quarter after having plunged in the first half of
the year. Although gains in equity prices likely led to a further recoupment of
households’ net worth in the third quarter, data indicate that, on net, households have lost
wealth equivalent to more than 1½ years of income over the past two years and are likely
still making corresponding adjustments to their spending. Moreover, responses to the
Senior Loan Officers Opinion Survey on Bank Lending Practices (SLOOS) suggest that
many banking institutions continued to tighten consumer lending standards in the third
quarter, although a considerable majority reported that such standards were roughly
unchanged (see the appendix to “Domestic Financial Developments”). Meanwhile,
consumer sentiment as measured by the Reuters/Michigan survey was about unchanged,
on net, in September and early October. While consumer sentiment has moved up from
its extremely depressed levels earlier in the year, it remains subdued, likely reflecting the
continued strains on household balance sheets and incomes.

4

The cash-for-clunkers program officially ran from July 1 to August 24. All told, about
690,000 vouchers for cash-for-clunkers rebates were issued under the program, and the Department of
Transportation announced on October 19 that 98 percent of the vouchers had been paid or approved for
payment.

II-14

Real Personal Consumption Expenditures
(Percent change from preceding comparable period)
Category
Total real PCE1
Motor vehicles
Goods ex. motor vehicles
Services
Ex. energy
Memo:
Real PCE control2
Nominal retail control3

2009
Q1
Q2
Annual rate

2009
July
Aug.
Sept.
Monthly rate

Q3

.6

-.9

n.a.

.2

.9

n.a.

9.5
2.0
-.3
-.2

-6.3
-2.8
.2
.7

54.3
4.3
n.a.
n.a.

6.2
.0
.1
.2

17.2
1.3
.2
.2

-24.8
.5
n.a.
n.a.

1.3
1.9

-2.5
-2.8

3.6
1.7

.0
-.2

1.1
.7

.4
.5

1. The values for Q3, July, August, and September are staff estimates based on available data.
2. Durables excluding motor vehicles, nondurables excluding gasoline, and food services.
3. Total sales less outlays at building material and supply stores, automobile and other
motor vehicle dealers, and gasoline stations.
n.a. Not available.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Goods
Percent

0.8
0.6

0.8

2.0

0.4

0.4

0.2

0.2
Sept.

-0.0
-0.2
-0.4

-0.4

-0.6

-0.6

-0.8

1.2

2.8
2.0

6-month
moving average

1.2

0.4

0.4

-0.0
-0.2

6-month moving average

Percent

2.8

0.6

NBER peak

-0.4
-1.2

-0.4
Monthly

-1.2

-2.0

Sept.

-2.0

-0.8
-2.8
-2.8
2006 2007 2008 2009 2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER). The NBER
peak is the last business cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Change in Real PCE Services
Percent

0.5

0.5

Percent

0.6

NBER peak
0.4

0.4

0.3

0.2

0.2

0.1

0.0

0.6

0.3

0.2

6-month
moving average

0.1

6-month moving average

Aug.

0.0

-0.1

0.4
Aug.

0.2
0.0

0.0

-0.1

0.4

-0.2

-0.2

Monthly

-0.2

-0.2
-0.4
-0.4
2006 2007 2008 2009 2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER). The NBER
peak is the last business cycle peak as defined by the NBER.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

II-15

Fundamentals of Household Spending
Household Net Worth
and Dow Jones Total Market Index
18000

Change in Real Disposable Personal Income

Index

Ratio

7.0

12-month percent change

7

7

6
15400

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

6.0

12800
Oct. 27

5.5

10200

6

5

5

4

4

3

6.5

3

2

Aug.

1
Total Market Index
(left scale)

5.0

2
1

5000

Q2
4.5

1999
2001
2003
2005
2007
2009
* The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.
Source: Federal Reserve Board; U.S. Department of
Commerce, Bureau of Economic Analysis; Wall Street Journal.

4.0

0

-1

-1

-2

7600

0

-2

-3

-3
1999
2001
2003
2005
2007
2009
Note: Values for December 2004 and December 2005
exclude the effect on income of the one-time Microsoft dividend
in December 2004.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

Target Federal Funds Rate
and 10-Year Treasury Yield

Personal Saving Rate
Percent

7

Percent

7

6

6

7

6

5

5

4
3

6
Treasury
yield

5

4
3

5

4
3
Aug.

4
Federal
funds
rate

3

2

2

1

1

2

2

1

1

0

0

-1

0

1999
2001
2003
2005
2007
2009
Note: The value for December 2004 excludes the effect
on income of the one-time Microsoft dividend in that month.
Source: U.S. Department of Commerce, Bureau of
Economic Analysis.

7

Oct. 27
1999
2001
2003
2005
Source: Federal Reserve Board.

2007

2009

0
-1

Consumer Confidence
1985 = 100

1966 = 100

170

Reuters/
Michigan
(right scale)

150

NBER peak

115
105

130

95

110

85

90
70
50

Conference Board
(left scale)

(p)
Oct.
Oct.

30
10

75
65
55
45

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER). The NBER peak
is the last business cycle peak as defined by the NBER.
(p) Preliminary.
Source: Reuters/University of Michigan Surveys of Consumers; Conference Board.

35

II-16

Housing
On balance, the incoming data on residential construction activity suggest that the
gradual recovery that began earlier this year has been maintained in recent months.
Although single-family housing starts were essentially flat at an annual rate of around
500,000 units in August and September, the level of starts remained significantly above
the record low of 360,000 units in the first quarter of the year. Adjusted permit
issuance—which is often a useful indicator of the underlying pace of starts—has also
been roughly constant in recent months and was only a bit below the rate of starts in
September. In the much smaller multifamily sector—where tight credit conditions have
persisted and vacancies have remained elevated—starts plunged beginning in the middle
of 2008 but have basically leveled off during the past several months.
The Census Bureau’s measure of the number of new-home sales agreements rose to an
annual rate of about 410,000 units in the third quarter following gains also in the
preceding quarter.

. Although sales
levels are still modest, they have been ample enough, given the slow pace of
construction, to reduce the overhang of unsold new single-family houses. The stock of
unsold new homes dropped further in September, and these inventories were around onehalf of their peak level in the summer of 2006; measured relative to the September pace
of sales, the months’ supply of new homes also remained lower than earlier in the year.
Sales of existing single-family homes jumped in the third quarter to an annual rate of
4.7 million units. Meanwhile, pending home sales agreements through August suggest
that resale activity will continue to rise in future months.5 Although sales in the existinghome market have been supported for much of the year by the large number of
transactions involving bank-owned and other distressed properties, resale activity more
recently appears to have been driven primarily by transactions of nondistressed
properties. Data from the National Association of Realtors suggest that distressed sales
fell to about 30 percent of all sales transactions for existing homes in the period from
May to September after reportedly accounting for more than 40 percent of sales between
December and April.

5

However, according to the National Association of Realtors (NAR), the high proportion of distressed
sales and the unusually tight credit conditions in the housing market have made pending home sales a less
informative leading indicator of existing home sales than usual. Increases in the shares of cash purchases
and of distressed sales have made the time between contract and closing for existing homes more uncertain
than in the past.

II-17

Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2009
Sector

2008

All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
New homes
Sales
Months’ supply2
Existing homes
Sales
Months’ supply2
Multifamily units
Starts
Built for rent
Built for sale
Permits
Condos and co-ops
Existing home sales

Q1

Q2

Q3

July

Aug.

Sept.

.91
.91

.53
.53

.54
.53

.59
.57

.59
.56

.59
.58

.59
.58

.62
.58
.58

.36
.36
.37

.43
.41
.42

.50
.46
.48

.51
.46
.49

.48
.46
.47

.50
.45
.47

.49
10.68

.34
11.61

.37
9.44

.41
7.62

.41
7.85

.42
7.51

.40
7.49

4.35
9.98

4.12
9.68

4.24
8.78

4.66
7.97

4.61
8.03

4.47
8.61

4.89
7.27

.28
.22
.07
.33

.17
.14
.03
.17

.12
.10
.02
.12

.09
n.a.
n.a.
.11

.09
n.a.
n.a.
.10

.11
n.a.
n.a.
.12

.09
n.a.
n.a.
.12

.56

.47

.52

.64

.63

.62

.68

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
2. At current sales rate; expressed as the ratio of seasonally adjusted inventories to seasonally adjusted
sales. Quarterly and annual figures are averages of monthly figures.
n.a. Not available.
Source: Census Bureau.

Private Housing Starts and Permits
(Seasonally adjusted annual rate)
Millions of units
2.0

2.0

1.8

1.8
Single-family starts

1.6

1.6

1.4

1.4

1.2

1.2
Single-family adjusted permits

1.0

1.0

.8

.8

.6

.6
Sept.

.4

.4

.2
.0

Multifamily starts
1999

2000

2001

2002

Sept.
2003

2004

2005

2006

2007

Note: Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
Source: Census Bureau.

2008

2009

.2
.0

II-18

Indicators of Single-Family Housing
Inventories of New Homes
and Months’ Supply

New Single-Family Home Sales
1.6
1.4

Millions of units
(annual rate)

Millions of units
(annual rate)

Total (left scale)

0.6
0.5

600

Thousands of units

Months

550
500

1.2

0.4

450

Inventories of new homes
(left scale)

1.0
0.3
0.8

Large homebuilders
(right scale)

0.2

0.6
Sept.
0.4
0.2

350
300

0.1

Sept.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.0

Months’ supply (right scale)
200

6.0

Index (2001=100)
Existing home sales
(left scale)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Months’ supply is calculated using the 3-month moving
average of sales.
Source: Census Bureau.

Mortgage Rates

Existing Single-Family Home Sales
6.5

Sept.

250

Source: For total, Census Bureau; for large homebuilders,
National Association of Home Builders.

Millions of units
(annual rate)

Sept.

400

140
130

Percent

7.5
7.0

110

7.5
7.0

30-year conforming FRM

120
5.5

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

6.5

6.5

6.0

6.0

5.5

5.5

Aug.
5.0

Pending home sales
(right scale)

100
Sept.

4.5

90
80

4.0
3.5

70
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: National Association of Realtors.

60

5.0
4.5

Oct. 21
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

House Price Expectations

Percent change from year earlier

20

15

15

60

10

10

5

5

Diffusion index

80

-5

Aug.
Aug.

-15
-20
-25
-30

-5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: For FHFA, Federal Housing Finance Agency;
for S&P/Case-Shiller, Standard & Poor’s; for LP,
LoanPerformance, a division of First American CoreLogic.

60
40

0

-10

80

5 years ahead
20

-15
LP price index
Monthly FHFA purchase-only index
20-city S&P/Case-Shiller monthly price index

Oct.(p)

40

0

0

-10

4.5

Note: 2-week moving average.
Source: Federal Home Loan Mortgage Corporation.

Prices of Existing Homes
20

5.0

20
Oct. (p)
0

-20

-20

1 year ahead

-40

-40

-25

-60

-60

-30

-80

-20

2007

2008

2009

-80

Note: Diffusion index is constructed by subtracting
expectations of decrease from expectations of increase.
p Preliminary.
Source: Reuters/University of Michigan Surveys of Consumers.

II-19

The modest recovery in housing demand that appears to have emerged probably reflects,
at least in part, improvements in housing affordability stemming from relatively low
mortgage rates and house prices that still remain below year-earlier levels but that have
been firming recently, apparently raising expectations of future gains.6 Interest rates for
conforming 30-year fixed-rate mortgages remain very low by historical standards at about
5 percent. In addition, although spreads between rates for jumbo and standard
conforming loans are still high relative to pre-crisis levels, they have continued to fall
recently despite the fact that the secondary market for private-label nonconforming
mortgages remains closed. As for house prices, the repeat-sales price index for existing
single-family homes calculated by LoanPerformance increased for a fifth consecutive
month in August and is now only 10 percent below its level a year earlier. Moreover, the
Reuters/Michigan survey’s diffusion index for year-ahead house price expectations
remained positive in early October, which indicates that the number of respondents who
expect house prices to increase over the next 12 months exceeds the number of
respondents who expect prices to decrease.
Equipment and Software
Real investment in equipment and software (E&S) seems to have stabilized in the third
quarter after falling steeply for more than a year. Business purchases of motor vehicles
appear to have increased, and purchases of high-tech equipment look to have continued
their modest recovery. More broadly, the pace of decline in nominal shipments of
nondefense capital goods excluding aircraft slowed substantially in the third quarter,
while orders moved up in September to a level slightly above shipments, closing what
had been a sizable gap.
Real business outlays on motor vehicles likely rose in the third quarter after declining
steeply for an extended period. Purchases of light vehicles by both daily rental
companies and other businesses moved up last quarter, as did sales of medium and heavy
trucks. In response to a higher volume of freight deliveries, the pace of new truck orders
has picked up noticeably, suggesting that sales should continue to increase through yearend.
Real spending on high-tech E&S looks to have risen modestly in the third quarter. Data
on shipments indicate that real outlays on computers and peripheral equipment and on
communications equipment increased at a solid pace last quarter, but company reports
6

Anecdotal reports suggest that the first-time homebuyer tax credit that has been in place this year may
have provided some support to home sales. The proportion of first-time homebuyers appears to have been
about 45 percent this year—only a little higher than the average proportion of about 40 percent reported by
the NAR for the past decade—suggesting that other factors likely have been more important for increasing
home sales.

II-20
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2009
Category

Q2

Q3

July

Annual rate

Aug.

Sept.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories1

-17.5
-14.4
-8.1
-3.5
-15.9

-.2
-1.9
-4.0
24.7
-3.9

.6
.3
1.8
3.8
-.2

-2.6
-2.2
-4.3
-4.6
-1.8

2.2
-.2
.4
-4.9
.2

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories1

13.3
3.8
13.0
48.2
-.6

22.2
11.2
-1.7
34.9
10.4

7.0
-1.3
-3.7
4.8
-1.7

-7.7
-.8
-2.8
-4.4
-.2

2.5
2.0
.4
-8.4
3.3

Memo:
Shipments of complete aircraft2

36.8

n.a.

34.1

32.6

n.a.

1. Excludes most terrestrial transportation equipment.
2. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.
n.a. Not available.
Source: Census Bureau.

Communications Equipment

Non-High-Tech,
Nontransportation Equipment

Billions of chained (2005) dollars, ratio scale
20
17
14

20
17
14

Shipments
Orders

11

11

8

59

Billions of chained (2005) dollars, ratio scale

54

59
54

Orders

8
Sept.

5

48

48

42

Sept. 36

36

2

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Shipments and orders are deflated by a price index
that is derived from the quality-adjusted price indexes of the
Bureau of Economic Analysis and uses the producer price
index for communications equipment for monthly interpolation.
Source: Census Bureau.

2

30

Computers and Peripherals
240
210
190

2000 = 100

Billions of chained (2005) dollars, ratio scale

Real M3
shipments
(right scale)

90

70

960
820
680

15

Thousands of units, ratio scale

540

13

130

1240

17
Sept.

24
21
19

Industrial production
(left scale)

150

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Shipments and orders are deflated by the staff
price indexes for the individual equipment types included
in this category. Indexes are derived from the quality-adjusted
price indexes of the Bureau of Economic Analysis.
Source: Census Bureau.

30

Medium and Heavy Trucks

170

110

42

Shipments

5

400

1240
960
820
680

Net new orders
of class 5-8 trucks

540
400
Sept.

11

260

Sales of class 4-8 trucks

260

9

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Shipments are deflated by the staff price index for
computers and peripheral equipment, which is derived from
the quality-adjusted price indexes of the Bureau of Economic
Analysis.
Source: Census Bureau; FRB Industrial Production.

7

120

2000
2002
2004
2006
2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

120

Note: Annual rate, FRB seasonals.
Source: For sales, Ward’s Communications; for orders, ACT Research.

II-21

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change

8

8

NBER peak
6

6

4

4

2

2

0

0

-2

-2

-4
-6

Q2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER).
The NBER peak is the last business cycle peak as defined by the NBER.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

User Cost of Capital
20

NBER peak

18

10

Non-high-tech

18

16

16
10-year high-yield

14

5
12

Q2

0

12

0
10
-5

-10

-10

6

-15

4

High-tech
1990
2000
2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
1995
2005

8

Source: Staff calculation.

16

Percent

6

10-year BBB
1990
1995
2000
2005
2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

4

Surveys of Business Conditions
Percent

NBER peak
Credit expected to be tighter (right scale)

8

Note: End of month. October value as of October 27.
Source: Merrill Lynch.

NFIB: Survey on Loan Availability
20

10
Oct.

-5

-15

20

NBER peak
14

5

Percent

20

15

15
10

-6

Corporate Bond Yields
4-quarter percent change

20

-4

18
14

Sept.

Diffusion index

95
85

ISM (left scale)
Philadelphia Fed (right scale)

85
75

10
6

8

75

2

12

65

55

55

Oct.
45
Sept.

-2
-6

4

-10

45

-14

0
Credit more difficult to obtain (left scale)
-4

65

1990
1995
2000
2005
2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

-18
-22

Note: Of borrowers who sought credit in the past 3
months, the proportion that reported or expected more difficulty
in obtaining credit less the proportion that reported or expected
more ease in obtaining credit. Seasonally adjusted.
Source: National Federation of Independent Business (NFIB).

35
25

35
NBER
peak

25

15
1990
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
1995
2000
2005
2010
Source: Institute for Supply Management (ISM), Manufacturing
ISM Report on Business; Philadelphia Fed Business Outlook Survey.

II-22

suggest that business purchases of software have shown some lingering weakness.
Looking forward, the NABE index on capital spending plans over the next 12 months for
computers and communications equipment bounced back noticeably from the low level
seen since the end of last year, while orders for high-tech equipment stood somewhat
above shipments in September. Meanwhile, major providers of telecommunications
services, which account for about one-fourth of spending on communications equipment,
reported that capital expenditures will be ramping up this quarter.
Business investment in equipment outside of transportation and high tech looks to have
bottomed out in the third quarter after falling steeply during the preceding three quarters.
Although shipments of these capital goods, which account for one-half of total E&S
outlays, edged down, on net, in recent months, new orders jumped in September and the
stock of unfilled orders increased for the first time in the past year, which could provide
some impetus for shipments in future months.
The fundamental determinants of investment in E&S have improved somewhat in recent
months, but, on balance, they point to only sluggish gains over the next couple of
quarters. Business output appears to have turned up in the third quarter, and the user cost
of capital has continued to fall in line with bond yields. Although spreads of corporate
bonds over Treasury securities are still somewhat elevated, they have decreased
considerably from their extremely high levels at the end of last year and continue to edge
lower, likely reflecting less uncertainty and better assessments of future profitability.
Meanwhile, monthly surveys of business conditions and sentiment have recovered to
levels suggesting a modest rise in business spending. However, the net share of small
businesses reporting increased difficulty in obtaining credit edged up in the September
NFIB survey, and the October SLOOS reported that banks, on balance, continued to
tighten standards on commercial and industrial loans to firms of all sizes over the past
three months.
Nonresidential Construction
Conditions in the nonresidential construction sector have generally remained bleak.
Recent data on nominal expenditures for nonresidential structures suggest that real
construction outlays outside of the energy-related sectors declined sharply in the third
quarter. The weakness was widespread across categories and likely reflected the drag
from rising vacancy rates and plunging property prices. In addition, the architectural
billings index in September remained at levels consistent with further declines in
spending, and the nonresidential construction industry has continued to shed workers.
Finally, the responses to the October SLOOS suggest that it remains extremely difficult
for businesses to obtain financing for new construction projects.

II-23

Nonresidential Construction and Indicators
(All spending series are seasonally adjusted at an annual rate; nominal CPIP deflated by
BEA prices through Q2 and by staff projection thereafter)

Office, Commercial,
Communication, and Other

Total Structures
Billions of chained (2005) dollars

380

380

360

360

340

340

320

Aug.

300

320
300

280

280

260

260

240

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

240

120
110
100
90
80
70
60
50
40
30
20
10
0

Source: Census Bureau.

Commercial
Office

Aug.

Communication

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Drilling and Mining Indicators

Billions of chained (2005) dollars
Manufacturing

Aug.

Power

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

75
70
65
60
55
50
45
40
35
30
25
20
15

35

Number

2200
2000
1800

20

Footage drilled
(left scale)

15

1600
Drilling rigs
in operation
(right scale)

Aug.
Oct.

10

Office

18

15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: The October readings for drilling rigs are based on
data through October 23, 2009. Both series are seasonally
adjusted by FRB staff.
Source: For footage drilled, U.S. Department of Energy,
Energy Information Agency; for drilling rigs, Baker Hughes.

3.0

Percent

Diffusion index
Billings (right scale)

400

Q2
12

55
50

1.0

45
Sept.
40

0.0
9

9
Retail

6

-0.5
-1.5
-2.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Change in
employment (left scale)

35

-1.0
6

3

60

2.0

0.5

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

1000
600

0

1.5

3

1200
800

5

2.5

12

1400

Architectural Billings and
Nonresidential Construction Employment
Percent

Industrial

2600
2400

25

Vacancy Rates
18

Millions of feet

30

Source: Census Bureau.

15

Other

120
110
100
90
80
70
60
50
40
30
20
10
0

Note: Other consists of structures for religious organizations,
education, lodging, amusement and recreation, transportation,
and health care.
Source: Census Bureau.

Manufacturing and Power
75
70
65
60
55
50
45
40
35
30
25
20
15

Billions of chained (2005) dollars

-2.5

30
Sept.
25
20
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Both series are 3-month moving averages. Employment
consists of industrial, commercial, and specialty trade construction.
Source: For billings, American Institute of Architects; for
employment, U.S. Department of Labor, Bureau of Labor Statistics.

II-24
Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2008
Measure and sector

2009

Q4

Q1

Q2

-35.7
-.7
-35.1

-114.9
-63.6
-51.3

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

-19.8
8.2
-10.2
-17.8

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

-155.9
-65.2
-55.7
-34.9

Real inventory investment
(chained 2005 dollars)
Total nonfarm business
Motor vehicles
Nonfarm ex. motor vehicles

June

July

Aug.

-163.1
-48.1
-115.1

...
...
...

...
...
...

...
...
...

-49.3
-28.9
-8.8
-11.6

-110.9
-39.8
-52.5
-18.6

-137.5
-44.8
-81.6
-11.2

-109.1 e
-36.4 e
-56.5 e
e
-16.1

-143.2
-77.3
-47.3
-18.6

-150.2
-63.6
-62.9
-23.7

-178.0
-68.9
-90.6
-18.5

-138.6
-55.2
-63.4
-20.0

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

-110.1
-47.2
-51.8
-11.0

n.a. Not available.
... Not applicable.
e Staff estimate of real inventory investment based on revised book-value data.
Source: For real inventory investment, U.S. Dept. of Commerce, Bureau of Economic Analysis;
for book-value data, Census Bureau.

ISM Customers’ Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months

1.9
1.8

1.9

60

Index

60

1.8

Staff flow-of-goods system

55
1.7

55

50

50

45

45

1.7
Sept.

1.6

1.6

1.5

1.5

1.4

1.4

1.3

Aug.

1.3
40

1.2

1.2
Census book-value data

1.1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000
2002
2004
2006
2008
Note: Flow-of-goods system covers total industry ex.
motor vehicles and parts, and inventories are relative
to consumption. Census data cover manufacturing and
trade ex. motor vehicles and parts, and inventories are
relative to sales.
Source: Census Bureau; staff calculation.

1.1

40
Sept.

35

35
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2000
2002
2004
2006
2008
Note: A number above 50 indicates inventories are "too high."
Source: Institute for Supply Management (ISM), Manufacturing
ISM Report on Business.

II-25

Real spending on drilling and mining structures slumped in the first half of the year, and
available indicators suggest that activity more recently has only edged up from a very low
level. The steep drop in energy prices in the second half of last year greatly weakened
incentives for additional drilling activity, particularly in the natural gas sector, which
accounts for most rigs in operation. However, the rebound in oil prices this year seems to
have led to an increase in oil drilling activity.
Business Inventories
The sharp cuts in production earlier this year markedly reduced business inventories.
Real nonfarm inventories excluding motor vehicles fell at an annual rate of $115 billion
in the second quarter, and the more recent book-value data for the manufacturing and
trade sector suggest that inventories continued to fall at a similar pace in the third quarter.
Although the measure of months’ supply (excluding motor vehicles) implied by the bookvalue data has declined considerably in recent months, it remains somewhat elevated,
especially for some categories of durable goods in manufacturing and wholesale trade.
Similarly, the staff’s flow-of-goods inventory system suggests that inventories continued
to contract in the third quarter, but that months’ supply for most major market groups
(excluding motor vehicles) is still elevated even after the declines seen through
September; progress in reducing months’ supply has been most apparent for consumer
goods. In contrast, a relatively low net fraction of manufacturing supply managers
surveyed by the ISM in September perceived their customers’ inventories as being too
high, which could suggest that purchasing managers in manufacturing may believe their
customers will be doing some restocking in the coming months.7
Federal Government Sector
The unified federal budget finished fiscal year 2009 in September with a deficit of
$1.42 trillion, which is about 10 percent of GDP. The budget deficit was almost
$1 trillion wider than in fiscal 2008, primarily reflecting the budget costs of the fiscal
stimulus and the financial stabilization programs and a recession-related increase in
outlays and a decline in revenues. The sizable jump in the budget deficit pushed up
federal debt held by the public from 40 percent of GDP at the end of fiscal 2008 to
53 percent of GDP at the end of fiscal 2009.

7

The question asked of purchasing managers in the ISM survey about whether stocks are too high or
too low does not specify the measure of sales against which respondents should compare the level of their
customers’ inventories. If the respondents are evaluating inventories relative to a level of sales expected in
coming months that is noticeably higher than the recent pace of sales (a plausible assumption given the
marked improvement in recent months of the ISM’s new orders index), the sharp drop in this measure of
customers’ inventories to a very low level is not necessarily at odds with the inventory ratios in both the
book-value data and the staff’s flow-of-goods system.

II-26
Federal Government Budget
(Unified basis; adjusted for payment-timing shifts and financial
transactions; data from Monthly Treasury Statement)

Surplus or Deficit (-)
300

Billions of dollars
300

12-month moving sum

0

0

-300

-300

-600

-600

-900

-900

-1200
-1500

-1200

Sept.

-1500

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Note: Thin line includes deficit effects of financial transactions related to Troubled Asset Relief Program (TARP) and governmentsponsored enterprise equity purchase programs.

Outlays and Receipts

Percent change from year earlier

20

20

Receipts

12-month moving sum
15

15

10

10

5

5

Outlays

0

0
Sept.

-5

-5

-10

-10

-15

-15

-20

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-20

2010

Recent Federal Outlays and Receipts
(Billions of dollars except as noted; adjusted for payment-timing shifts and financial transactions)

Sum of July-September

12 months ending in September

2008

2009

Percent
change

Outlays
Net interest
National defense
Major transfers1
Other

739.7
63.9
163.0
399.9
112.9

818.6
42.1
171.0
481.3
124.2

10.7
-34.2
4.9
20.4
10.0

2,961.5
248.9
624.5
1,642.0
446.2

3,258.1
190.8
665.7
1,898.3
503.3

10.0
-23.3
6.6
15.6
12.8

Receipts
Individual income and payroll taxes
Corporate income taxes
Other

589.7
468.7
67.8
53.2

515.9
424.5
36.3
55.2

-12.5
-9.4
-46.4
3.7

2,523.6
1,996.5
304.3
222.8

2,104.6
1,759.5
138.2
206.9

-16.6
-11.9
-54.6
-7.1

-150.0

-302.7

...

-437.9

-1,153.5

...

-168.9

-330.8

...

-454.8

-1,417.1

...

Function or source

Surplus or deficit (-)
Memo:
Unadjusted surplus or deficit (-)

1. Includes Social Security, Medicare, Medicaid, and income security programs.
... Not applicable.

2008

2009

Percent
change

II-27

For fiscal 2009 as a whole, outlays associated with the TARP and the conservatorship of
the GSEs totaled about $260 billion. But even excluding the costs of these financial
stabilization programs, other federal spending was about 10 percent higher than that in
the preceding fiscal year. Spending under this year’s fiscal stimulus bill amounted to
about $110 billion, and transfer payments—particularly for unemployment insurance and
other low-income support programs—were boosted by the weak conditions in the labor
market. In the period from July to September, defense spending rose solidly relative to
the same period a year earlier; the level of spending points to a substantial increase in the
NIPA measure of real defense purchases in the third quarter following a marked surge in
the second quarter.
Receipts in fiscal 2009 were roughly 17 percent lower than in the preceding year. The
drop in revenues primarily reflected the effects of the recession as wages and salaries
have waned, capital gains realizations have likely contracted, and profits have slumped.
Also, this year’s stimulus plan is estimated to have reduced tax receipts by more than
$80 billion in fiscal 2009.8 Summing these stimulus-related tax cuts with the stimulus
spending noted earlier shows that more than $190 billion in total stimulus funds had been
distributed by September, about one-fourth of the total $787 billion stimulus package.
State and Local Government Sector
Purchases by state and local governments likely declined in real terms in the third quarter
as governments took additional steps to address imbalances in their operating budgets.
According to the latest labor market report, state and local employment fell 47,000 in
September, and estimates for July and August were revised down to show a cumulative
drop of 84,000 during those two months; payrolls at both the state and local levels have
fallen sharply over the past three months after registering small declines during the first
half of the year. In addition to laying workers off, many governments have furloughed
employees—an action that does not show up in the employment figures for the sector—to
further reduce their compensation costs. Meanwhile, real construction expenditures
appear to have risen somewhat in July and August after increasing at an annual rate of
25 percent in the second quarter. The upturn in real construction spending followed a
steep drop in late 2008 and early 2009 and is likely attributable to a number of factors,
including the availability of federal stimulus grants and the easing of credit conditions in
the municipal bond market. A moderation in construction costs is also helping states and
localities make the most of the funding available for capital projects.

8

While the 2009 stimulus plan is estimated to have reduced tax receipts by more than $80 billion in
fiscal year 2009, the tax cuts in the 2008 stimulus plan lowered taxes by about $100 billion in fiscal 2008.
Thus, tax cuts associated with fiscal stimulus actions have not contributed to the year-over-year decline in
revenues.

II-28

State and Local Indicators

Real Spending on Consumption and Investment
Percent change, annual rate
12

12
Spending
4-quarter moving average

9

9

6

6

3

3
Q2

0

0

-3

-3

-6

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-6

2009

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; national income and product accounts.

Net Change in Employment

Real Construction
Billions of chained (2005) dollars, annual rate

Thousands of jobs, monthly average
50

50

40

40

30

30

20

20

10

250

250

240

240
Q3

230

230

220

220

210

210

200

200

10
Q3

0

0

-10

-10

-20

-20

-30

-30

-40

-40

-50

1999

2001

2003

2005

2007

2009

-50

190

1999

2001

2003

2005

2007

2009

190

Note: Nominal CPIP deflated by BEA prices through
Q2 and by a staff projection thereafter. Observation for
Q3 is the average for July and August.
Source: Census Bureau, Construction Spending.

Source: U.S. Dept. of Labor, Bureau of Labor Statistics,
Employment Situation.

State Revenues

Local Revenues

Percent change from year earlier

Percent change from year earlier

30

30

25

25

20

20

Individual and
corporate income
taxes

15

15

10

10

5

5

Total
revenues

0

25

25

20

20

Property taxes

15

15
Total revenues

10

10

5

5

0

0

0

-5

-5

-10

-10

-15

-15

-20

-20

-25

-25

-30

Q2
1999

2001

2003

2005

2007

2009

Source: Census Bureau, Quarterly Summary of State
and Local Government Tax Revenue.

-30

Q2

-5
-10

1999

2001

2003

2005

2007

2009

Source: Census Bureau, Quarterly Summary of State
and Local Government Tax Revenue.

-5
-10

II-29

Prices
Consumer price inflation has remained subdued in recent months after decelerating
noticeably over the past year. Our translation of the recent readings on the consumer
price index (CPI) and the producer price index (PPI) suggests that both the headline and
core PCE price indexes edged up 0.1 percent in September. Core PCE prices are
estimated to have risen at an annual rate of only 1¼ percent over both the most recent
3- and 12-month periods. Headline PCE prices declined ½ percent over the past
12 months, largely because of the plunge in energy prices at the end of 2008 and the
decline in food prices over the past year, but they have risen 2 percent over the past
three months as energy prices surged. Meanwhile, survey measures of longer-term
inflation expectations have stayed within the range seen in recent years.
Consumer energy prices rose last quarter, largely in response to the rebound in crude oil
prices this year. Prices paid by consumers for energy jumped 5 percent in August, and
we estimate that they edged up another 0.7 percent in September. Recent survey data
point to gasoline prices stepping up in October, and prices of crude oil have moved up, on
net, in recent weeks, portending some upward pressure to energy prices in the coming
months. After falling from an elevated level in the middle of last year, natural gas prices
have, on balance, been roughly flat since this summer, but futures prices for natural gas
currently tilt noticeably upward.
Consumer prices for food have remained soft. After rising only 0.1 percent in August,
food prices are estimated to have fallen 0.2 percent last month and to have declined
1.2 percent over the 12 months ending in September, primarily reflecting the weak
economy and ample supplies. Prices in farm commodity markets have been mixed
recently: Grain prices, on balance, have moved up since the time of the September
Greenbook because of concerns about frost damage to crops that were planted late, but
livestock prices have continued to move down over this period.
PCE prices excluding food and energy have continued to rise slowly in recent months.
We estimate that core PCE prices increased 0.1 percent in September, the same pace as in
the preceding two months. While core nonmarket prices have turned up in the past two
quarters after posting sizable declines earlier in the year, core market-based prices have
risen more slowly. In particular, prices for housing services and for many durable goods
declined over the three-month period ending in September.
In the preliminary Reuters/Michigan survey for October, median year-ahead inflation
expectations moved up to 2.8 percent, retracing their dip in September. Median inflation
expectations over the next 5 to 10 years edged up from 2.8 percent in September to

II-30

Price Measures
(Percent change)
12-month change

Sept.
2008

Sept.
2009

1-month change

Annual rate
Measures

3-month change

Monthly rate

June
2009

Sept.
2009

Aug.
2009

Sept.
2009

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

4.9
6.2
23.1
2.5
.5
3.2
2.4
4.5
2.4
4.2
2.0

-1.3
-.2
-21.6
1.5
1.6
1.5
.7
2.6
1.2
-1.4
1.1

3.3
-1.5
22.1
2.4
4.1
1.8
1.4
2.1
2.0
...
...

2.5
-1.1
21.1
1.3
.9
1.4
-.1
4.0
1.1
...
...

.4
.1
4.6
.1
-.3
.2
.1
.4
.1
...
...

.2
-.1
.6
.2
.3
.1
.1
.3
.2
...
...

PCE prices 2
Total
Food and bev. at home
Energy
Ex. food and energy
Core goods
Core services
Housing services
Other services
Memo: core ex. tobacco
Core market-based
Core non-market-based

4.1
7.0
24.5
2.5
.6
3.2
2.7
3.3
2.5
2.6
2.1

-.5
-1.2
-22.6
1.3
1.2
1.3
1.4
1.3
1.1
1.6
-.7

2.8
-2.8
26.9
2.0
2.7
1.8
1.4
2.0
1.7
2.0
2.6

2.0
-2.3
23.6
1.3
-.1
1.7
-.4
2.4
1.2
1.1
2.4

.3
.1
5.1
.1
-.2
.2
.1
.2
.1
.1
.1

.1
-.2
.7
.1
.2
.1
-.1
.2
.1
.1
.2

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

8.8
7.8
23.4
4.0
4.2
3.6
15.3
11.8
24.2
16.4

-4.8
-4.2
-22.1
1.8
2.2
1.2
-11.7
-7.5
-31.5
-19.7

9.0
4.4
40.8
2.1
2.4
1.3
6.8
-2.1
54.4
37.3

1.2
-4.9
12.0
.0
.0
.0
7.2
7.2
-11.3
63.3

1.7
.4
8.0
.2
.1
.3
1.8
.6
3.8
6.0

-.6
-.1
-2.4
-.1
-.1
-.1
.2
.9
-2.1
3.6

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted (n.s.a.).
2. PCE prices in September 2009 are staff estimates.
... Not applicable.
Source: For consumer price index (CPI) and producer price index (PPI), U.S. Dept. of Labor, Bureau of
Labor Statistics; for personal consumption expenditures (PCE), U.S. Dept. of Commerce, Bureau of
Economic Analysis.

II-31

Consumer Prices
(12-month change except as noted; PCE prices in September are staff estimates)

Measures of Core PCE

PCE Prices
Percent

5
4

5

4

4
Total PCE

3

3

2

3

Percent
PCE excluding food and energy
Market-based components
Trimmed mean

4

3

2
Sept.

1

2

2

1

Core PCE

0

0

-1

-1

-2

-2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

Aug.
Sept.
1

1

0

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: For trimmed mean, Federal Reserve Bank of
Dallas; for all else, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

CPI and PCE ex. Food and Energy

PCE Goods and Services
Percent

4

4

Percent

5
4

3

3

CPI

4

3
2

5

3
Services ex. energy

2
Sept.

2
PCE
1

CPI
chained

Sept.
Sept.

1

1

1

0

2

0

-1
-2

0

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor
Statistics; for PCE, U.S. Dept. of Commerce, Bureau of
Economic Analysis.

-3

Total PCE

-2

-3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

PCE excluding Food and Energy
Percent

9

-1
Goods ex.
food and energy

9

6

6

3

3

Percent

5

3-month change, annual rate
4

3-month change, annual rate

5
4

-3

-6
-9

2

0

-3

3

2

Sept.
0

3

1

1
Sept.

0

0

-6

-1

-1

-9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

-2

-2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Dept. of Commerce, Bureau of Economic
Analysis.

II-32

Energy and Food Price Indicators
(Data from U.S. Department of Energy, Energy Information Administration, except as noted)

Total Gasoline Margin
180

Gasoline Price Decomposition
Cents per gallon

Retail price less average spot crude price*

180

160

160

140

140

120

120

100

100

Cents per gallon

450
400

400

350

Oct. 19

80
60

2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff,
less average spot crude price: 60% West Texas Intermediate,
40% Maya heavy crude. Includes gasoline taxes.

300

350
Retail price*
Rack price

300

250

Oct. 19

250

60

200

150
80

200

150

100
50

Gasoline Inventories

100

Average spot crude price**
2005
2006
2007
2008
2009
2010
* Regular grade seasonally adjusted by FRB staff.
** 60% West Texas Intermediate, 40% Maya heavy crude.

50

Natural Gas Prices
Millions of barrels

250

450

250

Dollars per million BTU

18

Adjusted for ethanol use*

Futures price

240

240

16

Oct. 27

18
16

14

14

12

12

230

230

220

220

10

10

210

8

8

6

6

4

4

2

2

Oct. 23

210
200

200

190

190

180

180

2006
2007
2008
2009
2010
Note: Bounds are defined as the monthly mean over the
preceding five years, plus or minus the standard deviation
for each month. Monthly data through June 2009,
weekly data thereafter.
* The RBOB component of total motor gasoline inventories
is adjusted for ethanol use after 2006, boosting reported
stocks; estimated by FRB staff.

0

12-month percent change

8

7

7

6

14

6

5

Food and beverages

Sept.*

2
0

Ex. food and energy

2010

Dollars per bushel

Dollars per bushel

Corn (left scale)
Soybeans (right scale)
Wheat (right scale)

0

12

8

10

3

8

2

6

1

4

Oct. 27

-1

-2

-2
2005
2006
2007
2008
2009
2010
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.
*Staff estimate.

2
0

6
4

0

-1

16
14

10

4

3
1

12

5

4

2009

Spot Prices of Agricultural Commodities

PCE: Food at Home and Core Prices
8

2005
2006
2007
2008
Note: National average spot price.
Source: Bloomberg.

2
2005
2006
2007
2008
Source: Commodity Research Bureau.

2009

2010

0

II-33

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

Percent

Percent
12

6

10

10

5

8

8

4

Quarterly

6

Monthly

5
4
Oct.

Median, next 5 to 10 years
6

6

3

4

2

2

2

1

1

0

0

12

4

3

5

Q3
2
0

Median, next 12 months

1975
1985
1990 1993
1995
1973
1977 1980
1981
1985
1989
1997 2000
2001
Source: Reuters/University of Michigan Surveys of Consumers.

Inputs to Models of Inflation
12

2005
2005

2010
2009

2005 2006 2007 2008 2009 2010

Percent

Quarterly

10

Percent

10

5

Quarterly

4

4

3

8

3

8
FRB/US long-run expectations measure
for PCE inflation

6

6
2

4

Q3

2

4
Distributed lag of
core PCE inflation

2
0

0

Q3

2

1

1

0
0
0
1975
1985
1990 1993
1995
2005
2010
2005 2006 2007 2008 2009
1973
1977 1980
1981
1985
1989
1997 2000
2001
2005
2009
Note: The distributed lag of core PCE inflation is derived from one of the reduced-form Phillips curves used by Board staff.
Source: For the distributed lag of core PCE inflation, FRB staff calculations; for the FRB/US measure, for 2007 forward, the median
projection for PCE inflation over the next 10 years from the Survey of Professional Forecasters (SPF); for 1990 to 2006, the equivalent
SPF projection for the CPI; for 1981 to 1989, a related survey for the CPI conducted by Richard Hoey; and for the period preceding 1981,
a model-based estimate constructed by Board staff. The survey data before 2007 are adjusted down 0.5 percentage point to put the CPI
projections approximately on a PCE basis.

Inflation Compensation from TIPS
Percent
4

Percent
4

4 Weekly

4

3

3

3

2

2

1

1

1

1

0

0

0

0

-1

-1

-1

-1

3

Quarterly
5 to 10 years ahead
Q3

2

-2

Next 5 years

Oct. 27

2

-2
-2
-2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2005 2006 2007 2008 2009 2010
Note: Based on a comparison of an estimated TIPS (Treasury inflation-protected securities) yield curve with an estimated nominal
off-the-run Treasury yield curve, with an adjustment for the indexation-lag effect.
Source: FRB staff calculations.

II-34

Commodity Price Indexes
Journal of Commerce

Ratio scale, 2006 = 100
180
140
Oct. 27

100

100
100
Industrials
60

Metals
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

30

Note: The Journal of Commerce (JOC) industrial price index is based almost entirely on industrial commodities, with a small
weight given to energy commodities. Copyright for JOC data is held by CIBCR, 1994.

Commodity Research Bureau
Ratio scale, 1967 = 100
650
600
550
Oct. 27
500

600
500

450
400

400
Spot industrials
350

300

300
250

200

Futures

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: The Commodity Research Bureau (CRB) spot industrials index consists entirely of industrial commodities, excluding
energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals.

Selected Commodity Price Indexes
(Percent change)

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

2008 1

12/30/08
to
9/15/09 2

9/15/09 2
to
10/27/09

52-week
change to
10/27/09

-41.4
-48.2
-34.3
-14.1
-24.7

43.4
66.3
33.2
6.1
21.9

4.2
7.7
.9
5.3
6.3

20.0
56.1
17.2
3.2
27.2

1. From the last week of the preceding year to the last week of the year indicated.
2. September 15, 2009, is the Tuesday preceding publication of the September Greenbook.

150

II-35

2.9 percent in the preliminary October survey but remained within the narrow range that
has prevailed over the past few years.
At earlier stages of processing, the PPI for core intermediate materials rose 0.9 percent in
September after also increasing in the previous three months; even so, the index has
retraced only a fraction of its decline over the preceding eight months. Commodity
prices (excluding oil and gas) have risen significantly since the beginning of the year,
likely reflecting, at least in part, improvement in global economic activity. Since the time
of the September Greenbook, the Journal of Commerce (JOC) index of industrial
materials has increased more than 4 percent, the JOC index of metals has risen almost
8 percent, and the Commodity Research Bureau (CRB) spot index of industrial materials
has moved up about 1 percent.
Labor Costs
Recent developments in labor costs will be discussed in the Supplement to the Greenbook
because data for the Employment Cost Index and GDP—the latter is used to estimate
compensation per hour—are scheduled to be released after the publication of Greenbook
Part 2.

Last Page of Domestic Nonfinancial Developments

(This page is intentionally blank.)

Domestic Financial
Developments

(This page is intentionally blank.)

Domestic Financial Developments
Overview
Market expectations for the path of the federal funds rate and nominal Treasury yields
were little changed over the intermeeting period. Risk premiums on corporate bonds
declined a bit further, and some spreads in money markets edged lower. Stock prices
were about unchanged and the equity premium remained wide. Meanwhile, net debt
financing by nonfinancial businesses remained muted as C&I loans continued to run off.
In the household sector, the 30-year fixed rate for mortgages was little changed, while
delinquency rates on prime and nonprime mortgages continued to rise. Banks reported
further tightening in lending standards and terms as well as weaker demand for most
types of loans to businesses and households, on net, in the October Senior Loan Officer
Opinion Survey. Credit card ABS issuance stopped amid uncertainty about the FDIC’s
treatment of these securities in the event of a bank failure. Amounts outstanding in most
of the Federal Reserve’s liquidity and credit facilities continued to decline.
Policy Expectations and Treasury Yields
Policy rates implied by federal fund futures market quotes were little changed, on net,
over the intermeeting period. Based on the staff’s standard assumptions about term
premiums, investors apparently continued to expect the federal funds rate to remain in the
current target range until the second quarter of 2010 and to reach about 1¼ percent by the
end of 2010. The expected policy path moved down following the release of the
September FOMC statement and some weaker-than-expected data releases, but increased
amid speeches by Federal Reserve officials and better-than-expected earnings
announcements. Staff models indicate that term premiums on federal funds futures rates
remain elevated, suggesting that investors may expect policy to tighten somewhat later
than the second quarter of 2010. According to the Desk’s primary dealer survey, 14 of
the 18 reporting primary dealers expect the first target rate increase to occur in or after
the third quarter of 2010.
Intermediate- and longer-term nominal Treasury yields were little changed during the
period. Yields on TIPS declined noticeably, however, resulting in an increase in nearterm inflation compensation of 29 basis points. Increases in oil prices may have boosted
near-term inflation expectations, though staff models indicate that an increase in TIPS
liquidity may have been a factor. Five-year forward inflation compensation five years
ahead was little changed.

III-1

III-2
Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2008

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

2009

Instrument
Sept. 12

Aug. 11

Sept. 22

Oct. 27

2008
Sept. 12

2009
Aug. 11

2009
Sept. 22

2.00

.13

.13

.13

-1.87

.00

.00

1.46
1.80

.18
.28

.11
.20

.08
.17

-1.38
-1.63

-.10
-.11

-.03
-.03

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

2.39
2.75

.22
.29

.18
.21

.16
.25

-2.23
-2.50

-.06
-.04

-.02
.04

Large negotiable CDs1
3-month
6-month

2.79
3.09

.32
.46

.25
.35

.22
.31

-2.57
-2.78

-.10
-.15

-.03
-.04

Eurodollar deposits3
1-month
3-month

2.60
3.00

.50
.80

.40
.55

.32
.45

-2.28
-2.55

-.18
-.35

-.08
-.10

Bank prime rate

5.00

3.25

3.25

3.25

-1.75

.00

.00

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

2.24
2.97
3.93

1.20
2.70
3.97

.99
2.44
3.74

.99
2.41
3.72

-1.25
-.56
-.21

-.21
-.29
-.25

.00
-.03
-.02

U.S. Treasury indexed notes5
5-year
10-year

1.33
1.77

1.54
1.89

1.11
1.69

.78
1.51

-.55
-.26

-.76
-.38

-.33
-.18

Municipal general obligations (Bond Buyer)6

4.54

4.65

4.20

4.31

-.23

-.34

.11

4.26
4.36
6.62
7.22
10.66

3.98
4.35
5.41
6.72
10.61

3.67
4.12
5.11
6.36
9.90

3.70
4.04
5.10
6.22
9.44

-.56
-.32
-1.52
-1.00
-1.22

-.28
-.31
-.31
-.50
-1.17

.03
-.08
-.01
-.14
-.46

5.78
5.03

5.29
4.72

5.04
4.52

5.00
4.54

-.78
-.49

-.29
-.18

-.04
.02

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

Private instruments
10-year swap
10-year FNMA7
10-year AA8
10-year BBB8
10-year high yield8
Home mortgages (FHLMC survey rate)
30-year fixed
1-year adjustable

Record high

Change to Oct. 27
from selected dates (percent)

2009

Stock exchange index
Level
Dow Jones Industrial
S&P 500 Composite
Nasdaq
Russell 2000
D.J. Total Stock Index

Date

Aug. 11

Sept. 22

Oct. 27

Record
high

2009
Aug. 11

2009
Sept. 22

14,165
1,565
5,049
856
15,807

10-9-07
10-9-07
3-10-00
7-13-07
10-9-07

9,241
994
1,970
562
10,243

9,830
1,072
2,146
621
11,083

9,882
1,063
2,116
587
10,928

-30.23
-32.06
-58.09
-31.41
-30.87

6.93
6.95
7.43
4.42
6.68

.53
-.77
-1.41
-5.43
-1.40

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect.
6. Most recent Thursday quote.
7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
_______________________________________________________________________
NOTES:
September 12, 2008, is the last business day before Lehman Brothers Holdings filed for bankruptcy.
August 11, 2009, is the day before the August 2009 FOMC monetary policy announcement.
September 22, 2009, is the day before the most recent FOMC monetary policy announcement.
_______________________________________________________________________

III-3

Policy Expectations and Treasury Yields
Interest Rates
Percent

Percent

4.4

FOMC
statement

4.2

ISM index
Nonfarm
payroll

4.0
3.8
3.6

Consumer
confidence

PPI

Retail sales

2.50
2.25
2.00

10-year Treasury yield
(left scale)

1.75

3.4

1.50

3.2

1.25

3.0
2.8

1.00

Mar. 2010 Eurodollar
(right scale)

0.75

2.6

0.50
Sept. 16

Sept. 22

Sept. 28

Oct. 1

Oct. 6

Oct. 9

Oct. 14

Oct. 19

Oct. 22

Oct. 27

Note: 5-minute intervals. 8:00 a.m. to 4:00 p.m. No adjustments for term premiums.
Source: Bloomberg.

Implied Federal Funds Rate

Treasury Yield Curve
Percent

Percent

3.5

5.0

October 27, 2009

4.5

3.0
September 22, 2009

2.5

4.0
3.5
3.0

2.0

2.5

1.5

October 27, 2009

2.0

1.0

September 22, 2009

1.5
1.0

0.5
Sept. Jan.
2009

May Sept.
2010

Jan.

0.5

0.0

May Sept.
2011

0.0
1

3

5

7

10

20

Years ahead

Note: Estimated from federal funds and Eurodollar futures,
with an allowance for term premiums and other adjustments.
Source: CME Group.

Note: Smoothed yield curve estimated from off-the-run Treasury
coupon securities. Yields shown are those on notional par Treasury
securities with semiannual coupons.
Source: Federal Reserve Board.

10-Year Treasury Implied Volatility

Inflation Compensation
Percent

Daily

Sept.
FOMC

Percent
14
12

Sept.
FOMC

Daily

8

4

5 to 10 years ahead
Oct.
27

10

Oct.
27

5

3
2

Next 5 years*
1
0

6

-1

4

-2
Jan. May Sept.Jan. May Sept. Jan. May
2007
2008
2009
Note: 10-year Treasury note implied volatility derived from
options on futures contracts.
Source: Bloomberg.

Jan. May Sept. Jan. May Sept. Jan. May
2007
2008
2009
Note: Estimates based on smoothed nominal and inflation-indexed
Treasury yields.
*Adjusted for lagged indexation of Treasury inflation-protected
securities.
Source: Federal Reserve Board.

III-4

Financial Institutions, Short-Term Funding Markets, and Liquidity Facilities
Bank ETFs

Senior CDS Spreads for Banking Organizations
Jan 2, 2009 = 100

Daily

Large banks
Regional and smaller banks

Sept.
FOMC

Basis points
260
240

Sept.
FOMC

Daily

Large bank holding companies
Other banks

220

450
400

200

350

180

300

160

250

140
Oct.
27

200

120
Oct.
27

100
80

150
100

60
40
May Aug.
Dec.
Apr.
Aug.
2008
2009
Note: Large bank ETF consists of 24 banks; regional and smaller
bank ETF consists of 51 banks.
Source: Keefe, Bruyette & Woods (KBW) and Bloomberg.

50
May Aug.
Dec.
Apr.
Aug.
2008
2009
Note: Median spreads for 6 large bank holding companies and 10
other banks.
Source: Markit.

Libor over OIS Spread

Spreads on 30-day Commercial Paper

Jan.

Jan.

Basis points
Sept.
FOMC

Daily

1-month
3-month
6-month

Basis points
400

Daily

ABCP
A2/P2

350

Sept.
FOMC

800
700

300
250

500

200

400

150

300

100

Oct.
28

600

200

50

Oct.
26

0

0

July Nov. Mar. July Nov. Mar. July
2007
2008
2009
Source: British Bankers’ Association and Prebon.

July
Dec.
May
Oct.
Mar.
Aug.
2007
2008
2009
Note: The ABCP spread is the AA ABCP rate minus the AA
nonfinancial rate. The A2/P2 spread is the A2/P2 nonfinancial
rate minus the AA nonfinancial rate.
Source: Depository Trust & Clearing Corporation.

Usage of TALF and other lending facilities

Federal Reserve Large-Scale Asset Purchases

Billions of dollars
1600

100

Billions of dollars
Sept.
FOMC

Daily

1400

Billions of dollars

300
Weekly

250

1200
200

1000
800

Agency MBS
Agency debt
Treasury securities

Sept.
FOMC

150

600
Other facilities*
(left scale)

400
200

Oct.
27

100

Oct.
28

50

TALF
(right scale)

0

0
Jan.

June Nov.
2007

Apr.
Oct.
2008

Mar.

Aug.
2009

* Includes primary, secondary, and seasonal credit; TAF; PDCF;
dollar liquidity swaps; CPFF; and AMLF.
Source: Federal Reserve Board.

Dec.
Feb.
Apr.
June
Aug.
Oct.
2008
2009
Note: Due to settlement lags and other factors, cumulative
purchases may be substantially higher than current holdings
in the SOMA portfolio.
Source: Federal Reserve.

1200
1100
1000
900
800
700
600
500
400
300
200
100
0

III-5

Financial Institutions and Short-Term Funding Markets
Investor sentiment toward the banking sector deteriorated a bit over the intermeeting
period. While third-quarter earnings results at some large banks were boosted by
revenues in investment banking and securities trading, market participants reportedly
remained concerned about the earnings prospects for the banking sector in an
environment of weak economic activity and rising loan losses. On net, equity prices for
large banks declined about 9 percent, while prices for regional and smaller banks fell
about 4 percent over the period. CDS spreads for large bank holding companies were
about flat, but they widened for regional and smaller banking organizations. According
to the Federal Reserve’s weekly bank balance sheet data, commercial banks added more
than $13 billion to their allowances for loan and lease losses in the third quarter.
Conditions in short-term funding markets eased a bit further over the intermeeting period.
One- and three-month Libor-OIS spreads remained around pre-crisis levels, while sixmonth spreads—still somewhat elevated by historical standards—continued to narrow.
Spreads on A2/P2-rated commercial paper and AA-rated ABCP were little changed, on
net, remaining at the low end of their ranges over the past two years. Overall, year-end
pressures in funding markets appear quite modest; however, there is some evidence of
increased demand for Treasury securities that mature soon after the turn of the year,
suggesting some flight-to-quality demands related to year-end.
Federal Reserve Purchase Programs and Facilities
Over the intermeeting period, total Federal Reserve assets edged up, as increases in
securities outpaced declines in credit extensions under the credit and liquidity facilities.
As of October 28, the Federal Reserve purchased a total of about $105 billion of longterm securities during the intermeeting period, bringing the System’s cumulative
purchases of Treasury securities, agency debt, and agency MBS to $298 billion,
$140 billion, and $977 billion, respectively.1
Usage of Federal Reserve credit facilities declined further over the intermeeting period.
TAF auctions continued to be undersubscribed, and TAF credit extended dropped
29 percent over the intermeeting period. Commercial paper held through the CPFF also
decreased at the end of October when a substantial portion of the paper matured and was
funded outside the program. TALF credit outstanding moved sideways as modest new
1

Although approximately $977 billion of the $1.25 trillion in agency MBS has been purchased to date,
only about $775 billion is currently on the Federal Reserve’s balance sheet due to lags in settlement and
other factors.

III-6

Corporate Yields, Risk Spreads, and Stock Prices
Selected Stock Price Indexes

Expected Real Equity Return and
Long-Run Treasury Yield

Sept. 22, 2009 = 100
235

Daily
Sept.
FOMC

S&P Financial

Percent
14

Monthly

12

185
160
135

10

Expected 10-year real equity return

+

110
Oct.
27

S&P 500

6

85

Oct.
27

60

+
35
Oct.
2008

Jan.

Apr.
July
2009

Oct.

1994

1997

2000

2003

2006

2009

* Off-the-run 10-year Treasury yield less Philadelphia Fed 10-year
expected inflation.
+ Denotes the latest observation using daily interest rates and
stock prices and latest earnings data from I/B/E/S.
Source: Thomson Financial.

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Weekly Friday*

Percent
95

Sept.
FOMC

23

Daily
Sept.
FOMC

85

21
19

75

17

65

15

55

13

45

11
10-year high-yield

35
Oct.
27

9
Oct.
27

25
15

2007

7
5

10-year BBB

5
2005

2

-2
1991

Source: Standard & Poor’s.

2003

4

0

Expected real yield on 10-year Treasury*

July

8

3

2009

2003

* Latest observation is for most recent business day.
Source: Chicago Board of Exchange.

2005

2007

2009

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

Estimated Median Bid-Asked Spread
for Corporate Bonds

Corporate Bond Spreads
Basis points
2100

Daily
Sept.
FOMC

Basis points
500

Daily

450

Sept.
FOMC

1800

400

1500

350
300

1200

250
900

200

High-yield

150

600

10-year high-yield
Oct.
27

10-year BBB

Oct.
27

Investment-grade

300

50

0
2003

2005

2007

2009

Note: Corporate yields from smoothed yield curves based on
Merrill Lynch bond data and spreads measured relative to
comparable-maturity Treasury securities.

100
0

2005

2006

2007

2008

2009

Source: Staff estimate using data from the National Assn. of
Securities Dealers’ Trade Reporting and Compliance Engine.

III-7

loan extensions were offset by early loan repayments. The October 2 TALF subscription
garnered $2.4 billion in loan requests backed by ABS (supporting seven ABS deals
totaling approximately $6.5 billion). The October 21 CMBS TALF subscription saw
$2.1 billion in loan requests to finance legacy assets.
Stock Prices and Corporate Interest Rates
Broad stock-price indexes were about unchanged, on net, over the intermeeting period,
despite an initial wave of third-quarter earnings reports that mostly beat analysts’
forecasts. The staff’s estimate of the expected real equity return over the next 10 years
for S&P 500 firms was little changed at about its average levels during the recession of
the early 1990s. As a result, the gap between the expected return and the real 10-year
Treasury yield—a gauge of the equity risk premium—remained elevated and in line with
weak economic activity. Option-implied volatility on the S&P 500 index was little
changed, on balance.
Over the intermeeting period, corporate bond yields fell a bit, while those on comparablematurity Treasury yields were about flat, leaving spreads on investment- and speculativegrade corporate bonds 12 and 44 basis points lower, respectively. Corporate bond
spreads are now comparable to average levels in the previous recession. Estimates of
bid-asked spreads for investment- and speculative-grade corporate bonds—a measure of
liquidity in the corporate bond market—remained steady at moderate levels. Conditions
in the leveraged loan market continued to improve, as average bid prices rose a bit further
and bid-asked spreads narrowed.
Corporate Earnings and Credit Quality
To date, about half of the firms in the S&P 500 have reported third-quarter earnings, and
thus far most reports have come in well above expectations. On the basis of these reports
and analysts’ estimates for the rest, it appears that earnings per share among S&P 500
firms in the third quarter were on par with second-quarter results, which had been
boosted by some large one-time gains. In addition, revisions to analysts’ expectations of
year-ahead earnings for nonfinancial S&P 500 firms were a bit above zero, on balance, in
mid-October, largely due to the stronger-than-expected earnings reports over the past few
weeks.
Indicators of the credit quality of nonfinancial firms improved a bit in recent months.
The aggregate ratio of debt to assets for nonfinancial corporations ticked lower in the
second quarter, while the aggregate liquid asset ratio rose to around its peak level in

III-8

Corporate Earnings and Credit Quality
S&P 500 Earnings Per Share (Seasonally Adjusted)

Revisions to Expected S&P 500 Earnings

Dollars per share

Percent
24

Quarterly

4

Monthly

MidOct.

22

0

20
-4

18
Q3e

16
-8

14
12

-12

10

All firms
Nonfinancial firms

8

-16

6
4
2000

2003

2006

-20
2003

2009

2005

2007

2009

Note: Index is a weighted average of the percent change in the
consensus forecasts of current-year and following-year earnings per
share for a fixed sample.
Source: Thomson Financial.

e Estimate.
Source: Thomson Financial.

Financial Ratios for Nonfinancial Corporations
Ratio

Bond Ratings Changes of Nonfinancial Companies

Ratio

Percent of outstandings
0.14

0.36

40
Annual rate

Debt over
total assets
(left scale)

0.33

Liquid assets over
total assets
(right scale)

Upgrades

0.12

20
H1
Q3

Q2

0.30
Q2

0.10

0

0.08

20

0.27
0.06

40
Downgrades

0.24
0.04
1989

1993

1997

2001

2005

2009

Note: Data are annual through 1999 and quarterly thereafter; fixed
investment is at an annual rate.
Source: Compustat.

1991

1994

1997

2000

2003

2006

2009

60

Source: Calculated using data from Moody’s Investors Service.

Selected Default and Delinquency Rates

Expected Nonfinancial Year-Ahead Defaults

Percent of outstandings

Percent of liabilities
8

8

Monthly

7

7

6

6

5

5

C&I loan delinquency rate
Q2

4

4

3
Sept.

Bond default rate*

3

2
Oct.

1

2
1

0
0
1991

1994

1997

2000

2003

2006

2009

* 6-month trailing defaults divided by beginning-of-period
outstandings, at an annual rate.
Source: For default rate, Moody’s Investors Service; for
delinquency rate, Call Report.

1994

1997

2000

2003

2006

2009

Note: Firm-level estimates of default weighted by firm liabilities as
a percent of total liabilities, excluding defaulted firms.
Source: Calculated using firm-level data from Moody’s KMV.

III-9

2004. The pace of nonfinancial corporate ratings downgrades by Moody’s moderated
substantially in the third quarter, while the pace of upgrades ticked up. The six-month
trailing bond default rate for all U.S. firms edged down in September and is now below
its peak level in the previous recession. The year-ahead expected default frequency for
nonfinancial firms from Moody’s KMV inched down further in October to just below
2 percent, well off its peak level in March.
Business Finance
Gross issuance of investment-grade bonds by nonfinancial corporations has slowed
somewhat in October, even as speculative-grade firms have continued to issue bonds at a
robust pace. Commercial paper outstanding turned positive, but the gains were not
widespread across programs. C&I loans continued to contract significantly, albeit at a
slower rate than in September. All told, net debt financing by nonfinancial businesses is
on pace to post a small gain in October.
Gross public equity issuance by nonfinancial firms through seasoned and initial public
offerings has been solid in October, though noticeably below its robust September pace.
In the second quarter, equity retirements from estimated share repurchases slowed
further, while retirements from cash-financed mergers remained low. As a result, net
equity issuance in the second quarter stayed positive. In the third quarter and in early
October, announcements of new share repurchase programs were sparse, likely due to
corporations’ continuing efforts to preserve liquidity. By contrast, announcements of
mergers and acquisitions rebounded, boosted by both strategic deals as well as acquirers’
renewed interest in potential opportunities to restructure distressed companies.
Equity issuance by financial firms slowed in October from a solid September pace.
Issuance of bonds by financial firms remained robust, with about 20 percent offered
under the FDIC’s Temporary Liquidity Guarantee Program.2 Citigroup and GE Capital
accounted for all of the FDIC-guaranteed debt issuance.
Commercial Real Estate Finance
The commercial real estate sector remained strained. Outstanding commercial mortgage
debt decreased at an annual rate of nearly 3 percent in the second quarter and recent data
2

The TLGP in its current form will expire on October 31; however, the FDIC announced a modified
extension to the program through April 2010 that is intended as an emergency facility. This extension
carries significant restrictions on the use of the program—issuance approval will be given only on a caseby-case basis (requiring an inability to issue debt in the nonguaranteed market) and will be coupled with
much higher fees.

III-10

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2009
Type of security

Sept.

Oct. p

5.4
.6
4.8

8.1
1.4
6.7

4.2
1.2
3.0

50.1
32.6
5.3
12.2

30.4
13.4
7.4
9.7

39.9
17.1
12.4
10.4

23.0
7.0
8.0
8.0

1.6

-12.4

-.9

2.0

22.0

21.2

12.8

-17.7

-34.6

-42.3

-26.0

8.6
151.7

13.5
45.4

15.9
44.5

5.4
38.9

8.3
52.2

3.5
40.0

2005

5.5
1.6
3.8

3.7
.3
3.4

5.3
.2
5.1

29.3
13.1
6.2
10.1

35.1
17.5
7.5
10.0

27.7
19.5
1.8
6.4

2.4

-.4

10.2

11.1

5.0
170.4

Financial corporations
Stocks1
Bonds2

4.7
1.8
2.9

-.2

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

2008

18.7
8.7
5.2
4.8

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

2007

4.6
1.7
2.8

Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings

2006

H1

5.3
180.6

Q3

Note: Components may not sum to totals because of rounding.
1. Excludes private placements and equity-for-equity swaps that occur in restructurings.
2. Data include regular and 144a private placements. Bond totals reflect gross proceeds rather than par value of original discount bonds.
Bonds are categorized according to Moody’s bond ratings or to Standard & Poor’s if unrated by Moody’s.
3. End-of-period basis, seasonally adjusted.
p Forecast based on preliminary data.
Source: Depository Trust & Clearing Corporation; Thomson Financial; Federal Reserve Board.

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

Billions of dollars
80

Monthly rate, nonfinancial firms
Commercial paper*
C&I loans*
Bonds

80
Monthly rate, nonfinancial firms

60
H1
Oct.

Total

p

40

Public issuance
Private issuance*
Repurchases
Cash mergers

60
40

Total

Q1

Q2

e

Q3

20
20
0
0
-20
-20
-40
-40

-60

-60

-80
2005

2006

2007

2008

2009

* Seasonally adjusted, period-end basis.
p Preliminary.
Source: Depository Trust & Clearing Corporation; Thomson
Financial; Federal Reserve Board.

-80
-100
2005

2006

2007

2008

2009

* Private issuance was revised back to 2005.
e Estimate.
Source: Thomson Financial, Investment Benchmark Report;
Money Tree Report by PricewaterhouseCoopers, National
Venture Capital Association, and Venture Economics.

III-11

Commercial Real Estate
Commercial Mortgage Debt

Commercial Real Estate Sales

Percent change, annual rate

Billions of dollars
24

Quarterly

21

Percent

140
50
120

Sept.

18
15
12

Percent of properties sold
at nominal loss (right scale)

100

40

80

30
Dollar value of all sales (left scale)

9
60
6
3
0
Q2

20
40
10

20
Sept.

-3
0

2000

2002

2004

2006

2008

0
2001

Source: Federal Reserve.

2003

2005

2007

2009

Note: 3-month moving averages.
Source: Real Capital Analytics.

Prices of Commercial Real Estate
Index, 2001:Q1=100
225

NCREIF TBI (quarterly)
Moody’s index (monthly)

Delinquency Rates on Commercial Mortgages
Percent
on Existing Properties

5

Sept.

200

Q2

4

175
Q2

150

3

At commercial
banks*

125

CMBS
2

Aug.

100
75
50

1

At life
insurance
companies

Q2

0

25
1994

1997

2000

2003

2006

2009

1997

Source: NCREIF; MIT Center for Real Estate; Moody’s.

Commercial Mortgage CDS Index Prices
CMBX
Senior AAA

2003

2005

Sept.
FOMC

Junior AAA

BBB-

Feb.

July
2008

Dec.

May
Oct.
2009

Note: Each index corresponds to pools of mortgages
securitized in 2006:H1.
Source: JPMorgan Chase &Co.

2007

2009

REIT Funds Raised

Oct.
27

Sept.
2007

2001

Billions of dollars

Percent

Daily, by rating

Apr.

1999

Note: CMBS are commercial mortgage-backed securities.
*Excluding farmland.
Source: Citigroup; Call Reports; ACLI.

120
110
100
90
80
70
60
50
40
30
20
10
0

15

Quarterly

12

Capital
Debt

9
6
3

2004

2005

Source. NAREIT.

2006

2007

2008

2009

0

III-12

Residential Mortgages
Spread of Mortgage Rate to Treasury Yield

Mortgage Rate and MBS Yield
Percent

Basis points
8.0

Weekly

Sept.
FOMC

30-year conforming
fixed-rate mortgage rate

600

Weekly

7.5

30-yr FRM to 10-yr Treasury
5/1 ARM to 2-yr Treasury

7.0

550

Sept.
FOMC

500
450

6.5

400

6.0
Oct.
21

5.5
Oct.
21

350
300

Oct.
27

250

4.5

MBS yield

5.0

200

4.0

Oct.
21

3.5

150
100
50

Oct.
2006

Apr.

Oct.
2007

Apr.

Oct.
2008

Apr.

Oct.
2009

Oct.
Apr.
Oct.
2006
2007

Apr.

Oct.
Apr.
2008

Oct.
2009

Note: For MBS yield, Fannie Mae 30-year current coupon rate.
Source: For mortgage rate, Freddie Mac; for MBS yield,
Bloomberg.

Note: Spreads are relative to corresponding off-the-run
Treasury yields.
Source: Bloomberg; Freddie Mac.

Agency and Non-Agency MBS Issuance

Prices of Existing Homes

Billions of dollars

Percent change from a year earlier
300

Monthly rate

20

Monthly

15

Non-agency
GSEs
Ginnie Mae

250
10
200
Q2 J.

A.

5
Aug.

150

0
-5

H1

Q1

100

H2

FHFA price index
LP price index
20-city S&P/Case-Shiller price index

Aug.

-10

Aug.

-15

50
-20
2002 2003 2004 2005 2006 2007

2008

2009

0

-25
2003

Source: For non-agency issuance, Inside Mortgage Finance;
for agency, Fannie Mae, Freddie Mac, and Ginnie Mae.

2005

2007

2009

Note: LoanPerformance data are confidential until publicly released.
Source: For FHFA, Federal Housing Finance Agency; for LP,
LoanPerformance, a division of First American CoreLogic; for
S&P/Case-Shiller, Standard & Poor’s.

Delinquencies on Subprime and FHA-Backed
Mortgages

Delinquencies on Prime Mortgages
Percent of loans
Sept.

Monthly

Percent of loans
15
8

Variable-rate
Fixed-rate

Percent of loans
Aug.

Monthly

Sept.

12
FHA (left scale)

9

20
4

15
Subprime (right scale)

Sept.

3

30
25

6

6

35

10

2
5

0
2001

2003

2005

2007

2009

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

0

0
2001

2003

2005

2007

2009

Note: Percent of loans 90 or more days past due or in foreclosure.
For subprime mortgages, rates are for securitized loans.
Source: For FHA-backed mortgages, McDash Analytics; for
subprime mortgages, LoanPerformance, a division of
First American CoreLogic.

III-13

suggest another decline in the third quarter. The dollar value of commercial real estate
sales edged down in September as just under half of properties were sold at a nominal
loss. Commercial property prices decreased 3 percent in August, leaving the index at
about its mid-2003 level and 41 percent below its peak. Delinquency rates on securitized
commercial mortgage pools increased in September to 4.3 percent, more than reversing
the slight decrease in August. Commercial mortgage CDS index prices for senior AAA
pools were about flat, on net, but decreased for junior AAA and BBB-minus pools over
the intermeeting period. No CMBS has been issued this year, but other CRE sectors have
seen some interest from investors. Real estate investment trusts (REITs) have raised over
$15 billion this year in equity and unsecured debt, reportedly to pursue bargains.
Household Finance
The average interest rate on 30-year conforming fixed-rate mortgages stayed near
5 percent over the intermeeting period; spreads between mortgage interest rates and
10-year Treasury yields were little changed. Agency MBS yields were also about
unchanged, on net, and issuance of MBS by the housing-related GSEs was strong again
in August. Anecdotal reports suggest that the tapering of Federal Reserve agency MBS
purchase has, to date, placed only modest upward pressure on MBS yields. No privatelabel MBS have been issued since the beginning of 2008.
According to the repeat-sales index from LoanPerformance (LP), house prices increased
for the fifth consecutive month in August, rising 8.9 percent at an annual rate.
Nonetheless, over the year ending in August, the LP index decreased 10 percent. House
price indexes from the Federal Housing Finance Agency and S&P/Case-Shiller suggest
similar year-over-year rates of decline. Delinquency rates on prime and subprime
mortgages continued to climb, and the delinquency rate for FHA-backed loans rose to
nearly 8 percent in September.
Consumer credit contracted for the seventh consecutive month in August, reflecting
declines in revolving and nonrevolving credit. Consumer ABS issuance decreased in
October for both TALF-eligible and non-TALF-eligible securities. Issuance of credit
card ABS is likely to be subdued until the FDIC clarifies how it would handle these
securities in the event of a receivership of a sponsoring bank.3 The number of credit card
3

Over the intermeeting period, Moody’s and Fitch joined Standard & Poor’s in declining to rate credit
card ABS as AAA (unless the sponsoring bank’s rating is AA or higher) until the FDIC provides guidance
on whether it would repudiate the securitization contract in the event of a bank receivership. The FDIC’s
current guidance establishes a safe harbor from repudiation for ABS that are off-balance sheet under FASB

III-14

Consumer Credit and Mutual Funds
Consumer Credit

Gross Consumer ABS Issuance

Percent change, annual rate
16

3-month change

28

Monthly rate

12

Revolving

24

TALF eligible
Non-TALF

8

20

S.

H1

4
Nonrevolving

Billions of dollars

J.

16

Q2

0

12

-4
Aug.

-16
2005

2006

2007

2008

2006

2007

2008

Millions

Delinquencies on Consumer Loans
Percent
16

Monthly

7

15
Volume of
mail offerings
(left scale)

500

Aug.

Interest
rates
(right scale)

100

Sept.

5

13

Nonrevolving
consumer loans at
commercial banks

12

300

6

Credit card loans
in securitized pools

14

400

200

0

2009

Percent

600

4

* Through October 23.
Note: Credit card, auto, and student loan ABS.
Source: Inside MBS & ABS; Merrill Lynch; Bloomberg;
Federal Reserve.

Credit Card Rates and Volume of Mail Offerings
700

2005

2009

Source: Federal Reserve.

8
O.*

H2

-12
2004

A.

Q1

-8

Q2

3

11
Aug.

10

0

2

Auto loans at captive
finance companies

9
2007

2008

2009

1
1997

1999

2001

2003

2005

2007

2009

Source: For auto loans, Federal Reserve; for credit cards, Moody’s
Investors Service; for nonrevolving consumer loans, Call Report.

Source: Mintel.

Net Flows into Mutual Funds
(Billions of dollars, monthly rate)
Fund type
H1
Total long-term funds
Equity funds
Domestic
International
Hybrid funds
Bond funds
High-yield
Other taxable
Municipals
Money market funds

4

Aug.

2008
H2

Q1

Q2

2009
July

Aug.

Sept.e

Assets
Aug.

11.8
-3.6
-5.0
1.3
1.7
13.8
-0.2
11.1
2.9
56.1

-49.7
-36.0
-20.7
-15.3
-4.7
-9.0
0.1
-7.4
-1.6
59.6

0.5
-14.4
-7.8
-6.5
-2.9
17.8
2.7
11.2
3.9
0.1

46.1
14.2
9.7
4.4
2.3
29.7
2.9
21.1
5.7
-54.6

45.7
9.2
2.3
6.9
1.8
34.7
1.9
26.0
6.8
-50.0

50.0
3.9
-2.0
5.9
3.2
42.9
1.0
32.9
9.1
-55.6

48.2
-10.4
-11.0
0.5
11.0
47.6
1.2
36.2
10.2
-139.9

7,061
4,511
3,375
1,136
577
1,973
167
1,386
420
3,569

Note: Excludes reinvested dividends.
e Staff estimate.
Source: Investment Company Institute.

III-15

Treasury Finance
Foreign Participation in Treasury Auctions

Treasury Auction Amounts

Percent of total issue

Billions of dollars
140
Quarterly

Sept.
FOMC

6-month moving average
120

2-year
3-year
5-year
10-year

Oct.
15

Indirect bids
100

Q3

50
40
30

80
Oct.
15

60

20

40

10

20

Actual foreign allotment

0
2005

2006

2007

2008

0

2009

2001

2003

2005

2007

2009

Note: Indirect bids and actual allotment are a percentage of
the total amount accepted, including the amount tendered to
the Federal Reserve. Moving averages include 2-, 5-, and 10year original auctions and reopenings.
Source: Federal Reserve Board.

Source: U.S. Treasury Dept.

Average Absolute Nominal Yield Curve
Basis points
Fitting Error
Sept.
FOMC

Daily

Daily Treasury Market Volume
Billions of dollars
30

Sept.
FOMC

Monthly average

25

250

200

20

Oct.

150

15
100
10
Oct.
27

50

5
0

2001

2003

2005

2007

2009

0
2004

Note: Calculated from securities with 2 to 10 years until maturity,
excluding on-the-run and first off-the-run securities.
Source: Federal Reserve Board.

2006

2007

2008

2009

Note: October observation is the month-to-date average.
Source: Bloomberg.

Treasury Fails-to-Deliver

Treasury On-the-Run Premium
Basis points
Sept.
FOMC

Monthly average

2005

Billions of dollars

70

Weekly

Sept.
FOMC

3000
2500

60
50

2000

40

1500

30

1000

10-year note
Oct.

20

Oct.
14

10

0

0
2001

2003

2005

2007

2009

Note: Computed as the spread of the yield read from an estimated
off-the-run yield curve over the on-the-run Treasury yield. October
observation is the month-to-date average.
Source: Federal Reserve Board.

500

Q1

Q3
Q1
Q3
Q1
Q3
2007
2008
2009
Source: Federal Reserve Board, FR 2004, Government Securities
Dealers Reports.

III-16

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

2009
Type of security

2005

2006

2007

2008

38.4
34.2
15.6
18.6
4.2

36.1
32.5
10.6
21.9
3.7

40.4
35.5
12.6
22.9
4.9

2.1

2.5

2.4

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

Sept.

Oct. p

41.9
30.7
11.0
19.7
11.2

42.5
29.9
11.1
18.8
12.7

33.0
31.0
14.0
17.0
2.0

7.9

8.4

1.3

H1

Q3

37.5
32.4
14.6
17.8
5.0

36.5
32.9
12.5
20.5
3.6

2.3

4.5

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.
p Forecast based on preliminary data through October 22, 2009.
Source: Thomson Financial.

Ratings Changes
Number of ratings changes
4000
Annual rate

Q1

3200
Q2

Upgrades

2400
1600
800
0
800
Downgrades

1600
1991

1993

1995

1997

1999

2001

2003

2005

2007

2400

2009

Note: Recent upgrades reflect S&P’s change of rating standard.
Source: S&P’s Credit Week Municipal; S&P’s Ratings Direct.

Municipal Bond Yields

Municipal Bond Yield Ratio
Percent

General Obligation over Treasury
9

Weekly

Ratio
1.9

Weekly

8
7
6
Oct.
22

1.6

5

20-year general
obligation

1.8
1.7
1.5

4

1.4
1.3

3
7-day SIFMA
swap index*

1.2

2

1.1

20-year
Oct.
22

1
Oct.
14

0

0.8

-1
2005

2006

2007

2008

2009

* SIFMA is the Securities Industry and Financial Markets
Association.
Source: Municipal Market Advisors; Bond Buyer.

1.0
0.9

2003
Source: Bond Buyer.

2005

2007

2009

III-17

offers sent to households by mail remained steady at low levels in August, but the interest
rate offered on these credit card mailings edged up. The latest readings on delinquency
rates for consumer loans remained high by historical standards.
As in recent months, long-term mutual funds received sizable inflows in September, as
continued outsized flows to hybrid and bond funds more than offset net redemptions of
equity funds. Money market mutual funds experienced further substantial net outflows
last month, as yields on such funds remained extremely low.
Treasury and Agency Finance
Over the intermeeting period, the Treasury auctioned $190 billion of coupon-bearing
securities, including $7 billion in TIPS. The auctions were generally well received,
although the 30-year bond elicited relatively less strong demand. Demand for the reopened 10-year TIPS was strong, and the auction recorded the highest bid-to-cover ratio
since the inception of the TIPS program. Mutual fund flow data indicate that retail
demand for TIPS has risen in recent months relative to its historical average. Foreign
demand at auctions of both nominal and TIPS securities strengthened. As previously
announced, the Treasury ran down the outstanding amount of short-term bills associated
with its balances in the Supplementary Financing Program to about $15 billion; the
reduction in bill supply was reportedly associated with some downward pressure on bill
yields.
Treasury market functioning showed some further signs of improvement over the
intermeeting period. Average absolute fitting errors of the staff’s nominal Treasury
curve—a proxy for unexploited arbitrage opportunities in the nominal Treasury market—
declined slightly over the intermeeting period. On-the-run premiums on the 10-year
Treasury note continued to decline, although they remained significantly above their precrisis levels. Finally, fails-to-deliver in the Treasury market remained low. Trading
volumes in both nominal and TIPS markets increased but remained below those observed
in previous years.
State and Local Government Finance
Conditions in the municipal bond market were little changed over the intermeeting
period. In October, gross issuance of long-term municipal bonds has continued at a
robust pace, while short-term issuance moderated in line with typical seasonal patterns.
regulations. However, credit card ABS will no longer receive off-balance-sheet treatment when FAS
166/167 takes effect in the upcoming months.

III-18

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)1

Aggregate and components

(billions
of dollars),

2007

2008

5.9

8.3

2.7

0.1

4.0

3.0

8,354

Components2
Currency
Liquid deposits3
Small time deposits
Retail money market funds

2.0
4.3
4.3
20.2

5.8
6.9
11.7
13.1

6.9
12.5
-16.6
-22.1

3.4
12.7
-26.5
-33.0

5.3
20.6
-37.9
-38.0

0.6
21.5
-43.1
-46.7

863
5,503
1,133
850

Memo:
Institutional money market funds
Monetary base

40.2
2.0

24.7
70.4

6.4
24.2

-9.6
-2.1

-17.9
67.8

-40.8
109.8

2,341
1,967

M2

Q2

2009
Q3
Sept.

Level

Oct.
(e)

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

Oct.
(e)

III-19

Yields on long-term municipal bonds rose about 11 basis points over the intermeeting
period, and the ratios of yields on long-term municipal bonds to comparable-maturity
Treasury yields were unchanged on net. Rating upgrades in the second quarter again
outpaced downgrades, as rating agencies continued to change the rating scale for
municipalities toward the more lenient scale used for corporate debt.
Money and Bank Credit
M2 expanded at a moderate 4 percent annual rate in September and has risen at an
estimated 3 percent pace in October. While liquid deposits grew rapidly over this period,
small time deposits and retail money market mutual funds continued to contract.
Meanwhile, currency growth averaged 3 percent in September and October amid
moderate demand from abroad. Growth in the monetary base averaged about 89 percent,
primarily reflecting an increase in reserve balances due to additional purchases of longterm assets and the decline in the Treasury’s Supplementary Financing Account.
The runoff in bank credit steepened in September as the decrease in core loans intensified
to an 18 percent annual rate. According to the latest Senior Loan Officer Opinion Survey
on Bank Lending Practices, standards and terms tightened further and demand continued
to decline, on net, for most types of loans in the third quarter (see appendix to this
section). On the business side, C&I loans dropped at a 32 percent pace, with maturities
and steady paydowns reported across a wide variety of industries. Commercial real estate
loans also continued to decrease, reportedly due to widespread paydowns and chargeoffs. Residential mortgage loans on banks’ books also ran off more quickly, with
substantial loan sales to the GSEs continuing to more than offset strong originations.
Revolving home equity loans and consumer loans also contracted, even though
commercial banks continued to bring credit card assets back onto their books. The drop
in total loans at large banks continued to substantially outpace the decline at smaller
banks. The allowance for loan and lease losses rose further at large banks in September,
but it was about unchanged at small banks.
Fifteen depository institutions, with aggregate assets of $5.2 billion, failed over the
intermeeting period. Thus far in 2009, there have been 118 failures, the highest annual
total since 1992.

III-20

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

Level1
Sept. 2009

2007

H1
2009

July
2009

Aug.
2009

Sept.
2009

10.0

4.9

-5.8

-7.1

-6.9

-12.5

9,131

10.8
9.6

4.6
5.2

-7.2
-4.4

-16.8
-8.8

-15.2
-12.8

-18.4
-17.9

6,793
6,036

19.0
9.4

16.3
6.0

-13.9
-1.6

-16.3
-5.8

-26.5
-6.8

-32.0
-9.2

1,411
1,677

5.5
5.6
5.5
6.8
6.5
18.7

-3.0
13.0
-7.9
7.1
5.6
.7

-1.4
6.6
-4.3
.0
-1.7
-25.4

-7.4
-6.5
-7.9
-5.2
-2.3
-76.1

-11.8
-5.3
-14.4
-3.0
-7.4
-34.4

-21.2
-5.7
-27.2
-3.2
-5.8
-21.9

2,099
604
1,496
849
1,245
757

7.7
-5.4
28.1

Total

2008

6.0
15.0
-4.2

-.9
-1.7
.2

23.4
48.1
-10.1

18.6
33.7
-2.9

4.8
11.9
-5.5

2,338
1,399
939

Loans2
Total
Core
To businesses
Commercial and industrial
Commercial real estate
To households
Residential real estate
Revolving home equity
Closed-end mortgages
Consumer
Memo: Originated3
Other
Securities
Total
Treasury and agency
Other4

Note: Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data have been
adjusted to remove the effects of mark-to-market accounting rules (FAS 115) and the initial consolidation of certain variable
interest entities (FIN 46). Data also account for the effects of nonbank structure activity of $5 billion or more.
1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels.
2. Excludes interbank loans.
3. Includes an estimate of outstanding loans securitized by commercial banks that retained recourse or servicing rights.
4. Includes private mortgage-backed securities; securities of corporations, state and local governments, and foreign governments;
and any trading account securities that are not Treasury or agency securities.
Source: Federal Reserve.

Total Loans at Commercial Banks

Allowance for Loan Losses at Commercial Banks
Billions of dollars

Billions of dollars
4500

NBER
Monthly
peak

140

NBER
Monthly
peak

120

4000

100

Large*

3500

Large*

Sept.
Sept.

3000
Small**

Small**

2500

Feb.

June Oct.
2008

Feb.

June Oct.
2009

60
40

2000
June Oct.
2007

80

20
June Oct.
2007

Feb.

June Oct.
2008

Feb.

June Oct.
2009

Note: The NBER peak is the last business cycle peak as defined by the National Bureau of Economic Research (NBER).
* Large domestically chartered commercial banks are defined as the top 25 domestically chartered commercial banks, ranked by domestic
assets as of the previous commercial bank Call Report to which the H.8 release data have been benchmarked.
** Small domestically chartered commercial banks are defined as all domestically chartered commercial banks not included in the top 25.
Source: Federal Reserve.

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices
The October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed
changes in the supply of and demand for loans to businesses and households over the past three
months. The survey also included three sets of special questions: The first asked banks about the
reasons for the decline in commercial and industrial (C&I) loans over the first eight months of
2009, the second asked banks about the status of commercial real estate (CRE) loans on their
books that were scheduled to mature by September of this year, and the third asked banks about
potential changes in credit card lending due to implementation of the Credit Card Accountability
Responsibility and Disclosure (Credit CARD) Act. This appendix is based on responses from
57 domestic banks and 23 U.S. branches and agencies of foreign banks.1
In the October survey, domestic banks indicated that they continued to tighten standards and
terms over the past three months on all major types of loans to businesses and households.
However, the net percentages of banks that tightened standards and terms for most loan
categories continued to decline from the peaks reached late last year. The exceptions were prime
residential mortgages and revolving home equity lines of credit, which registered little change in
the net fractions of banks that had tightened standards.2 A small net fraction of branches and
agencies of foreign banks eased standards on C&I loans, while a significant net fraction
continued to tighten standards on CRE loans. Demand for most major categories of loans at
domestic banks reportedly continued to weaken, on balance, over the past three months. This
weakening was somewhat less widespread than in the July survey for C&I loans, CRE loans, and
nontraditional mortgages; approximately the same for consumer loans; and significantly more
widespread for home equity lines of credit. However, banks reported stronger demand, on net,
for prime residential real estate loans. Demand for C&I and CRE loans at foreign banks
continued to weaken, on balance, but the weakening was somewhat less widespread than that in
the July survey.
In response to a special question on the sources of the decline in C&I lending this year, the two
sources that domestic banks cited most often as being “very” important were decreased
originations of term loans and decreased draws on revolving credit lines. In response to a second
special question, banks indicated that, of the CRE loans on their books that were scheduled to
1

Respondent banks received the survey on or after October 6, 2009, and their responses were due by
October 20, 2009.
2
For questions that ask about lending standards, reported net percentages equal the percentage of
banks that reported tightening standards (“tightened considerably” or “tightened somewhat”) minus the
percentage of banks that reported easing standards (“eased considerably” or “eased somewhat”). For
questions that ask about demand, reported net percentages equal the percentage of banks that reported
stronger demand (“substantially stronger” or “moderately stronger”) minus the percentage of banks that
reported weaker demand (“substantially weaker” or “moderately weaker”).

III-A-1

III-A-2

Measures of Supply and Demand for Commercial and Industrial Loans,
by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for Commercial and Industrial Loans
Percent

July
survey

100
80

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

60
40
20
0
-20
-40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks’ Costs of Funds
Percent
100
80
60
40
20
0
-20
-40
-60
-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial and Industrial Loans
Percent
60
40
20
0
-20
-40
-60
-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

III-A-3

mature by September of this year, more loans had been extended than refinanced both for
construction and land development loans and for loans secured by nonfarm nonresidential real
estate. In response to special questions concerning the Credit CARD legislation passed in May
2009, the majority of banks reported that they had yet to fully comply with the new law. Banks
indicated that they expected to tighten many of the terms and conditions of credit card loans as a
result of the legislation, with the notable exception of penalty fees and the length of the grace
period for payments, which banks, on net, reported they would ease.
Lending to Businesses
Questions on commercial and industrial lending. The net fraction of banks that reported
tightening standards on C&I loans to firms of all sizes was about 15 percent, about one-half of the
net fraction that reported doing so in the July survey and substantially below the peak of around
80 percent that was reported in the October 2008 survey.
The net fractions of domestic respondents that reported having tightened selected terms on C&I
loans remained fairly elevated, but generally continued to fall from the highs reported in late
2008. Approximately 40 percent of banks, on net, reported increasing spreads of loan rates over
their cost of funds for large and middle-market firms and about 45 percent reported boosting such
spreads on loans to small firms. By comparison, about 60 percent and 65 percent of banks, on
net, reported raising spreads for loans to large and middle-market firms and to small firms,
respectively, in July. Nearly 40 percent of respondents reported increasing the premiums charged
on riskier loans to firms of all sizes. By contrast, only between 5 and 20 percent of banks, on net,
reported decreasing the maximum maturity of loans or credit lines, decreasing the maximum size
of credit lines, and tightening terms on loan covenants for loans to firms of all sizes. Indeed,
some banks reported easing a few loan terms.
The predominant reasons cited for tightening credit standards or terms for C&I loans were the
same as those reported in the previous three surveys. Respondents that tightened standards most
commonly cited the reason as being a reduced tolerance for risk, followed by an economic
outlook that was less favorable or more uncertain, and a worsening of industry-specific problems.
Each of the six domestic banks that reported easing loan terms in the latest survey cited more
aggressive competition from other banks or nonbank lenders as the most important reason for
doing so.
Notable net fractions of domestic banks reported weaker demand for C&I loans from firms of all
sizes, though the weakening was less widespread than in the July survey. In July, roughly
50 percent of domestic banks reported weaker demand for C&I loans to firms of all sizes; that
fraction fell to roughly 30 percent and to 35 percent for loans to larger and to smaller firms,
respectively, in October. The predominant reasons for reduced demand were similar to those
cited in the July survey and included decreases in the need to finance investment in plant and
equipment, inventories, accounts receivable, and merger and acquisition activity.

III-A-4

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

July
survey

100

80

60

40

20

0

-20

-40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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

40

20

0

-20

-40

-60

-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

III-A-5

For the first time since the April 2007 survey, a positive net share of U.S. branches and agencies
of foreign banks reported having eased standards for C&I loans, though about 90 percent reported
that their standards remained basically unchanged. About 15 percent of foreign respondents, on
net, reported narrower spreads of loan rates over their cost of funds and lower premiums charged
on riskier loans. Like the domestic banks, each of the five foreign banks that reported easing
standards or terms cited more aggressive competition from other banks or nonbank lenders as the
most important reason for having done so. Only about 5 percent of foreign banks, on net,
reported a decrease in demand for C&I loans.
Special Question on Commercial and Industrial Lending
The October survey included a special question on C&I lending, motivated by the significant
decline in C&I loans outstanding over the first eight months of 2009. The question focused on
the possible sources of the contraction in C&I lending, and it complements a special question in
the July survey that asked banks to rank the relative importance of various supply and demand
factors in explaining the decline in C&I loans. Domestic respondents to the July survey
predominantly cited demand factors, including lower loan demand from creditworthy borrowers
because their funding needs had declined, followed by a deterioration in the credit quality of
potential borrowers.
Respondents to the October survey indicated that decreased originations of term loans and
reduced draws on revolving credit lines were generally more important sources of declines than
paydowns of outstanding C&I loan balances. More specifically, on a weighted basis, about
40 percent and 30 percent of banks, respectively, reported that decreased originations of term
loans and decreased draws on revolving credit lines were “very” important sources of the decline
in C&I loans this year.3 About 15 percent of banks reported that paydowns of previous draws on
revolving credit lines were a “very” important source of the decline. Respondents also pointed to
increased prepayments of term loans, paydowns of bridge loans, and increased loan write-downs
as either “very” or “somewhat” important sources of the decline in C&I loans this year. In
contrast, relatively few domestic banks, on a weighted basis, reported that increased sales or
syndications of outstanding loans and increased incidence of term loans that matured and were
not rolled over or extended were important factors.
Among the foreign respondents that indicated that C&I lending had declined at their banks this
year, about 50 percent, on a weighted basis, reported that decreased origination of term loans was
a “very” important source of the decline.4 In weighted terms, about 30 percent and 15 percent of
3

Data from commercial bank Call Reports were used to weight individual responses by the amount of
C&I loans booked in domestic offices outstanding at the end of the second quarter. The pattern of
responses was similar on an unweighted basis.
4
Data from FFIEC 002 reports for U.S. branches and agencies of foreign banks were used to weight
individual responses by the amount of C&I loans booked in domestic offices outstanding at the end of the
second quarter.

III-A-6

Measures of Supply and Demand for Residential Mortgage Loans

Net Percentage of Domestic Respondents Tightening Standards for Residential Mortgage Loans
Percent

Percent

100

100

80

80

60

60

40

40

All residential
20

20

0

0

Prime
Nontraditional
-20

-20

1990

1992

1994

1996

1998

2000

2002

2004

2006

Q2

Q4

2007

Q2

Q4

2008

Q2

Q4

2009

Note: For data starting in 2007:Q2, changes in standards for prime and nontraditional mortgage loans are reported separately.

Net Percentage of Domestic Respondents Reporting Stronger Demand for Residential Mortgage Loans
Percent

Percent

80

80

Prime

All residential

60

60

Nontraditional

40

40

20

20

0

0

-20

-20

-40

-40

-60

-60

-80

-80

1990

1992

1994

1996

1998

2000

2002

2004

2006

Q2
2007

Q4

Q2

Q4

2008

Note: For data starting in 2007:Q2, changes in demand for prime and nontraditional mortgage loans are reported separately.

Q2
2009

Q4

III-A-7

foreign banks, respectively, also reported paydowns of bridge loans and paydowns of draws on
revolving credit lines as being “very” important. More than one-half of the respondents, on a
weighted basis, also reported an increased incidence of term loans not being rolled over or
extended, and increased write-downs as “very” or “somewhat” important sources of the decline in
C&I loans.
Questions on commercial real estate lending. About 35 percent of domestic respondents
reported tightening standards on CRE loans in the latest survey, a slightly smaller fraction than
the 45 percent that reported having done so in July. The net percentage of respondents that
reported weaker demand for CRE loans remained high by historical standards at about 45 percent,
but this fraction dropped almost 20 percentage points relative to July. About 20 percent of
foreign respondents, on net, reported tighter credit standards and weaker demand for CRE loans,
down somewhat from the July survey.
Special Question on Commercial Real Estate Lending
The October survey included a special question on the status of CRE loans on banks’ books that,
at the beginning of 2009, were scheduled to mature by September of this year. The question
focused on construction and land development loans and loans secured by nonfarm nonresidential
real estate. Among the domestic respondents that reported possessing such maturing CRE loans,
about 85 percent, on a weighted basis, reported that they had extended more than one-fourth of
them.5 In contrast, weighted fractions of only about 15 percent and 25 percent of domestic banks
reported that they had refinanced more than one-fourth of maturing construction and land
development loans and maturing loans secured by nonfarm nonresidential real estate,
respectively. In general, large banks tended to extend more of their maturing CRE loans than
small banks.
Lending to Households
Questions on residential real estate lending. About 25 percent of banks, on net, reported in the
latest survey that they had tightened standards on prime residential real estate loans over the past
three months. This figure is slightly higher than in the July survey but is still significantly below
the peak of about 75 percent that was reported in July 2008. For the third consecutive quarter,
banks reported that demand for prime residential real estate loans strengthened on net. About
30 percent of banks reported tightening standards on nontraditional mortgage loans, which
represents a 15 percentage point decline in net tightening from the July survey. Only about
5 percent of domestic respondents, on net, reported weaker demand for nontraditional mortgages,
the smallest net fraction reporting so since the survey began to include questions on the demand
for nontraditional mortgages in April 2007.
5

Data from commercial bank Call Reports were used to weight individual responses by the amount of
CRE loans booked in domestic offices outstanding at the end of the second quarter for each type of CRE
loan.

III-A-8

Measures of Supply and Demand for Consumer Loans

Net Percentage of Domestic Respondents Tightening Standards for Consumer Loans
Percent

July
survey

100
80
60

Credit card loans
Other consumer loans

40
20
0
-20

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Net Percentage of Domestic Respondents Reporting Increased Willingness to Make Consumer Installment Loans
Percent
40

20

0

-20

-40
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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

1992

1994

1996

1998

2000

2002

2004

2006

2008

III-A-9

The net percentage of respondents that tightened standards on revolving home equity lines of
credit was about 30 percent, roughly the same as in the previous survey. A net fraction of
30 percent of banks reported weaker demand for home equity lines of credit, compared with
about 15 percent in the previous survey.
Question on consumer lending. About 15 percent of respondents reported tightening standards
for credit card loans to individuals or households, down from the 35 percent that reported doing
so in the previous survey and the smallest net percentage reported since April 2008. Sizable net
fractions of banks—between 30 and 40 percent—continued to report a tightening of various terms
and conditions on credit card loans, including credit limits, interest rate spreads, minimum
required credit scores, and willingness to grant loans to customers who do not meet credit-scoring
thresholds.
About 15 percent of banks, on net, reported having tightened standards on consumer loans other
than credit card loans, down from the 35 percent that reported having done so in the previous
survey and the smallest net percentage of tightening recorded since January 2008. With the
exception of interest rate spreads, which nearly 35 percent of banks reported having widened,
reports of tighter terms on other consumer loans were also less widespread.
For consumer loans of all types, 25 percent of banks reported weaker demand, roughly the same
as in the July survey.
Special Question on the Credit CARD Act of 2009
The October survey included a special question on banks’ expectations with regard to the effects
of the Credit CARD Act of 2009. Of the banks that make credit card loans, 75 percent did not
expect to be compliant with the provisions of the legislation until February 2010, when most of
the provisions will go into effect, while the rest were either already compliant or expected to be
compliant by the end of this year. Weighted by credit card loans booked in domestic offices,
about 90 percent did not expect to be in compliance until February 2010.6
As a result of the act, banks reported that they expect to tighten (or have already tightened) many
terms on credit card loans for both prime and nonprime borrowers, although small fractions of
banks reported, on net, that they expected to lengthen grace periods for prime borrowers and
decrease penalty fees for both prime and nonprime borrowers. The decrease in penalty fees is
consistent with the provisions of the legislation that restrict the conditions under which banks
may impose such fees. When responses are weighted, significantly larger fractions of banks
6

Data from commercial bank Call Reports were used to weight individual responses by the amount of
credit card loans booked in domestic offices outstanding at the end of the second quarter for all the
commercial bank subsidiaries within a given parent holding company. Many credit card loans made at the
commercial banks in the sample are booked at various other commercial bank subsidiaries within the parent
holding company.

III-A-10

reported easing penalty fees for both prime and nonprime borrowers.
For both prime and nonprime borrowers, majorities of respondents expected to increase interest
rate spreads, raise minimum required credit scores, reduce credit limits, and reduce the extent to
which loans will be granted to customers who do not meet credit-scoring thresholds.
Expectations for considerable degrees of tightening were more common for loans to nonprime
borrowers. On a weighted basis, substantial majorities of respondents, on net, expected to
increase interest rate spreads, raise minimum required credit scores, and reduce credit limits.
The survey also included two questions on interest rate practices for credit card loans. A net
fraction of about 35 percent of banks expected to increase the use of risk-based pricing. A similar
fraction of banks expected to increase the use of variable interest rates and decrease the use of
fixed interest rates, but when weighted by credit card loans outstanding, this fraction is about
75 percent.
Questions on existing credit lines. As in the July survey, sizable net fractions of domestic
respondents reported decreasing the sizes of credit lines for existing customers on most types of
accounts. For certain loan categories, such as home equity lines of credit, commercial
construction lines of credit, and lines of credit for financial firms, the net percentages of banks
reporting such adjustments increased.
As in the July survey, considerable net fractions of foreign respondents reported decreasing the
sizes of credit lines for existing customers on C&I credit lines, commercial construction lines of
credit, and lines of credit to financial firms. Nevertheless, the net percentages of foreign banks
reporting such changes edged down from their levels in the July survey.

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International Developments

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International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit narrowed to $30.7 billion in August, from
$31.9 billion in July, the result of a small increase in exports and a decrease in imports.

The value of exports of goods and services moved up 0.2 percent in August, following a
robust 2.5 percent gain in July. The August increase was primarily accounted for by an
increase in exports of services, with exports of goods exhibiting only a very mild
increase. Among major categories, exports of aircraft showed a marked decline, with
exports of computers and consumer goods recording more modest decreases. In contrast,
exports of automotive products and industrial supplies showed noteworthy increases.
Higher automotive exports likely reflected the continuing recovery in U.S. automakers’
production, while the increase in exports of industrial supplies reflected higher prices.

IV-1

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The average value of exports in July and August surged 19.2 percent at an annual rate,
the first quarterly increase since the third quarter of 2008. With the exception of aircraft,
all major categories of exports rose. About two thirds of the overall gain was accounted
for by significant jumps in exports of automotive products and industrial supplies, with
the increase in the latter partly reflecting higher prices.
The value of imports of goods and services decreased 0.6 percent in August, after
rebounding strongly in June and July. The August decrease was led by a decline in the
value of oil imports, which wholly reflected lower volumes, as prices moved up. Imports
of aircraft and consumer goods also recorded notable decreases. In contrast, imports of
machinery, automotive products, and industrial supplies increased significantly. As with
exports, the increase in automotive imports continued to reflect, in part, a recovery in
North American auto production, while the increase in imports of industrial supplies
reflected higher prices.
The average value of imports in July and August rose 26.6 percent at an annual rate,
interrupting a string of three consecutive quarterly declines. Nearly all major categories
rose. Imports of automotive products and oil recorded the largest increases, although the
increase in the value of oil imports reflected higher prices, as volumes remained
essentially flat. Imports of computers, machinery, industrial supplies, and services
showed somewhat more moderate increases, while imports of aircraft registered a small
decrease.
Prices of Internationally Traded Goods
Non-oil imports. Prices for imported core goods rose 0.7 percent in September, the
largest increase since July 2008. The increase largely reflected higher prices of materialintensive goods, and in particular, prices for non-fuel industrial supplies. Prices for
finished goods were essentially flat across all major subcategories.
In the third quarter, core import prices, as measured by the Bureau of Labor Statistics
(BLS), increased 2¼ percent at an annual rate, primarily due to a more than 7 percent
increase in prices of material intensive goods. Prices of finished goods increased a
modest ¼ percent, as lower prices for consumer goods largely offset higher prices for
automotive products and capital goods.

IV-5

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IV-7

Oil. Following a 1.6 percent increase in August, the Bureau of Labor Statistics price
index of imported oil was flat in September, increasing only 0.1 percent. The spot price
of West Texas intermediate (WTI) crude oil averaged just above $69 per barrel in
September, not materially different from the previous month’s average price. In recent
weeks, however, spot WTI has increased sharply, closing most recently on October 27 at
$79.55 per barrel. The upward movement in oil prices is surprising, although some
analysts have pointed to a more positive assessment of global growth prospects as well as
U.S. data pointing to a more rapid pace of inventory drawdown than had previously been
expected.
Exports. Core exports prices fell 0.4 percent in September following a 0.8 percent
increase in August. The lower September prices primarily reflected a decline in the
prices of exported agricultural products. Prices for finished goods were flat.
In the third quarter, core export prices on a BLS basis increased 3¾ percent at an annual
rate. An 11½ percent increase in prices for industrial supplies contributed to the increase.
Prices for exports of finished goods rose almost 2 percent, led by higher prices for
consumer goods.

U.S. International Financial Transactions
Since the previous Greenbook, we have received Treasury data on international financial
transactions which indicate the recent trend of portfolio reallocations toward riskier
securities continued in August. Private foreign investors sold U.S. Treasury securities
and purchased U.S. equities, and U.S. investors purchased a sizable amount of foreign
equities. Foreign official purchases of U.S. Treasury securities remained strong in
August, although purchases were below the levels recorded at the height of the financial
crisis.
Foreign official inflows in August (see line 1 of the table “Summary of U.S. International
Transactions”; see also the figure “Foreign Official Financial Inflows through August
2009”) eased a bit to $21 billion.
. More recent custody data from the FRBNY
suggest that the pace of foreign official inflows into Treasury securities accelerated in
September and October, consistent with reports of greater intervention activity by foreign
monetary authorities.

IV-8

Foreign private demand for U.S. securities remained weak in August, as private
foreigners on net sold $16 billion in U.S. securities (line 4 of the table and the middleright panel of the figure “Private Securities Flows through August 2009”). Foreign
private investors purchased modest amounts of agency debt (line 4b) and corporate stocks
(line 4d), but continued to sell U.S. corporate debt (line 4c). In the years prior to the
financial crisis, foreign investors had typically purchased a significant percentage of new
issues of U.S. corporate debt. Despite the pick-up in issuance of U.S. corporate debt in
2009, however, foreign investors have on net sold a significant amount of corporate
bonds. This lack of interest may reflect the larger share of recent issuance accounted for
by nonfinancial firms, as foreign investors have tended to favor debt issued by financial
firms.
Financial outflows associated with U.S. investors’ net purchases of foreign securities
slowed in August (line 5 and the bottom panels of the figure “Private Securities Flows
through August 2009”). Strong net purchases of foreign stocks by U.S. investors were
offset by net sales of foreign bonds.
Central banks’ outstanding drawings on the Federal Reserve swap lines declined further
to $33 billion as of October 23, which reflects further normalization of the funding
markets. The official inflows associated with the unwinding of these swaps are included
in line 2. There were small net inflows associated with net private bank borrowing in
August (line 3).

IV-9

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Foreign Financial Markets
The trade-weighted index of the exchange value of the dollar against the major foreign
currencies has depreciated slightly on net since the September Greenbook. Some further
unwinding of the crisis-induced shift toward the dollar due to continued improvements in
funding conditions and global economic outlook was subsequently reversed after the
weaker-than-expected U.S. consumer confidence data revived concerns over the pace of
an economic rebound. The dollar depreciated 1 percent on balance against the euro and
the Canadian dollar and 6 percent against the Australian dollar, but appreciated 1 percent
against the yen and sterling. Dollar weakness against the euro prompted President
Trichet of the European Central Bank (ECB) to call for a strong dollar. Despite
interventions by several Asian and Latin American central banks to stem appreciation of
their currencies, the exchange value of the dollar against the other important trading
partners of the United States has decreased slightly, with the dollar down 4 and 5 percent
against the Brazilian real and Russian ruble, respectively, and 2 percent against the
Korean won.
Expected policy rates (from OIS forwards) 12 months hence rose broadly in most major
industrial economies on the improved foreign economic outlook. The Reserve Bank of
Australia (RBA) became the first central bank among G-20 countries to hike rates since
August 2008, raising its policy rate 25 basis points to 3.25 percent. Further tightening by
the RBA is expected in November and December. Norges Bank also raised its policy rate
25 basis points to 1.5 percent. Expected policy rates have also risen in other major
foreign industrial economies, despite indications that central banks will continue to
remain accommodative for some time. The ECB left its policy rate unchanged at 1
percent, as expected. Its second 12-month long-term refinancing operation was again
conducted at a fixed rate of 1 percent, which temporarily dampened market expectations
that the ECB will begin to hike rates within the next year. The Bank of Canada kept its
key policy rate unchanged and reiterated its intention to maintain its stance through mid2010. The Bank of England kept its policy rate and its asset purchase program
unchanged, as expected. Although the October Monetary Policy Committee minutes
were seen by participants as suggesting earlier rate increases than had been previously
expected, as well as a diminished likelihood for an increase in asset purchases, the
weaker-than-expected Q3 GDP data pared back such expectations.
Ten-year sovereign yields were little changed in Europe and increased 8 and 12 basis
points in Japan and Canada, respectively. Headline stock indexes fluctuated in a narrow
range in most major industrial economies. Equity prices in most major emerging market

IV-13

economies rose 4 to 16 percent, but in China and South Korea they were little changed.
CDS spreads on emerging market sovereign debt continued to decline.

IV-14

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Developments in Advanced Foreign Economies
Incoming indicators for the third quarter have been positive, on balance, across the
advanced foreign economies with the notable exception of the United Kingdom, where
GDP unexpectedly contracted. Purchasing managers indexes (PMIs) rose solidly in the
third quarter, reaching levels consistent with a stabilization or moderate expansion of
output, and flash PMIs continued to rise in the euro area in October. Consumption
spending, with the help of fiscal stimulus in many cases, appears to have risen over the
third quarter. Surveys suggest that consumer confidence also continued to climb,
although it remains below pre-recession levels, in part because households remain
concerned over labor market conditions. Trade volumes are up from their early-year
lows, and in some countries, the rebound in trade has been accompanied by an increase in
production. The production bounce has been especially pronounced in Japan.
Twelve-month consumer price inflation stayed negative in all major economies, with the
exception of the United Kingdom, where it was 1.1 percent in September. The European
Central Bank (ECB), the Bank of Japan (BOJ), and the Bank of England (BOE) kept
policy rates on hold and continued implementing their asset-purchase programs, but BOJ
officials signaled an intention to let some credit-easing programs expire at the end of the
year.

IV-20

IV-21

Incoming data for Japan suggest that external demand remained the main driver of the
recovery in the third quarter. Although both imports and exports remain well below 2008
levels, international trade surged in the third quarter with real exports and real imports
rising at annual rates of 52 percent and 39 percent, respectively. Domestic demand also
improved in the third quarter. With the help of government stimulus, consumption,
which rose 3 percent in the second quarter, appears to have continued to rise in the third
quarter. Consumer confidence has risen back to levels last seen in the fourth quarter of
2007.
Industrial production rose in August for the sixth consecutive month, and machinery
orders appear to have stabilized over the summer, suggesting that private investment
might have leveled out after contracting sharply over the past year. Recent indicators of
business confidence, including the BOJ’s Tankan index, show that pessimism among
Japanese firms eased somewhat in the third quarter, although business sentiment remains
near record lows.
The overall good news for the Japanese economy is moderated somewhat by data from
the labor and housing markets. Despite the recent downtick in the unemployment rate to
5.5 percent in August from 5.7 percent in July, the more reliable ratio of job openings to
applicants (the number of officially posted job openings relative to the number of
officially registered job seekers) held at a 46-year record low in August. The housing

IV-22

market also remains depressed, with housing starts dropping more than 9 percent in
August from the previous month to a new series low.
On the consumer price front, 12-month headline inflation was unchanged in August at
negative 2.2 percent, a record low. Energy prices continued to put downward pressure on
inflation, but they were not solely to blame. Inflation excluding food and energy prices
fell 0.9 percent over the 12 months ending in August.
The BOJ held its target for the overnight call rate at 0.1 percent over the intermeeting
period but signaled that it intends to let some of its credit-easing programs expire at the
end of the year, citing improved conditions in the markets for commercial paper and
corporate bonds. Newly appointed Prime Minister Hatoyama has promised to transform
the economy into one where growth is generated by domestic spending rather than by
exports alone. In October, the administration unveiled a set of emergency measures
intended to create 100,000 jobs by the end of the fiscal year. The stimulus package
focuses on easing regulatory hurdles and helping job-seekers find work in the agricultural
and environmental sectors.

IV-23

IV-24

On balance, recent indicators for the euro area suggest a further improvement in
economic conditions. Measures of economic sentiment continued to improve and flash
PMIs rose further in October, generally indicating expansion. Industrial production,
excluding construction, has been particularly strong, increasing 1 percent in August, the
fourth consecutive monthly increase. New industrial orders grew 2.0 percent in August.
On a less positive note, in August, real retail sales declined 0.2 percent, and the
unemployment rate edged up to 9.6 percent. Exports fell about 6 percent in August, led
by an almost 9 percent decline in manufactured products. In addition, the pace of car
registrations slowed from more than 12 percent in the second quarter to 1.4 percent in the
third, reflecting the unwinding of schemes to support car sales.
Developments of credit to the nonfinancial sector have been mixed, with rising credit to
the household sector and falling credit to nonfinancial corporations. In September, loans
to nonfinancial corporations fell 0.2 percent from the previous month, the fifth
consecutive monthly decline. Loans to households added to recent gains, increasing
0.3 percent from the previous month.

IV-25

Twelve-month euro-area inflation was negative 0.3 percent in September, following
negative 0.2 percent in August. The downturn in energy prices (which fell 11 percent in
September from a year earlier) has been an important factor in the decline of inflation.
Excluding food and energy, September inflation was 1.2 percent.
The Governing Council of the ECB kept its benchmark policy rate unchanged at
1 percent at its October 8 meeting. Since the ECB’s record liquidity injection of
€442 billion in one-year funds in June, the overnight EONIA rate has tended to be just
above the 0.25 percent rate on the ECB’s deposit facility. The second one-year operation
on September 30 elicited less interest, with allotments totaling €75 billion. The ECB has
continued to implement plans to buy €60 billion worth of covered bonds and had
purchased about €20 billion by late October.

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In the United Kingdom, real GDP contracted 1.6 percent in the third quarter according to
the preliminary estimate, bringing the cumulative drop since the beginning of the
recession to 6.0 percent. The output of services industries fell 1.1 percent despite strong
performance from retail sales during the quarter. The output of manufacturing and
construction industries is estimated to have fallen 0.9 percent and 4.7 percent,
respectively.

The moderation in the pace of GDP contraction was accompanied by tentative signs of
stabilization in the labor market. The Labor Force Survey measure of the unemployment
rate was unchanged at 7.9 percent in the three months to August. Short-term
unemployment (durations 0 to 6 months) fell somewhat relative to the previous three
months. A similarly-sized increase in unemployment at longer durations suggests that
finding new employment remains difficult. Expenditures on machinery, equipment, and
infrastructure appear especially weak. According to the Bank of England (BOE) Agents’
Summary of Business Conditions, investment intentions of manufacturing and services
firms remained depressed in September. New construction orders fell back in August.
Measures of credit to the nonfinancial sector continue to be weak. Bank lending to
private nonfinancial corporations fell 3.8 percent in the 12 months to August, a pace
approaching the low observed in the wake of the early 1990s recession. Net lending
secured by dwellings was near its recent trough in August despite some improvement in

IV-28

house purchases and prices since the beginning of the year. House prices fell close to
20 percent between late summer 2007 and early spring 2009 but have since risen around
6 percent. Housing equity withdrawal as a share of households’ post-tax disposable
income was negative 3 percent in the second quarter, compared with about 5 percent in
2007.
Price pressure remains subdued. Headline inflation tumbled to 1.1 percent in September
on a 12-month basis, its lowest reading since June 2003, as sharp increases in utility
prices last year dropped out of the equation. Producer input prices fell 6.5 percent over
the same period, up from double-digit declines at the beginning of the summer. In
contrast, in August, the 12-month change in average weekly earnings excluding bonuses
posted its first increase in a year.
At its October meeting, the BOE left its policy rate unchanged and maintained its current
asset-purchase programs. As of October 22, the BOE had acquired £170.6 billion in
assets through the creation of bank reserves, the vast majority of which (£168.6 billion)
were gilts. The central bank is expected to complete its £175 billion asset-purchase
program by the end of the month and decide on a further extension at the November
meeting of its monetary policy committee.

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Canadian indicators for the third quarter are positive, on balance. After faltering early in
the year, trade volumes have rebounded. Over the three months ending in August,
exports and imports increased at annual rates of 23 percent and 43 percent, respectively.
Both exports and imports were supported by a surge in automotive trade. Machinery and
equipment imports were also up sharply. Likely reflecting, in part, the strength in
international trade, manufacturing shipments rose solidly. The Canadian housing market
is also rebounding forcefully. Total housing starts rose more than 15 percent, not at an
annual rate, in the third quarter. Monthly GDP declined negligibly in July.
Canadian labor-market conditions showed modest improvement. Total employment
declined slightly in the third quarter as a whole, but rose modestly in both August and
September. The September gain was driven by a sharp increase in full-time employment;
prior to the September release, almost all of the stability in Canadian employment was
attributable to increases in part-time work. With the increase in full-time employment,
hours worked rose 1.6 percent in September, the first increase in three months. The
unemployment rate fell 0.3 percentage point to 8.4 percent, the first monthly decline
since the beginning of the labor-market downturn in the fall of 2008.
Consumer prices fell 0.9 percent in the 12 months ending in September. The decrease
was due primarily to a decline in energy prices. Inflation excluding food and energy was
0.9 percent, near its lowest level of the past several years.

IV-31

The Bank of Canada kept its policy rate at 0.25 percent and has reiterated its intention,
conditional on the outlook for inflation, to keep rates at this level until at least the end of
the second quarter of 2010.

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Economic Situation in Other Countries
Data since the September Greenbook indicate that the economic recovery in the emerging
market economies continued over the third quarter. Domestic demand appears to be
playing an important role in supporting recovery across Asia and parts of South America.
China’s economy continued to roar ahead, supported by accommodative policies, and
growth was surprisingly strong in Korea and Singapore. Ample government credit has
supported demand in Brazil. The Mexican economy showed signs of a revival in activity
after a year of output contraction. Inflation, although declining, remains a concern in
Mexico and Brazil, but inflation pressures appear to be contained in Asia with the major
exception of India. Imports have generally continued to rise and there are firmer signs of
export growth.
In China, the staff estimates that real GDP increased 9.8 percent at an annual rate in the
third quarter, as activity continued to be supported by monetary and fiscal stimulus. (The
official, headline four-quarter growth rate was 8.9 percent.) In September, industrial
production was nearly 12 percent above its year-earlier level, and the official PMI
reading remained solidly in the expansionary range. Real retail sales growth remained
strong, and fixed-asset investment was up more than 33 percent from September of last
year. Robust domestic demand has contributed to rising imports, which are now within
10 percent of their pre-crisis peak. Exports have also increased, but in September, they
remained 17 percent below their year-earlier levels.
In October, Premier Wen Jiabao explicitly stated that the recovery of the Chinese
economy is on firm ground. He stressed that in the coming months authorities will focus
on striking the appropriate balance between maintaining growth, restructuring the
economy, and guarding against inflation. As in recent months, loan growth in September
was around 1 percent on a month-over-month basis, considerably down from the pace in
the first half of the year, but a level still supportive of economic growth; the value of
outstanding loans was 34 percent higher than a year ago. Food prices moved higher in
the third quarter, pushing quarterly headline inflation up to 1.2 percent at an annual rate,
whereas inflation measured on a four-quarter basis remained negative.

IV-34

In India, recent indicators point to solid growth in the third quarter. The pace of
recovery of the manufacturing sector has been surprisingly swift, mostly driven by a
sharp rise in the demand for investment goods and consumer durables, particularly autos.
The merchandise trade deficit, which had narrowed sharply during the crisis, has widened
during the past few months as the domestic-demand-led recovery has caused imports to
grow faster than exports. However, weak credit demand raises some concerns that the
recovery may prove to be tenuous.
Consumer price inflation spiked in July and August to just under 11 percent on a
12-month basis, while wholesale price inflation, which is more closely followed in India,
turned positive in September after several months of falling prices. The monsoon season
was one of the driest in decades and put upward pressure on food prices in recent months.
In late October, the central bank removed the extraordinary liquidity measures that had
been provided during the crisis, while leaving its key policy rates unchanged.

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In the newly industrialized economies (NIEs), third-quarter Korean real GDP rose
12.3 percent, boosted by a sharp moderation in inventory drawdown. 1 Consumption and
fixed investment decelerated from the second quarter. Preliminary data indicate that
growth remained at a double-digit level in Singapore, reflecting strong exports and
stabilizing domestic demand. The trade surpluses in Singapore, Korea, and Taiwan—
which had risen sharply during the crisis because imports collapsed more sharply than
exports—narrowed again in the third quarter as brisk domestic demand growth led
imports to bounce back faster than exports.
Inflation has risen a little from low or negative rates in the region. Inflationary pressures
have not presented a threat in the near term, but the reduced degree of economic slack has
led observers to believe that central banks in the region, particularly Korea, will tighten
monetary policy in coming months. Policymakers have also expressed concerns about
potential asset bubbles and to date have addressed these concerns with prudential
measures.

1

The NIEs are Hong Kong, South Korea, Singapore, and Taiwan.

IV-38

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In the Association of Southeast Asian Nations (ASEAN-4), economic recovery
continued into the third quarter, albeit at a slower pace than in the previous quarter. 2
Within the region, the recovery of Thailand’s economy appears the most tenuous.
Domestic demand appears to be supporting growth in Indonesia. In contrast, domestic
demand was weak in Thailand as well as the Philippines, where remittances declined over
the July-August period. In Thailand and Malaysia, industrial production fell in August
after several months of growth, and in each case, was about 12 percent below the peaks
attained in early 2008. Trade balances in the region were generally flat or deteriorated
slightly, as the pace of recovery in imports exceeded the pace of recovery in exports.
Consumer prices increased on a monthly basis in August and September. As a result, on
a 12-month basis, inflation in Indonesia and the Philippines edged up, and in Thailand
and Malaysia became less negative. With inflation subdued, central banks maintained
their policy rates unchanged.

2

The ASEAN-4 are Indonesia, Malaysia, the Philippines, and Thailand.

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In Mexico, data suggest that activity began to revive in the third quarter following four
quarters of decline in real GDP. Industrial production was up, on balance, over the JulyAugust period, boosted by auto production for the export market. Accordingly, overall
exports were up in the third quarter through August. In September, the manufacturing
PMI continued to climb and moved into the expansion range. Although business
confidence has picked up, consumer confidence remained weak.
Weak domestic activity has helped mitigate inflationary pressures in recent months,
bringing 12-month headline and core inflation down to just below 5 percent. However,
inflation remains above the 2 to 4 percent inflation target range. Balancing concerns
about inflation against the still-fragile state of the economy, the Bank of Mexico kept its
policy rate on hold at its mid-October meeting. In early September, the Calderon
government introduced a bill that envisions far-reaching reforms to public finances.
However, the lower house unexpectedly watered down the tax provisions considerably,
fueling concern that Mexico’s government would continue to be heavily dependent on oil
revenues amid a trend of declining oil production. That development fueled speculation
that Mexico’s credit risk rating will be reduced. In response, the Senate, which had been
expected to accept the lower house provisions, is now expected to review the bill and has
until the end of October to decide on the tax provisions.

IV-44

In Brazil, data releases indicate that the recovery continued in the third quarter,
supported by higher commodity prices and expansionary fiscal policies. The
manufacturing PMI continued to climb through September and remained in the range
indicating expansion. Industrial production climbed further through August, but was still
10 percent below its September 2008 peak. Production was supported by strong domestic
demand, particularly for autos and appliances, which have been boosted by temporary
government tax incentives. Domestic demand also continued to be supported by rapid
loan growth, particularly government-directed credit. The trade surplus narrowed in the
third quarter, as exports expanded at a slower pace than imports.
Headline and core inflation both fell in September, coming in at 4.3 percent and
5 percent, respectively, on a 12-month basis. At its October 21 meeting, the central bank
of Brazil held its policy rate at 8¾ percent, where it has been since last July. However,
there has been considerable speculation in recent weeks that soon the central bank will
raise reserve requirements to tighten credit conditions and that the central bank will raise
its policy rate in early 2010.
Strong net capital inflows continued through late October, fueling upward pressures on
the currency. In late October, as a result of official purchases of foreign exchange to
stem the appreciation of the real, international reserves reached a record high of
$230 billion. The government imposed a 2-percent tax on portfolio capital inflows to
stem currency appreciation. Analysts have questioned how effective the tax will be in the
longer term in curbing capital inflows and whether the move will hinder financial sector
development.

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In Russia, economic activity began to rebound in the third quarter following three
quarters of decline. Industrial production was up 22 percent at an annual rate in the third
quarter. Retail sales were flat in the third quarter, but consumer confidence has shown
improvement in recent months. The unemployment rate ticked down in September, to a
seasonally-adjusted 8 percent, from 9 percent in May. Consumer prices rose just
0.3 percent in September bringing headline consumer price inflation down to 10.7 percent
on a 12-month basis, the lowest in two years. Higher oil prices have supported a strong
ruble. The central bank of Russia has allowed some currency appreciation but also has
been accumulating reserves over the past few months.

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Abbreviations–Part 2

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Abbreviations—Part 2
ABCP

asset-backed commercial paper

ABS

asset-backed securities

ACLI

American Council of Life Insurers

AMLF

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility

ARM

adjustable-rate mortgage

ASEAN-4

Association of Southeast Asian Nations (Indonesia, Malaysia,
the Philippines, and Thailand)

BEA

Bureau of Economic Analysis, Department of Commerce

BLS

Bureau of Labor Statistics, Department of Labor

BOE

Bank of England

BOJ

Bank of Japan

BOP

balance of payments

CARD

Credit Card Accountability Responsibility and Disclosure (Act)

CD

certificate of deposit

CDS

credit default swap

C&I

commercial and industrial

CMBS

commercial mortgage-backed securities

CPFF

Commercial Paper Funding Facility

CPI

consumer price index

CPIP

construction put in place

CRB

Commodity Research Bureau

CRE

commercial real estate

DI

depository institution

ECB

European Central Bank

EONIA

euro overnight index average

E&S

equipment and software

ETF

exchange-traded fund

FASB

Financial Accounting Standards Board
V-1

V-2

FDIC

Federal Deposit Insurance Corporation

FHA

Federal Housing Administration, Department of Housing and Urban
Development

FHFA

Federal Housing Finance Agency

FHLMC

Federal Home Loan Mortgage Corporation (Freddie Mac)

FNMA

Federal National Mortgage Association (Fannie Mae)

FOMC

Federal Open Market Committee; also, the Committee

FRB

Federal Reserve Board

FRBNY

Federal Reserve Bank of New York

FRM

fixed-rate mortgage

GDP

gross domestic product

GM

General Motors

GSE

government-sponsored enterprise

IP

industrial production

ISM

Institute for Supply Management

JOC

Journal of Commerce

JOLT

Job Openings and Labor Turnover Survey

Libor

London interbank offered rate

LP

LoanPerformance

MBS

mortgage-backed securities

MPU

microprocessor unit

NABE

National Association of Business Economists

NAR

National Association of Realtors

NBER

National Bureau of Economic Research

NCREIF

National Council of Real Estate Investment Fiduciaries

NFIB

National Federation of Independent Business

NIEs

newly industrialized economies (Hong Kong, South Korea, Singapore,
and Taiwan)

NIPA

national income and product accounts

nsa

not seasonally adjusted

V-3

OIS

overnight index swap

OPEC

Organization of the Petroleum Exporting Countries

PC

personal computer

P&C

Productivity and Costs

PCE

personal consumption expenditures

PDCF

Primary Dealer Credit Facility

PMI

purchasing managers index

PPI

producer price index

RADGO

real adjusted durable goods orders

RBA

Reserve Bank of Australia

REIT

real estate investment trust

s.a.a.r.

seasonally adjusted annual rate

SLOOS

Senior Loan Officer Opinion Survey on Bank Lending Practices

SOMA

System Open Market Account

SPF

Survey of Professional Forecasters

TAF

Term Auction Facility

TALF

Term Asset-Backed Securities Loan Facility

TARP

Troubled Asset Relief Program

TIPS

Treasury inflation-protected securities

TLGP

Temporary Liquidity Guarantee Program

WTI

West Texas Intermediate

Last page of Part 2


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102