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Prefatory Note
The attached document represents the most complete and accurate version
available based on original copies culled from the files of the FOMC Secretariat at the
Board of Governors of the Federal Reserve System. This electronic document was
created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions
text-searchable. 2 Though a stringent quality assurance process was employed, some
imperfections may remain.
Please note that this document may contain occasional gaps in the text. These
gaps are the result of a redaction process that removed information obtained on a
confidential basis. All redacted passages are exempt from disclosure under applicable
provisions of the Freedom of Information Act.
1
In some cases, original copies needed to be photocopied before being scanned into electronic format. All
scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly
cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial
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2
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Confidential (FR) Class II FOMC
Part
1
October 31, 2001
CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Summary and Outlook
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Confidential (FR) Class II FOMC
October 31, 2001
Summary and Outlook
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Domestic Developments
The economy clearly was quite weak before September 11, and the effects of the
attacks appear to have been sufficiently strong to lead to a contraction in real
GDP. BEA estimates that real GDP declined at an annual rate of 0.4 percent in
the third quarter, and we believe that the contraction is likely to deepen in the
current quarter. Businesses appear to have become much more pessimistic and
have moved quickly to trim expenses by cutting capital spending, employment,
and inventories. Although sales of motor vehicles apparently have surged in
response to the substantial incentives from the major automakers, spending on
other goods appears to have been lackluster. On net, we expect real GDP to fall
at an annual rate of almost 2-1/2 percent in the current quarter and to be about
unchanged in the first quarter of 2002.
The unprecedented events of the last six weeks and the attendant uncertainty
render the shape or timing of an upturn difficult to foresee with any clarity. To
be sure, a number of precursors of recovery have been put in place. First, the
cumulative easing in the stance of monetary policy will provide support for
activity. Second, the Congress seems likely to agree to a significant package of
fiscal stimulus in addition to the tax cuts and spending increases that already
have been enacted. Third, the current round of inventory liquidation will
eventually run its course and give a significant boost to production at some point
in the future. That said, the near-term impediments to recovery remain
considerable and include the large decline in the stock market over the past year
and a half, the relatively weak growth of foreign economies, and the negative
shock to business and consumer confidence. We project that, on balance, real
GDP will begin to rise again by the middle of next year and to accelerate over
the forecast period: Real GDP increases 2-1/2 percent in 2002 and 3-3/4 percent
in 2003.
The unemployment rate is forecast to move a bit above 6 percent by the middle
of next year and then to recede gradually below 6 percent by the end of 2003.
Despite the appreciable slack in resource utilization that is expected to prevail
over the next two years, we project core inflation to slow only modestly. This
forecast reflects our expectation that structural productivity will increase less
than it did in recent years.
Key Background Factors
The path for the federal funds rate through 2002 is assumed to be 25 basis
points lower than in the September Greenbook; the funds rate is then assumed to
increase gradually over 2003 as the economic recovery gains momentum.
Futures markets appear to expect an easier stance of monetary policy through
the middle of next year, but then a more prompt and larger reversal, than is
assumed in the staff projection. Our forecast of little change in longer-term
Treasury and mortgage interest rates by the end of the forecast period reflects a
balancing of the upward rate pressure stemming from expansionary fiscal policy
I-2
Part1: Summary and Outlook, October 31, 2001
and rising economic growth with the downward pressure from reduced inflation
expectations. The decline in bond yields is a tad less than that assumed in the
September Greenbook largely because our baseline fiscal policy assumptions
are now more in line with what market participants apparently are assuming.
The operation of financial markets has mostly recovered from the shocks set in
motion by the terrorist attacks, although liquidity in corporate and government
bond markets is somewhat below normal. Credit risk is still an issue, and even
though rate spreads have declined recently, investors remain highly selective.
Indeed, the level of spreads on more marginal credits remains high, and we do
not expect an appreciable narrowing until market participants see more clearly
prospects for a sustained pickup in economic activity and improvement in
profits.
The gain in equity prices over the intermeeting period has left broad stock
indexes about 10 percent above the levels that we had expected to prevail as we
entered the fourth quarter. The earnings performance consistent with our
forecast appears to be weaker than what market participants anticipate, and our
best guess is that we will see an erosion in stock prices at some point in coming
months. Our baseline assumption is that equity prices will turn up before the
middle of 2002, as investors begin to anticipate a stronger economy, but the
rebound in share values is anticipated to be modest compared with past cyclical
experiences.
The events of September 11 and their aftermath continue to alter the outlook for
fiscal policy in important ways. To date, the Congress has passed an emergency
appropriations bill and a package of direct assistance and loan guarantees for the
airline industry.1 And a consensus has emerged to do even more, despite the
virtually certain consequence of deepening an already substantial on-budget
deficit and the increasingly plausible risk of running a unified deficit. For the
purposes of this forecast, we have assumed cumulative stimulus with total
budget costs of $112 billion in fiscal 2002 and $104 billion in fiscal 2003
relative to the current services policies in place before September 11; in the last
Greenbook the costs were $52 billion and $76 billion, respectively. Compared
1. We assume that, of the $40 billion in emergency budget authority already approved,
$20 billion will be used to fund the defense spending initiatives in fiscal years 2002 and 2003
that the Administration had proposed before the attacks. The other $20 billion in new budget
authority is expected to be used primarily to fund some additional defense spending, federal
antiterrorism programs, and grants to help states and localities pay for post-disaster cleanup; the
effects on outlays are expected to be spread roughly evenly between fiscal years 2002 and 2003.
Regarding the separate airline rescue package, $5 billion of cash assistance will show through in
outlays in fiscal 2002. The airline legislation also included loan guarantees of up to $10 billion;
the subsidy value of the guarantees eventually will be included in the budget accounts.
Domestic Developments
I-3
Federal Receipts and Outlays
(Billions of dollars, fiscal years, unified basis)
Item
2001
2002
2003
Outlays
Previous
1,863
1,852
1,984
1,976
2,049
2,052
Receipts
Previous
1,990
1,988
1,986
2,046
2,063
2,091
127
136
2
70
14
38
-34
-30
-161
-98
Surplus, deficit (-)
Total
Previous
On-budget
Previous
-165
-143
with last Greenbook, we have added to our package a second tax rebate-paid in
the first quarter of 2002 and targeted at low-income tax filers who did not
receive the full benefit of the first rebate. The cost of this provision is
$14 billion in fiscal 2002, consistent with the bill that has passed the House.
Also in line with that bill, our expanded package includes a temporary tax
incentive for investment in equipment and software that allows firms to expense
30 percent of the cost of eligible capital items ordered during the three years
following September 11, 2001. Our package includes additional spending for
extended unemployment insurance benefits, increased subsidies for health
insurance, and some additional federal purchases for increased security and
infrastructure.
The temporary expensing provision has a major influence on the contour of the
projection. To illustrate this influence, we later present an alternative simulation
that omits the temporary expensing provision; this simulation produces
substantially slower output growth in 2002 and 2003.
Together with the softer economy, our new fiscal package implies a marked
reduction in the unified budget surplus, from $127 billion in fiscal 2001 to
$2 billion in fiscal 2002 and $14 billion in fiscal 2003; on-budget deficits (that
is, excluding the Postal Service and social security) are forecast to deepen from
$34 billion in fiscal 2001 to $165 billion in fiscal 2003.
Measured against the currencies of a broad group of our trading partners, the
real trade-weighted foreign exchange value of the dollar has risen about
1 percent since the last Greenbook, despite negative news on the state of the
U.S. economy. In light of this development, we project a flat path for the real
I-4
Part 1: Summary and Outlook, October31, 2001
dollar over the forecast period, compared with the 1 percent depreciation
assumed in the September Greenbook.
Incoming data on economic activity abroad, especially in Asia, have been
weaker than we had expected, and as a result, we have marked down the
annualized growth rate of foreign real GDP in the second half of this year by
about 1/2 percentage point. Next year, we anticipate a gradual pickup in
economic activity abroad, with foreign real GDP increasing 2 percent, down
about 1/4 percentage point from the September Greenbook. In general,
monetary easing abroad and the modest recovery in the United States should
provide some support for foreign economic activity next year. We are
forecasting a further recovery in 2003, with foreign GDP up 3-1/2 percent,
stimulated by the projected rebound in U.S. economic activity.
The price of crude oil, which declined shortly after September 11, has remained
largely unchanged since the September Greenbook. Tracking recent futures
quotes, we now project that the spot price of WTI will average a little more than
$22 per barrel in the fourth quarter of this year, a projection similar to that in the
September Greenbook. Thereafter, the spot price of WTI is projected to decline
only about $1 per barrel, roughly half the price decline assumed in the
September Greenbook. This difference owes largely to a greater likelihood of
reduced future supplies from OPEC-which is talking more assertively about
cutting future production-and from heightened Middle East uncertainties.
Recent Developments and the Near-Term Economic Outlook
As noted earlier, we are now expecting real GDP to decline at an annual rate of
about 2-1/2 percent in the fourth quarter-a downward revision of
1-3/4 percentage points from our September Greenbook projection. The
contraction in capital spending in the current quarter appears likely to be much
sharper than we had previously anticipated, and ongoing efforts by firms to deal
with the inventory overhang are likely to continue to depress production in the
months immediately ahead. Real GDP is projected to be roughly flat in the first
quarter of next year, and we do not expect clear signs of an upturn in production
to be evident before the spring.
Industrial production is projected to drop in both the current quarter and the first
quarter of 2002. Apparently in anticipation of a retrenchment in sales after the
incentives expire, motor vehicle producers stepped down assemblies sharply in
October from the third-quarter pace, and we anticipate that production will
continue to run near that lower level through the remainder of the quarter.
Vehicle production is then forecast to decline further in the first quarter. We
also should begin to see marked and sustained reductions in aircraft production.
Outside transportation, cutbacks in factory output are expected to be widespread
I-5
Domestic Developments
Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
Measure
Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Business fixed investment
Government outlays for consumption
and investment
2001:Q4
Sept.
Oct.
2002:Q1
Sept.
Oct.
GB
GB
GB
GB
-.7
-1.9
.4
-11.5
-10.9
-2.4
-3.2
1.3
-16.2
-22.3
-.1
-.9
.1
-5.3
-5.6
-.1
-1.6
-.6
-5.8
-6.3
4.7
7.9
3.5
2.8
Contribution to growth,
percentage points
Inventory investment
Net exports
.5
-.4
-.8
-.3
.4
-.3
1.3
-.5
through the first quarter of next year, as businesses move aggressively to
eliminate inventory overhangs.
The BLS will publish the employment report for October on Friday, and given
the sharp rise in new claims for unemployment insurance, we anticipate another
large decline in payrolls. We are projecting a cumulative decline in private
nonfarm employment of close to 3/4 million over the October-to-December
period, followed by additional job losses in the first quarter of 2002. As a result,
the unemployment rate is projected to move up sharply, to 5.4 percent in the
fourth quarter and to 5.9 percent in the first quarter.
We estimate that, among the components of final demand, consumer
expenditures rose at an annual rate of only 1-1/2 percent in the third quarter,
reflecting the steep declines in September retail sales and the drop in unit sales
of light motor vehicles. We assume some bounceback in the fourth quarter from
the depressed level of spending that followed the terrorist attacks. Indeed,
automakers are reporting that sales of light vehicles in October skyrocketed to
19-1/2 million units (annual rate) as households responded to the special zeropercent financing packages; elevated sales should last through mid-November,
when the new incentive plans are scheduled to expire. We estimate that the
incentives will boost unit sales nearly a million units on net in the fourth quarter,
but the temporary nature of the program likely is pulling forward sales from
future months, and the resultant payback period is expected to extend into the
second quarter of next year.
I-6
Part1: Summary and Outlook, October 31, .2001
We believe that this summer's tax rebates are providing a lift to consumption
expenditures in the current quarter. An additional round of tax rebates, the
scheduled tax rate reductions, and higher transfer payments will likewise
stimulate spending early next year. Even so, total real PCE edges down in the
first quarter. This reflects the payback in auto sales, the lagged effects of the
huge decline in stock market wealth, and the pessimism about economic
prospects.
Business spending on equipment and software declined at an annual rate of
nearly 13 percent in the third quarter. An across-the-board plunge in orders of
nondefense capital goods excluding aircraft in September points to a continued
substantial decline in real E&S expenditures over the next few months. Among
the components of investment, there is yet little sign of a turnaround in hightech spending; indeed the enormous decline in September orders for
communications equipment suggests that at least a portion of the high-tech
overhang persists, and we forecast that real high-tech spending will decline
through early next year. Also, investment in commercial aircraft has been hit
hard by the effects of the terrorist attacks. For other types of equipment,
spending is likely to post another noticeable decline through the first quarter of
next year. Summing up the pieces, expenditures for business equipment and
software are projected to drop at an annual rate of about 20 percent this quarter
and about 5 percent next quarter.
The decline in business investment has spread to outlays on nonresidential
structures, which decreased sharply in the third quarter. Vacancy rates for office
buildings and industrial structures have risen to the highest levels in more than
five years, and the slump in oil prices has dimmed the outlook for oil and gas
drilling. As a result, real expenditures on nonresidential structures are projected
to fall at an annual rate of about 30 percent in the current quarter and of close to
10 percent in the first quarter of 2002.
Residential investment expenditures edged down in the third quarter. Despite
the support provided by lower mortgage rates, the evident weakness in income,
employment, and wealth is anticipated to restrain demand during the fourth
quarter. Indeed, adjusted permits for single-family construction dropped in
September to the lowest level since the summer of 2000, suggesting a
significant slowing in expenditures for residential structures in the months
ahead.
Real federal government consumption and investment spending, boosted by the
recently enacted emergency supplemental, is projected to step up sharply in the
fourth quarter; spending receives an additional lift in the first quarter because of
increases in expenditures on infrastructure and security. Emergency spending
by state and local governments for cleanup and repair is anticipated to add to the
Domestic Developments
I-7
rise in real spending in that sector. Still, the weaker budget positions of these
governments are likely to restrain other types of state and local spending.
The levels of exports and imports dropped sharply in the third quarter, in part
reflecting the disruptions associated with the terrorist attacks, and are projected
to edge down a bit further in the fourth quarter. Both remain depressed by the
weakness in economic activity in the United States and among our major trading
partners. Arithmetically, real net exports are anticipated to subtract about 1/4
percentage point from the change in real GDP in the fourth quarter of this year
and 1/2 percentage point in the first quarter of next year.
Core PCE inflation in the third quarter was held down by BEA's treatment of
insurance payments resulting from the events of September 11, and we expect to
see an offsetting jump in the current quarter. In the first quarter of 2002, we
look for core PCE prices to increase at an annual rate of 1-1/2 percent, about the
average pace of the previous two quarters. Core CPI inflation is projected to
stay at an annual rate of around 2-1/2 percent in the near term. The total PCE
price index is projected to rise at a rate of about 1-1/2 percent in the fourth
quarter despite a drop in energy prices of about 25 percent. In the first quarter
of next year, with the transitory influence of insurance payments no longer a
factor and the decline in energy prices becoming much smaller, the total PCE
price index is expected to rise about 1-1/2 percent.
The Longer-Term Outlook for the Economy
The outlook for economic activity in 2002 and 2003 has been revised upward in
this forecast, reflecting the added fiscal stimulus, a higher projected path for the
stock market, and a marginally easier monetary policy. After having increased
at an annual rate of about 2-3/4 percent in the second quarter of 2002, real GDP
rises at an average pace of 3-1/2 percent in the second half and then
3-3/4 percent in 2003.
Over the projection period, final demand is supported by the lagged effects of
monetary easing and fiscal stimulus, a reduction in energy prices, and the
waning of the negative effects on consumer and business sentiment of the
terrorist attacks. However, even after factoring in the recent rally, household net
worth has taken an enormous hit over the past year and a half. All else being
equal, the accompanying restraint on consumption growth is enough to boost the
personal saving rate about 1 percentage point next year.
Lagging somewhat the projected acceleration in output, the jobless rate is
expected to crest at 6.1 percent in the first half of next year and then to slip
below 6 percent late in 2003-a level more than 1/2 percentage point above our
estimate of the NAIRU. Although the capacity utilization rate in manufacturing
gradually rises to about 76 percent by the end of 2003, it remains 5 percentage
I-8
Part 1: Summary and Outlook, October 31, 2001
Projections of Real GDP
(Percent change at annual rate from end of preceding period
except as noted)
2002
Measure
H1
Real GDP
Previous
H2
2003
1.3
.6
3.5
3.3
3.7
3.5
.5
.2
2.7
2.9
3.2
3.2
1.5
.6
2.5
2.5
3.2
3.2
Residential investment
Previous
-1.5
-1.6
5.5
5.5
2.4
2.5
BFI
-3.7
-3.9
6.5
4.1
9.2
6.9
Government purchases
Previous
3.4
4.0
3.6
4.3
3.1
3.1
Exports
Previous
-1.1
.4
4.9
5.9
6.8
6.8
Imports
Previous
4.6
3.4
8.9
6.6
9.8
8.3
Final sales
Previous
PCE
Previous
Previous
Contribution to growth,
percentage points
Inventory change
Previous
Net exports
Previous
.8
.4
.8
.4
.4
.3
-.7
-.4
-.7
-.3
-.6
-.4
points below its longer-run average. Against such a background, wage and
price pressures will remain weak, and indeed, core inflation is projected to edge
lower.
Household spending. As noted earlier, real PCE is projected to contract
slightly in the first quarter of next year. Thereafter, several powerful factors are
expected to support a more robust pace of consumer spending over the
remainder of the forecast period. Real disposable income will receive a boost
from the assumed fiscal actions as well as from lower energy prices. By 2003,
Domestic Developments
the drag on consumption growth from depressed sentiment and lower wealth
should have dissipated, and with income and employment prospects improving,
consumption spending is projected to accelerate. Indeed, with a cyclical
rebound in spending on durable goods, the growth in total PCE outpaces that in
real income in 2003, and the personal saving rate declines slightly.
Residential investment is projected to rise slowly, on balance, over the next two
years. After declining through early next year, housing demand should
strengthen in the second half of 2002 and in 2003 in response to renewed job
growth and still-low mortgage rates. Starts of new single-family units are
forecast to reach a trough of about 1.20 million units (annual rate) in the current
quarter and then gradually rise to 1.33 million units in 2003. Starts of
multifamily units are also expected to decline in the current quarter, before
stabilizing at a rate of 340,000 units late next year.
Equipment and Software
In putting together the baseline forecast, we have assumed enactment of a
temporary investment tax incentive. Specifically, in line with the bill recently
passed by the House of Representatives, we have assumed that, for a three-year
period retroactive to September 11, 2001, businesses will be allowed to take an
immediate deduction against earnings equal to 30 percent of their outlays for
equipment and software and will be allowed to depreciate the remaining 70
percent as under current rules.3 For equipment with a tax life of five to seven
years-the predominant category-a "partial expensing" provision along these
lines would reduce the cost of capital about 1-1/2 percent.
In quantifying the timing and magnitude of the effects of this provision, we
have drawn on economic theory, the available econometric evidence, and a
considerable dose of judgment. Econometric evidence suggests that, over the
long run, the capital stock responds roughly proportionately to permanent
changes in the cost of capital. Thus, a 1 percent reduction in the cost of capital
should elicit an increase of about 1 percent in the capital stock. Of course, even
assuming typical lags in adjustment to achieve such an increase in the capital
stock would require a much larger percentage increase in investment in the short
run.
A number of factors suggest that temporary investment incentives should give a
larger near-term boost to investment than do equally sized permanent
incentives. First, a temporary provision imposes a smaller drain on the U.S.
Treasury and so elicits a far smaller adverse reaction from bond-market
3. Firms can use this expensing provision on investments with a tax-service life of twenty
years or less.
I-10
Part 1: Summary and Outlook, October31, 2001
participants. Second, businesses face an incentive to accelerate some of the
investment that otherwise would have occurred after the expiration of the tax
provision. The extent of this pull forward will depend on, among other factors,
the incremental costs that firms may face as a result of crowding more
investment into a given period, as well as the cost of carrying potentially lessthan-fully-utilized capacity. Unfortunately, we have only limited empirical
evidence on the size and timing of this pull-forward effect.
Relying on such evidence as we have, we project that the partial expensing
provision will boost the growth of investment in equipment and software by
roughly 3-1/2 percentage points in both 2002 and 2003; after allowing for
multiplier and other effects, the tax incentive raises GDP growth in these two
years 0.5 percentage point and 0.7 percentage point, respectively. In deriving
this estimate, we have balanced the strong incentives to bring forward spending
against various factors that might damp the near-term response. These latter
considerations include the time it takes to plan for, build, and install new capital
goods, as well as the possibility that firms might delay any increase in
investment until the prospects for resumed economic growth are clear, given the
current low level of capacity utilization in many sectors. Of course, the forecast
of real equipment and software spending is influenced by other factors such as
accelerating real activity, declining interest rates, and the terrorist-related
impact on business confidence. All told, real equipment and software spending
is projected to rise 4 percent next year and 12-1/2 percent in 2003.
Nonresidential structures. Outlays for nonresidential structures have dropped
sharply in the last few quarters, and because of the lagged effects of a weak
economy and lower oil and natural gas prices, we expect further declines next
year before spending stabilizes in 2003. We have factored in a small amount for
reconstruction of facilities damaged in New York City, but given the lags
involved, we do not expect the replacement of lost office space to materially
add to spending until late in the forecast period; even then, the increment is
small-only $3 billion in 2003. Overall, after a drop of nearly 11 percent this
year, real outlays for nonresidential structures are projected to fall another
6 percent in 2002 and to be unchanged in 2003.
Inventory investment. Reductions in nonfarm inventories are expected to
continue through the middle of next year. Nonetheless, the pace of the
drawdown slows over the next few quarters, and as a result, inventory
investment is projected to make a positive contribution of more than
3/4 percentage point to the change in real GDP in 2002. In 2003, businesses are
expected to build inventories as demand solidifies, with the positive swing in
inventory investment contributing almost 1/2 percentage point to the change in
real GDP.
Domestic Developments
Government purchases. Real federal purchases are projected to increase
4-3/4 percent in 2002, reflecting the recently enacted emergency supplemental
as well as our assumed package of additional spending on security and
infrastructure. Purchases receive a further small boost from policy actions in
2003 and are projected to increase just 2 percent. State and local spending is
expected to increase 2-3/4 percent in 2002 and 3-1/2 percent in 2003-a
slowdown from the 5 percent rise expected for this year. These jurisdictions no
doubt are experiencing downward pressure on revenues that will persist into
next year and, as a result, will restrain spending a bit.
Net exports. Real exports have weakened markedly further in recent months,
and we now expect that they will be down more than 8 percent during 2001.
Exports are projected to turn up during 2002 and to strengthen further in 2003 as
foreign economic activity recovers. The firming in domestic spending over the
same period should lead to a pickup in imports, which also have dropped off
sharply this year. Taken together, real net exports, which are expected to be a
slight positive for real GDP this year, are projected to arithmetically subtract
about 2/3 percentage point per year, on average, from the changes in real GDP
for 2002 and 2003.
Aggregate Supply, the Labor Market, and the Outlook for Inflation
We have made a number of minor adjustments to our forecast of structural labor
productivity and potential output in this Greenbook. As a result of the terrorist
acts to date and the country's initial response, we have raised our estimate of the
negative shock to the level of multifactor productivity from 1/8 percent in the
September Greenbook to roughly 1/4 percent. The range of uncertainty about
Decomposition of Structural Labor Productivity
(Percent change, Q4 to Q4, except as noted)
Measure
Structural labor productivity
Previous
1973- 1996996- 1999
95
98
2000
2001
2002
2003
1.4
1.4
2.4
2.4
2.8
2.8
2.7
2.6
1.9
1.9
1.4
1.5
1.9
1.8
Capital deepening
.6
1.1
1.5
1.4
.6
.2
.6
Previous
.6
1.1
1.5
1.3
.7
.2
.5
.6
.6
.3
1.0
1.0
1.0
1.0
1.0
1.0
.8
.9
1.0
1.0
.3
.3
.3
.9
.9
.3
.3
.3
Contributions'
Multifactor productivity
Previous
Labor composition
NOTE. Components may not sum to totals because of rounding.
1. Percentage points.
I-12
Part 1: Summary and Outlook, October 31, 2001
this estimate is obviously huge, and additional terrorist acts likely would
increase the magnitude of this adjustment. The effect begins in the fourth
quarter of 2001 and lasts until the end of next year. Thereafter, growth in
structural MFP returns to the 1.0 percent pace that prevailed prior to
September 11. In contrast, the upward revision to our investment forecast
results in a larger contribution of capital deepening in 2002 and 2003. On net,
we now are projecting structural productivity to rise 1.4 percent in 2002 and 1.9
percent in 2003.
Productivity and the labor market Our productivity forecast follows the
typical cyclical pattern around the underlying structural trends noted above.
Output per hour in the nonfarm business sector is projected to rise at an annual
rate of 1/2 percent, on average, in the second half of this year. It is expected to
increase at roughly its structural pace of 1-1/2 percent in the first half of 2002.
Thereafter, as the economy strengthens, businesses are assumed to be better able
to bring work schedules and employment in line with sales and production, and
productivity is expected to accelerate noticeably. Nonfarm business output per
hour is projected to increase at an annual rate of more than 2-3/4 percent in the
second half of next year-well above our estimated structural rate-and to
continue to rise at a pace slightly above the structural increase in 2003.
Nonfarm payroll employment is expected to drop sharply through year-end and
to continue declining into the first quarter of next year. Thereafter we expect
employment to start rising again as spending and production stabilize and then
turn upward. In the second half of 2002, rehiring should be well under way,
The Outlook for the Labor Market
(Percent change, Q4 to Q4, except as noted)
2000
2001
2002
2003
Output per hour, nonfarm business
Previous
2.3
2.3
.7
1.0
2.0
1.8
2.2
2.1
Nonfarm private payroll employment
Previous
1.7
1.7
-.9
-.8
.1
-.3
1.6
1.5
Household employment survey
Previous
1.0
1.0
-.8
-.9
.2
.1
1.3
1.4
Labor force participation rate'
Previous
67.1
67.1
66.8
66.7
66.8
66.7
66.7
66.7
Civilian unemployment rate1
Previous
4.0
4.0
5.4
5.4
6.1
6.2
5.9
6.0
Measure
1. Percent, average for the fourth quarter.
Domestic Developments
I-13
stemming the rise in the unemployment rate. Consistent with a stronger path of
output growth than that in the September Greenbook, the unemployment rate
has been revised down 0.1 percentage point in 2002 and 2003.
Wages and prices. With considerable slack in labor markets over the forecast
period, the downward pressure on wage inflation is expected to be sizable.
The increase in the ECI for hourly compensation is projected to step down from
4.0 percent this year to 3.3 percent in 2002 and 3.2 percent in 2003-the slowest
pace since 1996. Most of the deceleration in the ECI represents smaller wage
adjustments; benefit costs are expected to slow only modestly, reflecting
ongoing rapid increases in the costs of health insurance.
Despite considerable deceleration in labor compensation, the reduced gains in
structural labor productivity next year limit the pass-through into prices. Core
PCE prices are projected only to edge down, from a rate of increase of
1.6 percent this year to 1.3 percent in 2003. Energy prices are expected to fall
through early next year and then move up only a small amount over the
remainder of the forecast period. As a result, total PCE prices are expected to
increase 1.5 percent in 2002 and 1.4 percent in 2003.
Financial Flows and Conditions
We anticipate that domestic nonfinancial debt will expand fairly slowly over the
forecast period, rising about 4-1/4 percent in 2002 and about 4-1/2 percent in
2003. After four years of paydowns, Treasury debt is projected to be about flat,
on balance, over the next two years, as stimulative fiscal policy actions as well
as the operation of automatic stabilizers virtually eliminate the budget surplus.
Borrowing by the nonfederal sectors, which has slowed appreciably since
midyear, is projected to remain subdued through next year before edging higher
in 2003.
In the household sector, debt growth is expected to slow a bit further from the
rapid gains posted earlier this year but then to pick up somewhat in 2003. The
slowdown is concentrated in the consumer credit component, where the payback
in spending on motor vehicles next year damps growth considerably, although a
rebound should become evident by late in the year. By contrast, low mortgage
interest rates are expected to support refinancing activity as well as purchases of
new homes, and mortgage debt is projected to expand at a relatively strong pace
in both 2002 and 2003. Some tightening of credit conditions may weigh on
household debt growth over the forecast period, as high household debt burdens
and the rise in unemployment stimulate loan delinquencies and loan losses.
In the business sector, debt growth has slowed considerably since midyear and
is expected to remain modest through the end of the forecast period. Lending
standards and terms are likely to remain tight in coming quarters, especially for
Part 1: Summary and Outlook, October 31, 2001
I-14
I-14
Part 1: Summary and Outlook, October 31, 2001
Inflation Projections
(Percent change, Q4 to Q4, except as noted)
Measure
PCE chain-weighted price index
Previous
Food and beverages
Previous
Energy
Previous
Excluding food and energy
Previous
Consumer price index
Previous
Excluding food and energy
Previous
GDP chain-weighted price index
Previous
2000
2001
2002
2003
2.6
2.6
1.4
1.8
1.5
1.5
1.4
1.5
2.5
2.5
3.2
3.2
2.2
2.3
2.0
2.2
15.3
15.4
-7.8
-3.3
-.8
-4.8
.5
-.8
1.9
1.9
1.6
1.8
1.5
1.6
1.3
1.5
3.4
3.4
2.0
2.4
2.0
1.8
1.9
2.0
2.5
2.5
2.7
2.7
2.2
2.3
2.0
2.2
2.4
2.4
2.0
2.3
1.8
1.6
1.6
1.7
1.6
1.6
-2.9
-2.5
.6
1.9
1.3
1.1
ECI for compensation of private
industry workers1
Previous
NFB compensation per hour
Previous
Prices of core non-oil
merchandise imports
Previous
1. December to December.
riskier credits, as the economy weakens and delinquencies mount. However,
we do not expect a significant dislocation in the supply of credit. While net
borrowing from commercial banks and in the commercial paper market will
likely remain very light for a while, investment-grade firms, responding to the
low level of long-term interest rates, are expected to continue to raise substantial
amounts in the bond market. Selected below-investment-grade firms should
also be able to raise funds in the bond market, as well as in the syndicated loan
market, although on stringent terms. As the economy is seen to be recovering
later next year, restraint by lenders should begin to be relaxed somewhat.
State and local government debt is projected to expand at a sluggish pace over
the projection period. Fiscal pressures likely will lead some jurisdictions to
Domestic Developments
scale back spending plans, including new projects that would have been funded
with debt issues. Retirements of securities that have been advance-refunded
also should limit the rise in municipal debt.
Growth of the monetary aggregates is expected to trend lower over the forecast
period. In part, the slowdown reflects the waning effects of factors that have
strongly boosted money growth this year, including sharp declines in
opportunity costs and the reduced attractiveness of the stock market relative to
safe and liquid deposits and money funds. Nonetheless, growth of M2 is
expected to remain above that of nominal income in 2002, mainly reflecting the
lagged adjustment of M2 holdings to this year's declines in opportunity costs.
With these adjustments largely completed by the end of next year, growth of
M2 should come roughly in line with that of nominal income in 2003.
Alternative Simulations
The staff forecast is conditioned on assumptions regarding the future course of
fiscal policy, financial conditions, and other factors, any of which could easily
move in a significantly different direction than we anticipate. Here, we focus on
three particular risks and use model simulations to illustrate their implications
for the forecast. First, fiscal policy may not prove to be as stimulative as we
expect. In particular, the Congress may not include a partial expensing
provision in the fiscal stimulus bill. Second, household spending may not hold
up as well as we anticipate under the burden of rising unemployment and
reduced wealth. The third simulation illustrates the upside risk that we have
overestimated the hit to household and business confidence. In two final
simulations, we show the effects of a further monetary easing and the
implications of having the funds rate evolve as anticipated by the market.
No expensing provision. As noted above, an important factor underlying the
staff projection for business investment and economic activity more generally is
the assumption that the fiscal stimulus package will contain a temporary partial
expensing provision-a powerful incentive to equipment and software spending
over our projection interval. If no such provision is forthcoming-or,
alternatively, if we have substantially overstated its stimulative effects-E&S
expenditures would be depressed relative to baseline in both 2002 and 2003.
As shown in the "no expensing provision, unchanged policy" scenario, growth
in real output is about 1/2 percentage point weaker in 2002 and a bit more than
that in 2003 in the absence of partial expensing, given the staff's assumed path
for the nominal funds rate. In addition to the direct effect on demand, the more
subdued pace of investment contributes to a modest reduction in labor
productivity and aggregate supply relative to baseline. The unemployment rate
rises to 6-1/4 percent late next year and remains at this level in 2003. With the
I-16
Part1: Summary and Outlook, October 31, 2001
Alternative Scenario: No Expensing Provision
(Percent change, annual rate, from end of preceding period, except as noted)
Measure
2001
Q3Q3
2002
Q4
Q1
Q
Q2
2003
H2
_
Real GDP
Baseline
No expensing provision, unchanged policy
No expensing provision, policy easing
-2.4
-2.4
-2.4
-.1
-.3
-.3
2.8
2.3
2.3
3.5
2.8
2.9
3.7
3.0
3.2
-12.8 -19.8
-12.8 -19.8
-12.8 -19.8
-4.6
-6.2
-6.2
1.2
-1.8
-1.7
10.3
5.9
5.9
12.3
8.6
8.9
-.4
-.4
-.4
Real business equipment and software
Baseline
No expensing provision, unchanged policy
No expensing provision, policy easing
Civilian unemployment rate1
Baseline
No expensing provision, unchanged policy
No expensing provision, policy easing
4.8
4.8
4.8
5.4
5.4
5.4
5.9
5.9
5.9
6.0
6.0
6.0
6.1
6.3
6.2
5.9
6.3
6.2
3
.3
.3
3.0
3.0
3.0
1.6
1.6
1.6
1.5
1.5
1.5
1.5
1.5
1.5
1.3
1.3
1.4
PCE prices excluding food and energy
Baseline
No expensing provision, unchanged policy
No expensing provision, policy easing
1.Average for the final quarter of the period.
increased labor market slack offset by the reduction in labor productivity,
inflation is unchanged from its baseline path.
Because both aggregate demand and supply are depressed, a Taylor rule would
prescribe a cut of only 25 basis points in the funds rate relative to baseline,
starting in the second half of 2002. Such a modest policy response ("no
expensing provision, policy easing") would have little effect on the economy
relative to an unchanged policy, slightly elevating output growth in 2003 and
leaving inflation little changed.
Weaker household spending. In the second scenario, households react more
adversely than we anticipate to rising unemployment, past declines in wealth,
and growing consumer indebtedness, leading to a much slower pace of
consumer spending and residential investment in both the near and longer term.
Under the baseline funds rate assumption, this increased restraint is sufficient to
raise the personal saving rate 1 percentage point relative to baseline by the
middle of next year and to keep it at this more elevated level through the end of
2003. As shown in the "weaker spending, unchanged policy" scenario, real
activity continues to contract appreciably through the first quarter of next year,
Domestic Developments
Alternative Scenario: Weaker Household Spending
(Percent change, annual rate, from end of preceding period, except as noted)
Measure
2001
2002
2003
Q3
Q4
Q1
Q2
H2
-.4
-.4
-.4
-2.4
-3.4
-3.4
.1
-1.7
-1.6
2.8
.9
1.1
3.5
1.8
2.3
3.7
2.6
3.7
1.4
1.4
1.4
13
-.1
-.1
-.6
-2.6
-2.5
3.7
1.4
1.6
2.5
.5
1.0
3.2
2.1
3.1
4.8
4.8
4.8
5.4
5.5
5.5
5.9
6.1
6.1
6.0
6.3
6.3
6.1
6.8
6.7
5.9
7.2
6.6
3
.3
.3
3.0
3.0
3.0
1.6
1.6
1.6
1.5
1.5
1.5
1.5
1.4
1.5
1.3
.9
1.1
Real GDP
Baseline
Weaker spending, unchanged policy
Weaker spending, policy easing
Real personal consumption
Baseline
Weaker spending, unchanged policy
Weaker spending, policy easing
Civilian unemployment rate1
Baseline
Weaker spending, unchanged policy
Weaker spending, policy easing
PCEprices excluding food and energy
Baseline
Weaker spending, unchanged policy
Weaker spending, policy easing
1. Average for the final quarter of the period.
and past that point, output growth remains anemic. As a result, the
unemployment rate climbs steadily to more than 7 percent by the end of 2003,
and the resultant labor market slack lowers core PCE price inflation below
1 percent in 2003.
Monetary policy could cushion this weakness should it emerge, but probably not
to an appreciable extent before the second half of next year. Under the Taylor
rule, the funds rate is reduced 100 basis points by the end of next year relative to
baseline and somewhat more in 2003. As shown by the "weaker spending,
policy easing" scenario, this extra stimulus brings the growth rate of output back
to baseline during 2003, but because of the earlier, more depressed pace of
activity, the unemployment rate remains above 6-1/2 percent. Core inflation is
roughly 1 percent during 2003.
Stronger sentiment. In the baseline outlook, we assume that consumer
confidence has been shaken by recent events and will remain unusually weak
through next year. But October's surge in auto sales and the recent
strengthening in equity prices raise the possibility that we have misread the
public's mood and that households, investors, and firms may in fact be less
I-18
Part1: Summary and Outlook, October 31, 2001
Alternative Scenario: Stronger Sentiment
(Percent change, annual rate, from end of preceding period, except as noted)
Measure
2001
Q3
Q4
Q3
Q4
2002
2003
Q1
Q2
H2
-.1
1.5
1.4
2.8
4.5
4.3
3.5
4.5
4.0
3.7
4.3
3.6
Real GDP
Baseline
Stronger sentiment, unchanged policy
Stronger sentiment, policy tightening
-.4
-.4
-.4
-2.4
-1.6
-1.6
Real personal consumption
Baseline
1.4
13
-.6
3.7
2.5
3.2
Stronger sentiment, unchanged policy
1.4
2.6
1.2
5.2
3.4
3.7
Stronger sentiment, policy tightening
1.4
2.6
1.2
5.0
3.0
3.1
Baseline
4.8
5.4
5.9
6.0
6.1
5.9
Stronger sentiment, unchanged policy
4.8
5.3
5.7
5.7
5.6
5.0
Stronger sentiment, policy tightening
4.8
5.3
5.7
5.7
5.7
5.5
.3
.3
.3
3.0
3.0
3.0
1.6
1.6
1.6
1.5
1.5
1.5
1.5
1.6
1.5
13
1.5
1.3
Civilianunemployment rate'
PCEprices excludingfood and energy
Baseline
Stronger sentiment, unchanged policy
Stronger sentiment, policy tightening
1.Average for the final quarter of the period.
pessimistic than we have assumed. If so, the current slowdown might be less
pronounced than we anticipate and the subsequent rebound more
robust-particularly given the supportive monetary and fiscal policies built into
the baseline outlook.
To illustrate this risk, this simulation eliminates the exogenous shock to
consumer sentiment that we built into the baseline forecast. This more upbeat
mood directly contributes to higher consumer spending and housing investment,
particularly in the near term. It also prompts both stronger business investment
and higher share prices (roughly 15 percent on the Wilshire by early next year
relative to baseline). Under the Greenbook funds rate assumption ("stronger
sentiment, unchanged policy"), these forces are sufficient to moderate the
current-quarter decline in real GDP and to produce a more vigorous recovery
thereafter: Starting in the second quarter of next year, real GDP growth averages
close to 4-1/2 percent through the end of 2003. As a result, the unemployment
rate peaks at 5-3/4 percent early next year and then falls to 5 percent by the end
of the forecast period; core inflation remains roughly stable at just over 1-1/2
percent.
I-19
Domestic Developments
With growth appreciably stronger in this scenario, the Taylor rule calls for a
60-basis-point increase in the funds rate relative to baseline by the end of next
year. As shown in the "stronger sentiment, policy tightening" scenario, this
policy response moderates the strength of the recovery, causing the
unemployment rate to settle at 5-1/2 percent in 2003. As a result, core inflation
differs little from the baseline forecast.
Alternative monetary policies. The "easier monetary policy" scenario assumes
that the funds rate is reduced an additional 50 basis points beyond what is
incorporated in the baseline. Under this alternative, growth of real GDP would
be stronger, with the unemployment rate declining to 5-1/2 percent by the end of
2003. If policy were to follow the "market-based funds rate" path embodied in
current futures prices, real output growth would on average be a touch more
subdued than in the baseline.
Alternative Monetary Policy Scenarios
(Percent change, annual rate, from end of preceding period, except as noted)
Measure
2001
2002
Q3
Q3
Q
Q4
Q1
Q2003
Q2
H2
-.4
-.4
-.4
-2.4
-2.4
-2.4
-.1
.1
.1
2.8
3.1
3.1
3.5
3.9
3.7
3.7
4.2
3.3
4.8
4.8
4.8
5.4
5.4
5.4
5.9
5.9
5.9
6.0
6.0
6.0
6.1
6.0
6.0
5.9
5.5
5.9
PCEprices excluding food and energy
Baseline
3
3.0
1.6
1.5
1.5
13
Easier monetary policy
Market-based funds rate
.3
.3
3.0
3.0
1.6
1.6
1.5
1.5
1.6
1.6
1.5
1.2
Real GDP
Baseline
Easier monetary policy
Market-based funds rate
Civilian unemployment rate'
Baseline
Easier monetary policy
Market-based funds rate
1. Average for the final quarter of the period.
Strictly Confidential <FR>
Class II FOMC
October 31, 2001
STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT
(Percent, annual rate)
ANNUAL
1999
2000
2001
2002
2003
QUARTERLY
2000
01
Q2
Q3
Q4
2001
Q1
Q2
Q3
Q4
2002
Q1
02
Q3
Q4
5.6
5.2
5.2
5.2
5.6
5.3
5.3
5.3
3.5
3.5
3.5
3.5
3.5
3.7
3.7
3.8
2.1
1.7
1.6
1.6
2.0
1.5
1.5
1.5
2.0
2.0
2.0
2.0
2.0
1.9
1.9
1.9
6.2
6.2
6.1
6.0
6.1
6.0
5.9
5.9
Q4
7.2
3.5
7.2
3.5
4.0
1.6
4.0
1.6
2.9
1.8
2.9
1.8
3.6
3.2
3.6
3.2
-0.1
0.0
-0.1
0.0
2001
Q2
Q4
3.6
1.2
3.5
-0.2
0.8
-0.6
0.8
-1.4
2.7
1.9
2.7
1.2
3.6
1.1
3.6
0.5
0.5
0.9
0.5
0.9
2002
Q2
04
2.3
5.0
3.2
5.2
0.6
3.3
1.3
3.5
1.6
1.6
1.9
1.6
1.7
1.9
2.0
2.1
0.7
0.1
0.6
0.1
2003
Q2
5.4
5.2
5.4
5.3
3.5
3.5
3.6
3.7
1.9
1.6
1.8
1.5
2.0
2.0
1.9
1.9
0.0
-0.2
-0.1
-0.1
-0.3
-0.1
1.4
0.9
-0.2
-0.3
-0.1
1.4
0.7
-0.2
2003
Q1
02
03
Q4
TWO-QUARTER
2000
3
02
04
POUR-QUARTER
1999
2000
2001
2002
2003
1.
2.
3.
4.
4
Q4
Q4
Q4
Q4
Q4
urban consumers.
For all
Level, except as noted.
Percent change from two quarters earlier; for unemployment rate, change in percentage points.
Percent change from four quarters earlier; for unemployment rate, change in percentage points.
Strictly
Confidential
Class II FOMC
<FR>
October 31,
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES
(Seasonally adjusted annual rate)
2001
--------- Projected--------Item
Units1
1995
1996
1997
1998
1999
2000
2001
2002
2003
7400.5
7813.2
8318.4
8781.5
9268.6
9872.9
10194.8
10426.5
10977.9
7543.8
7813.2
8159.5
8508.9
8856.5
9224.0
9320.7
9381.5
9713.6
2.2
4.1
4.3
4.8
4.4
2.8
-0.3
2.4
3.7
1.7
2.9
3.2
4.3
3.9
4.4
5.0
3.9
5.1
5.8
4.7
6.3
5.3
4.3
5.4
3.5
3.4
4.7
-0.5
0.8
-0.3
3.0
1.6
1.9
4.2
3.2
3.9
2.8
3.7
2.5
2.7
3.1
5.0
3.2
2.7
4.1
8.8
2.5
3.9
5.0
12.7
5.0
3.6
5.2
11.3
5.0
4.0
4.2
5.3
3.6
4.3
2.1
7.4
0.7
1.7
2.0
0.1
2.0
2.5
3.2
6.1
2.5
2.9
7.5
8.9
3.3
-1.5
12.1
11.8
12.8
5.6
11.8
13.7
6.5
3.5
12.3
14.9
4.9
10.0
7.4
11.2
-3.6
3.4
8.9
8.3
10.8
-1.2
-12.8
-13.2
-11.4
-0.5
1.2
4.1
-6.4
1.9
9.2
12.3
0.2
2.4
EXPENDITURES
Nominal GDP
Real GDP
Bill. $
Bill. Ch. $
Real GDP
Gross domestic purchases
% change
Final sales
Priv. dom. final purchases
Personal cons. expenditures
Durables
Nondurables
Services
Business fixed investment
Equipment & Software
Nonres. structures
Residential structures
Exports
9.7
9.8
8.5
2.3
4.5
7.0
-8.4
1.9
6.8
Imports
5.0
11.2
14.3
10.8
11.5
11.3
-7.4
6.7
9.8
-0.8
2.7
2.4
2.7
4.0
1.2
5.0
3.5
3.1
-5.3
-4.7
2.1
2.0
0.8
3.0
0.1
-1.4
3.7
0.6
-0.8
3.8
4.5
4.7
3.7
-1.4
-2.2
2.5
4.5
5.1
5.2
4.8
3.0
2.8
2.1
2.3
3.6
-
Gov't. cons.
& investment
Federal
Defense
State & local
63.8
76.7
62.1
50.6
-46.9
-13.7
47.1
41.9
-78.4
21.2
-89.0
60.6
-113.3
75.0
-221.1
63.5
-316.9
52.3
-399.1
-45.0
-401.4
-13.7
-448.7
46.1
-533.4
% change
4.3
6.0
6.2
6.0
6.0
5.3
1.6
4.2
5.4
Nonfarm payroll employment
Unemployment rate
Millions
117.2
5.6
119.6
5.4
122.7
4.9
125.8
4.5
128.9
4.2
131.8
4.0
132.3
4.7
131.6
6.0
133.4
6.0
Industrial prod. index
% change
3.6
82.5
5.6
81.6
7.2
82.7
3.2
81.3
5.1
80.5
4.2
81.3
-6.7
75.4
2.3
72.3
4.3
75.0
Millions
1.35
14.77
12.87
1.90
1.48
15.05
13.34
1.70
1.47
15.06
13.12
1.93
1.62
15.43
13.41
2.02
1.64
16.78
14.30
2.48
1.57
17.25
14.39
2.86
1.59
16.48
13.52
2.95
1.61
14.66
11.92
2.74
1.68
15.69
12.77
2.92
Change in bus. inventories
Nonfarm
Net exports
Nominal GDP
S
Bill. Ch. $
EMPLOYMENT AND PRODUCTION
Capacity util. rate - mfg.
Housing starts
Light motor vehicle sales
North Amer. produced
Other
INCOME AND SAVING
Nominal GNP
Bill. $
7420.9
7831.2
8325.4
8778.1
9261.8
9860.8
10185.9
10424.1
10978.1
Nominal GNP
Nominal personal income
% change
4.4
4.3
1.7
5.6
5.9
5.9
2.6
4.8
6.0
6.3
3.8
4.2
5.8
6.7
5.0
4.7
6.0
4.8
2.1
2.4
5.4
7.3
4.0
1.0
1.5
3.1
2.2
1.8
4.2
4.2
3.7
3.3
5.4
4.7
2.9
3.0
Corp. profits, IVA & CCAdj.
Profit share of GNP
Excluding FR Banks
% change
11.3
9.0
8.7
11.4
9.6
9.4
9.9
10.0
9.7
-9.6
8.9
8.6
11.3
8.9
8.6
-1.2
8.9
8.6
-19.4
7.2
6.9
5.6
6.7
6.4
6.2
6.8
6.5
Federal surpl./deficit
State & local surpl./def.
Bill. $
-192.0
15.3
11.4
-136.8
21.4
18.7
-53.3
31.0
29.9
43.8
40.7
40.0
119.2
42.1
41.7
218.6
32.8
33.1
114.5
16.8
17.0
-61.2
9.7
10.0
3.2
7.2
7.5
16.9
5.1
17.2
5.7
18.0
6.7
18.8
7.5
18.4
6.8
18.1
6.3
16.9
4.2
16.3
3.5
17.0
4.1
2.1
1.9
1.8
1.1
1.6
2.4
2.0
1.8
1.6
2.1
1.9
1.4
0.8
1.9
2.5
1.3
1.7
1.6
PCE chn.-wt. price index
Ex. food and energy
2.1
2.3
2.3
1.8
1.5
1.7
1.1
1.6
2.0
1.5
2.6
1.9
1.4
1.6
1.5
1.4
1.5
1.3
CPI
Ex. food and energy
2.7
3.0
3.2
2.6
1.9
2.2
1.5
2.4
2.6
2.0
3.4
2.5
2.0
2.7
2.0
2.2
1.9
2.0
2.6
3.1
3.4
3.5
3.4
4.4
4.0
3.3
3.2
1.1
2.6
1.5
2.3
3.2
0.9
2.3
3.5
1.1
2.9
5.3
2.3
2.8
4.3
1.5
2.3
7.4
5.0
0.7
4.6
3.9
Real disposable income
Personal saving rate
Ex. social ins. funds
Gross natl. saving rate
Net natl. saving rate
PRICES AND COSTS
9 change
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
ECI, hourly compensation
2
Nonfarm business sector
Output per hour
Compensation per Hour
Unit labor cost
1. Changes are from fourth quarter to fourth quarter.
2. Private-industry workers.
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)
Strictly Confidential <FR>
Class II FOMC
Item
Units
1999
1999
1999
1999
Q1
Q2
Q3
Q4
2000
Q1
2000
Q2
October 31,
2000
Q3
2000
2001
Q1
Q4
2001
2001
Q2
EXPENDITURES
Nominal GDP
Real GDP
Bill. $
Bill. Ch.
9093.1
8733.5
9161.4
8771.2
9297.4
8871.5
9522.5
9049.9
9668.7
9102.5
9857.6
9229.4
9937.5
9260.1
10027.9
9303.9
10141.7
9334.5
10202.6
9341.7
Real GDP
Gross domestic purchases
Final sales
Priv. do=. final purchases
s change
3.1
4.8
3.0
5.3
1.7
2.9
3.9
5.9
4.7
5.3
4.2
4.9
8.3
8.2
6.1
5.5
2.3
3.5
4.8
7.5
5.7
6.3
3.9
4.6
1.3
2.0
2.3
3.9
1.9
2.2
2.4
2.6
1.3
0.7
4.0
2.8
0.3
0.4
0.7
-0.0
Personal cons.
Durables
Nondurables
Services
4.9
7.1
5.6
4.1
5.7
15.7
4.3
4.5
4.4
9.0
2.6
4.3
5.7
13.7
7.6
3.2
5.9
19.0
5.1
3.7
3.6
-2.5
4.7
4.4
4.3
8.2
4.2
3.5
3.1
-2.1
0.6
5.6
3.0
10.6
2.4
1.8
2.5
7.0
0.3
2.8
Business fixed investment
Equipment a Software
Nonres. structures
Residential structures
6.0
10.5
-6.5
10.3
7.7
11.9
-4.3
3.0
10.2
16.2
-7.0
-0.8
5.8
6.4
4.0
1.6
15.8
18.1
8.8
8.5
12.2
12.4
11.8
-0.8
7.1
4.7
15.2
-10.4
1.0
-1.1
7.6
-1.1
-0.2
-4.1
12.3
8.5
-14.6
-15.4
-12.2
5.9
Exports
IZports
-6.8
8.4
4.2
13.3
9.7
13.8
12.1
10.5
9.0
17.1
13.5
16.4
10.6
13.0
-4.0
-0.5
-1.2
-5.0
-11.9
-8.4
2.0
-3.7
-3.5
5.2
1.2
0.8
-3.5
1.4
4.4
7.2
12.8
2.9
8.5
14.5
14.3
5.4
-1.1
-12.8
-20.0
5.6
4.4
15.9
15.4
-1.1
-1.8
-10.4
-10.4
3.0
3.3
4.6
10.5
2.7
5.3
3.2
7.5
6.4
5.0
1.8
2.3
6.6
83.4
78.7
-283.0
32.7
34.2
-313.4
39.6
52.2
-333.3
92.7
88.7
-337.8
28.9
37.8
-371.1
78.9
75.1
-392.8
51.7
56.6
-411.2
42.8
39.7
-421.1
-27.1
-27.3
-404.5
-38.3
-35.8
-406.7
Gov't. cons.
$
expenditures
& investment
Federal
Defense
State & local
Change in bus. inventories
Nonfarm
Net exports
Bill. Ch. $
Nominal GDP
% change
4.9
3.0
6.1
10.0
6.3
8.0
3.3
3.7
4.6
2.4
Nonfazr payroll employment
Unemployment rate
Millions
127.8
4.3
128.5
4.3
129.2
4.2
130.1
4.1
131.0
4.1
131.9
4.0
131.9
4.0
132.3
4.0
132.6
4.2
132.5
4.5
Industrial prod. index
Capacity util. rate - afg.
s change
3.9
80.2
4.9
80.3
5.8
80.5
5.7
80.9
6.7
81.3
7.9
81.9
3.5
81.7
-0.9
80.3
-6.8
77.9
-4.4
76.4
Millions
1.71
16.17
13.87
2.30
1.57
16.76
14.32
2.44
1.65
17.06
14.58
2.47
1.66
17.11
14.41
2.70
1.67
18.13
15.25
2.87
1.59
17.27
14.40
2.87
1.51
17.30
14.47
2.83
1.54
16.32
13.45
2.87
1.63
16.89
13.96
2.93
1.62
16.65
13.62
3.03
9089.5
5.2
3.0
1.4
3.5
9157.0
3.0
4.7
2.0
2.7
9283.8
5.7
5.2
2.1
2.1
9517.0
10.4
6.3
3.0
1.4
9650.7
5.7
8.6
3.3
0.8
9841.0
8.1
8.5
5.9
1.3
9919.4
3.2
5.5
2.6
0.8
10032.1
4.6
6.8
4.2
1.0
10131.3
4.0
5.8
2.7
1.1
10190.9
2.4
3.5
2.4
1.1
EMPLOYMENT AND PRODUCTION
Bousing starts
Light motor vehicle sales
North Amer. produced
Other
INCOM
AND SAVING
aominal GP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate
Bill. $
Corp. profits,
% change
36.1
9.2
8.9
-10.2
8.8
8.6
-4.9
8.6
8.3
31.9
9.0
8.7
6.1
9.0
8.7
10.7
9.1
8.8
1.0
9.0
8.7
-19.6
8.4
8.1
-24.6
7.8
7.5
-14.3
7.5
7.2
Bill. $
85.2
48.9
48.4
116.5
36.2
35.8
132.0
38.3
38.0
143.1
44.9
44.7
212.8
33.2
33.3
209.1
34.7
34.9
229.9
34.8
35.1
222.5
28.6
29.1
205.3
22.3
22.6
186.7
21.3
21.4
19.0
7.6
18.5
6.9
18.3
6.4
18.0
6.3
18.0
6.3
18.3
6.6
18.2
6.4
17.9
6.0
17.3
5.1
17.2
4.6
1.7
1.4
1.4
1.8
3.8
2.1
1.5
2.0
2.0
2.2
4.2
1.9
PCE chn.-wt. price index
Ex. food and energy
1.3
1.4
2.0
1.2
2.2
1.5
2.4
1.8
4.0
2.9
2.1
1.7
CPI
Ex. food and energy
1.7
1.8
2.7
2.1
2.9
1.8
3.1
2.5
4.3
2.5
2.8
2.7
1.4
4.6
3.4
4.6
5.6
4.7
2.4
3.8
1.3
-1.4
4.2
5.6
3.0
5.2
2.1
7.4
4.2
-2.9
t
IVA & CCAdj.
change
Profit share of GEP
Excluding FR Banks
Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds
Gross natl. saving rate
Net natl. saving rate
PRICES AND COSTS
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
ECI,
hourly compensation
l
Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost
1.
Private-industry workers.
% change
-0.6
6.2
6.8
6.3
7.6
1.2
Strictly
Class II
Confidential <FR>
FOMC
October 31,
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)
2001
- - - - - - - - - - - - - - - - - - - Projected - - - - - - - - - - - - - - - -
-
2001
Q3
2001
Q4
2002
Q1
2002
Q2
2002
Q3
2002
Q4
2003
01
2003
Q2
2003
Q3
2003
04
10243.0
9331.8
10191.8
9274.7
10241.6
9273.0
10354.6
9336.1
10488.2
9417.6
10621.7
9499.1
10766.2
9581.0
10906.3
9668.7
11047.7
9757.3
11191.5
9847.5
-0.4
-0.8
0.1
-0.7
-2.4
-2.1
-1.6
-3.2
-0.1
0.4
-1.3
-1.6
2.8
3.6
2.3
3.0
3.5
4.3
2.5
3.2
3.5
3.8
2.9
3.1
3.5
4.2
3.0
3.9
3.7
4.3
3.0
3.8
3.7
4.2
3.2
3.8
3.8
3.8
3.7
4.0
1.4
2.8
0.8
1.4
1.3
9.1
-0.8
0.8
-0.6
-22.4
2.3
2.9
3.7
10.8
2.4
3.0
2.8
10.1
1.5
2.0
2.3
5.9
1.7
1.9
3.0
5.7
2.3
2.9
3.0
5.5
2.4
2.9
3.2
6.4
2.6
3.0
3.3
6.6
2.7
3.0
Business fixed investment
Equipment & Software
Nonres. structures
Residential structures
-12.7
-12.8
-12.1
1.8
-22.3
-19.8
-28.7
-16.2
-6.3
-4.6
-11.0
-5.8
-1.0
1.2
-7.0
3.0
5.2
8.9
-4.7
5.7
7.8
11.7
-2.8
5.4
9.1
12.6
-0.5
5.2
8.9
12.2
-0.4
3.6
8.8
11.6
0.6
1.1
10.1
13.1
1.3
-0.1
Exports
Imports
-16.3
-15.2
-3.2
-0.6
-3.3
1.0
1.1
8.3
3.3
9.7
6.5
8.0
3.9
9.3
6.6
10.8
7.3
10.5
9.6
8.6
1.7
4.5
5.0
0.4
7.9
8.7
5.6
7.5
2.8
3.5
2.7
2.4
4.0
6.4
3.6
2.8
3.6
6.3
3.4
2.3
3.5
3.2
2.2
3.6
3.0
2.0
1.8
3.5
3.2
2.2
2.6
3.6
3.3
2.3
2.6
3.7
2.9
1.8
2.0
3.5
-50.9
-47.3
-393.9
-71.3
-69.4
-400.3
-38.8
-37.3
-412.7
-28.4
-28.9
-439.0
-1.5
-2.1
-465.4
14.0
13.4
-478.0
25.9
25.3
-502.6
43.9
42.8
-526.4
58.3
57.2
-547.8
60.4
59.0
-556.7
% change
1.6
-2.0
2.0
4.5
5.3
5.2
5.6
5.3
5.3
5.3
arm payroll employment
Aloyment rate
Millions
132.3
4.8
131.7
5.4
131.2
5.9
131.4
6.0
131.7
6.1
132.1
6.1
132.6
6.1
133.1
6.0
133.6
5.9
134.2
5.9
iadustrial prod. index
Capacity util.
rate - mfg.
% change
-6.2
74.7
-9.5
72.5
-3.4
71.5
2.4
71.8
5.0
72.6
5.2
73.4
4.5
74.1
4.3
74.7
4.2
75.3
4.3
76.0
Housing starts
Light motor vehicle sales
North Amer. produced
Other
Millions
1.59
16.12
13.15
2.97
1.51
16.25
13.37
2.88
1.56
13.95
11.32
2.63
1.59
14.33
11.64
2.69
1.63
15.03
12.25
2.78
1.66
15.32
12.47
2.85
1.68
15.49
12.60
2.89
1.68
15.60
12.69
2.91
1.68
15.76
12.83
2.93
1.67
15.90
12.95
2.95
Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate
Bill. $
% change
10234.5
1.7
2.7
12.6
3.7
10187.1
-1.8
0.3
-7.8
1.4
10239.0
2.1
4.8
11.7
4.2
10352.0
4.5
3.6
-1.3
3.1
10485.4
5.3
4.1
2.2
3.0
10620.0
5.2
4.5
2.5
3.0
10765.6
5.6
4.8
3.4
3.1
10907.6
5.4
4.7
2.8
3.1
11048.3
5.3
4.7
2.9
3.0
11191.0
5.3
4.5
2.6
2.9
Corp. profits,
IVA & CCAdj.
Profit share of GNP
Excluding FR Banks
4 change
-29.1
6.8
6.5
-7.6
6.7
6.4
-4.6
6.6
6.3
10.1
6.7
6.4
11.6
6.8
6.5
6.0
6.8
6.5
5.7
6.8
6.5
7.9
6.8
6.5
5.2
6.8
6.5
5.8
6.8
6.6
Federal surpl./deficit
State a local surpl./def.
Ex. social ins. funds
Bill. $
-21.9
16.5
16.6
87.9
7.0
7.4
-110.3
4.8
5.1
-53.8
8.4
8.7
-41.5
12.3
12.6
-39.2
13.5
13.8
-23.6
12.7
13.0
-4.2
8.6
8.9
14.0
6.5
6.8
26.7
1.0
1.3
17.0
3.8
15.9
3.1
16.3
3.5
16.2
3.3
16.4
3.5
16.5
3.6
16.8
3.9
17.0
4.0
17.1
4.2
17.1
4.1
Units
EXPENDITURES
Nominal GDP
Real GDP
Bill. $
Bill. Ch. $
Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases
% change
Personal cons.
Durables
Nondurables
Services
expenditures
Gov't. cons. & investment
Federal
Defense
State & local
Change in bus.
Nonfarm
Net exports
inventories
Nominal GDP
Bill. Ch. $
EMPLOYMENT AND PRODUCTION
INCOME AND SAVIN
Gross natl. saving rate
Net natl. saving rate
PRICES AND
COSTS
% change
0.4
2.0
1.6
2.0
1.5
1.5
1.5
1.4
1.9
1.6
1.9
1.5
1.5
1.5
PCE chn.-wt. price index
Ex. food and energy
1.4
3.0
1.4
1.6
1.5
1.4
1.4
1.4
1.4
1.3
1.4
1.3
1.4
1.3
CPI
Ex.
0.3
2.5
1.9
2.4
2.0
2.1
2.0
2.1
1.9
2.0
1.9
2.0
1.9
2.0
3.8
3.5
3.3
3.3
3.2
3.2
3.2
0.3
4.4
4.1
2.4
3.8
1.4
2.1
3.7
1.6
2.4
3.6
1.2
2.1
3.5
1.4
2.2
3.4
1.2
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
food and energy
1
hourly compensation
.arm business sector
Jutput per hour
Compensation per hour
Unit labor cost
1. Private-industry workers.
2.4
4.0
1.6
-1.6
4.7
6.3
Strictly Confidential <FR>
Class II FOMC
CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS
1999
Item
03
Real GDP
Gross dom. purchases
1999
04
2000
01
2000
02
2000
03
2000
Q4
2001
01
4.7
5.4
8.3
8.4
2.3
3.6
5.7
6.5
1.3
2.0
1.9
2.3
1.3
0.7
4.2
4.2
6.2
4.8
4.7
6.2
3.9
4.0
2.3
3.3
2.4
2.2
4.0
1.1
1.5
1.4
3.9
1.5
1.0
1.5
2.5
-0.2
1.0
1.8
2.9
0.7
0.8
1.4
2.1
-0.2
0.1
2.2
Residential structures
1.3
1.5
-0.2
-0.0
0.8
0.6
0.1
0.1
1.9
1.6
0.3
0.4
1.5
1.2
0.4
-0.0
0.9
0.5
0.5
-0.5
Net exports
Exports
Imports
-0.8
1.0
-1.8
-0.2
1.3
-1.4
-1.3
1.0
-2.3
-0.8
1.4
-2.3
Government cons. & invest.
Federal
Defense
Nondefense
State and local
0.8
0.4
0.5
-0.1
0.3
1.5
0.9
0.6
0.3
0.7
-0.2
-0.8
-0.9
0.0
0.6
2.2
1.5
0.6
-2.3
-2.0
-0.3
Final sales
Priv. dom. final purchases
Personal cons. expenditures
Durables
Nondurables
Services .
Business fixed investment
Equipment & Software
Nonree. structures
Change in bus. inventories
Nonfarm
Farm
Note.
Components may not sum to totals
because of rounding.
2001
02
October 31, 2001
2001
Q3
99Q4/
004/
104/
98Q4
99Q4
004
0.3
0.4
-0.4
-0.8
4.4
5.4
2.8
3.6
-0.3
-0.5
3.9
2.4
0.7
-0.0
0.1
-0.6
4.2
4.5
3.3
3.9
0.8
-0.3
0.1
-0.1
0.2
-0.1
-0.0
-0.4
0.4
0.4
-2.0
-1.6
-0.4
0.3
-1.6
-1.2
-0.4
0.1
0.9
1.0
-0.1
0.1
1.1
0.8
0.3
-0.1
-1.7
-1.3
-0.4
-0.0
-0.7
1.1
-1.8
-0.4
-0.5
0.1
0.6
-0.1
0.8
-0.1
-1.4
1.3
0.4
-1.8
2.3
-1.0
0.5
-1.5
-0.8
0.8
-1.6
0.2
-0.9
1.1
0.6
0.9
0.6
0.3
-0.1
-0.3
-0.7
-0.4
-0.2
0.3
0.6
0.3
0.4
-0.1
0.3
0.9
0.2
0.3
-0.1
0.7
0.9
0.1
0.1
0.0
0.8
0.3
0.3
0.2
0.1
0.0
0.7
0.3
0.2
0.1
0.4
0.2
-0.1
-0.1
0.0
0.3
0.9
0.3
0.2
0.1
0.6
1.8
1.5
0.3
-1.0
-0.8
-0.2
-0.5
-0.7
0.2
-2.6
-2.6
0.0
-0.4
-0.3
-0.1
-0.5
-0.4
-0.1
0.2
0.1
0.0
-0.5
-0.5
-0.0
-1.1
-1.1
-0.0
,
Strictly Confidential <FR>
Class II FOMC
CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS
October 31,
2001
Item
2001
04
2002
01
2002
Q2
2002
Q3
2002
04
2003
Ql
2003
Q2
2003
Q3
2003
Q4
0104/
00Q4
02Q4/
01Q4
03Q4/
02Q4
Real GDP
Gross dom. purchases
-2.4
-2.2
-0.1
0.4
2.8
3.7
3.5
4.4
3.5
3.9
3.5
4.3
3.7
4.5
3.7
4.4
3.8
4.0
-0.3
-0.5
2.4
3.1
3.7
4.3
-1.6
-2.7
-1.3
-1.4
2.4
2.6
2.5
2.7
2.9
2.7
3.0
3.3
3.1
3.2
3.2
3.2
3.7
3.4
0.8
-0.3
1.6
1.6
3.2
3.3
0.9
0.7
-0.2
0.3
-0.4
-2.1
0.5
1.2
2.5
0.8
0.5
1.2
1.9
0.8
0.3
0.9
1.6
0.5
0.3
0.8
2.1
0.5
0.5
1.2
2.1
0.4
0.5
1.2
2.2
0.5
0.5
1.2
2.3
0.5
0.5
1.2
1.4
0.6
0.1
0.7
-2.9
-1.9
-1.0
-0.8
-0.7
-0.4
-0.3
-0.3
-0.1
0.1
-0.2
0.1
0.6
0.7
-0.1
0.2
0.8
0.9
-0.1
0.2
1.0
1.0
-0.0
0.2
1.0
1.0
-0.0
0.2
0.9
0.9
0.0
0.1
1.1
1.1
0.0
-0.0
-0.3
-0.3
0.1
-0.5
-0.3
-0.1
-0.9
0.1
-1.0
-0.9
0.3
-1.2
-0.4
0.6
-1.0
-0.8
0.4
-1.2
-0.8
0.6
-1.4
-0.7
0.7
-1.4
-0.2
0.9
-1.2
1.4
0.5
0.2
0.3
0.9
0.5
0.2
0.1
0.1
0.3
0.7
0.4
0.1
0.3
0.3
0.7
0.4
0.1
0.3
0.3
0.7
0.2
0.1
0.1
0.5
0.6
0.1
0.1
0.1
0.4
0.6
0.1
0.1
0.0
0.5
0.6
0.2
0.1
0.0
0.5
0.6
0.1
0.1
0.0
-0.8
-0.9
0.0
1.3
1.3
0.0
0.4
0.3
0.1
1.0
1.0
-0.0
0.6
0.6
-0.0
0.4
0.4
-0.0
0.7
0.7
0.0
0.5
0.5
-0.0
0.4
Final sales
Priv. dom. final purchases
Personal cons. expenditures
Durables
Nondurables
Services
Business fixed investment
Equipment & Software
Nonres. structures
Residential structures
Net exports
Exports
Imports
Government cons. & invest.
Federal
Defense
Nondefense
State and local
Change in bus. inventories
Nonfarm
Farm
Note.
Components may not sum to totals
because of rounding.
2.2
0.5
0.5
1.2
1.0
1.0
0.0
0.1
0.2
-0.9
1.1
-0.7
0.2
-0.9
-0.6
0.7
-1.3
0.5
0.4
0.0
Strictly Confidential (FR)
Class II FOMC
October 31, 2001
Staff Projections of Federal Sector Accounts and Related Items
(Billions of dollars except as noted)
Fiscal year'
2000 a
Unified budget
2
Receipts
Outlays 2
Surplus/deficit 2
On-budget
Off-budget
Surplus excluding
deposit insurance
Means of financing
Borrowing
Cash decrease
Other3
Cash operating balance,
end of period
Toa
M
2001a
2002
2003
Qla I Q2'
Q3a
2025
1789
236
87
150
460
482
-22
-88
65
660
467
194
119
75
409
451
-42
-51
10
474
501
-27
-77
49
419
501
-82
-108
26
233
-23
193
-42
-28
-83
126
-223
4
-18
24
-7
6
-157
-15
-21
69
-1
-26
34
15
-22
76
-3
9
-97
-28
-2
28
44
44
30
32
60
53
44
45
45
I
Q4
NIPA federal sector
Q2
Q3
Q4
Not seasonally adjusted
621
473
454
494
488
521
127
-15
-68
54
-30
-122
72
16
54
-15
45
-68
25
Ql
Q2
Q3
Q4
455
514
-60
-88
28
651
510
142
63
79
503
504
-0
-19
18
488
537
-48
-110
61
-60
141
-1
-49
62
-5
2
-104
-30
-8
-11
15
-3
30
60
45
30
Seasonally adjusted annual rates
Receipts
Expenditures
Consumption expenditures
Defense
Nondefense
Other spending
Current account surplus
Gross investment
Current and capital
account surplus
2087
1882
508
338
169
1375
205
98
2092
1905
510
340
171
1395
187
100
1916
1937
517
345
172
1420
-21
100
2030
1942
528
347
181
1414
88
104
1885
1995
544
356
188
1451
-110
105
1957
2011
554
360
194
1456
-54
107
1987
2028
564
363
201
1464
-42
108
2019
2058
570
366
204
1488
-39
109
2047
2070
585
375
210
1485
-24
110
2077
2082
589
378
211
1493
-4
111
2109
2095
593
381
213
1502
14
113
2145
2118
597
383
214
1521
27
114
108
87
-122
-16
-216
-161
-150
-148
-134
-116
-99
-87
-98
21
23
-156
-16
-189
-125
-112
-114
-107
-92
-79
-72
4
Fiscal indicators
High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI)
percent, calendar year
.9
-22
.8
.1
.8
-.2
0
-0
2
-1
2
-.6
-. 1
0
-. 1
-. 1
-. 1
-. 1
2
11
25
9
4
3
12
-5
17
5
1
1
3
2
2
2
-110
1. Fiscal year data for the unified budget come from OMB; quarterly data come from the Monthly Treasury Statement and may not sum to OMB fiscal year totals.
2. OMB's August 2001 baseline surplus estimates are $187 billion in FY 2002 and $211 billion in FY 2003. CBO's August 2001 baseline surplus estimates, assuming discretionary spending grows with
inflation beginning in FY 2002, are $176 billion in FY 2002 and $172 billion in FY 2003. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI
surplus and the Postal Service surplus are excluded from the on-budget surplus and shown separately as off-budget, as classified under current law.
3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
4. HEB is the NIPA current and capital account surplus in current dollars, with cyclically sensitive receipts and outlays adjusted to the level of potential output associated with an unemployment rate of
6 percent. Quarterly figures for change in HEB and FI are not at annual rates. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. FI is the weighted difference of discretionary
changes in federal spending and taxes in chained (1996) dollars,scaled by real federal consumptionplus investment. For FI and the change in HEB, negative values indicate aggregate demand restraint.
a--Actual
Strictly Confidential (FR)
Class II FOMC
Change in Debt of the Domestic Nonfinancial Sectors
(Percent)
October 31, 2001
Nonfederal
Households
Memo:
Total 2
Federal
government 3
Total 4
Total
Year
1994
1995
1996
1997
4.5
5.4
5.3
5.6
4.7
4.1
4.0
0.6
4.5
5.9
5.8
7.3
7.4
7.4
6.9
6.2
5.7
5.1
6.7
6.6
14.5
14.1
7.9
4.3
1998
1999
2000
2001
6.7
6.7
5.0
5.2
-1.4
-1.9
-8.0
-0.9
9.4
9.3
8.5
6.6
8.2
8.4
8.4
7.7
9.1
9.2
8.3
9.5
2002
2003
4.3
4.4
1.1
-0.6
5.0
5.5
5.7
6.4
Quarter
2001:1
2
3
4
2002:1
2
3
4
2003:1
2
3
4
5.5
5.4
5.7
3.8
5.1
3.8
4.1
3.9
5.2
4.2
4.2
3.9
-0.1
-7.6
7.7
-3.5
6.2
-0.4
0.1
-1.4
4.4
-1.2
-1.9
-3.6
6.7
8.3
5.3
5.4
4.8
4.7
4.9
5.0
5.4
5.3
5.4
5.4
7.8
9.2
7.0
6.0
5.3
5.4
5.7
5.9
6.2
6.1
6.3
6.4
Period I
Home
mortgages
Consumer
credit
State and local
governments
Nominal
GDP
3.7
7.2
6.3
9.2
-4.0
-4.6
-0.6
5.3
6.2
4.3
6.0
6.2
5.4
7.1
9.3
4.4
11.3
11.5
10.0
5.5
7.2
4.4
2.2
6.2
6.0
6.0
5.3
1.6
7.4
7.6
1.3
3.9
4.6
4.9
2.8
2.6
4.2
5.4
7.8
11.4
9.5
8.1
7.6
7.1
7.0
7.1
7.4
7.3
7.4
7.4
10.1
4.5
1.5
1.4
0.1
0.6
2.0
2.6
3.2
3.6
4.1
4.5
5.4
7.2
3.8
4.9
4.5
4.4
4.5
4.6
4.9
4.9
4.8
4.8
7.8
8.4
3.3
4.8
3.9
3.0
2.1
2.1
2.6
2.6
2.6
2.6
4.6
2.4
1.6
-2.0
2.0
4.5
5.3
5.2
5.6
5.3
5.3
5.3
Business
Note. Quarterly data are at seasonally adjusted annual rates.
1. Data after 2001:Q2 are staff projections. Changes are measured from end of the preceding period to
end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4.
2. On a monthly average basis, total debt is projected to grow 5.3 percent in 2001,4.3 percent in 2002, and 4.4 percent in 2003.
3. On a monthly average basis, federal debt is projected to grow -1.6 percent in 2001, 0.9 percent in 2002, and -0.3 percent in 2003.
4. On a monthly average basis, nonfederal debt is projected to grow 6.9 percent in 2001, 5.0 percent in 2002, and 5.4 percent in 2003.
2.6.3 FOP
Flow of Funds Projections: Highlights
(Billions of dollars except as noted)
Strictly Confidential (FR)
Class II FOMC
October 31, 2001
Seasonally adjusted annual rates
Calendar year
Category
2001
2002
2000
2001
2002
2003
Net funds raised by domestic
nonfinancial sectors
1 Total
2 Net equity issuance
3 Net debt issuance
702.5
-166.6
869.1
886.7
-62.8
949.5
824.0
0.3
823.7
920.7
30.0
890.7
967.2
-33.9
1001.1
959.7
-35.2
994.9
961.0
-114.0
1075.0
659.1
-68.0
727.1
949.7
-22.0
971.7
746.5
1.0
745.5
812.5
14.0
798.5
787.2
8.0
779.2
Borrowing sectors
Nonfinancial business
4 Financing gap
5 Net equity issuance
6
Credit market borrowing
306.9
-166.6
594.8
230.0
-62.8
357.5
164.4
0.3
316.5
234.7
30.0
357.7
304.2
-33.9
355.8
252.3
-35.2
480.0
183.1
-114.0
259.7
180.7
-68.0
334.5
170.3
-22.0
311.0
141.8
1.0
305.3
156.9
14.0
318.7
188.7
8.0
330.7
Households
7 Net borrowing 2
8
Home mortgages
9
Consumer credit
10 Debt/DPI (percent) 3
543.0
377.3
132.3
96.5
543.2
468.1
69.7
98.8
432.3
398.1
21.8
101.0
516.1
437.4
64.7
102.9
549.5
385.1
158.1
97.8
660.9
572.1
72.8
98.9
516.0
490.2
24.5
98.1
446.5
425.0
23.4
101.3
400.5
408.6
1.0
99.6
413.8
389.8
10.6
100.9
446.6
389.6
32.7
101.3
468.5
404.5
43.0
101.8
State and local governments
11
Net borrowing
12 Current surplus 4
27.2
191.9
79.7
197.4
38.4
200.4
36.4
210.6
100.1
189.8
110.1
192.9
43.7
216.9
64.8
190.2
53.4
190.9
41.4
197.4
29.4
204.4
29.4
208.8
-295.9
-295.9
-254.8
-30.8
-30.8
-102.1
36.6
36.6
37.9
-19.5
-19.5
-33.1
-4.3
23.7
22.5
-256.0
-157.4
-193.7
255.7
68.6
41.8
-118.7
34.3
27.4
206.9
76.5
82.4
-15.0
-97.1
-126.8
3.8
5.7
14.8
-49.3
51.6
67.5
Depository institutions
16 Funds supplied
445.3
207.3
235.0
282.8
209.1
239.1
166.2
214.9
161.8
230.8
276.8
270.8
Memo (percentage of GDP)
17 Domestic nonfinancial debt 5
18
Domestic nonfinancial borrowing
19
Federal government 6
20
Nonfederal
180.7
8.8
-3.0
11.8
184.0
9.3
-0.3
9.6
188.5
7.9
0.4
7.5
186.8
8.1
-0.2
8.3
181.6
9.9
-0.0
9.9
182.9
9.8
-2.5
12.3
184.7
10.5
2.5
8.0
187.9
7.1
-1.2
8.3
189.0
9.5
2.0
7.5
189.0
7.2
-0.1
7.3
188.5
7.6
0.0
7.6
188.0
7.3
-0.5
7.8
Federal government
13 Net borrowing
14 Net borrowing (quarterly, n.s.a.)
15
Unified deficit (quarterly, n.s.a.)
Note. Data after 2001:Q2 are staff projections.
I. For corporations: Excess of capital expenditures over U.S. internal funds.
2. Includes change in liabilities not shown in lines 8 and 9.
3. Average debt levels in the period (computed as the average of period-end debt positions)
divided by disposable personal income.
2.6.4 FOF
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
4. NIPA surplus less changes in retirement fund assets plus consumption of fixed capital.
5. Average debt levels in the period (computed as the average of period-end debt positions)
divided by nominal GDP.
6. Excludes government-insured mortgage pool securities.
International Developments
Foreign economic activity appears to be contracting during the second half of
this year, as the ongoing slowdown in the global economy has been exacerbated
by uncertainty following the events of September 11. Although we still have
little hard information on foreign real output after August, anecdotal reports and
confidence indicators suggest some negative effect on both employment and
sentiment. In addition, the anticipated contraction in U.S. activity in the second
half of this year is expected to depress foreign exports. However, foreign equity
markets have rebounded to levels close to those before September 11, relieving
concerns about a substantial additional negative wealth effect.
We expect that some support from both monetary and fiscal policy as well as the
lower level of oil prices will lead to a small positive rate of growth in foreign
activity by early 2002. Growth is then expected to improve gradually to rates
close to potential later in the year as the U.S. economy revives. Nevertheless, in
most parts of the world, sizable negative output gaps are expected to persist
through 2003, and inflation should remain muted. This forecast is somewhat
weaker than our previous projection.
Summary of Staff Projections
(Percent change from end of previous period, s.a.a.r.)
2000
Projection
2001:
.
H1
H2
H1
2001
2 :
H2
2002
2003
Foreign output
September GB
5.4
5.5
2.9
2.7
.0
.1
-.5
.0
2.1
2.4
3.4
3.4
Foreign CPI
September GB
2.2
2.2
3.4
3.4
2.5
2.5
1.7
2.0
2.1
2.2
2.3
2.3
Indicator
2
NOTE. Changes for years are measured as Q4/Q4; for half-years, Q2/Q4 or
Q4/Q2.
We continue to expect oil prices to edge down over the next two years, in line
with futures quotes, although the projection's endpoint is a bit higher than in the
September Greenbook. We are projecting the dollar to change little over the
forecast period, in contrast to the small decline assumed in the previous forecast.
We expect the arithmetic contribution of the external sector to U.S. GDP growth
to be a little more negative in both 2002 and 2003 than it was in the previous
forecast. After declining sharply this year, both exports and imports should pick
up next year and show further expansion in 2003.
International financial markets. Foreign short-term interest rates in the major
industrial countries generally declined during the intermeeting period, most
I-32
Part 1: Summary and Outlook, October 31, 2001
notably in Canada and the United Kingdom in response to their reductions in
policy interest rates. Although the European Central Bank left its policy rates
unchanged during the period, euro short-term market rates dropped nearly 15
basis points, reflecting expectations for an easing by year end. The Bank of
Japan continued to leave an elevated amount of reserves in the banking system,
keeping its current account positions above Y6 trillion and short-term interest
rates near zero.
Stock markets in foreign industrial countries generally rose on balance over the
intermeeting period, likely reflecting a reversal of the sharp increase in risk
aversion immediately following the terrorist attacks as well as prospects for
easier monetary policy. Equity prices in many emerging-market countries also
rose; sovereign bond yield spreads generally narrowed, including those of
Mexico and Brazil. In contrast, in Argentina, where concerns over public sector
indebtedness remain high, equity prices fell more than 5 percent, and bond yield
spreads widened 400 basis points.
Theheightened uncertainty about the U.S. economic outlook has not resulted in
significant downward pressure on the foreign exchange value of the dollar. The
broad nominal index is up slightly since the previous FOMC meeting, with
small net gains against all of the major industrial country currencies and against
most emerging-market currencies as well. In particular, the Brazilian real
appeared to suffer from concerns about prospects in Argentina. The only major
exception to this general pattern was the Mexican peso, which rose nearly 3
percent against the dollar.
The continued strength of the dollar may reflect a view that long-term prospects
for the United States are still more favorable than those abroad. Over the
intermeeting period, foreign long-term bond yields have fallen somewhat more
than comparable U.S. rates. The relative decline has been ascribed to both
disappointing recent foreign economic data and concerns that the policy
response to the slowdown abroad will be less vigorous than that in the United
States. We continue to believe that the large and growing U.S. external debt
will at some point begin to outpace growth in demand for U.S. assets, thus
exerting downward pressure on the dollar. However, the current countervailing
trend suggests that a turnaround may not be imminent. We have thus assumed
for this forecast that the dollar will be little changed, on net, over the projection
period in both nominal and real terms against the currencies of our major trading
partners.
The Desk did not intervene during the period for the
accounts of the System or the Treasury.
InternationalDevelopments
I-33
Oil prices. The spot price of West Texas Intermediate has traded in a fairly
narrow range around $22 per barrel over the intermeeting period. Concerns
about weak world oil demand resulting from both lower jet fuel consumption
and prospects for reduced economic activity more generally have weighed on oil
prices. In addition, relative to earlier this year, OPEC appears to have become
somewhat less willing to sacrifice market share for higher oil prices by making
additional production cuts. However, OPEC officials have been consulting with
several non-OPEC producers with the aim of reaching a more broadly based
agreement on production restraint. We project that, in line with recent futures
quotes, the spot price of WTI will remain just above $22 per barrel through
2002 and will gradually drift down to $21.50 per barrel by the end of 2003. The
endpoint of this projection is about $1 per barrel higher than that in the
September Greenbook, reflecting some expectation that future production will
be restrained.
Foreign industrial countries. Recent indicators of economic activity in the
foreign industrial countries are consistent with our previous forecast for little
change in output on average in the third quarter. Forward-looking indicators
point to a slight decline in the fourth quarter, a bit weaker forecast than our
previous one. We continue to project a gradual recovery next year, with growth
averaging a bit less than 2 percent in 2002 and about 3 percent in 2003,
reflecting the expected reduction in inventory and investment overhangs,
monetary stimulus, lower oil prices, and the projected revival in U.S. growth.
All the major foreign industrial economies follow this general pattern, although
the severity and the duration of the slowdown differ across areas. Inflation in
these countries, which is currently averaging about 1-1/2 percent, is expected to
fall to about 1 percent by the second quarter of next year as a result of both
lower oil prices and the sluggish pace of activity and to remain around that rate
through 2003.
The Japanese economy remains the weakest, with a drop of more than 4 percent
in industrial production suggesting that real GDP posted another sizable decline
in the third quarter. In addition, the unemployment rate reached a record level
of 5.3 percent in September, and the Tankan showed a sharp reduction in
business confidence. A further contraction in output is expected in the fourth
quarter, reflecting declines in both public and private investment and a fall in
exports. We expect the economy to contract somewhat more in the first half of
next year as private investment and exports remain weak, but then to turn up a
little in the second half of the year as the shake-out in private investment
spending ends and improving world activity boosts exports. The Japanese
government plans to pass a supplementary budget next month that will focus on
increasing public employment and shoring up the unemployment safety net
rather than on public investment, providing some support to consumption next
I-34
Part 1: Summary and Outlook, October31, 2001
year. The Bank of Japan is expected to maintain short-term interest rates near
zero through the forecast period and to keep reserves above the target level of ¥6
trillion, as prices continue to fall at an annual rate of about 1 percent.
The Canadian economy is also expected to contract in the second half of this
year following a sluggish second quarter. In the third quarter, employment fell
slightly and consumer confidence weakened. In addition, business confidence
plunged, suggesting lethargic investment spending over the next couple of
quarters. Lower U.S. demand and disruptions to travel and tourism are also
expected to have a negative impact on the economy in the near term. Real GDP
growth is expected to pick up in the second half of next year, as improved
demand in the United States contributes to a return to positive export growth,
and fiscal and monetary stimulus boost domestic demand. Following a largerthan-expected 75-basis-point rate cut on October 23, we expect the Bank of
Canada to reduce rates by another 25 basis points before the end of this year and
to hold them steady through the end of 2002. We expect rates to rise about 100
basis points over 2003 as the expansion solidifies.
After a sluggish second quarter, growth in the euro area appeared to revive
somewhat in the summer months, as both industrial production and German
manufacturing orders rebounded in August. However, more recently business
confidence has fallen sharply, consumer confidence has dipped, and
unemployment rates have edged up. We expect third-quarter data to show a
small increase in real GDP, followed by a stagnant fourth quarter as exports
weaken. Growth is expected to remain sluggish in the first half of next year and
then revive somewhat in the second half as both consumption and investment
spending respond to continued moderation in oil prices and recent and projected
monetary easing, and exports recover along with a revival in foreign activity.
The ECB is expected to reduce official interest rates 25 basis points by the end
of this year and an equal amount early next year. We expect a moderate
increase in rates beginning in late 2002 as the economy strengthens.
In contrast to the general pattern of weakening global activity, preliminary thirdquarter real GDP for the United Kingdom showed an increase of 2.4 percent at
an annual rate. However, this number is based primarily on data from July and
August, and indicators show some slowing in September. In addition, business
confidence fell very sharply in October. We expect some weakening in activity
in the next two quarters, although not as much as in most other countries. We
then expect some pickup later next year as export growth responds to improving
global demand. We assume that the Bank of England will cut official rates
another 25 basis points this quarter in response to the weaker outlook and will
keep them unchanged through the middle of next year. We then expect rates to
be increased 125 basis points by the end of 2003 as the economy improves.
InternationalDevelopments
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I-35
I-35
Other countries. Indicators for the major emerging-market economies suggest
that output contracted for the third consecutive quarter in 2001:Q3. In addition
to the spillover effects of the weakness in the U.S. economy, the Asian
economies continue to suffer from depressed global electronics demand, and
some Latin American countries, particularly Brazil, have been hit by the
unsettled situation in Argentina. We expect economic growth to remain
negative in the fourth quarter in both these regions, with only a gradual recovery
in most areas over the next two years. Because of significant excess capacity,
inflation should remain generally well contained through the end of the forecast
period.
In Asia, Singapore's real GDP plunged 10 percent at an annual rate in the third
quarter following declines of a similar size in the two preceding quarters. In
other ASEAN countries, particularly those that export significant quantities of
electronic goods, industrial production remained sluggish through August. One
of the few indicators of September activity, industrial production in Taiwan,
showed a very large 8 percent (monthly rate) drop. Somewhat surprisingly,
Korean industrial production registered significant increases in both August and
September, but business sentiment dropped sharply in September. The
mainland Chinese economy remains the most notable exception to the region's
sluggish performance, as output has continued to expand rapidly, supported by
sizable fiscal stimulus. We now expect GDP in the developing Asian
economies to contract about 1-1/4 percent at an annual rate on average during the
second half of this year, as continued strong growth in China is outweighed by
declines in most other countries in the region. A gradual recovery is still
expected over the next two years in response to improving external conditions
and to monetary and fiscal stimulus measures undertaken by several countries.
Growth in this region is projected to average about 3 percent next year and 5
percent in 2003.
In Latin America, production indicators suggest a small further decline in real
GDP in the third quarter after three quarters of contraction, and we expect the
fourth quarter to be even weaker, with real GDP falling about 1 percent at an
annual rate on average. For Mexico, industrial production data through August
showed only a small decline from the second quarter. However, in September
auto production fell sharply and business confidence plunged to its lowest level
since August 1998. In Brazil, industrial production through August also
declined only slightly from the second quarter, but consumer confidence
dropped off sharply in October. Argentina remains in a deep recession and a
restructuring of its debt is now being openly debated; we expect that continued
financial disruptions will weigh very heavily on activity through next year, and
more than the usual degree of uncertainty applies to our projection that the
economy will move toward stability in 2003. For the region as a whole, we
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Part1: Summary and Outlook, October 31, 2001
expect real GDP to increase at an average annual rate of about 2 percent in 2002
and 3-1/2 percent in 2003.
Prices of internationally traded goods. The prices of both imported non-oil
goods and core goods fell about 6 percent at an annual rate in the third quarter,
similar to the rate of decline in the second quarter. The declines were led by
decreases in the price of imported industrial supplies, with smaller price
declines recorded in all other major trade categories. Import prices should
continue declining in the fourth quarter, largely because of near-term weakness
in materials prices. Next year, core import prices are projected to begin to rise
as primary commodity prices move back up and foreign inflation rates rise
slightly.
The price of U.S. core goods exports declined about 1-1/2 percent at an annual rate
in the third quarter, a bit more than in the second quarter, as a larger drop in the
price of exported industrial supplies was only partly offset by a swing from
negative to positive in the change in the price of agricultural exports. Core
goods export prices are projected to continue to decline through the first quarter
of 2002 and then to rise at less than a 1 percent pace over the remainder of the
forecast period, reflecting the very moderate increases projected for U.S. goods
prices.
Selected Trade Prices
(Percent change from end of previous period except as noted; s.a.a.r.)
Projection
2000
2001:
Trade category
H1
H2
H1
2.7
.7
-.5
2001:
H2
2002
2003
Exports
Core goods
-2.0
.6
.8
Imports
Non-oil core goods
Oil (dollars per barrel)
-1.5
1.7
1.5
26.18 28.87 24.21
-4.2
.6
20.23 19.64
1.3
19.05
NOTE. Prices for core exports and non-oil core imports, which exclude
computers and semiconductors, are on a NIPA chain-weighted basis.
The price of imported oil for multi-quarter periods is the price for the final quarter
of the period.
Trade in goods and services. The U.S. trade deficit in goods and services for
July and August combined was $338 billion (s.a.a.r.), considerably smaller than
that for the second quarter, as imports fell more than exports. The average value
of imports for the two months was down 14 percent at an annual rate from the
InternationalDevelopments
I-37
second-quarter average, with declines widespread among most major trade
categories. Over the same period the value of exports was down 12 percent at
an annual rate, with the largest decrease in exported capital goods, and smaller
but still substantial drops in exported consumer goods and industrial supplies.
The declines in both imports and exports followed similar-sized decreases in the
second quarter.
The nominal (but not the real) value of net exports of goods and services was
affected significantly in the third quarter by the payments of foreign insurers and
reinsurers on claims resulting from the events of September 11.1 These
payments are shown as a subtraction from imported services, reducing the
reported value of services imports by more than $40 billion at an annual rate.
As a result, the U.S. current account deficit as a share of GDP is projected to
decline temporarily to 3-1/2 percent in the third quarter of this year before
returning to about 4 percent in the fourth quarter. We expect that the current
account deficit as a share of GDP will rise to 4-1/2 percent in 2003.
The decline in real imports of goods and services in the first two quarters of the
year appears to have been followed by an even sharper drop in the third quarter.
This exceptional weakness reflects in part the downturn in U.S. investment
activity, as the decline in imports has been concentrated in computers,
semiconductors, and other capital goods. Imports of consumer goods, which
increased in real terms in the second quarter, also appear to have declined a bit
in the first two months of the third quarter. The terrorist attacks are expected to
have two distinct effects on real trade. First, delays in goods exports and
imports due to temporary port closures and other transportation disruptions
should be made up in October. This will result in lower real exports and imports
in the third quarter, followed by a higher level in the fourth quarter. In addition,
we expect real services imports (and exports), particularly travel, to suffer more
sustained losses.
On balance, we expect real imports of goods and services to be little changed in
the fourth quarter as reduced travel and continued weakness in U.S. spending on
investment goods is offset by the transactions delayed from the third quarter and
1. The "insurance payment" component of imported services is calculated as the value of
premiums paid to foreign companies less the amount of losses recovered from foreign
companies. In the third quarter, the size of "losses recovered" will far exceed the amount paid
for insurance premiums, resulting in a "negative" recorded insurance payment. According to
NIPA accounting, the entire amount of an insurance payment is recorded in the quarter in which
the incident occurred. The value of insurance payments by foreign insurers is not reflected in
NIPA real imports of services. The deflator for service imports is thus adjusted down in the third
quarter to offset the lower value of service imports, and returns to its usual value in the fourth
quarter.
I-38
Part 1: Summary and Outlook, October 31, 2001
an increase in domestic consumption from fiscal stimulus. As the recovery in
U.S. activity takes hold in 2002, imports should begin to rise again in the first
quarter and rebound more robustly thereafter. Specifically, we project that
imports will grow at a 8-1/2 percent annual rate through the last three quarters of
2002 and at a 10 percent pace in 2003. The lagged effects on relative prices of
the dollar's appreciation over the past six quarters provide some stimulus to
imports, but the primary boost derives from revived U.S. growth and the high
U.S. propensity to import.
Summary of Staff Projections
for Trade in Goods and Services
(Percent change from end of previous period, s.a.a.r.)
2000
Measure
Real exports
September GB
Real imports
September GB
Projection
20 0 1 :
HI
H2
2001
H1
2001
2
H2
2002
2003
11.2
3.0
-6.7
-10.0
1.9
6.8
11.2
3.0
-6.7
-9.7
3.1
6.8
16.8
6.0
-6.7
-8.2
6.7
9.8
16.8
6.0
-6.8
-4.9
5.0
8.3
NOTE. Changes for years are measured as Q4/Q4; for half-years, Q2/Q4 or
Q4/Q2.
Exports of real goods and services are estimated to have declined at a doubledigit rate in the third quarter for the second consecutive quarter. The drop in
exports of high-tech goods and other capital equipment has been particularly
pronounced as global investment has weakened markedly. Looking ahead, we
expect export growth to remain slightly negative through the first quarter of
2002 in response to projected sluggish foreign activity, the lagged effects of past
dollar appreciation, and subdued exports of services (particularly travel and
passenger fares). As foreign growth recovers, exports of goods and services
should rebound, growing 3-1/4
percent through the last three quarters of 2002 and
picking up to 7 percent in 2003.
InternationalDevelopments
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I-39
I-39
Alternative Simulations
Although our baseline forecast contains a modest amount of fiscal stimulus
abroad, it is possible that foreign governments will in fact react more
aggressively to the weakening in global demand. In our first alternative
simulation, we use the FRB Global model to consider the possibility that fiscal
policy abroad will provide more stimulus than incorporated into our baseline
forecast. Given that the dollar has appreciated since the September Greenbook
despite our earlier expectations that it would decline, the second scenario
considers the effects of a stronger dollar than we are currently assuming.
More expansionary fiscal policy abroad. In this scenario, we assume that
government spending in all major foreign countries is higher than in the baseline
by 1 percent of GDP throughout the forecast period. Two monetary policy
responses are considered. In the first case, both the United States and the major
foreign industrial countries keep short-term real interest rates fixed at their
baseline values. Rather than use the more standard convention of a Taylor rule
for the foreign countries in this case, we keep their real rates fixed under the
assumption that they would be trying to maximize the impact of the fiscal
stimulus. In the second case, monetary policy authorities both in the United
States and abroad adjust nominal interest rates according to a Taylor rule.
With fixed rates, the rise in government spending raises U.S. real output growth
0.4 percentage point in 2002:H1, 0.3 percentage point in 2002:H2, and 0.2
percentage point in 2003. The effect of the shock on core price inflation is small
and only becomes apparent in 2003, as core inflation adjusts more slowly than
output to changes in aggregate demand. In the Taylor rule case, changes in
government spending abroad have a smaller and more transient effect on U.S.
output. U.S. real GDP growth rises 0.3 percentage point above the baseline in
2002:H1, then falls immediately back to baseline growth thereafter. However,
this case requires an increase in the federal funds rate of 30 basis points by the
second half of 2002, while short-term rates in Europe and Japan both are up
around 200 basis points. Inflation rises a little earlier than in the fixed real rates
case despite a more aggressive monetary policy response because the relative
movements in interest rates here and abroad result in a larger dollar
depreciation.
I-40
Part 1: Summary and Outlook, October 31, 2001
Alternative Scenario: More Expansionary Fiscal Policy Abroad
(Percent change from previous period, annual rate)
2003
2002
2001
Indicator and simulation
H2
H1
H2
H1
H2
Baseline
-1.4
1.3
3.5
3.6
3.7
Alternative scenario
Fixed real rates
-1.4
1.7
3.8
3.8
3.9
-1.4
1.6
3.5
3.6
3.7
1.6
1.6
1.5
1.4
1.3
1.6
1.6
1.5
1.5
1.5
1.6
1.6
1.6
1.5
1.4
U.S. real GDP
Taylor rule
U.S. PCE prices excl. food and
energy
Baseline
Alternative scenario
Fixed real rates
Taylor rule
NOTE. H1 is Q2/Q4; H2 is Q4/Q2.
1. Foreign policy follows a Taylor rule and U.S. policy keeps real rates fixed.
Stronger dollar. In this scenario, there is a shock to the risk premium on U.S.
assets (relative to foreign assets) that would raise the value of the real dollar by
10 percent immediately if both domestic and foreign real interest rates remained
unchanged. Again, we consider two monetary policy responses for the United
States. In the first, the United States has a fixed real rate, whereas major foreign
industrial countries follow a Taylor rule. In the second, both foreign and U.S.
monetary policies follow a Taylor rule. In the first case, real GDP growth falls
0.3 percentage point on average in both 2002 and 2003. Core price inflation
falls a few tenths below baseline for most of the simulation period. In the
Taylor rule case, the response of U.S. GDP and core prices is more muted. Real
GDP growth is down only about 0.2 percentage point from baseline growth on
average in 2002, while core price inflation does not drop as much as in the fixed
real rate case. In this case, the federal funds rate is down 60 basis points by the
second half of 2002 relative to the baseline and is lower by about 25 basis points
at the end of 2003.
InternationalDevelopments
I-41
Alternative Scenario: Ten Percent Dollar Appreciation
(Percent change from previous period, annual rate)
2001
2002
2003
Indicator and simulation
U.S. real GDP
Baseline
Alternative scenario
Fixed real rates
Taylor rule
H2
H1
H2
H1
H2
-1.4
1.3
3.5
3.6
3.7
-1.5
-1.5
1.0
1.1
3.2
3.4
3.2
3.6
3.5
3.7
U.S. PCEprices excl. food and
energy
Baseline
1.6
1.6
1.5
1.4
Alternative scenario
Fixed real rates
1.6
1.3
1.1
1.2
Taylor rule
1.6
1.3
1.2
1.3
NOTE. H1 is Q2/Q4; H2 is Q4/Q2.
1. Foreign policy follows a Taylor rule and U.S. policy keeps real rates fixed.
1.3
1.2
1.3
Strictly Confidential (FR)
October 31, 2001
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, Q4 to Q4)
----- Projected---Measure and country
1995
1996
1997
1998
1999
2000
2001
2002
2003
2.4
4.0
4.2
1.4
4.8
4.1
-0.2
2.1
3.4
Industrial Countries
of which:
Canada
Japan
United Kingdom
Euro Area (2)
Germany
2.0
2.6
3.5
2.6
3.8
3.1
0.3
1.8
2.9
4.2
-1.4
2.6
2.0
0.6
5.1
0.4
2.7
3.6
3.0
0.3
-2.1
2.0
0.8
0.2
Developing Countries
Asia
Korea
China
Latin America
Mexico
Brazil
3.0
6.9
7.5
10.4
-3.8
-7.1
-0.8
-0.2
-1.9
-5.2
9.5
1.2
2.8
-1.1
6.2
8.6
13.8
4.1
4.4
5.4
4.0
-1.0
-1.7
0.4
7.3
-0.8
-1.2
0.3
1.0
1.2
1.8
1.5
1.0
1.0
2.3
-1.2
2.2
1.5
1.1
3.1
-1.2
2.1
2.7
2.5
2.2
-0.6
2.2
2.3
1.8
1.6
-0.9
2.1
1.7
1.1
1.5
-0.9
2.4
1.7
1.1
REAL GDP
(1)
Total foreign
CONSUMER PRICES
1.
2.
3.
4.
(3)
Industrial Countries
of which:
Canada
Japan
United Kingdom (4)
Euro Area (2)
Germany
2.0
-0.8
2.9
NA
1.5
Developing Countries
Asia
Korea
China
Latin America
Mexico
Brazil
16.9
6.4
4.3
11.1
42.0
48.7
21.5
1.3
1.5
11.1
4.8
5.0
6.8
25.8
28.0
9.6
1.5
6.8
2.7
4.9
0.9
15.5
17.0
4.6
9.0
4.4
5.9
-1.2
15.4
17.4
1.5
4.6
0.2
1.2
-0.9
12.5
13.6
8.2
Foreign GDP aggregates calculated using shares of U.S. exports.
Harmonized data for euro area from Eurostat.
Foreign CPI aggregates calculated using shares of U.S. non-oil imports.
CPI excluding mortgage interest payments, which is the targeted inflation rate.
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent changes)
----------------------2001
Measure and country
Measure and country
REAL GDP (1)
Total foreign
Q1
Q1
Q2
Q2
Q3
Q3
Q4
Q4
Q1
Q1
October 31, 2001
Projected --------------------------2002
2003
Q2
Q3
Q4
01
Q2
Q3
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q4
-------------------- Quarterly changes at an annual rate -----------------0.8
-0.7
-0.5
-0.4
0.7
1.9
2.7
3.0
3.4
3.5
3.4
3.4
Industrial Countries
of which:
Canada
Japan
United Kingdom
Euro Area (2)
Germany
1.6
-0.1
0.0
-0.5
0.6
1.6
2.4
2.7
3.0
3.0
2.9
2.9
0.4
-3.2
1.8
0.3
-0.1
-0.2
-3.0
2.4
0.8
-0.2
.-0.9
-2.6
1.4
0.1
-0.5
0.4
-0.8
1.7
0.5
0.1
2.0
-0.3
2.3
1.2
0.8
3.5
1.1
2.7
2.9
2.8
3.5
1.2
2.7
2.9
2.9
3.3
1.3
2.7
2.8
2.6
3.3
1.3
2.7
2.7
2.5
Developing Countries
Asia
Korea
China
Latin America
Mexico
Brazil
-0.6
-1.0
1.3
8.1
-0.9
-1.3
0.7
-1.6
-3.2
1.8
7.5
-0.6
-1.0
0.1
-1.3
-2.4
-0.5
6.9
-0.7
-1.0
0.5
-0.5
-0.2
-1.0
6.8
-1.2
-1.5
-0.0
3.2
3.6
2.5
7.5
2.8
3.2
2.7
4.1
4.7
4.5
7.5
3.6
4.1
2.6
CONSUMER PRICES (3)
-------------------
Industrial Countries
of which:
Canada
Japan
United Kingdom (4)
Euro Area (2)
Germany
Developing Countries
Asia
Korea
China
Latin America
Mexico
Brazil
1.
2.
3.
4.
--------------------------- Four-quarter changes -------------------------1.7
2.1
1.7
1.5
1.4
0.9
0.9
1.0
1.0
1.0
1.0
1.0
2.8
-1.0
1.9
2.5
2.4
3.6
-1.2
2.3
3.1
3.2
2.7
-1.1
2.4
2.7
2.4
2.2
-0.6
2.2
2.3
1.8
2.2
-0.9
2.3
2.2
1.4
1.3
-0.6
1.9
1.5
0.7
1.5
-0.9
1.9
1.6
1.0
1.6
-0.9
2.1
1.7
1.1
1.6
-0.9
2.3
1.7
1.1
1.5
-0.9
2.3
1.7
1.1
1.5
-0.9
2.4
1.7
1.1
1.5
-0.9
2.4
1.7
1.1
3.0
0.8
3.9
-0.7
5.9
5.9
6.8
3.3
1.0
3.6
-0.3
7.0
7.0
7.2
Foreign GDP aggregates calculated using shares of U.S. exports.
Harmonized data for euro area from Eurostat.
Foreign CPI aggregates calculated using shares of U.S. non-oil imports.
CPI excluding mortgage interest payments, which is the targeted inflation rate.
4.0
3.0
2.7
3.1
5.4
5.3
5.9
Strictly Confidential
Class II FOMC
(FR)
October 31, 2001
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1995
1996
1997
1998
1999
2000
-----2001
Projected -----2002
2003
NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth, Q4/Q4
Net Goods & Services
Exports of G&S
Imports of G&S
0.4
1.0
-0.6
-0.2
1.1
-1.3
-0.8
1.0
-1.7
-1.1
0.3
-1.3
-1.0
0.5
-1.5
-0.8
0.8
-1.6
0.2
-0.9
1.1
-0.7
0.2
-0.9
-0.6
0.7
-1.3
Percentage change, Q4/Q4
Exports of G&S
Services
Computers
Semiconductors
Other Goods 1/
9.7
8.8
39.1
79.6
4.6
9.8
8.9
21.6
44.6
7.3
8.5
1.4
25.8
21.3
9.8
2.3
2.9
8.1
9.1
1.3
4.5
1.9
13.8
34.6
3.2
7.0
4.1
23.1
26.9
5.7
-8.4
-5.6
-22.1
-37.6
-5.9
1.9
5.6
14.6
15.7
-1.5
6.8
5.3
29.9
29.9
4.7
Imports of G&S
Services
5.0
5.5
11.2
5.3
14.3
14.0
10.8
8.5
Oil
Computers
11.5
2.8
11.3
12.2
-7.4
-8.7
6.7
7.3
9.8
5.6
2.4
35.0
7.8
17.8
3.9
33.0
4.1
25.8
Semiconductors
Other Goods 2/
-3.4
25.1
12.4
13.6
-1.0
-19.2
92.4
-1.2
3.4
14.6
56.7
10.4
0.8
29.9
32.9
12.7
-8.7
11.5
33.5
12.9
22.5
10.4
-53.4
-4.8
15.7
6.2
29.9
9.8
-316.9
1034.8
1351.7
-399.1
1133.2
1532.3
-401.4
1091.0
1492.4
-448.7
1053.5
1502.2
-533.4
1110.6
1644.0
Billions of chained 1996 dollars
Net Goods & Services
Exports of G&S
Imports of G&S
-78.4
808.2
886.6
-89.0
874.2
963.1
-113.3
981.5
1094.8
-221.1
1002.4
1223.5
Billions of dollars
US CURRENT ACCOUNT BALANCE
Current Acct as Percent of GDP
-109.9
-1.5
-120.9
-1.5
-139.8
-1.7
-217.5
-2.5
-324.4
-3.5
-444.7
-4.5
-405.6
-4.0
-424.0
-4.1
-496.4
-4.5
Net Goods & Services (BOP)
-96.4
-101.8
-107.8
-166.8
-261.8
-375.7
-334.4
-356.9
-431.0
Investment Income, Net
Direct, Net
Portfolio, Net
25.0
64.9
-39.9
25.5
69.4
-43.9
13.6
72.4
-58.8
-1.2
66.3
-67.5
-8.5
67.0
-75.6
-9.6
81.2
-90.9
-13.6
90.8
-104.4
-7.3
88.0
-95.3
-4.7
84.7
-89.4
Other Income & Transfers,Net
-38.6
-44.6
-45.7
-49.4
-54.0
-59.3
-57.6
-59.8
-60.7
1. Merchandise exports excluding computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
Strictly Confidential
Class II FOMC
October 31, 2001
(FR)
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1998
------- '---------------------
Q1
Q2
Q3
Q4
1999
----------------------------
Q1
Q2
Q3
2000
------------------- '--------
Q4
Q1
Q2
Q3
Q4
-0.1
1.3
-1.3
-1.3
0.9
-2.2
-0.8
1.4
-2.2
-0.7
1.1
-1.8
-0.4
-0.5
0.1
IPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
-1.8
0.1
-1.9
-1.8
-0.5
-1.4
-0.8
-0.2
-0.5
0.2
1.7
-1.5
-1.8
-0.8
-1.0
-1.2
0.4
-1.6
-0.7
1.0
-1.7
Percentage change from previous period, s.a.a.r.
Exports of G&S
Services
Computers
Semiconductors
Other Goods 1/
0.5
2.4
-8.3
5.9
0.0
-4.0
8.0
8.2
-17.2
-9.2
-2.2
-8.412.0
272.7
-9.3
16.3
10.5
22.8
-56.6
27.8
-6.8
-3.9
0.5
45.4
-11.5
4.2
3.8
26.8
31.6
1.1
9.7
2.0
18.3
36.5
11.0
12.1
6.0
11.0
25.8
14.2
9.0
10.3
32.7
29.9
5.3
13.5
9.9
49.2
64.5
9.1
10.6
-6.7
25.8
35.0
16.3
-4.0
3.7
-7.9
-10.2
-6.5
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
15.9
21.3
3.6
38.4
8.5
14.2
11.3
6.7
42.8
18.5
-25.4
11.9
4.2
7.0
1.1
6.4
-6.3
4.1
12.2
0.1
-21.6
43.6
-8.2
16.2
8.4
-8.2
3.9
40.6
37.0
9.0
13.3
1.8
29.8
41.1
47.5
11.3
13.8
7.9
-5.8
8.3
12.7
17.6
10.5
11.0
-31.5
13.8
39.6
14.0
17.1
20.6
29.7
12.8
45.6
14.6
16.4
12.4
40.3
34.4
24.9
13.1
13.0
17.1
-4.9
18.4
64.9
11.9
-0.5
0.0
-7.7
-7.2
-24.9
2.4
-337.8
1072.1
1409.8
-371.1
1095.5
1466.6
-392.8
1130.6
1523.4
-411.2
1159.3
1570.6
-421.1
1147.5
1568.5
Billions of chained 1996 dollars, s.a.a.r.
Net Goods & Services
Exports of G&S
Imports of G&S
-180.8
1003.4
1184.2
-223.1
993.1
1216.2
-241.2
987.6
1228.9
-239.2
1025.6
1264.8
-283.0
1007.6
1290.6
-313.4
1018.0
1331.4
-333.3
1041.8
1375.1
Billions of dollars, s.a.a.r.
JS CURRENT ACCOUNT BALANCE
urrent Account as % of GDP
-174.0
-2.0
-209.6
-2.4
-242.1
-2.7
-244.1
-2.7
-265.8
-2.9
-309.5
-3.4
-352.3
-3.8
-369.9
-3.9
-419.6
-4.3
-432.5
-4.4
-461.2
-4.6
-465.3
-4.6
Net Goods & Services (BOP) -139.5
-169.9
-181.9
-176.0
-211.5
-251.5
-284.5
-299.9
-349.3
-363.1
-389.4
-401.2
9.9
74.2
-64.2
5.8
69.8
-64.0
-12.3
57.8
-70.1
-8.3
63.3
-71.5
-5.2
66.2
-71.4
-6.6
63.0
-69.6
-15.5
63.3
-78.8
-6.8
75.7
-82.5
-17.5
65.5
-83.0
-14.4
72.5
-86.8
-14.5
84.2
-98.7
7.9
102.8
-94.9
Other Inc. & Transfers, Net -44.4
-45.5
-47.9
-59.8
-49.1
-51.5
-52.2
-63.3
-52.8
-55.0
-57.4
-72.0
Investment Income, Net
Direct, Net
Portfolio, Net
1. Merchandise exports excluding computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
Strictly Confidential
Class II FOMC
October 31, 2001
(FR)
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
2001
----------------------------- Projected -------------------------------2002
2003
----------------------------
Q1
Q2
Q3
Q4
---------------------------
Q1
Q2
Q3
---------------------------
Q4
Q1
Q2
Q3
Q4
-0.4
0.6
-1.0
-0.8
0.4
-1.2
-0.8
0.6
-1.4
-0.7
0.7
-1.4
-0.2
0.9
-1.1
[PA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
0.6
-0.1
0.8
-0.1
-1.4
1.3
0.4
-1.8
2.3
-0.2
-0.3
0.1
-0.5
-0.3
-0.1
-0.9
0.1
-1.0
-0.9
0.3
-1.2
Percentage change from previous period, s.a.a.r.
Exports of G&S
Services
Computers
Semiconductors
Other Goods 1/
-1.2
1.8
-5.8
-22.4
-0.1
-11.9
2.4
-41.1
-56.1
-10.8
-16.3
-13.5
-21.9
-45.3
-14.8
-3.2
-12.0
-15.1
-18.5
3.3
-3.3
11.5
-3.9
-3.9
-9.8
1.1
2.6
17.0
17.0
-1.4
3.3
4.0
21.5
26.2
0.6
6.5
4.6
26.2
26.2
5.2
3.9
5.2
28.6
28.6
0.3
6.6
5.4
28.6
28.6
4.4
7.3
5.4
31.1
31.1
5.2
9.6
5.4
31.1
31.1
9.0
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
-5.0
4.9
27.1
-11.0
-31.8
-8.4
-8.4
-2.0
4.3
-29.1
-75.0
-4.8
-15.2
-28.9
-27.2
-23.6
-63.0
-7.6
-0.6
-4.9
-0.4
-11.5
-25.2
1.8
1.0
14.3
-6.7
-3.9
-3.9
-0.6
8.3
4.3
29.2
17.0
17.0
6.7
9.7
5.4
9.9
21.5
26.2
9.6
8.0
5.5
-13.8
26.2
26.2
9.2
9.3
5.5
-6.9
28.6
28.6
10.1
10.8
5.7
18.9
28.6
28.6
9.8
10.5
5.7
11.4
31.1
31.1
9.7
8.6
5.7
-16.3
31.1
31.1
9.6
-478.0
1071.1
1549.0
-502.6
1081.4
1584.0
-526.4
1098.7
1625.1
-547.8
1118.2
1666.0
-556.7
1144.2
1700.8
Billions of chained 1996 dollars, s.a.a.r.
Net Goods & Services
Exports of G&S
Imports of G&S
-404.5
1144.1
1548.6
-406.7
1108.3
1515.0
-393.9
1060.2
1454.0
-400.3
1051.5
1451.8
-412.7
1042.8
1455.4
-439.0
1045.7
1484.7
-465.4
1054.3
1519.6
Billions of dollars, s.a.a.r.
IS CURRENT ACCOUNT BALANCE
:urrent Account as % of GDP
-447.1
-4.4
-425.4
-4.2
-353.5
-3.4
-396.4
-3.9
-389.3
-3.8
-412.4
-4.0
-435.3
-4.1
-458.8
-4.3
-467.1
-4.3
-485.9
-4.4
-505.5
-4.6
-526.9
-4.7
Net Goods & Services (BOP) -380.1
-355.2
-285.6
-316.8
-325.8
-348.5
-371.2
-381.8
-404.1
-425.0
-443.8
-451.1
Investment Income, Net
Direct, Net
Portfolio, Net
-14.6
90.7
-105.3
-16.6
92.3
-109.0
-13.4
88.7
-102.1
-9.7
91.5
-101.1
-7.5
91.1
-98.6
-7.5
89.4
-96.9
-7.7
86.5
-94.2
-6.6
85.1
-91.7
-5.5
85.1
-90.7
-3.5
85.3
-88.8
-4.4
84.2
-88.5
-5.4
84.2
-89.7
Other Inc. & Transfers, Net -52.4
-53.6
-54.4
-69.9
-55.9
-56.4
-56.4
-70.4
-57.4
-57.4
-57.4
-70.4
1. Merchandise exports excluding computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
@FedFRASER