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The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
Please note that some material may have been redacted from this document if that
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Content last modified 02/09/2012.

Class III FOMC - Internal (FR)

Part 2

October 18, 2006

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Class III FOMC - Internal (FR)

October 18, 2006

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
The broad picture of economic activity has not changed appreciably over the past month.
Payroll employment has continued to rise moderately on net, and spending on
consumption and business fixed investment has held up well. However, the increase in
starts in September notwithstanding, the contraction in housing construction remains a
significant drag on overall activity, and industrial production has slackened noticeably
since midyear, in part because of steep reductions in motor vehicle assemblies. Energy
prices dropped sharply in September and fell further in the first half of October, but core
consumer price inflation remains elevated relative to readings from a year ago.
Labor Market
The demand for labor continued to increase in September, although at a slower pace than
in previous months according to the first estimate. Private nonfarm payrolls rose 59,000
in September after an upward-revised increase of 162,000 in August. Employment gains
in the service-producing sector were generally widespread last month and were again led
by an advance in health-care employment. The construction industry also added jobs, on
net, with hiring in the nonresidential sector more than offsetting further losses in the
residential sector. In contrast, retail trade employment decreased again and now stands
more than 100,000 below its year-earlier level. Manufacturing employment also fell
again in September, and job losses were widespread across industries. The average
workweek was unchanged in September, and aggregate hours of production or
nonsupervisory workers during the third quarter as a whole moved up at an annual rate of
0.9 percent.
The unemployment rate ticked down in September for the second consecutive month, to
4.6 percent, the low end of a narrow band that has prevailed since the beginning of the
year. Meanwhile, the labor force participation rate remained at 66.2 percent. The
number of persons working part time for economic reasons—another indicator of labor
market slack—has returned to its low spring level after ticking up this summer.1 In
addition, the number of job losers unemployed less than five weeks (who account for the
vast majority of those in transition from employment to unemployment) is very low.
Other indicators do not point to any significant changes in labor market conditions. The
four-week moving average of initial claims for unemployment insurance (UI) was
1

The category “working part time for economic reasons” measures employees who are working part
time because they are unable to find full-time jobs. This indicator reflects economic slack because it
captures individuals who would be willing to work more hours in response to employer demand; it is
positively correlated with the unemployment rate.

II-1

II-2

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

2005

July

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

Aug.

Sept.

Monthly change

165
152
4
-6
25
7
13
6
-1
12
41
14
51
14
221

176
169
6
1
26
13
2
4
2
20
26
-8
69
7
287

115
98
5
11
1
8
-28
9
-3
11
40
-1
44
17
241

121
108
2
-16
12
6
-8
9
-1
11
31
-4
64
12
162

123
104
3
-23
5
-1
1
13
-10
6
45
-6
66
19
-34

188
162
2
-7
23
10
-14
0
8
10
37
7
92
26
250

51
59
0
-19
8
9
-12
14
-2
16
12
-11
33
-8
271

2.3
33.8
40.6

3.0
33.8
41.0

2.6
33.9
41.2

.9
33.8
41.3

.1
33.9
41.4

-.1
33.8
41.3

-.1
33.8
41.1

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

Changes in Private
Payroll Employment

Aggregate Hours and Workweek of
Production or Nonsupervisory Workers
Thousands
500

500

Hours
35.0

2002 = 100
106

3-month moving average
400

400

300

200

100

34.5

104

Aggregate
hours
(right scale)

102

Sept.
Sept.
0

34.0

100
98

0
96

-100

-200

-300

-400

1999 2000 2001 2002 2003 2004 2005 2006 2007

-400

33.5

Workweek
(left scale)

94
92

33.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

2005

July

Aug.

Sept.

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

5.1
16.6
8.8
3.8
4.2

4.7
15.5
8.1
3.6
3.9

4.7
14.7
8.1
3.6
3.8

4.7
16.1
8.2
3.5
3.8

4.8
15.5
8.5
3.6
3.8

4.7
16.2
8.2
3.5
3.7

4.6
16.4
8.0
3.3
3.8

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

66.0
43.7
74.6
75.4
59.4

66.0
43.7
74.0
75.5
59.4

66.1
43.8
74.2
75.5
59.5

66.2
43.6
74.9
75.4
59.8

66.2
44.0
74.5
75.3
59.9

66.2
43.5
75.5
75.3
59.8

66.2
43.3
74.7
75.5
59.7

Labor Force Participation Rate
and Unemployment Rate

Percent
67.6

Percent
7.0

Participation rate (left scale)

67.4

6.5

67.2

6.0

67.0
66.8

5.5

66.6

5.0

66.4

Sept.

66.2

4.0

66.0
Unemployment rate (right scale)

65.8
65.6

4.5

1999

2000

3.5

2001

2002

Persons Working Part Time
for Economic Reasons

2003

2004

2005

2006

3.0

Job Losers
Unemployed Less Than 5 Weeks

4.0

Percent of household employment
4.0

3.5

3.0

Percent of household employment
1.4
1.3
1.2
1.1
1.0

2.5

Sept.

2.5

0.9
Sept.
0.8

2.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

2.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

0.7

II-4

Labor Market Indicators

Unemployment Insurance

Layoff Announcements

Millions
4.0
4-week moving average

Thousands
550
Insured unemployment
(left scale)

3.6

500

3.2

450

2.8

400
Sept. 30

2.0
1.6

Thousands
250

200

150

150
Sept.

100

Initial claims
(right scale)

2.4

250

100

350
300

Oct. 7
1999 2000 2001 2002 2003 2004 2005 2006 2007

250

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

Labor Market Tightness

Percent

150

130
110

Percent of private employment
3.6

3.4

25
Hard to fill**
(left scale)

3.0

2.8

2.6

2.4

2.2

2.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

3.2
Aug.

3.0

Sept.

3.6

3.2

Job availability*
(right scale)

Job Openings

Index

1.8

*Proportion of households believing jobs are plentiful, minus the
proportion believing jobs are hard to get, plus 100.
**Percent of small businesses surveyed with at least one "hard to
fill" job opening.
Source. For job availability, Conference Board; for hard to fill,
National Federation of Independent Business.

2001

2002

2003

2004

Expected Labor Market Conditions
Percent
30

Index
120

120
Conference Board

Manpower, Inc.
25

25
100

Q4
20

Sept.

100

Sept.

1.8

2006

Source. Job Openings and Labor Turnover Survey.

Net Hiring Plans
30

2005

Oct.
10

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

Michigan SRC

5
0

1999 2000 2001 2002 2003 2004 2005 2006 2007
Note. The proportion of households expecting labor
market conditions to improve, minus the proportion
expecting conditions to worsen, plus 100.

II-5

313,000 in the week ending October 7, up just a little from its trough earlier in the year,
and the level of insured unemployment has also barely risen from the low levels of the
spring. Layoff announcements moved up in September, largely on the news of cutbacks
by domestic automobile manufacturers, but many of these job cuts will take place over
time or through attrition. According to the Job Openings and Labor Turnover Survey, the
rate of job openings has moved sideways this year, and private surveys of hiring plans
still suggest that labor demand is rising at a moderate pace. Readings on households’
expectations for the labor market remain mixed: Respondents to the Conference Board
survey were relatively upbeat through September, while the measure from the Michigan
survey remained at a low level in early October.
The Bureau of Labor Statistics (BLS) has released its preliminary estimate of the annual
benchmark revision to the establishment survey data, which indicates that the level of
total nonfarm payroll employment in March 2006 was 810,000, or 0.6 percent higher than
previously reported. This revision, which would be very large by historical standards,
will be wedged-in between March 2005 and March 2006 when the BLS revises the
employment data next February. All else being equal, the benchmark revision would also
boost the change in hours more than ½ percentage point over the four quarters ending in
2006:Q1, and it would therefore lower productivity growth over this period from the
currently published 2.7 percent to about 2.1 percent.2
Industrial Production
Industrial production (IP) softened over the course of the third quarter after having posted
brisk gains through midyear. In September, total IP decreased 0.6 percent after having
been unchanged in August. September’s decline reflected a sizable weather-related
decrease in the output of utilities and a fairly broad-based decline of 0.3 percent in
manufacturing output. In contrast, output in the mining sector more than reversed its

The benchmark revision will not affect the level of compensation in the national income and product
accounts (NIPA) because the Bureau of Economic Analysis (BEA) has already incorporated the incomerelated data from the state UI programs into its estimates. However, the upward revision to hours would
reduce compensation per hour. Unit labor costs, which depend on output and compensation but not on
hours, would be unaffected.

II-6

Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2005

Component

2006

20051

(percent)

2006
Q3

July

Annual rate
Total
Previous

Aug.

Sept.

Monthly rate

100.0
100.0

3.0
3.0

5.9
5.8

3.6
...

.3
.4

.0
-.1

-.6
...

80.8
73.7
68.9

4.2
4.4
2.9

5.2
5.6
4.8

3.8
5.4
3.8

.4
.9
.8

.2
.1
-.1

-.3
-.2
-.3

Mining
Utilities

9.8
9.5

-6.8
2.9

18.0
-.2

1.8
4.3

-.2
.6

-.5
-.9

.7
-4.4

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.8
.8
1.2
2.8

25.7
12.0
25.4
29.9

17.7
13.4
34.8
11.7

28.9
18.0
7.3
44.0

2.1
1.3
.5
3.2

2.5
1.4
-1.5
4.8

1.9
1.4
2.5
1.7

Motor vehicles and parts

7.1

2.3

1.0

-12.0

-5.2

1.9

-2.1

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

21.0
4.1
16.9

2.3
2.6
2.2

1.8
-1.4
2.6

3.4
2.9
3.5

.8
.7
.8

.1
.5
.0

-.1
-1.1
.1

Business equipment
Defense and space equipment

8.0
2.0

9.6
9.2

10.9
5.6

14.0
3.8

2.5
.6

.4
-.5

-.6
.2

Construction supplies
Business supplies

4.4
7.8

6.5
2.7

.9
3.7

.7
-.8

.7
.2

-.3
-.8

-.5
-.5

24.4
13.7
10.7

.6
3.6
-3.1

7.0
7.6
6.1

2.3
3.9
.1

.6
1.0
.2

-.2
-.2
-.2

-.5
-.2
-.8

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

Materials
Durables
Nondurables

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

Capacity Utilization
(Percent of capacity)
19722005
average

19942005
high

200102
low

Aug.

Sept.

Total industry

81.0

85.0

73.9

81.1

82.0

82.3

82.5

81.9

Manufacturing
Ex. motor veh. and parts
Mining
Utilities

79.8
79.9
87.3
86.7

84.5
84.3
89.0
93.7

72.0
71.8
85.6
83.7

80.3
80.5
87.9
83.5

80.8
81.0
90.4
86.6

81.1
81.6
91.2
87.3

81.2
81.6
90.9
88.3

80.8
81.3
91.6
84.4

Stage-of-process groups
Crude
Primary and semifinished
Finished

86.4
82.1
77.9

89.4
88.1
80.5

83.2
74.6
70.8

85.8
82.3
78.9

88.2
82.9
79.7

88.9
83.4
79.8

88.8
83.6
80.0

89.0
82.6
79.6

Sector

2006

II-7

Indicators of Industrial Activity

Energy IP

Capacity Utilization by Stage of Processing
2002 = 100

106

Percent of capacity
106

Petroleum refining

102

98
Sept.

94
90

Natural gas extraction

92
Crude
87
Sept.

86
Crude oil

Finished

70
70
July Jan. July Jan. July Jan. July Jan. July Jan.
2002
2003
2004
2005
2006

1998
2000
2002
2004
Note. Horizontal lines are 1972-2005 averages.

Millions of units

Millions of units
14

+
Oct.

0.3
11
Autos and light trucks
(right scale)

160

140

0.4

0.2

2002 = 100
160

140

Actual

120

100

40
+

0.1

40
Boeing strike

0
0.0

1999 2000 2001 2002 2003 2004 2005 2006 2007
Note. October values are based on latest industry
schedules.

-20

Percent

Percent
Imports/domestic absorption
(right scale)

2002
2003
2004
2005
2006
2007
2008
Note. 1998 price-weighted index. Actual completions equal
deliveries plus the change in the stock of finished aircraft.

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

Trade Shares: Business Equipment
37

0
-20

Percent
44

Aug.

Diffusion index
90

ISM (right scale)

Sept.

41
34

0
40

Exports/shipments
(left scale)

32
31

2000 2001 2002 2003 2004 2005 2006
Note. Trade shares are 3-month moving averages.
Source. Staff flow-of-goods system.

Aug.

-1
-2

-3

-4

60
50
40

RADGO (left scale)

30
20

2002
2003
2004
2005
2006
Note. The diffusion index equals the percentage of
respondents reporting greater levels of new orders plus
one-half the percentage of respondents reporting that
new orders were unchanged. RADGO is a 3-month moving
average.

Content partially redacted.

Medium and heavy trucks
(left scale)

0.5

2006

Boeing Commercial Aircraft Completions:
Actual

Motor Vehicle Assemblies
0.6

Primary and semifinished

II-8

Indicators of High-Tech Manufacturing Activity

Rate of Change in Semiconductor
Industrial Production

MPU Shipments and Intel Revenue
Percent

14
12

10
MPUs

Intel revenue

8
7

0
Non-MPU chips

-2

-4

-4
2002
2003
2004
2005
Note. MPU is a microprocessor unit.

Worldwide MPU shipments

-6

2006

2000 2001 2002 2003 2004 2005 2006 2007
Note. Q4 Intel revenue is the range of the company’s
guidance as of October 17, 2006, and Q3 worldwide MPU
shipments is a staff estimate. FRB seasonals.
Source. Intel and Semiconductor Industry Association.

Millions of units, ratio scale

0.9

CIO Magazine Computer Hardware and
Storage Systems Diffusion Index

U.S. Personal Computer and Server Sales

Index
18

Last month of each quarter

0.8

0.7

0.6

Sept.

1.0

-6

Billions of dollars, ratio scale

14
3-month moving average

70
Sept.
65

PCs (right scale)

13
0.5

Servers (left scale)
12

0.4

2000
2001
2002
2003
2004
2005
2006
Note. FRB seasonals. Q3 values are Gartner forecasts.
Source. Gartner.

2001
2002
2003
2004
2005
2006
Note. The average of diffusion indexes for future spending
on computer hardware and storage systems.
Source. CIO magazine. Monthly through 2005. As of 2006,
the survey is collected only on the last month of each quarter.

CIO Magazine Data Networking Equipment
and Telecom Equipment Diffusion Index

IP: Communications Equipment
2000 = 100, ratio scale

Index
135
125

Sept.

70
Last month of each quarter

115

105
95
60
85
Sept.
75
55
65

2000

2001

2002

2003

2004

2005

2006

2001
2002
2003
2004
2005
2006
Note. The average of diffusion indexes for future spending
on data networking equipment and telecom equipment.
Source. CIO magazine. Monthly through 2005. As of 2006,
the survey is collected only on the last month of each quarter.

II-9

August drop, largely because of gains in crude oil extraction and in mined construction
supplies such as stone, sand, and gravel.3
In September, capacity utilization in the manufacturing sector declined 0.4 percentage
point to 80.8 percent, but was still 1 percentage point above its average between 1972 and
2005. By stage of process, the utilization rate for industries at the crude stage edged up.
The utilization rates for industries at the latter stages of process moved down further from
the highs recorded earlier in the summer, though they remained above their 1972-2005
averages.
The output of motor vehicles and parts fell 2.1 percent in September, as automakers
continued to trim production of light trucks in response to bloated inventories. For the
third quarter as a whole, motor vehicle output was down 12 percent (annual rate) from its
second-quarter level. Elsewhere in transportation, commercial aircraft production
continued to climb steadily, and orders for Boeing aircraft remain robust. Reflecting a
strengthening in domestic demand, this year’s orders for Boeing aircraft are tracking only
slightly behind the record-breaking pace recorded in 2005. Deliveries of Boeing’s singleaisle workhorse, the 737, have increased markedly, and the company is currently starting
up production of the new 787 for delivery in mid-2008.
High-tech output increased at an annual rate of nearly 30 percent in the third quarter, a
noticeable step-up from the 20 percent rate during the second quarter. The drivers of
high-tech output growth switched in the middle of 2006: Communications equipment
production flattened out after a second-quarter surge, while semiconductor output
accelerated. Semiconductor production rose 1.7 percent in September and was up nearly
45 percent at an annual rate for the quarter as a whole. Intel Corporation’s introduction
of faster, more energy-efficient microprocessors (MPUs) late this summer led to a jump
in their production, which accounted for the bulk of September’s increase in overall
output of semiconductors. The company’s revenue guidance for the fourth quarter—
roughly flat in nominal terms—is consistent with another sizable gain in MPU output.

British Petroleum (BP) brought three of its four eastern Prudhoe Bay pumping stations back on line
in September, thereby boosting output at Prudhoe Bay to 90 percent of full capacity. However, weatherrelated disruptions temporarily cut production during the second week of October. BP expects production
to reach full capacity within the next few months once a bypass for the damaged pipelines is complete.
Next year, BP plans to replace most of its Prudhoe Bay pipeline with narrower pipe that will maintain the
current capacity but will be less prone to corrosion.

II-10

The IP index for computers continued to increase at a restrained rate in the third quarter.
This estimate is based, in part, on projections from the Gartner Group, which show a
continued firming of business demand for servers and a slowing in unit sales of personal
computers on the heels of a second-quarter spurt. Meanwhile, the output of
communications equipment rose only modestly in the third quarter after having been
boosted significantly in the first half of the year by a major capital spending push among
telecommunications service providers. Regarding the outlook, CIO magazine’s diffusion
index of plans for future spending on data networking and telecom equipment has
dropped noticeably from the elevated readings seen during the first half of the year.
Among market groups excluding energy, motor vehicles and parts, and high-technology
products, production was mixed in the third quarter, as downstream categories performed
somewhat better than upstream industries. The output of consumer goods quickened in
the third quarter, mainly because of a pickup in the production of consumer durables.
The output of business equipment, which continues to benefit from both strong domestic
orders and growing demand from abroad, advanced at an annual rate of 14 percent in the
third quarter after a similar increase in the second quarter. The output of defense and
space equipment continued to trend upward despite recent declines in military aircraft
production. In contrast, among upstream market groups, materials production
decelerated further during the third quarter, and the production of business supplies
declined after having risen steadily in the first half of the year. The output of
construction supplies edged up during the third quarter but was little changed from its
level earlier in the year.
Recent indicators of near-term manufacturing activity have generally been a bit less
positive than they were earlier in the year, but they point to continued expansion in the
coming months. The Institute for Supply Management’s diffusion index for new orders
held steady at 54.2 in September, a level consistent with continued modest gains in
output. Meanwhile, the three-month moving average of the staff’s measure of real
adjusted durable goods orders has changed little, on balance, of late. Much of the
softening in factory production in the past few months appears to have been associated
with the direct and indirect effects of slower homebuilding and, more importantly, with
the inventory adjustment now under way in motor vehicle production. More broadly,
manufacturing inventories in the staff’s flow-of-goods inventory system appear well
aligned with demand and provide little indication that other inventory-related production
cutbacks are in store for the months ahead.

II-11
Sales of Light Vehicles
(Millions of units at an annual rate; FRB seasonals)
2006
Category

2005

Total

July

Aug.

Sept.

16.9

16.3

16.6

17.1

16.0

16.6

7.7
9.2

7.8
9.1

7.8
8.5

7.9
8.7

8.2
8.9

7.7
8.3

7.6
8.9

North American1
Autos
Light trucks

13.5
5.5
8.0

13.4
5.7
7.7

12.6
5.4
7.1

12.8
5.4
7.4

13.2
5.6
7.6

12.4
5.3
7.1

12.9
5.3
7.6

Foreign-produced
Autos
Light trucks

3.4
2.2
1.2

3.4
2.1
1.3

3.7
2.4
1.3

3.7
2.5
1.3

4.0
2.7
1.3

3.6
2.4
1.2

3.7
2.3
1.4

56.8

55.8

53.9

52.8

52.1

52.7

53.6

Autos
Light trucks

Memo:
Big Three domestic
market share (percent)2

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

New Light Vehicle Fuel Economy
Miles per gallon
21.0

Six-month moving average

Content redacted.

Sept.

20.5

20.0

19.5

1996

1998

2000

2002

2004

2006

19.0

Source. Staff estimate based on a monthly salesweighted average of city mileage ratings for all new
models of light vehicles. Data are seasonally adjusted.

Michigan Survey Index of Car-Buying Attitudes
80

Ratio scale, current dollars per vehicle
200

72
64

180
160

140

1600

Oct.
100
Oct. 8

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

80
60

0
-8

2500

120

32
16

3800
3400

Appraisal of car-buying conditions (right scale)

Average Value of Incentives on Light Vehicles

Index

Percent

1996

1998

2000

2002

2004

2006

2002

2004

2006

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

700

II-12
Production of Domestic Light Vehicles
(Millions of units at an annual rate except as noted)
2006
Item

June

July

Aug.

Sept.

U.S. production1
Autos
Light trucks

11.2
4.5
6.7

11.1
4.3
6.8

10.4
4.3
6.2

10.5
4.3
6.2

11.2
4.1
7.1

10.2
4.1
6.2

10.6
4.3
6.3

10.4
4.5
6.0

Days’ supply2
Autos
Light trucks

69
53
81

75
54
90

71
54
82

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

75
55
90

70
50
85

73
53
88

70
55
81

Inventories3
Autos
Light trucks

3.01
.99
2.03

3.06
.95
2.10

2.95
.95
2.00

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

3.06
.95
2.10

2.99
.90
2.09

2.96
.92
2.04

2.95
.95
2.00

Memo: U.S. production,
total motor vehicles4

11.7

11.6

10.9

11.0

11.6

10.7

11.1

10.9

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

Inventories of Light Vehicles
Millions of units
3.4
3.2
Sept.

3.0
2.8
2.6
2.4

1998

1999

2000

2001

2002

2003

2004

2005

2.2

2006

Days’ Supply of Light Vehicles
Days
90
80
Sept.

70
60
50
40

1998

1999

2000

2001

2002

2003

2004

2005

2006

II-13

Light Motor Vehicles
Sales of light vehicles have continued to run at a moderate pace, while the Big Three
manufacturers have slashed production in an effort to reduce bloated inventories. On the
sales front, purchases were at an annual rate of 16½ million units in both September and
over the third quarter as a whole, a pace slightly above that recorded in the second quarter
and in the range that has prevailed for most of the past three years. Because of their
ability to deliver more-competitive offerings within the relatively fuel-efficient segments
of cars and light sport-utility vehicles, the transplant firms continued to perform well
against the Big Three in the third quarter, and the domestic market share has continued to
erode.
More recently, sales at the three Japanese transplant firms reportedly picked up a bit in
the first ten days of October, while sales at the Big Three may be running a bit below the
September pace. Meanwhile, assessments of car-buying conditions in the Michigan
survey improved noticeably in early October, in part because of a lessening of concern
about the price of gas. No significant changes have been made in cash rebates and other
incentive programs in recent weeks.
Light vehicle assemblies dropped in the third quarter by an annual rate of almost
700,000 units, to 10.4 million units—the slowest pace in more than a decade—and are
scheduled to remain at about this pace in the fourth quarter. The curtailment of
production has been concentrated in light trucks, where inventories remain persistently
high, and has helped to lower days’ supply of all light vehicles from 75 days in June to
70 days at the end of September. If sales in the fourth quarter match their third-quarter
pace, the scheduled assembly rate would reduce days’ supply to the neighborhood of
65 days by the end of the year, a number that would be in line with the industry-preferred
norm.
Consumer Spending
Real personal consumption expenditures regained some steam in September after a
lackluster August and appear to have risen at a moderate pace in the third quarter as a
whole. In part, the step-up in September reflected the monthly pattern of motor vehicle
purchases. In addition, we estimate that real spending on goods excluding motor vehicles
increased 0.7 percent last month after having risen only slightly, on net, over the summer;
the rise in real spending in September was broadly based and showed particular strength

II-14

Retail and Food Services Sales
(Percent change from preceding period; seasonally adjusted current dollars)
2006
Q3
July

Category

Q2
Annual rate

Aug.
Sept.
Monthly rate

Total sales
Retail control1
Ex. sales at gasoline stations
Memo:
Real PCE control2

13.4
8.9
9.4

3.3
8.1
4.9

4.1
4.0
5.9

1.4
.7
.6

.1
.2
.4

-.4
-.6
.8

8.7

1.0

2.3

1. Total sales less outlays at building material and supply stores and automobile and other motor
vehicle dealers.
2. Total goods spending excluding autos and trucks. Values for July and August are staff estimates;
values for Q3 and September are staff forecasts.

Real PCE Goods

Real PCE Services

Billions of chained (2000) dollars
3676

3676

Billions of chained (2000) dollars
4707

4707

Quarterly average

Quarterly average
Q3

3581

4612

4612
Q2

Sept.

Aug.

3486

4517

3391

4422

3296

4327

3201

4232

3106

4137

3106

2004

2005

2006

2004

2005

4137

2006

Note. Values for July and August are staff estimates;
values for Q3 and September are staff forecasts.

Personal Saving Rate
8

Percent
8

Aug.

-2
-4

0
-2

1996

1997

1998

1999

2000

2001

2002

2003

2004

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

2005

2006

-4

II-15

in purchases of apparel.4 Real outlays for consumer services posted a good-sized increase
in July as a result of a weather-induced spurt in energy services, but they rose just
0.1 percent in August (the most up-to-date data) as temperatures returned to seasonal
norms; cooler-than-normal temperatures likely held down expenditures on energy
services in September.
Real disposable personal income (DPI) posted a solid increase in the first half of the year,
mainly because of a surge in wages and salaries in the first quarter, and it appears to have
moved up further in the third quarter.5 Real DPI rose moderately in both July and
August, reaching a level that was ¾ percent above its second-quarter average, and it
likely rose again in September in light of the sharp drop in energy prices in that month.
The personal saving rate is currently estimated to have edged up to negative 0.5 percent
in August, a value similar to the average over the first half of the year.
Consumer spending continues to draw a good bit of support from the lagged effects of the
increases in household wealth over the past two years. As of the second quarter, the ratio
of household wealth to disposable income stood at 5.60, well above its historical average;
it probably remained in this area in the third quarter after factoring in both the rise in
stock values and the apparent deceleration in house prices. Meanwhile, borrowing costs
have risen this year, on balance, for both short- and long-term loans.
The fragmentary information on consumer spending in October has been positive. Sales
at chain stores in the first half of the month were strong. In addition, the preliminary
October report from the University of Michigan points to a considerable improvement in
consumer confidence, perhaps because of declining gasoline prices. The sentiment
measure from the Conference Board was little changed in September and remained well
within the favorable range that has been evident this year.

Although sales at stores in the retail control group—which excludes auto dealers and building
material stores—fell 0.6 percent in nominal terms in September, the steep drop in gasoline prices more than
accounted for the decline.
5
The text refers to the published data on wages and salaries and DPI. Although the anticipated upward
revision to payroll employment by the BLS supports the idea that some of the surge in wages and salaries
in the first quarter will be permanent, we continue to judge that a substantial fraction reflected transitory
factors, such as bonuses and stock options, that are unlikely to be repeated in the subsequent few quarters.
The first opportunity for such a reversal to appear in the data will be in late November, when the wage and
salary data for the second quarter are benchmarked to UI tax records. In our projection, we have assumed
that the reversal will be concentrated in the third quarter.

II-16

Fundamentals of Household Spending

Changes in Real Wages and Salaries, Real Personal Income, and Real DPI
Percent, annual rate
12

Real wage and salary disbursements (white)
Real personal income* (black)
Real DPI* (striped)

-3
2005

2005:Q4

2006:Q1

2006:Q2

June

July

August

* The value for 2005 is a Q4-to-Q4 percent change and excludes the effect on income of the one-time Microsoft dividend in December 2004.

Household Net Worth and Wilshire 5000

Change in Real DPI

Index

4-quarter percent change
7

7500

5.5

5000

5.0

2500

2000

2002

2004

2006

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

Ratio of household net
worth to DPI* (right scale)
1985

1990

1995

2000

2005

4.5
4.0

* The value for 2004:Q4 excludes the effect on income of
the one-time Microsoft dividend in December 2004.

Federal Funds Rate and 10-Year Treasury Yield

Consumer Confidence
1985 = 100
180
160

6.0
Q2

1
1998

6.5

10000

1996

7.0
Sept.

Wilshire 5000
(left scale)

12500

Ratio

15000

1966 = 100
140
Michigan SRC (right scale)
Conference Board (left scale)

Percent
7

130

6
Treasury
yield

120

140

Sept.
5

110
120

100

Sept.

100

Oct.
(p)

3
2

60
40

Federal
funds
rate

70
1996
1998
p Preliminary.

2000

2002

2004

2006

1996

1998

2000

2002

2004

2006

II-17

Private Housing Activity
(Millions of units, seasonally adjusted; annual rate except as noted)
2006
Sector
All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
Permit backlog2
New homes
Sales
Months’ supply3
Existing homes
Sales
Months’ supply3
Multifamily units
Starts
Permits
Permit backlog2
Mobile homes
Shipments
Condos and co-ops
Existing home sales

2005

July

Aug.

Sept.

2.07
2.16

2.12
2.14

1.87
1.93

1.74
1.70

1.76
1.76

1.67
1.73

1.77
1.62

1.72
1.68
1.71
.171

1.75
1.61
1.64
.163

1.53
1.46
1.49
.157

1.41
1.27
1.30
.133

1.45
1.33
1.36
.148

1.37
1.28
1.32
.153

1.43
1.21
1.24
.133

1.28
4.43

1.11
5.90

1.10
6.20

n.a.
n.a.

1.01
7.00

1.05
6.60

n.a.
n.a.

6.18
4.40

5.96
5.20

5.86
6.30

n.a.
n.a.

5.51
7.20

5.51
7.30

n.a.
n.a.

.353
.473
.060

.376
.528
.066

.343
.466
.068

.315
.438
.069

.307
.443
.069

.147

.122

n.a.

.111

.109

n.a.

.896

.832

.828

n.a.

.822

.793

n.a.

.322
.431
.067

.346
.412
.067

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

Private Housing Starts and Permits
(Seasonally adjusted annual rate)

Millions of units
2.0

2.0
1.8

1.8
Single-family starts

1.6

1.4

1.4
Sept.

1.2

1.2
Single-family adjusted permits

1.0

.6
Multifamily starts

.4
Sept.

.2
.0

.2
1999

2000

2001

2002

2003

2004

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

2005

2006

II-19

Housing
Despite some favorable incoming data, the housing sector remains weak. Although
single-family starts rose to an annual rate of 1.43 million units in September, they were
still about 20 percent below the peak seen in January. In addition, adjusted permit
issuance in this sector, which tends to be a more reliable indicator of the underlying pace
of homebuilding, fell 6 percent in September to an annual rate of 1.24 million units, the
lowest level in nearly five years. Indeed, the gap between single-family starts and singlefamily adjusted permits in September was the largest on record and points to a reversal of
the September increase in starts. In contrast, construction in the much smaller
multifamily sector has continued to fluctuate within the range that has prevailed since
1995.
Sales of both new and existing homes have also dropped sharply since peaking last
summer, but sales of existing single-family homes in August held steady at an annual rate
of 5.5 million units, and sales of new homes edged up to an annual rate of about
1.1 million units. Moreover, the index of pending home sales—an indicator of future
sales of existing homes—increased about 4 percent in August, and the index of
homebuying sentiment from the Michigan survey jumped in October to its highest level
in more than a year. Recent declines in mortgage rates may provide some support to
demand in the coming months: The average rate for thirty-year fixed-rate mortgages has
fallen about 35 basis points since July, while the average rate for one-year adjustable-rate
mortgages has fallen more than 20 basis points.
Nonetheless, even a significant firming of demand may—in the absence of further cuts in
construction—be insufficient to rapidly eliminate the overhang of unsold homes.
Reported inventories of unsold new homes have been increasing relative to sales for
some time, and the months’ supply of new homes for sale is now more than 30 percent
higher than the upper bound of the relatively narrow (and historically low) range it
occupied from 1997 to 2005. In addition, these published inventory figures likely
understate problems in the sector because they do not include the effect of cancellations
on the stock of unsold homes.
.

House-price appreciation has slowed from the elevated rates seen through last year. The
purchase-only version of the price index for existing homes calculated by the Office of
Federal Housing Enterprise Oversight (OFHEO) increased at an annual rate of just

II-20

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

June

Annual rate

July

Aug.

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

1.4
10.6
-11.7
87.7
7.9

5.2
5.8
-18.7
1.0
10.1

-.2
-.2
-3.9
2.8
-.1

.6
1.5
15.2
-12.1
1.4

1.3
.7
-1.7
3.9
.7

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

-25.6
16.7
-16.3
159.3
12.1

4.6
3.7
-13.2
-31.7
11.1

1.7
.9
-1.7
11.2
.2

-.9
.6
15.3
-15.9
.7

-2.9
.4
-8.6
16.5
.1

Memo:
Shipments of complete aircraft1

33.0

33.8

35.0

32.0

38.0

1. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate.

Non-High-Tech,
Nontransportation Equipment

Communications Equipment
20
17
14

Billions of dollars, ratio scale
Shipments
Orders

20
17
14

Aug.

1999 2000 2001 2002 2003 2004 2005 2006 2007

58
53

170

Aug.

150
130

Sept.

200

150
130

680

110

1999 2000 2001 2002 2003 2004 2005 2006 2007
* Deflated by the staff price index for computers
and peripheral equipment, which is derived from BEA’s
quality-adjusted price indexes.

1100
920
800

170

110

1999 2000 2001 2002 2003 2004 2005 2006 2007

Medium and Heavy Trucks

2003 = 100, ratio scale
Industrial production
Real M3 shipments*

Aug.

Computers and Peripherals
200

Billions of dollars, ratio scale
Shipments
Orders

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

1100
920
800
680

560

Sept.

560

440

320

200

1999 2000 2001 2002 2003 2004 2005 2006 2007
Note. Annual rate, FRB seasonals.
Source. For class 4-8 trucks, Ward’s Communications;
for class 5-8 trucks, ACT Research.

200

II-21

Fundamentals of Equipment and Software Investment

Real Business Output
4-quarter percent change
8

-2

-4

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-4

User Cost of Capital
Non-High-Tech

High-Tech
4-quarter percent change

4-quarter percent change

-3

-6

-9

-12

-15

-3
Q2

-6

1990
1990 1992 1994
1994 1996 1998
1998 2000 2002
2002 2004 2006
2006

-15

NABE Capital Spending Diffusion Index

Real Corporate Cash Flow
4-quarter percent change

Index

30
Q2

Q2
10

-5

-10

-20

-10

1990
1990 1992 1994
1994 1996 1998
1998 2000 2002
2002 2004 2006
2006

-10
1990 1992 1994
1994 1996 1998
1998 2000 2002
2002 2004 2006
2006
1990
Note. The diffusion index equals the percentage of
respondents planning to increase spending minus the
percentage of respondents planning to reduce spending.
Source. NABE Industry Survey.

-20

II-22

5 percent in the second quarter, and the increase of 8 percent between the second quarter
of 2005 and the second quarter of 2006 was the smallest four-quarter change in nearly
three years. More recently, the Case-Shiller home-price index, which covers sales in only
ten large U.S. cities, showed roughly no net change, on a seasonally adjusted basis,
between January and July, and the average price of existing homes sold posted an
outright decline over the twelve months ending in August. 6 However, unlike the OFHEO
and Case-Shiller indexes, the series for the average price of existing homes sold does not
control for changes in the average characteristics of homes sold. Thus, the abrupt
downswing in this measure may reflect, in part, a shift in the composition of sales away
from higher-end homes. The rate of appreciation in new home prices has come down as
well. Moreover, homebuilders have reportedly stepped up their use of incentives—such
as paying closing costs, buying down mortgage rates, and including optional items at no
cost—to bolster sales. If so, the deceleration of new home prices may be more
pronounced than the reported price data suggest.
Equipment and Software
Real spending on equipment and software appears to have increased at a solid pace
during the summer. Shipments and orders of nondefense capital goods excluding aircraft
increased in both July and August. And for the most part, the fundamental influences on
equipment and software spending continue to look favorable. Corporate financial
reserves remain plentiful, and the cost of capital for high-tech goods continues to fall—a
trend that seems to have quickened in the third quarter as the pace of computer-price
declines sped up and corporate bond rates dropped. That said, the step-down of late in
the growth of business output suggests that accelerator effects will be providing less
impetus to investment in the future, and some indicators of business conditions, including
those from some of the Federal Reserve Banks and from the Institute for Supply
Management, have edged down recently.
In the high-tech sector, orders and shipments of communications equipment moved up in
August. The increase hinted that real outlays in this sector may be stabilizing after a
spectacular first-quarter increase that was only partially unwound in the second quarter.
Real computer spending is likely to show a substantial pickup in the NIPA estimate for

The cities covered by the Case-Shiller index are Boston, Chicago, Denver, Las Vegas, Los Angeles,
Miami, New York, San Diego, San Francisco, and Washington.

II-23

the third quarter in light of the strong July and August shipments of computers as
measured by the M3.7
In the transportation sector, real business purchases of motor vehicles have been brisk
lately, in part because of a pull-forward of spending on medium and heavy trucks
motivated by the Environmental Protection Agency’s regulations on truck emissions,
which are scheduled to take effect in 2007. Deliveries of these trucks should remain at a
high level through year-end, although the decline in orders in recent months points to a
drop-off after the turn of the year. Aircraft shipments through August (as estimated by
the Census Bureau) and information on Boeing deliveries suggest that domestic aircraft
outlays have picked up somewhat from their extremely low second-quarter level.
Real spending on equipment other than high tech and transportation appears to have
retained considerable momentum in the third quarter. Shipments in this broad category
rose 0.7 percent in August on top of the 1.4 percent increase posted in July, and robust
orders in recent months suggest that further increases in shipments are in store for the
months ahead.
Nonresidential Construction
Activity in the nonresidential construction sector continued to strengthen in August. The
recovery in manufacturing construction that began midway through 2004 has spread to
the rest of nonresidential structures, and all the major categories of construction have now
shown sustained increases in spending. Nonetheless, the vacancy rate in the retail sector
has been essentially flat at a low level for some time now, and vacancy rates remain high
in the office and industrial categories. 8 Forward-looking indicators suggest that outlays
on nonresidential construction will continue to rise over the next few quarters, although
perhaps not as rapidly as they have so far this year. The three-month moving average of
the architectural billings index has strengthened significantly in recent months after
dipping in the early summer and now shows that more architectural firms are reporting

The BEA still puts some weight (25 percent) on the M3 series when measuring computer
expenditures, although it now gives the majority of the weight (75 percent) to the IP index for computers.
As noted earlier, the IP index of computer production continued to show relatively sluggish growth in the
third quarter.
8
The vacancy rates for the office and industrial sectors plotted in the figure are estimates by Costar.
Torto Wheaton Research reported more-significant declines in these vacancy rates than the Costar data
indicate, although the levels of the Torto Wheaton series were higher in the second quarter than the Costar
estimates. The Torto Wheaton data are based on a larger sample of areas and property types but are much
less timely and appear to be of somewhat lower quality than Costar’s.

II-24

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

Total Structures

Office, Commercial, and Other

290

Billions of chained (2000) dollars
290

270

250

230

210

Aug.

230
210

Billions of chained (2000) dollars
80

170

1999 2000 2001 2002 2003 2004 2005 2006 2007

190

170

Aug.

60
50

Commercial

40
Office

190

Aug.
Other

Aug.

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

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

70
60

Architectural Billings and
Nonresidential Construction Employment
Diffusion index
60

Percent change
3.0
2.5

Power & communication

60
2.0

Billings (right scale)

Sept.

1.5
50

1.0
0.5

Aug.
30

Manufacturing

-0.5
20

Sept.

0.0

Employment (left scale)

-1.0
10

1999 2000 2001 2002 2003 2004 2005 2006 2007

-1.5

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

Vacancy Rates

Drilling Rigs in Operation
Percent
18

18
15

Office

Number
1600

1600
1400

Oct.

1200
12
Industrial
9
6

6
3

1999 2000 2001 2002 2003 2004 2005 2006 2007

1200
Natural gas

1000

800

600

400

Retail
3

Note. Industrial space includes both manufacturing structures
and warehouses.
Source. For office and industrial, CoStar Property Professional;
for retail, National Council of Real Estate Investment Fiduciaries.

1400

400
Petroleum

200
0

Oct.

1999 2000 2001 2002 2003 2004 2005 2006 2007

200
0

Note. October values are averages through October 13, 2006.
Source. DOE/Baker Hughes.

II-25

Nonfarm Inventory Investment
(Billions of dollars; seasonally adjusted annual rate)
2005
Measure and sector

2006

June

July

Aug.

38.6
23.4
15.2

36.8
8.5
28.3

52.2
3.0
49.2

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

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

16.9
.5
9.9
6.6

22.7
7.6
7.9
7.2

36.3
11.0
18.4
6.9

33.4
9.7
15.1
8.6

15.1 e
6.3 e
9.0 e
-.2 e

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

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

56.2
23.3
20.7
12.2

53.3
23.5
17.9
12.0

109.1
48.3
43.2
17.5

110.2
52.6
38.9
18.7

94.4
44.6
38.1
11.7

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

98.1
21.4
55.2
21.4

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

ISM Customer Inventories:
Manufacturing

Inventory Ratios ex. Motor Vehicles
Months
1.9
1.8

1.9

1.7

1.6

1.6
Sept.

1.5

1.4

1.3

Average, 1996 to present

Sept.

1.3
Census book-value data

1.1

1.8

Staff flow-of-goods system

1.7

1.2

Index

Aug.

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

1.2
1.1

1999 2000 2001 2002 2003 2004 2005 2006 2007

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

II-26

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

July-September
Function or source

2005

2006

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

618.4
-.8
11.9
607.3

638.9
-.7
-17.4
657.0

Receipts
Payment timing
Adjusted receipts

549.2
.0
549.2

Surplus or deficit (-)
Selected components
of adjusted outlays
and receipts
Adjusted outlays
Net interest
Non-interest
National defense
Social Security
Medicare
Medicaid
Income security
Agriculture
Other

Percent
change

2005

2006

3.3
...
...
8.2

2472.1
-1.3
11.8
2461.6

2654.4
-1.0
-14.2
2669.6

7.4
...
...
8.4

596.9
-6.0
602.9

8.7
...
9.8

2153.3
6.0
2147.3

2406.7
-6.0
2412.7

11.8
...
12.4

-69.2

-42.0

...

-318.7

-247.7

...

607.3
42.7
564.5
128.9
131.8
77.8
43.5
72.0
3.2
107.3

657.0
57.1
599.9
134.7
140.2
87.4
45.3
73.8
2.2
116.3

8.2
33.6
6.3
4.5
6.4
12.4
3.9
2.4
...
8.4

2461.6
183.5
2278.1
490.6
523.3
295.7
181.7
344.6
28.3
413.9

2669.6
226.6
2442.9
524.4
554.6
338.2
180.6
353.6
30.8
460.7

8.4
23.5
7.2
6.9
6.0
14.4
-.6
2.6
9.1
11.3

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

549.2

602.9

9.8

2147.3

2412.7

12.4

415.9
361.1
65.1
10.3
80.4
86.1
5.7
52.8

443.6
378.0
74.3
8.6
102.7
107.8
5.1
56.6

6.7
4.7
14.0
-16.1
27.7
25.2
-10.8
7.1

1673.4
1486.6
364.9
180.3
272.3
301.1
28.8
201.7

1836.4
1590.4
432.4
186.4
353.9
380.9
27.0
222.3

9.7
7.0
18.5
3.4
30.0
26.5
-6.3
10.2

Adjusted surplus or deficit (-)

-58.1

-54.0

...

-314.2

-256.9

...

Note. Components may not sum to totals because of rounding.
1. Financial transactions consist of deposit insurance, spectrum auctions, and sales of major assets.
2. A shift in payment timing occurs when the first of the month falls on a weekend or holiday, or
when the first 3 days of a month are nonworking days. Outlays for defense, Social Security,
Medicare, income security, and "other" have been adjusted to account for these shifts. In addition,
defense outlays for retiree health care have been converted from an annual to a monthly basis. For August
2006, receipts and outlays have been adjusted to reflect a one-time accounting correction by the Treasury
that reduced both individual income taxes and Social Security benefits by $6 billion.
... Not applicable.
Source. Monthly Treasury Statement.

II-27

increases in billings than are reporting decreases. 9 In addition, total employment in the
nonresidential buildings and nonresidential specialty trade categories has continued to
move up in recent months.
In the drilling and mining sector, the increase in the total number of rigs drilling for
natural gas or petroleum through the end of September suggests that outlays continued to
rise rapidly in the third quarter. The number of active rigs did tick down in early
October, but energy prices remain high enough that drilling activity is likely to remain
strong.
Business Inventories
The pace of real inventory accumulation outside the motor vehicle sector moved up to an
annual rate of nearly $50 billion in the second quarter, and book-value data through
August suggest that the rate of stockbuilding remained substantial in the third quarter.
Broad measures of months’ supply outside of the motor vehicle sector, including the
staff’s flow-of-goods inventory system, suggest that inventories are generally well
aligned with demand. Although the September survey from the Institute for Supply
Management indicated a noticeable rise in the number of respondents who think their
customers’ inventories are too high, two-thirds of respondents remain comfortable with
their customers’ inventory positions.
Federal Government Sector
As a result of an exceptionally sharp increase in receipts in September, the unified budget
deficit for fiscal year 2006 came in at $248 billion, down from $319 billion in the
2005 fiscal year. Outlays rose about in line with nominal GDP in fiscal 2006, but
receipts rose much more rapidly, and the deficit fell from 2½ percent of GDP in 2005 to
2 percent of GDP in 2006.
Tax receipts in the July to September period stood 10 percent above the year-earlier level
after adjusting for shifts in payment timing. Corporate collections (mainly the estimated
payments that were due on September 15) posted another enormous increase, apparently
because of both strong gains in corporate profits and other factors, including unusually
high settlements of previous years’ liability. Nonwithheld individual income and payroll

The architectural billings index includes billings for both nonresidential and residential construction
projects, but the lion’s share of these projects (about 88 percent) is nonresidential.

II-28

II-29

taxes also remained quite strong, while withheld taxes fell a bit short of the gains in
wages and salaries over the past year.
Outlays in the July to September period, adjusted for shifts in payment timing, rose
8 percent from the year-earlier comparable period. One factor that boosted spending over
this period was a one-time jump of $12 billion in outlays recorded by the Department of
Education in September. The jump stemmed from a re-estimate of the subsidy costs of
the student loan program. More generally, though, the underlying rise in outlays appears
to have eased a bit of late as increases in defense spending and in Medicare expenditures
(after accounting for the prescription drug benefit) have slowed.
On the legislative front, the Congress has passed just two of the twelve regular
appropriations bills: defense and homeland security. The defense appropriation provides
$447 billion in budget authority for fiscal 2007, including $70 billion of emergency
funding (a $50 billion “down payment” for this year’s spending in Iraq and Afghanistan
and $20 billion for repair and acquisition of equipment). The bill also provides for an
increase of 6 percent in non-emergency defense funding. The homeland security bill
contains an 8 percent boost in budget authority; this increase is somewhat larger than
what the President had requested, mainly because the Congress added emergency funds
for border fencing and border-control agents. Before the Congress went into recess on
September 29, it passed a continuing resolution to provide funding through November 17
for other programs normally covered under the annual appropriations process. At this
point, discretionary spending for fiscal 2007 appears set to exceed the rather stringent
limits adopted by the Congress last spring, in part because of the additional $20 billion
for repair and acquisition of military equipment and the $2 billion in emergency funds for
homeland security.
State and Local Government Sector
Real purchases by state and local governments appear to have risen just modestly in the
third quarter after having posted a sizable increase over the first half of the year. The
slowing was concentrated in construction spending, which has been little changed in real
terms since midyear after having surged over the first half. Employment growth has been
uneven of late, in part because of shifts in hiring around the start of the school year; in
general, though, employment has continued to expand at about the gradual pace that has
been evident since the start of 2004.

II-30

II-31

Price Measures
(Percent change)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

Sept.
2005

Sept.
2006

June
2006

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

4.7
2.5
34.8
2.0
.6
2.5
3.7
1.7

2.1
2.5
-4.3
2.9
.5
3.9
2.2
2.7

5.1
1.7
23.8
3.6
.9
4.5
...
...

PCE prices 2
Total
Food
Energy
Ex. food and energy
Core goods
Core services
Core market-based
Core non-market-based

3.8
2.2
35.7
2.1
.0
3.0
1.8
3.5

1.9
2.5
-4.7
2.4
.1
3.3
2.1
n.a.

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

6.9
2.0
27.7
2.6
2.8
2.3
8.7
3.6
29.7
6.5

.9
2.2
-1.8
1.2
1.2
1.5
4.7
7.4
-7.8
19.7

Measures

Sept.
2006

Aug.
2006

Sept.
2006

.8
3.5
-15.6
2.7
.0
3.8
...
...

.2
.4
.3
.2
.2
.2
...
...

-.5
.3
-7.2
.2
-.1
.3
...
...

3.8
2.3
27.6
2.5
.1
3.6
2.5
2.6

1.0
2.9
-17.6
2.2
-.1
3.2
2.0
n.a.

.2
.3
.3
.2
.2
.2
.2
.2

-.3
.2
-7.9
.2
-.1
.3
.2
n.a.

6.4
3.7
22.3
2.3
2.2
2.5
10.3
9.0
6.4
59.4

-4.4
7.6
-24.7
-.3
-1.0
.5
-1.9
5.0
8.0
-1.9

.1
1.4
.3
-.4
-.5
-.3
.4
.4
2.2
-2.8

-1.3
.7
-8.4
.6
.5
.6
-1.4
.1
-3.4
1.0

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
2. PCE prices in September are staff estimates.
... Not applicable.
n.a. Not available.

II-32

Consumer Prices
(12-month change except as noted)

PCE Prices

CPI and PCE ex. Food and Energy
Percent

Percent
4

3
CPI

Total PCE

3
2

Sept.*
2

Core PCE

2000

2001

2002

2003

2004

PCE
1

Sept.*

CPI
chained

2005

2006

0
2007

* Staff estimate.

2000

2001

2002

2003

2004

2005

2006

0
2007

* PCE for September is a staff estimate.

PCE excluding Food and Energy

PCE excluding Food and Energy
Percent

Percent
3

5
3-month change, annual rate

Sept.*
2

3
Sept.*

Market-based components

2000

2001

2002

2003

2004

2005

2006

0
2007

-1

* Staff estimate.

2000

2001

2002

2003

2004

2005

PCE Energy
Percent

4
Sept.*

3
Services ex. energy

1
Sept.*

0
-1

-3

Percent
4

-2

-1
2007

* Staff estimate.

PCE Goods and Services

2006

0
-1

Goods ex.
food and energy

2000

2001

2002

* Staff estimate.

2003

2004

2005

2006

Sept.*

-2

-10

-3
2007

-20

-10

2000

2001

2002

* Staff estimate.

2003

2004

2005

2006

-20
2007

II-33

State and local revenue flows have continued to exhibit considerable vigor. According to
the Census Bureau’s Quarterly Summary of State and Local Tax Revenue, state revenues
during the year ending in the second quarter—which was equivalent to fiscal year 2006
for most states—were 9 percent above their year-earlier level. As was the case at the
federal level, second-quarter receipts were boosted substantially by both continued
strength in corporate income taxes and a large increase in nonwithheld personal income
tax payments.10 Revenues received by local governments rose 7 percent during the year
ending in the second quarter, about the same rate as during the comparable period in each
of the preceding two years.
Prices
The consumer price index declined 0.5 percent in September as energy prices fell
sharply; prices excluding food and energy rose 0.2 percent for the third consecutive
month. Given the available data, we estimate that core prices for personal consumption
expenditures (PCE) also rose 0.2 percent last month, which leaves the three-month
change in September at 2.2 percent at an annual rate—down from a high of 2.9 percent in
May. We estimate that core PCE prices increased 2.4 percent over the twelve months
ending in September, 0.3 percentage point higher than the increase recorded during the
preceding twelve-month period.
The pickup in core PCE inflation over the past year has been concentrated in shelter
costs, which have accelerated nearly 2 percentage points.11 However, shelter costs have
slowed considerably in the past few months, rising just 0.3 percent in both August and
September after five consecutive months of increases of either 0.4 percent or 0.5 percent.
Core goods price inflation was little changed in the past year, as a noticeable acceleration
in prices for apparel and a number of other nondurable goods was offset by a deceleration
in the prices of a wide variety of durable goods.
We estimate that the PCE price index for food and beverages increased 0.2 percent in
September, as a sizable increase in the index for fruits and vegetables was partly offset by
a smaller-than-normal rise in the index for food away from home. The spot prices of
wheat and corn have risen rapidly of late, but so far these increases have had little effect

The breakdown of personal income taxes into their withheld and nonwithheld components is
provided by the Rockefeller Institute’s State Revenue Report.
11
The core CPI has accelerated more than the core PCE price index over the past year, largely because
shelter is given a larger weight in the CPI.

II-34

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

Total Gasoline Margin
180

Gasoline Price Decomposition
Cents per gallon

Retail price less average spot crude price*

180

160

140

120

Cents per gallon

350
300

300

250

250
Retail price*

200

200
Rack price

Oct. 16

150
100

100

2004

2005

2006

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

100

2004

2005

Ethanol Prices
Millions of barrels
245

Total excluding ethanol
Adjusted for ethanol use*

235

225

225
Oct. 13

215

205

195

185

2005

185

2006

Cents per gallon

500
450

Near futures price, daily
Monthly futures, Oct. 17

350

300

250

200

150

100

2005

2007

100

Natural Gas Inventories
Dollars per million BTU

Billions of cubic feet
18

4000

3500

2004

Note. National average spot price.
Source. Bloomberg.

2005

2006

Oct. 6

3000

2000

1500

1000

500

3000

2500

Oct. 17

3500

2000
8

4000

Total

2500

2003

2006

Source. Chicago Board of Trade.

2002

450
400

Natural Gas Prices

2001

500

400

Note. Shaded region is average historical range as
calculated by DOE. Monthly data through July 2006,
weekly data thereafter.
* Inventories of RBOB gasoline augmented to reflect
fuel ethanol to be blended; estimated by FRB staff.

2006

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

Gasoline Inventories
245

150

Average spot crude price**

Oct. 16
80

350

2005

2006

Note. Shaded region is historical range for 2000 to
2004 as calculated by FRB staff. Monthly data through June
2006, weekly data thereafter.

II-35

on food prices for consumers. Over the past year, food prices have risen 2½ percent, a
slightly larger increase than in the previous year.
We estimate that PCE energy prices declined 8 percent in September and stood about
4¾ percent below their year-earlier level. Retail gasoline prices have fallen especially
rapidly as a result of both the fall in crude oil costs and a sharp narrowing of the margin
between retail gasoline prices and crude oil prices. The narrowing of this margin was
caused by a glut of gasoline inventories, which had been accumulated by wholesalers
earlier this year as a precaution against possible hurricane-related supply disruptions or
distribution problems related to ethanol-based gasoline. However, these disruptions
failed to materialize, and in early October gasoline inventories reached a sixteen-year
seasonal high, thereby putting downward pressure on retail prices and total margins. In
all, retail gasoline prices were down 13 percent in September, and preliminary survey
information points to another big drop in October.
Natural gas inventories also continued to accumulate rapidly through early October and
now stand at their highest level in twelve years. This inventory situation has caused spot
prices of natural gas to plummet, and by early October they were at a four-year low.
Because residential rates (which are typically regulated by state commissions) tend to lag
behind changes in the spot price, the drop in spot prices had little effect on consumer
prices for natural gas in September, but it should show through more clearly in October.
With the sharp decline in consumer gasoline prices, near-term inflation expectations have
eased substantially after spiking up in August. The Michigan Survey Research Center
reported that in early October, median one-year inflation expectations moved down to
2.9 percent, while median five- to ten-year expectations edged up 0.1 percentage point, to
3.1 percent—well within the narrow range seen over the past year. As of October 17,
inflation compensation implied by rate spreads on nominal and CPI-indexed Treasury
bonds was about 2.2 percent for five-year maturities and about 2.6 percent at longer
horizons, after adjusting for carry effects. These figures are a shade lower than those in
the September Greenbook.
Turning to prices at earlier stages of processing, the producer price index (PPI) for core
intermediate materials rose only 0.1 percent in September, well below the 0.7 percent
average monthly rate for the preceding twelve months. This reading reflected a drop in

II-36

Measures of Expected Inflation
Survey Measures (Michigan SRC)
12

Percent

Percent
12

Quarterly

Monthly

Median, 5 to 10 years ahead
6

Oct.

Q3
2

Median, 12 months ahead

0
1971

1975
1976

1980
1981

1985
1986

1990
1991

1995
1996

2000
2001

Inputs to Models of Inflation
12

2005
2006

2005

Percent

Quarterly

Percent

2006

Quarterly

8
3

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

3
Q4

Q3
2

4
Distributed lag of
core CPI inflation**

Q4
Q3

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

Inflation Compensation from TIPS
5

Percent

Percent
5

Quarterly

Weekly

4
3

5 to 10 years ahead

Next 5 years

3
Oct. 17

3
Q3

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

II-37

Expected Inflation
In the September Greenbook, we introduced a new exhibit showing three types of
measures of expected inflation. To recap, the top two panels show the median responses
to two familiar questions from the Michigan Survey Research Center: one about inflation
twelve months ahead and one about inflation five to ten years ahead. The questions are
asked of approximately 500 households per month and do not refer to any particular price
index. (Specifically, the questions ask, “By about what percent [per year] do you expect
prices to go up/down, on the average, during the next twelve months [five to ten years]?”)
The middle panels show two series that are important inputs into our inflation models:
The FRB/US long-run expectations measures for CPI inflation and a distributed lag of
core CPI inflation. The FRB/US variable is constructed by splicing together three
different series: for 1991 forward, the median projection for CPI inflation over the next
ten years from the Survey of Professional Forecasters conducted by the Federal Reserve
Bank of Philadelphia; for 1981 through 1991, a related survey conducted by Richard
Hoey, of Drexel Burnham Lambert; and for years preceding 1981, a model-based
estimate constructed by the Board staff. The distributed-lag measure is derived from one
of the staff’s reduced-form Phillips curve models of core CPI inflation; multiplying the
lagged inflation terms by the estimated coefficients on those terms (which are constrained
to sum to 1) generates the measure shown. This distributed lag, although not a direct
measure of expected inflation, is highly correlated with actual inflation and likely
includes an important expectations component.
Finally, in the bottom pair of panels, we show two series for inflation compensation
derived from a comparison of yields on nominal Treasury securities with yields from
Treasury inflation-protected securities (TIPS). These series, one for the next five years
and one for five to ten years ahead, provide a market-derived measure of expected
inflation, albeit one that also includes premiums for liquidity and for inflation risk.
Beginning with March 2004, the series on inflation compensation over the next five years
is adjusted for the indexation-lag effect.
prices of materials for nondurable manufacturing—including some chemicals that have a
high energy content. In addition, the erratic PPI for air transport fell sharply in
September. Prices of core crude materials rose 1.0 percent in September, about half the
average increase over the previous twelve months. September’s rise in the PPI for core

II-38

Commodity Price Indexes
Journal of Commerce
1996 = 100
180

180

160

160
Oct. 17

140
120

100

100
Industrials

80
Metals

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

Commodity Research Bureau
1967 = 100
450

450

400

400
Oct. 17
Spot industrials

350

300

250

250
Futures

200
150

200

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

Selected Commodity Price Indexes
(Percent change)

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

2005 1

12/27/05
to
9/12/06 2

9/12/06 2
to
10/17/06

52-week
change to
10/17/06

5.3
5.8
10.1
-6.1
20.6

8.3
22.6
13.3
11.8
8.8

-.6
7.8
4.2
-.5
2.4

4.3
44.2
25.7
3.3
14.0

1. From the last week of the preceding year to the last week of the year indicated.
2. September 12, 2006, is the Tuesday preceding publication of the September Greenbook.

150

II-39

Broad Measures of Inflation
(Percent change, Q2 to Q2)
Measure

2003

2004

2005

2006

Product prices
GDP price index
Less food and energy

2.1
1.9

2.9
2.6

2.8
2.9

3.3
3.1

Nonfarm business chain price index

1.2

2.3

3.0

3.3

Expenditure prices
Gross domestic purchases price index
Less food and energy

2.1
1.8

3.1
2.6

3.2
2.8

3.6
2.9

PCE price index
Less food and energy

1.8
1.4

2.8
2.1

2.6
2.0

3.3
2.2

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

1.7
1.2

2.4
1.5

2.4
1.7

3.2
1.9

CPI
Less food and energy

2.2
1.5

2.8
1.8

3.0
2.1

4.0
2.5

Chained CPI
Less food and energy

1.9
1.2

2.7
1.7

2.6
2.0

3.4
2.2

Median CPI
Trimmed mean CPI

2.3
1.9

2.3
2.1

2.3
2.2

3.0
2.7

Trimmed mean PCE

1.7

2.3

2.2

2.5

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

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10 years) 4

2004:Q4

3.3

3.4

3.0

3.1

2.8

2.5

2005:Q1
Q2
Q3
Q4

3.0
2.9
3.8
3.7

3.6
3.9
4.3
4.6

3.0
3.2
3.5
3.7

3.2
3.3
3.5
3.5

2.8
2.9
2.9
3.1

2.5
2.5
2.5
2.5

2006:Q1
Q2
Q3

3.6
4.0
3.3

3.7
4.5
4.0

3.0
3.5
3.4

3.3
3.6
3.3

2.9
3.1
3.0

2.5
2.5
2.5

2006:July
Aug.
Sept.
Oct.

4.1
3.8
2.1
n.a.

3.8
4.6
3.6
3.5

3.2
3.8
3.1
2.9

3.2
3.5
3.2
3.6

2.9
3.2
3.0
3.1

...
...
2.5
...

Period

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

II-40

crude materials reflected a large pickup in prices of aluminum and steel scrap, while
prices turned down for crude materials used in construction.
More recently, the Journal of Commerce metals index has risen 7¾ percent since the time
of the September Greenbook; the jump reflects sizable increases for a number of metals.
However, the foodstuffs index from the Commodities Research Bureau fell ½ percent
from its mid-September level, while spot prices of construction materials such as lumber,
plywood, and fiberboard have turned down sharply since the September Greenbook.
Labor Costs
The BLS’s preliminary estimate of the benchmark revision to payroll employment
implies a downward revision of slightly more than ½ percentage point to the increase in
compensation per hour over the four quarters ending in 2006:Q1. Nonetheless, at
5¾ percent, the increase is still large. The only timely information on wages is for
average hourly earnings, which rose 0.2 percent in both August and September after a
larger increase in July. Average hourly earnings rose 4 percent over the twelve months
ending in September, compared with an increase of 2¾ percent over the preceding year.

Last Page of Domestic Nonfinancial Developments

Domestic Financial
Developments

III-T-1

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

2005

Change to Oct. 17 from
selected dates (percentage points)

2006

Instrument
June 28

Dec. 30

Sept. 19

Oct. 17

2004
June 28

2005
Dec. 30

2006
Sept. 19

1.00

4.25

5.25

4.25

1.00

.00

1.36
1.74

3.99
4.22

4.82
4.90

4.96
4.95

3.60
3.21

.97
.73

.14
.05

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

1.28
1.45

4.23
4.37

5.25
5.25

5.24
5.24

3.96
3.79

1.01
.87

-.01
-.01

Large negotiable CDs1
3-month
6-month

1.53
1.82

4.49
4.65

5.34
5.38

5.32
5.34

3.79
3.52

.83
.69

-.02
-.04

Eurodollar deposits3
1-month
3-month

1.29
1.51

4.36
4.52

5.33
5.39

5.32
5.36

4.03
3.85

.96
.84

-.01
-.03

Bank prime rate

4.00

7.25

8.25

4.25

1.00

.00

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

2.88
3.97
4.90

4.43
4.35
4.47

4.81
4.66
4.81

4.86
4.71
4.85

1.98
.74
-.05

.43
.36
.38

.05
.05
.04

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

1.56
2.25

2.03
2.10

2.41
2.39

2.53
2.48

.97
.23

.50
.38

.12
.09

Municipal general obligations (Bond Buyer)5

5.01

4.38

4.30

4.33

-.68

-.05

.03

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

5.21
5.38
5.60
6.25
8.41

4.92
4.84
5.27
5.82
8.30

5.30
5.11
5.72
6.28
8.49

5.27
5.16
5.75
6.32
8.39

.06
-.22
.15
.07
-.02

.35
.32
.48
.50
.09

-.03
.05
.03
.04
-.10

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

6.21
4.19

6.21
5.16

6.40
5.54

6.37
5.56

.16
1.37

.16
.40

-.03
.02

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

Record high

2005

Change to Oct. 17
from selected dates (percent)

2006

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

Level

Date

Dec. 30

Sept. 19

Oct. 17

Record
high

2005
Dec. 30

2006
Sept. 19

11,993
1,527
5,049
782
14,752

10-18-06
3-24-00
3-10-00
5-5-06
3-24-00

10,718
1,248
2,205
673
12,518

11,541
1,318
2,222
725
13,187

11,950
1,364
2,345
765
13,691

-.36
-1.70
-53.55
-2.16
-7.19

11.50
9.27
6.33
13.62
9.37

3.54
3.47
5.52
5.44
3.82

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Most recent Thursday quote.
6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
8. Home mortgage rates for October 17, 2006, are for the week ending October 12, 2006.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the most recent policy tightening began.
September 19, 2006, is the day before the most recent FOMC announcement.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Eurodollar Futures Contract Rates
September
FOMC

Percent
5.75

Philadelphia
New home
Fed
sales
index

ISM

Nonfarm
payrolls

FOMC Retail
minutes sales

5.50

December 2006
Oct.
17

5.25

5.00
December 2007
4.75

4.50
Sept. 19

Sept. 22

Sept. 27

Oct. 2

Oct. 4

Oct. 6

Oct. 10

Oct. 12

Oct. 16

Note. 5-minute intervals.

Expected Federal Funds Rate

Policy Uncertainty

Percent
5.50
5.25

Basis points
300

Daily
Sept.
FOMC

12 months ahead

250

October 17, 2006

5.00

200
Oct.
17

4.75
4.50

September 19, 2006

4.25

150
100
50

6 months ahead

4.00
Oct. Feb.
2006

June Oct.
2007

Feb.

June
2008

Oct.

Oct. Feb.
2004

June Oct.
2005

Feb.

June
2006

Oct.

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

Note. Width of a 90 percent confidence interval for the
federal funds rate computed from the term structures for
both the expected federal funds rate and implied volatility.

Nominal Treasury Yields

Inflation Compensation

Percent
Sept.
FOMC

Daily

10-year

Percent
3.5

Daily

Sept.
FOMC

5 to 10
years ahead

3.0
Oct.
17

Oct.
17

2-year

2.5
3
5-year

2
Oct. Feb.
2004

June Oct.
2005

Feb.

June
2006

Oct.

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

2.0
Oct. Feb.
2004

June Oct.
2005

Feb.

June
2006

Oct.

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

Domestic Financial Developments
Overview
Policy expectations were unchanged in the near term, but edged up beyond mid-2007
amid mixed economic news and FOMC communications that were taken to suggest
greater concern about inflation risks. Nominal and inflation-indexed Treasury yields both
increased a bit on balance, leaving implied measures of inflation compensation little
changed. Equity prices rose about 4 percent, boosted by the surprising resilience of
corporate profits and perhaps also by the effects of lower spot oil prices on the economic
outlook. Risk spreads on investment-grade bonds were about unchanged over the
intermeeting period, while speculative-grade spreads narrowed a little. The available
indicators suggest that household credit quality remained favorable, on the whole, despite
the continuing deceleration in home prices; business credit quality also remained strong.
Policy Expectations and Interest Rates
The decision at the September FOMC meeting to leave the target federal funds rate
unchanged and to retain the forward-looking language from the previous statement was
largely anticipated, and elicited little market reaction. Early in the intermeeting period,
some weaker-than-expected data releases pushed the expected path of policy beyond the
near term substantially lower. However, this move was subsequently more than reversed,
as investors apparently interpreted comments by several FOMC officials and the
September FOMC minutes as suggesting that the Committee was more concerned about
the risks to the inflation outlook and less worried about a slowdown in economic growth
than had been thought. In addition, a few subsequent data releases, including the
announcement of an upcoming upward revision to payroll data, boosted policy
expectations. Investors continue to expect the Committee to leave the target federal
funds rate unchanged through the end of the year. The expected path for policy
incorporates about ½ percentage point of policy easing next year, a bit less than was
expected at the time of the last FOMC meeting. Measures of uncertainty about the future
path of policy, as derived from options on Eurodollar futures contracts, remain near
historical lows.
Nominal two-year Treasury yields largely tracked policy expectations, rising 5 basis
points, on net, over the intermeeting period; ten-year yields increased 4 basis points.
After adjusting for carry effects, yields on Treasury inflation-protected securities (TIPS)
rose a bit more, leaving TIPS-based measures of inflation compensation a tad lower, on
net, amid a moderate decline in spot oil prices. Near-term inflation compensation
remains near the low end of its recent range.

III-1

III-2

Corporate Yields, Risk Spreads, and Stock Prices
Wilshire 5000

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

Sept. 20, 2006 = 100
Daily

Monthly

105
Oct.
17

100
12-month forward
trend-E/P ratio

90
85

Sept.
FOMC

Oct.
17

6
4

Long-run real Treasury yield*

75
2004

2005

2006

1985 1988 1991 1994 1997 2000 2003 2006
* Estimated yield on synthetic Treasury perpetuity minus
Philadelphia Fed 10-year expected inflation.
+ Denotes the latest observation using daily interest rates and
stock prices and latest earnings data from I/B/E/S.

Implied Volatility on S&P 500 (VIX)

Corporate Bond Yields
Percent

Percent
50

Daily

Percent
9.5

Daily
Sept.
FOMC

Sept.
FOMC

8.5

11
10-year high-yield
(left scale)

7.5

30
9
Oct.
17

20
7
Oct.
17

10-year BBB
(right scale)

5.5

10
5

2002

2003

2004

2005

6.5

2006

4.5
2002

2003

2004

2005

2006

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

Corporate Bond Spreads

Commercial Paper Quality Spread

Basis points
1000

Basis points

Basis points
375

Daily

Weekly average

Sept.
FOMC

800

10-year high-yield
(left scale)

300

600
225

400

200

Oct.
17

150

10-year BBB
(right scale)

75
2002

2003

2004

2005

2006

Note. Measured relative to comparable-maturity Treasuries.

2002

2003

2004

2005

2006

Note. Measured by the difference between yields on 30-day A2/P2
paper and A1/P1 paper.

III-3

Stock Prices and Corporate Interest Rates
Broad stock price indexes gained about 4 percent on net, boosted initially by an unusually
small number of earnings warnings in advance of the earnings reporting season and later
by actual reports, the vast majority of which beat analysts’ forecasts. Investors may also
have been encouraged by continued declines in spot oil prices. With the rise in stock
prices, the twelve-month forward trend-earnings to price ratio for S&P 500 firms inched
down, and its spread over a long-run real Treasury yield, a rough measure of the equity
risk premium, narrowed a bit. Implied volatility on the S&P 500 index continued to
hover close to its historical lows.
Over the intermeeting period, yields on investment-grade corporate bonds moved roughly
in line with those on comparable-maturity Treasury securities, leaving risk spreads
moderately above their lows in the past couple of years. A small decline in yields on
speculative-grade bonds narrowed their spreads a little. Risk spreads on commercial
paper, measured by the difference between yields on thirty-day A2/P2 and A1/P1 paper,
remained low.
Corporate Earnings and Credit Quality
Through mid-October, nearly 100 firms in the S&P 500 had reported third-quarter
earnings, and thus far very few have come in short of expectations. On the basis of these
reports and analysts’ estimates for the remaining firms, we project that third-quarter
earnings per share for the S&P 500 have increased about 15 percent from a year earlier, a
pace roughly on par with that in the second quarter. Such a result would imply a very
modest gain from the second quarter level on a seasonally adjusted basis. Over the past
few weeks, analysts’ forecasts of year-ahead earnings for S&P 500 firms continued to be
revised down, on balance, but this was largely due to reduced energy-sector forecasts.
Overall, the credit quality of nonfinancial firms continued to be solid. Although balance
sheet liquidity declined further in the second quarter, it remained high by historical
standards, and corporate leverage was unchanged at low levels. Bond rating downgrades
during the third quarter were moderate and mainly reflected the July and September
downgrades of Ford Motor Company, while bond upgrades were minimal. The realized
six-month trailing bond default rate was near zero again in September, and the near-term
outlook for credit quality remained favorable, as the forecast of the aggregate year-ahead
default rate based on the KMV model hovered around the bottom of its historical range.

III-4

Corporate Earnings and Credit Quality
Corporate Earnings Growth

Revisions to Expected S&P 500 Earnings

Percent
Quarterly*

30
Q2

Percent

Monthly

Q3e

S&P 500 EPS
NIPA, economic
profits before tax

Early
Oct.

-1

-10

-2

-20

-3

-30
1990

1994

1998

2002

2006

-4
2002

2003

2004

2005

2006

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

* Change from 4 quarters earlier.
e Staff estimate.
Source. I/B/E/S for S&P 500 earnings per share.

Bond Ratings Changes of Nonfinancial Companies

Financial Ratios for Nonfinancial Corporations
Ratio
0.12

Percent of outstandings

Ratio
0.35

Annual*

Annual rate

Upgrades
H1Q3

Debt over total assets
(right scale)

0.09

10
0

0.30

10
20

0.06
Liquid assets over total assets
(left scale)

0.25

Downgrades

0.03

50
1990

1994

1998

2002

2006

1992 1994 1996 1998 2000 2002 2004 2006

Note. Compustat data.
* Data are quarterly starting in 2000:Q1.

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

Selected Default and Delinquency Rates

Expected Year-Ahead Defaults

Percent of outstandings

Percent of liabilities
7

2.0

Monthly

6
1.5

5
4

C&I loan delinquency rate
(Call Report)

1.0

3
2
Q2

Bond default rate*

Sept.

1991

1994

1997

2000

2003

2006

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

0.5

Sept.

0.0

0
1994

1997

2000

2003

2006

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

III-5

Business Finance
Gross Issuance of Securities by U.S. Corporations
(Billions of dollars; monthly rates, not seasonally adjusted)
2006
Type of security
Nonfinancial corporations
Stocks1
Initial public offerings
Seasoned offerings
Bonds2
Investment grade
Speculative grade
Other (sold abroad/unrated)
Memo
Net issuance of commercial paper3
Change in C&I loans at
commercial banks3,4
Financial corporations
Stocks1
Bonds2

2002

2003

2004

2005

5.2
.7
4.4

3.7
.4
3.3

5.4
1.6
3.8

4.6
1.7
2.8

5.2
1.9
3.3

24.8
15.7
4.8
4.2

31.6
16.0
11.3
4.3

22.7
8.3
9.5
4.9

19.1
8.5
6.4
4.3

-5.7

-3.4

1.5

-5.2

-7.7

4.0
87.0

6.6
111.1

July

Aug.

Sept.

2.6
.7
1.9

2.0
.4
1.6

2.0
.5
1.5

3.6
1.1
2.5

30.5
14.5
8.3
7.8

18.4
10.6
4.6
3.2

11.6
6.1
4.6
1.0

20.0
10.6
4.7
4.7

23.7
15.3
4.5
3.9

-.4

3.4

-1.2

-3.0

-.6

3.2

10.0

14.6

13.4

17.5

19.5

3.1

6.9
139.3

5.0
176.3

4.4
190.2

5.1
168.4

4.9
114.0

3.2
176.0

7.1
215.3

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

Selected Components of Net Debt Financing

Components of Net Equity Issuance

Billions of dollars

60
Monthly rate, nonfinancial firms

30
Monthly rate, nonfinancial firms

Commercial paper*
C&I loans*
Bonds

20
10

Total

-10
20
-20
10
-30
0
-40
-10

-50

Public issuance
Private issuance
Repurchases
Cash mergers

-20
-30

-60
-70

Total

-40
2002

2003

2004

2005

* Seasonally adjusted, period-end basis.

2006

-80
2002

2003

e Staff estimate.

2004

2005

2006

III-6

Commercial Real Estate
Gross Issuance of CMBS

Commercial Mortgage Debt

Billions of dollars

Percent change from year earlier
18

Quarterly

70
Quarterly

16
e
Q3

14
50

12
10

4
10

0
1996

1998

2000

2002

2004

2006

1996

e Staff estimate.

1998

2000

2002

2004

2006

Source. Commercial Mortgage Alert.

Commercial Mortgage Rates

Investment-Grade CMBS Spreads
Percent

Basis points
9

Monthly

300

Weekly

250

200

BBB
7

150
Sept.
6

Oct. 11

AAA

100

5
2000

2001

2002

2003

2004

2005

2006

50
2000

Note. Based on newly securitized commercial mortgages.
Source. Commercial Mortgage Alert.

2001

2002

2003

2004

2005

2006

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

Delinquency Rates on Commercial Mortgages

Commercial Real Estate Prices and Rents

Percent

Percent change from year earlier
4

Quarterly

16
Quarterly
Q2

3
At commercial
banks

12
8

Prices

4
2

0
-4

Rents
-8

At life
insurance
companies

-12

-16
1996

1998

2000

2002

2004

Source. For banks, Call Report; for life insurance
companies, ACLI.

2006

1988

1991

1994

1997

2000

2003

2006

Note. Series include office, industrial, and retail properties.
Source. MIT Transaction Index, Torto Wheaton.

III-7

Business Finance
In September and early October, gross bond issuance was robust, but the rate remained
below the torrid pace of the first half of the year. Investment-grade firms accounted for
about 60 percent of third-quarter issuance. A substantial share of firms continued to
report using bond proceeds for refinancings and mergers and acquisitions. C&I loans
slowed markedly in September, while commercial paper outstanding was about
unchanged. On balance, net debt financing for September and the third quarter as a
whole was strong, though well off its very rapid pace in the first half of the year.
After a sluggish summer, both IPOs and seasoned equity offerings picked up a bit in the
second half of September and early October, while private equity issuance appears to
have remained vigorous due to investments by buyout and venture capital firms. Even
so, gross equity issuance continued to be dwarfed by equity retirements, which have been
boosted by strong profits and ample cash positions on corporate balance sheets. In the
third quarter, retirements from share repurchases and those from cash-financed mergers
and acquisitions are estimated to have about matched their extraordinary first-half
volumes. Overall, net equity issuance appears to have remained deeply negative.
Commercial Real Estate
Commercial mortgage borrowing was strong in the second quarter; recent data suggest
borrowing eased somewhat in the third quarter, perhaps reflecting the rise in interest rates
on commercial mortgages and the net tightening of standards for these loans reported on
the October Senior Loan Officer Opinion Survey. Despite this move toward tightening
by banks, spreads of yields on investment-grade CMBS over those on comparablematurity Treasury securities have held steady at low levels in recent months. The credit
quality of commercial mortgages has remained strong, with delinquency rates at historic
lows in the second quarter. Commercial property prices continued to increase rapidly in
the second quarter, and an additional modest rise in rents pointed to continued
improvement in market fundamentals.
Household Finance
Interest rates on new home mortgages were little changed, on net, over the intermeeting
period. In the second quarter, the growth of home mortgage debt from a year earlier
slowed further; on a quarter-to-quarter basis, the growth rate was 9 percent at an annual
rate, the lowest seen in more than five years. We have little hard data in hand for the
third quarter, but we expect some further moderation because of the continued

III-8

Household Liabilities
Mortgage Rates

Mortgage Debt and Consumer Credit
Percent

Percent change from year earlier
9

Weekly

16
Mortgage

8
30-year
FRM

14
Q2

7
Oct.
11

1-year
ARM

8
6

Consumer
Aug.

3
1996

1998

2000

2002

2004

2006

0
1996

1998

2000

2002

2004

2006

Source. Freddie Mac.

Financial Obligations Ratio

Consumer Credit Delinquencies

Percent of disposable income

Percent
19.5

Quarterly

Credit card loans
in securitized pools

Q2
19.0

18.5

4
Aug.
Consumer loans
at commercial banks

18.0

Aug.
17.5

2
Auto loans at captive
finance companies

17.0
1996

1998

2000

2002

2004

2006

1
1996

1998

2000

2002

2004

2006

Source. For credit cards, Moody’s; for auto loans and
consumer loans, Federal Reserve.

Mortgage Delinquencies

Household Bankruptcies
Percent
10

Monthly*

9
Subprime

Aug.

Prime
July

Weekly, n.s.a.

Thousands of filings
100
*
90

Oct. 14

0
2002

2003

2004

2005

2006

Note. Percent of loans more than 90 days past due or in
foreclosure. * Data are as of year-end before September 2003.
Source. LoanPerformance.

0
2003
2004
2005
2006
* 515,017 filings for the week ending Oct. 15, 2005.
Source. Lundquist Consulting, Inc.

III-9

deceleration of house prices. Meanwhile, year-over-year growth in consumer credit
remained modest through August.
Overall household debt expanded more rapidly than disposable income in the second
quarter, pushing the financial obligations ratio to another new high. Nonetheless,
households generally do not appear to be having trouble meeting their obligations.
Delinquency rates on credit cards, auto loans, and prime mortgages remain low; the
delinquency rate on subprime mortgages crept up further in August but remained well
within the range seen over the past several years. The pace of personal bankruptcy filings
continued to be subdued over the intermeeting period.
House prices posted their smallest increase in several years in the second quarter, and
monthly indicators imply a further deceleration in the third quarter. Futures quotes
continue to imply an outright price decline in coming quarters in ten of the largest
markets, but they do not indicate that market participants have become markedly more
pessimistic over the intermeeting period. The available data on house prices, stock
prices, and income suggest that the ratio of household net worth to disposable personal
income was little changed in the third quarter.
Treasury and Agency Finance
The Treasury auctioned two- and five-year nominal coupon securities and reopened the
ten-year TIPS during the intermeeting period. These auctions were reportedly well
received, with above-average bid-to-cover ratios suggesting overall strong demand for
those securities. Indirect bidding, which may in part reflect demand from foreign official
institutions, was also robust. Following strong mid-September tax receipts, issuance of
four-week Treasury bills has been lower than expected, but bid-ask spreads in that market
were unaffected. Similarly, liquidity in the note and bond markets has continued to be
ample, as both bid-ask spreads and trading volumes have remained within their recent
ranges.
Net agency debt issuance has been light, as Fannie Mae and Freddie Mac continued to
reduce their mortgage portfolios through August. On September 29, the Office of
Federal Housing Enterprise Oversight announced that the two government-sponsored
enterprises (GSEs) were adequately capitalized as of June 30 and also announced a fiveyear plan to enhance its supervision of the GSEs. Stock prices of both Fannie Mae and
Freddie Mac rose over the intermeeting period, likely boosted in part by Freddie Mac’s

III-10

Household Assets
House Prices
Percent change from year earlier
14

Quarterly

House-Price Path Implied by Futures on
10-City Index
January 2000 = 100
Quarterly

240

Implied

230

220

6
OFHEO purchase-only index

210

Oct. 17
Sept. 19

190

0
1996

1998

2000

2002

2004

200

2006

2005

Source. Office of Federal Housing Enterprise Oversight.

2006

2007

Source. Chicago Mercantile Exchange.

Stock Prices

Net Worth and Equity
Percent change from year earlier

Ratio to disposable income
60

Quarterly, end of period

Quarterly, end of period, s.a.
Q3e

6
5

Net worth

4
0
3
Equity

-30

Q3e

Wilshire 5000

1
-60

1996

1998

2000

2002

2004

2006

0
1996

1998

2000

2002

2004

2006

e Staff estimate.

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

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

2004

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

2005

16.0
11.3
2.6
8.7
2.1
2.6
-1.3
3.4
0.4

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

2006
Q3e

Aug.

Sept.e

Assets
Aug.

38.9
31.1
10.7
20.4
0.4
7.4
-0.4
5.8
2.1

6.2
7.0
-2.4
9.4
-0.1
-0.7
-1.4
0.7
0.1

11.5
4.9
-2.9
7.9
0.3
6.2
0.5
4.4
1.2

11.7
4.8
-3.7
8.5
0.2
6.7
0.5
4.7
1.4

19.0
9.3
-1.0
10.3
0.9
8.7
0.5
6.3
1.9

7,394
5,361
4,222
1,139
603
1,431
147
930
354

III-11
Treasury Financing
(Billions of dollars)
2005

Item

2006
Q3

Aug.

97.4

-42.0

-64.9

56.0

156.1 -74.8
-2.3
17.6
158.5 -92.4
78.1 -125.5
80.4
33.1
28.4 -37.6
-1.3
15.0

43.4
-1.5
44.9
-5.3
50.1
-6.3
5.0

62.7
-0.7
63.4
29.6
33.8
21.3
-19.1

-41.5
1.2
-42.8
-50.8
8.0
-35.7
21.2

52.1

16.4

52.1

-69.2 -119.7 -183.3

Total surplus, deficit (–)
Means of financing deficit
Net borrowing
Nonmarketable
Marketable
Bills
Coupons
Decrease in cash balance
Other1
Memo:
Cash balance, end of period

72.8
20.6
52.1
-9.3
61.4
-2.5
-1.1

112.2
21.2
91.0
48.8
42.3
-0.9
8.4

35.7

36.6

8.2

45.8

Sept.

Note. Components may not sum to totals because of rounding.
1. Direct loan financing, accrued items, checks issued less checks paid, and other transactions.

GSE Market Developments
GSE Stock Prices

10-Year GSE Yield Spreads

June 30, 2005 = 100

Basis points
45

115
Daily

Daily

Fannie Mae
Freddie Mac

Sept.
FOMC

Fannie Mae
Freddie Mac

110

Sept.
FOMC

105
100

95
Oct.
17

Oct.
17

30
85
80
25
75
70
20
Aug.

Nov.
2005

Feb.

May July
2006

Oct.

Aug.

Nov.
2005

Feb.

May July
2006

Oct.

Note. GSE yields based on senior unsecured debt. Spreads
measured relative to the 10-year Treasury yield.

III-12

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

2006
Type of security
Total
Long-term 1
Refundings 2
New capital
Short-term
Memo: Long-term taxable

2002

2003

2004

2005

July

Aug.

Sept.

36.3
30.3
10.1
20.2
6.0

37.9
32.0
10.0
22.1
5.8

34.7
29.8
10.8
19.0
4.9

38.4
34.1
15.5
18.7
4.2

32.9
30.1
9.7
20.4
2.8

34.6
29.1
8.0
21.2
5.4

31.1
27.3
4.9
22.3
3.8

39.3
31.8
12.1
19.7
7.5

33.3
28.4
6.9
21.4
4.9

1.7

3.5

2.0

2.1

2.8

2.6

3.9

1.4

2.4

1. Includes issues for public and private purposes.
2. All issues that include any refunding bonds.

Ratings Changes
Number of ratings changes
2400

Annual rate

Upgrades

1800
Q3 p

1200
600
0
600
1200
1800

Downgrades

2400
1990

1992

1994

1996

1998

2000

2002

2004

2006

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

Municipal Bond Yields

Municipal Bond Yield Ratio

General Obligation

Percent

General Obligation over Treasury
8

Weekly

Ratio

Weekly

1.0

20-year

6
5
0.9

Oct.
12

Oct.
17

1-year

Oct.
12

0.8

2
1
0

1994

1997

2000

2003

2006

Source. Municipal Market Advisors and Bond Buyer.

0.7
1994

1997

Source. Bond Buyer.

2000

2003

2006

III-13

positive preliminary earnings estimates for the first half of 2006. Agency debt spreads
were little changed.
State and Local Government Finance
Gross issuance of long-term municipal bonds declined in September, mainly because of a
substantial drop in advance refundings, but issuance for the third quarter as a whole
remained robust. Issuance of short-term municipal bonds also declined in September, as
it typically does early in the fiscal year.
The credit quality of municipal bonds continued to be solid. During the third quarter, the
number of bonds with rating upgrades again far outpaced the number with downgrades,
and the ratio of municipal bond yields to Treasuries remained low.
Money and Bank Credit
M2 grew at an annual rate of 3¾ percent during the third quarter. The slow growth is in
line with apparently weak nominal GDP growth in the quarter and the lagged effects of
rising short-term interest rates earlier in the year. Liquid deposits—rates on which adjust
quite sluggishly to changes in market rates—continued to run off last quarter, and the
currency component of M2 was flat owing to low foreign demand for U.S. dollars. In
contrast, growth of small time deposits and of retail money funds, whose yields tend to
rise with market rates, remained strong.
Commercial bank credit decelerated markedly over August and September, trimming
third-quarter growth to 8¼ percent, down from the 12 percent annual pace during the first
half of the year. The slowdown was due to a run-off in securities and a step-down in the
growth of loans late in the quarter. C&I loans—after soaring in July and August—
decelerated sharply to a 3¼ percent annual rate in September, with widespread weakness
reported across the different bank categories. Commercial real estate loans also slowed
over August and September, a pattern consistent with the weakening of demand and the
tightening of credit standards for such loans reported in the October Senior Loan Officer
Opinion Survey. On the household side, residential real estate loans ran off again in
September, while consumer loans originated by banks expanded moderately.

III-14

M2 Monetary Aggregate
(Based on seasonally adjusted data)

Percent change (annual rate)1

Aggregate and components
M2
Components2
Currency
Liquid deposits3
Small time deposits
Retail money market funds
Memo:
Institutional money market funds
Monetary base

2006
Q3
Aug.

2004

2005

5.3

4.0

4.7

3.8

5.5
10.0
-.3
-11.3

3.5
2.0
18.8
-.2

5.7
.8
17.1
9.9

-5.8
5.6

5.0
3.5

10.5
5.3

Level
(billions
of dollars),

Sept.

4.2

2.8

6,878

-.1
-3.1
21.8
22.0

1.3
-3.7
25.3
20.6

-.3
-4.4
22.1
17.3

741
4,220
1,124
786

16.8
-.4

24.5
.6

20.8
-.4

1,263
804

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

III-15

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

Total2

Level,1
Sept. 2006

2004

2005

H1
2006

Q3
2006

Aug.
2006

Sept.
2006

8.9

10.5

11.9

8.3

5.7

7,780

Loans3
Total
To businesses
Commercial and industrial
Commercial real estate

9.7

11.6

10.0

8.7

2.8

5,790

1.2
11.7

13.2
17.1

16.3
15.6

19.1
12.9

29.4
8.2

3.2
7.8

1,149
1,398

To households
Residential real estate
Revolving home equity
Consumer
Originated4
Other5

15.6
43.8
8.8
6.0
7.4

12.0
13.3
3.1
.5
8.4

7.7
.0
6.7
7.1
12.0

7.4
4.0
5.8
5.5
1.8

-6.9
-10.4
8.8
7.1
15.0

-1.7
5.4
-3.3
4.8
9.1

1,723
449
726
1,106
794

6.6
5.2
4.9
5.7

7.6
5.3
.0
13.3

12.8
13.0
8.3
19.4

3.5
3.2
6.1
-.5

-3.1
3.2
6.9
-1.8

-5.6
-5.1
-1.4
-9.9

1,990
2,144
1,216
928

Securities
Adjusted2
Reported
Treasury and agency
Other6

Note. Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data
are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by reclassifications.
1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels.
2. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115).
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified.
Also includes lease financing receivables.
6. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign
governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains
on derivative contracts.

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices
The October 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices
addressed changes in the supply of, and demand for, bank loans to businesses and
households over the past three months. Special questions in the survey queried banks
about the extent to which the recent strength in commercial and industrial lending
reflected a surge in loans to fund merger and acquisition activity. This appendix is
based on responses from fifty-five domestic banks and seventeen foreign banking
institutions.
Overall, the respondents noted mixed changes in lending standards and terms over the
past three months, while demand for most loan types reportedly declined somewhat.
Both domestic and foreign institutions indicated that they had eased lending terms on
commercial and industrial (C&I) loans over the previous three months, while credit
standards on such loans had changed little. Domestic banks, however, reported that
they had tightened lending standards on commercial real estate loans over the previous
three months. Demand for C&I loans at domestic institutions was reportedly little
changed in the October survey, while demand for commercial real estate loans at these
institutions weakened over the past three months. In the household sector, respondents
generally reported no change in credit standards on residential mortgage loans over the
survey period, while demand for such loans continued to weaken. Standards and terms
on credit card and non-credit-card consumer loans were also little changed, but a
considerable net fraction of domestic institutions indicated that they had experienced
weaker demand for consumer loans over the previous three months.
Business Lending
In the October survey, domestic institutions reported that credit standards on C&I loans
to large and middle-market firms were unchanged, on net, over the past three months.
On balance, however, domestic respondents indicated that they had further eased terms
on C&I loans to such firms over the same period. Almost one-third of respondents—a
somewhat smaller net fraction than in the July survey—noted that they had trimmed
spreads of loan rates over their cost of funds over the past three months, while nearly
one-fifth of banks—about the same net percentage as in the previous survey—reported
that they had reduced the costs of credit lines. About 10 percent of domestic
respondents, on net, indicated that they had eased loan covenants.
Credit standards on C&I loans to small firms were also reportedly little changed, on net,
in the October survey. However, one-third of domestic institutions, on balance,
indicated that they had trimmed spreads of loan rates over their cost of funds over the

III-A-2

Measures of Supply and Demand for C&I Loans,
by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
Percent
80

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

-20
1990

1992

1994

1996

1998

2000

2002

2004

2006

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

1992

1994

1996

1998

2000

2002

2004

2006

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

1992

1994

1996

1998

2000

2002

2004

2006

III-A-3
Measures of Supply and Demand for Loans to Households

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

50
40
30
20
10

Other consumer loans

0
-10
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

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

60
40
20
0
-20
-40

Consumer loans

-60
-80
1990

1992

1994

1996

1998

2000

2002

2004

2006

Net Percentage of Domestic Respondents Tightening Standards for Mortgages to Individuals
Percent
40
30
20
10
0
-10

1990

1992

1994

1996

1998

2000

2002

2004

2006

III-A-4
previous three months, and nearly one-fifth of respondents noted that they had reduced
the costs of credit lines.
At U.S. branches and agencies of foreign banks, only two institutions reported that they
had eased their standards on C&I loans during the survey period. Considerable net
fractions of these institutions, however, indicated that they had trimmed spreads of loan
rates over their cost of funds and reduced the cost of credit lines.
All domestic and foreign respondents that reported having eased their lending standards
or terms in the October survey pointed to more-aggressive competition from other
banks or nonbank lenders as the most important reason for having done so. Notable net
fractions of domestic institutions also cited increased liquidity in the secondary market
for these loans, a more favorable or less uncertain economic outlook, and a reduction in
defaults by borrowers in public debt markets as reasons for having eased credit
standards or terms on C&I loans.
At domestic banks, demand for C&I loans from large and middle-market firms was
reportedly little changed, on balance, in the October survey. About 15 percent of these
institutions, on net, indicated that they had experienced weaker demand for such loans
from small firms over the previous three months. At U.S. branches and agencies of
foreign banks, nearly one-fifth of respondents, on balance, reported that they had seen
weaker demand for C&I loans over the same period. All of the domestic institutions
that experienced weaker demand for C&I loans attributed the softening, in part, to
borrowers’ decreased needs to finance investment in plant or equipment. Considerable
fractions of respondents also cited borrowers’ decreased financing needs for inventories
and accounts receivable, as well as increases in customers’ internally generated funds,
as reasons for weaker loan demand. Among domestic banks that saw stronger demand
for C&I loans, three-fourths pointed to a rise in merger and acquisition (M&A) activity
as a reason for stronger loan demand, while two-thirds cited borrowers’ increased needs
to finance inventories.
Regarding future business, about 10 percent of domestic institutions, on net, and nearly
20 percent of foreign respondents reported that the number of inquiries from potential
business borrowers had decreased moderately over the previous three months.
Nearly 40 percent of domestic institutions—a notably larger net fraction than in the July
survey—indicated that they had tightened lending standards on commercial real estate
loans over the previous three months. More than one-fourth of domestic respondents—
also a larger net percentage than in the previous survey—reported that they had
experienced weaker demand for such loans over the same period. By contrast, both

III-A-5
lending standards and demand for commercial real estate loans at foreign institutions
were little changed in the October survey.
The October survey included a set of special questions about the extent to which the
recent strength in C&I lending has reflected a surge in loans to fund M&A activity.1
Holdings of C&I loans originated for M&A-related purposes were generally small for
the respondent banks.2 About one-half of domestic institutions indicated that M&Arelated C&I loans accounted for less than 5 percent of the loans currently on their
books, and roughly one-third of banks noted that such loans accounted for between 5
percent and 10 percent of their loans. The remainder of banks—except for one
institution—reported a share that was between 11 percent and 30 percent. 3 On average,
those banks with larger C&I loan portfolios had higher M&A loan concentrations. As a
result, when the responses are weighted by the dollar volume of C&I loans at the end of
the second quarter, banks that reported an M&A share of less than 5 percent accounted
for only about one-third of all C&I loans on the books of banks responding to this
special question. At U.S. branches and agencies of foreign banks, more than one-half
of respondents indicated that the share of M&A-related C&I loans was 10 percent or
less, while almost one-third noted that the share was between 11 percent and 20 percent.
The remainder of foreign banks reported a share that was between 21 percent and 40
percent. In contrast to the domestic banks, foreign banks with larger C&I loan
portfolios had somewhat smaller M&A loan concentration on average: When the
responses are weighted by the dollar volume of C&I loans, foreign institutions that
reported an M&A share of 10 percent or less accounted for 65 percent of all C&I loans
on the books of respondent institutions.
One-half of domestic respondents and roughly 60 percent of foreign respondents, on
balance, reported that the share of M&A-related C&I loans on their books had increased
over the past twelve months. When the responses are weighted by C&I loans, these

The number of domestic banks that responded to these special questions varied from ten to
fifty-four depending on the question. According to second-quarter Call Reports, these
respondents accounted for between 12 percent and 56 percent of all C&I loans on the books of
domestic commercial banks as of June 30, 2006. The number of foreign institutions that
responded to these special questions varied from two to seventeen depending on the question.
As of June 30, 2006, the foreign respondents accounted for between 10 percent and 48 percent of
all C&I loans on the books of U.S. branches and agencies of foreign banks.
2
In the survey, M&A-related C&I loans were defined as those made to finance leveraged
buyouts and other M&A activity.
3
A similar question regarding the share of C&I loans on banks’ books that were merger related
was asked in the late 1980s and early 1990s, when M&A activity was strong. On average, the
fraction of institutions that reported shares of 10 percent or less was smaller than in the current
survey, while the fraction of banks that indicated shares between 11 percent and 20 percent was
significantly larger.

III-A-6
institutions accounted for 70 percent and about 85 percent, respectively, of loans
outstanding at the end of the second quarter.
Among the domestic institutions that experienced an increase in the share of M&Arelated C&I loans over the past twelve months, one-third indicated that this increase
reflected to a moderate extent a shift of funding for M&A activity to banks as a result of
a reduction in the relative attractiveness of bond finance. Eighty percent of these
institutions pointed to relatively more favorable nonprice terms as a reason for the shift
of M&A financing out of the bond market, while 60 percent pointed to relatively more
favorable pricing in the loan market. Only two of the foreign respondents that
experienced an increase in the share of M&A-related C&I loans pointed to a shift of
funding for M&A activity from the bond market to banks as a reason for the increase.
Domestic respondents generally reported that the share of M&A-related C&I loans on
their books that were used to finance leveraged buyouts was fairly small. Roughly
three-fourths of institutions indicated that this share was less than or equal to 10
percent, and only about one-tenth of domestic banks reported that this share was
between 51 percent and 75 percent. 4 These fractions are roughly similar if the
responses are weighted by the respondents’ C&I loans. The shares of C&I loans
accounted for by leveraged buyouts were larger on average at the U.S. branches and
agencies of foreign banks. Nonetheless, nearly one-half of the foreign respondents
reported that the share was less than or equal to 10 percent, and about one-third of
respondents indicated that the share was between 11 percent and 50 percent.5 On
average, foreign respondents with larger C&I loan portfolios had somewhat larger
fractions of their M&A-related loans devoted to leveraged buyouts.
Domestic respondents generally reported that the share of M&A-related C&I loans on
their books that were bridge loans was quite small: Ninety percent of domestic
institutions reported that this share was less than or equal to 10 percent.6 Again, these
shares were higher at U.S. branches and agencies of foreign banks, where nearly two4

In the late 1980s and early 1990s, the share of merger-related C&I loans used to finance
leveraged buyouts was reportedly considerably higher. Banks that indicated a share of less than
20 percent accounted for as little as 5 percent of all respondents in February 1989 and for as
much as 40 percent in March 1991. Banks that indicated a share of more than 80 percent
accounted for as little as 15 percent of all respondents in March 1991 and for as much as 30
percent in February 1988.
5
Two foreign respondents noted that the share of M&A-related C&I loans on their books that
were used to finance leveraged buyouts was more than 75 percent. These institutions, however,
accounted for only 1 percent of all C&I loans on the books of the foreign banks that responded to
this special question.
6
In the survey, bridge loans were defined as those loans that banks expected to be paid down
with funds raised in capital markets within the next twelve months.

III-A-7
thirds of respondents indicated that the share of such loans was 10 percent or less, while
30 percent of respondents noted that this share was between 11 percent and 50 percent.
On balance, about 15 percent of domestic institutions reported that they had tightened
credit standards for approving applications for M&A-related C&I loans or credit lines
over the past twelve months. These respondents, however, indicated that they had also
eased some terms on such loans or credit lines over the same period: Nearly one-third
of domestic respondents, on net, indicated that they had trimmed spreads of loan rates
over their cost of funds, and 15 percent noted that they had reduced the costs of credit
lines. At foreign institutions, about one-fourth of respondents reported that they had
eased credit standards for approving applications for M&A-related C&I loans or credit
lines over the past twelve months. Notable net fractions of foreign respondents also
indicated that they had increased the maximum size of loans or credit lines, reduced the
costs of credit lines, and eased loan covenants.
About one-fourth of domestic respondents indicated that they anticipate that the quality
of M&A-related C&I loans currently on their books will deteriorate over the next
twelve months, and the rest expect that loan quality will likely stabilize around current
levels. A somewhat larger net fraction of domestic respondents—about 35 percent—
reported that they expect the quality of their C&I loans that were not used to finance
M&A activity to deteriorate over the same period.7 However, when the responses to
these two special questions are weighted by the dollar volume of C&I loans at the end
of the second quarter, the institutions that anticipated a deterioration in the credit
quality accounted for about 45 percent and 35 percent, respectively, of all C&I loans
held by respondent banks. At foreign institutions, 35 percent of respondents indicated
that they anticipate that the quality of M&A-related C&I loans currently on their books
will deteriorate over the next twelve months, while 30 percent indicated that they expect
that the quality of their C&I loans that were not used to finance M&A activity will
deteriorate over the same period. These shares are broadly similar if the responses are
weighted by the respondents’ C&I loans outstanding.

In the late 1980s and early 1990s, banks that had charged off merger-related C&I loans were
asked to compare the chargeoff rate on such loans with that on comparably seasoned C&I loans
that were not merger related. In the survey conducted in February 1987, a considerable net
fraction of banks—about 75 percent—reported that the chargeoff rate on merger-related C&I
loans was somewhat or much lower than that on other comparable C&I loans. The net fraction
of banks giving a similar answer declined notably over subsequent surveys. In March 1991,
about 20 percent of respondents, on net, indicated that the chargeoff rate on merger-related C&I
loans was somewhat or much higher than the chargeoff rate on comparably seasoned C&I loans
that were not merger related.

III-A-8
Household Lending
Domestic respondents indicated that their willingness to make consumer installment
loans was about unchanged in the October survey. On net, standards and terms on
credit card and non-credit-card consumer loans changed little over the past three
months. About 45 percent of domestic respondents reported that they had experienced
weaker demand for consumer loans, a somewhat larger net fraction than in the July
survey.
Domestic banks reported that credit standards on residential mortgage loans were little
changed, on net, over the past three months. Demand for residential mortgage loans
weakened further in the October survey: About 60 percent of domestic institutions—
roughly the same net fraction as in the July survey—noted that demand for such loans
had weakened over the previous three months.
Last Page of Financial Developments

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
The U.S. international trade deficit widened to a record $69.9 billion in August from
$68 billion in July (revised). The widening of the deficit reflected a surge in imports,
which more than offset a sizeable jump in exports.
Trade in Goods and Services
2005
Nominal BOP
Exports
Imports
Real NIPA
Exports
Imports
Nominal BOP
Net exports
Goods, net
Services, net

Annual rate
Monthly rate
2006
2006
Q1
Q2
Q3e
June
July
Aug.
Percent change

10.8
12.6

17.0
7.5

6.8
4.9

14.0
9.1

-716.7
-782.7
66.0

-764.6
-831.9
67.3

14.0
11.0

2.3
1.1

-1.3
.9

2.3
2.4

6.2
n.a.
...
1.4
n.a.
...
Billions of dollars

...
...

-68.0
-73.5
5.5

-69.9
-75.5
5.7

-775.3
-842.4
67.1

8.5
15.6

-827.1
-894.0
66.8

-64.8
-70.0
5.2

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

In August, the value of exports of goods and services increased 2.3 percent after
declining in July. The increase was led by stronger exports of capital goods, with
aircraft, computers, semiconductors, and other machinery all climbing briskly. Exports
of industrial supplies also exhibited strong growth, while exports of consumer goods
were boosted by a particularly large jump in the volatile category of artwork and
antiques. Exports of automotive products fell slightly, whereas services exports
expanded modestly.
The average value of exports in July and August increased 8.5 percent (a.r.) from the
second quarter. Exports of automotive products, consumer goods, and industrial supplies
contributed significantly to the overall increase, whereas services exports were flat.

IV-2

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

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

Percentage points, a.r.

0
-100

2.0
1.5

-200

1.0

-300

0.5

-400
0.0
-500
-0.5

-600

-1.0

-700

-1.5

-800

1998

2000

2002

2004

Aug
-900
2006

Selected Exports

1998

2000

2002

2004

2006

-2.0

Selected Imports
Billions of dollars, a.r.

Billions of dollars, a.r.

450

400

450

400
Capital goods

Capital goods
ex. aircraft

350

300

250

250
Industrial
supplies

Consumer
goods
200

200

150

100

Industrial
supplies

Consumer
goods

Oil
50

Aircraft

1998

2000

2002

2004

2006

1998

2000

2002

2004

2006

IV-3

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

Exports of G&S

Levels
2006
2006
Q2
Q3e
July
Aug.
1423.5 1452.9 1436.7 1469.1

Goods exports
Gold
Other goods

1011.4 1040.6 1025.5 1055.7
8.8
9.0
7.7
10.3
1002.5 1031.6 1017.8 1045.4

Change1
2006
2006
Q2
Q3e
July
Aug.
45.8
29.3 -18.3
32.4
33.3
1.2
32.1

29.2
.2
29.1

-18.0
-2.6
-15.4

30.2
2.7
27.5

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

409.3
71.5
47.8
54.8
235.2

411.6
67.6
47.1
54.4
242.5

403.9
66.2
45.9
53.8
237.9

419.3
69.0
48.3
54.9
247.1

8.7
-3.4
.8
4.0
7.4

2.3
-3.9
-.7
-.5
7.3

-15.9
-6.8
-5.4
-.3
-3.3

15.4
2.7
2.4
1.1
9.2

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

104.7
253.3
126.0
73.1
36.1

114.4
259.8
132.5
76.2
37.1

115.2
256.5
131.1
76.0
35.0

113.6
263.0
134.0
76.3
39.2

-.8
18.6
1.2
3.6
.9

9.8
6.4
6.5
3.1
1.1

7.7
-3.7
1.5
-.8
-9.1

-1.6
6.4
2.8
.3
4.2

412.1

412.3

411.2

413.4

12.5

-.3

2.2

Imports of G&S

2198.8 2280.0 2252.7 2307.3

56.5

81.2

19.9

54.7

Goods imports
Oil
Gold
Other goods

1853.8 1934.6 1906.9 1962.2
317.2 349.7 343.3 356.2
6.2
5.5
5.9
5.0
1530.4 1579.3 1557.6 1601.1

43.8
28.7
.4
14.8

80.8
32.6
-.7
48.9

23.3
17.3
-.2
6.1

55.3
12.9
-1.0
43.5

Services exports

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

415.6
27.7
101.4
27.0
259.5

430.3
25.3
104.8
28.8
271.5

424.5
25.6
103.8
28.1
267.1

436.1
24.9
105.8
29.5
275.9

11.1
-.8
1.9
-.1
10.1

14.8
-2.4
3.4
1.8
12.0

8.6
-4.9
5.0
2.4
6.1

11.6
-.6
2.0
1.5
8.8

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

258.2
291.4
430.6
73.2
61.5

254.5
307.1
446.0
76.4
65.0

251.4
301.1
442.0
75.2
63.5

257.6
313.1
450.1
77.7
66.4

-.1
.6
6.2
-.9
-2.2

-3.7
15.7
15.4
3.2
3.5

-15.2
8.3
1.3
2.8
.2

6.3
12.0
8.1
2.6
2.9

345.0

345.4

345.8

345.1

12.7

-3.4

-.7

13.63
63.67

14.04
68.19

13.76
68.29

14.32
68.09

-.69
8.57

.42
4.54

.04
3.25

.56
-.20

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

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

IV-4

The value of imported goods and services increased 2.4 percent in August. A sharp rise
in the value of imported oil and natural gas contributed importantly to the increase. The
increase was also supported by stronger imports across most other categories of goods.
Imports of capital goods were boosted by robust imports of computers, semiconductors,
and telecommunications equipment, while a jump in imports of metals pushed up imports
of non-oil industrial supplies. Imports of foods, automotive products, and consumer
goods also increased. Imports of services fell back slightly in August, largely on account
of a decline in imports of travel services.
The average value of imports in July and August increased 15.6 percent (a.r.) from the
second quarter. A large increase in the value of imported oil contributed to the overall
increase, but imports of non-oil industrial supplies, capital goods, and consumer goods
also exhibited large gains. Imports of automotive products fell, and services imports
were flat.
Prices of Internationally Traded Goods
Non-oil imports. In September, import prices of non-oil goods and core goods rose
0.1 and 0.2 percent, respectively. These increases primarily reflected a 0.9 percent rise in
prices for material-intensive goods. Prices for non-fuel industrial supplies increased
1.0 percent in September, as higher prices for metals were partly offset by falling prices
for chemicals. After increasing 2.5 percent in August, food prices were up 0.4 percent in
September. In contrast to material-intensive goods, prices for imported finished goods
edged up only 0.1 percent. Prices for imported computers fell 0.5 percent, and prices for
semiconductors edged down 0.1 percent.
The average level of core import prices in the third quarter was 4½ percent at an annual
rate above the second-quarter average, as prices increased in all major sub-categories.
Prices for material-intensive goods were up 9¼ percent (a.r.), whereas prices for finished
goods increased 2¾ percent (a.r.).
Oil. The BLS price index of imported oil plummeted 10.3 percent in September. The
spot price of West Texas Intermediate (WTI) crude oil fell from an average of $73 per
barrel in August to an average of $64 per barrel in September. Thus far in October, the
spot price of WTI has fallen further, closing at $58.94 per barrel on October 17. The
sharp drop in the spot price appears to reflect an improved outlook for oil supply.

IV-5

Prices of U.S. Imports and Exports
Merchandise Imports

Categories of Core Imports
12-month percent change

12-month percent change

8
6

Core goods

15
Material-intensive
goods

Non-oil goods
1998

2000

2002

2004

2006

Finished goods

-2

-5

-4

-10

-6

1998

Oil

2000

2002

2004

2006

-15

Natural Gas
Dollars per barrel

85
75

300

2000=100

Dollars per million BTU

250

200

65
55
45
Spot WTI

15
2000

2002

2004

Import price
index
(left scale)

100

Import unit value

1998

150

2006

Merchandise Exports

50
0

Spot Henry Hub
(right scale)
1998

2000

2002

2004

2006

5
0

Categories of Core Exports
12-month percent change

12-month percent change

8
6

15
Material-intensive
goods

Core goods

Finished goods

-2

-5

-4

-10

Total goods

1998

2000

2002

2004

2006

-6

1998

2000

2002

2004

2006

-15

IV-6

Prices of U.S. Imports and Exports
(Percentage change from previous period)
Annual rate
2006
Q1
Q2
Q3
Merchandise imports
Oil
Non-oil
Core goods1
Finished goods
Cap. goods ex. comp. & semi.
Automotive products
Consumer goods
Material-intensive goods
Foods, feeds, beverages
Industrial supplies ex. fuels
Computers
Semiconductors
Natural gas
Merchandise exports
Core goods2
Finished goods
Cap. goods ex. comp. & semi.
Automotive products
Consumer goods
Material-intensive goods
Agricultural products
Industrial supples ex. ag.
Computers
Semiconductors

Monthly rate
2006
July
Aug.
Sept.

----------------------- BLS prices --------------------.1
12.8
5.2
.8
.8
-2.1
6.8
79.1
12.5
3.9
2.1 -10.3
-1.2
1.0
3.8
.1
.5
.1
2.2

3.9

4.5

.7
1.7
-.8
.8

.8
2.5
1.0
-.4

2.7
2.9
1.6
3.4

.4
.2
.2
.6

.0
.0
.0
.1

.1
.2
.1
.1

9.6
5.5
11.8

14.9
-.7
20.7

9.3
9.4
9.2

-.8
.0
-1.0

.9
2.5
.5

.9
.4
1.0

-6.9
2.4
-65.2

-7.4
-.3
-63.8

-5.2
3.7
-4.8

-.6
.8
-1.1

.0
.0
11.5

-.5
-.1
-5.2

2.9

6.7

4.9

-.5

3.6

8.0

6.4

-.6

2.6
4.0
1.0
1.4

2.8
3.0
1.9
3.0

2.4
2.2
1.5
3.1

.3
.3
.2
.3

.1
.2
.0
.1

.1
.1
.1
.1

5.2
-1.4
7.2

15.7
2.2
20.1

12.6
18.5
11.3

.7
1.9
.5

1.4
.9
1.5

-1.6
-.7
-1.8

1.2
-7.9

-3.5
-5.9

-3.1
-11.9

-.4
-1.0

-.4
-2.2

.7
-.6

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

-.7
-1.8
1.6

9.8
.7
3.8

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

----

Exports of goods & services
Total merchandise
Core goods2

2.3
2.8
3.7

6.1
6.2
6.9

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

----

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

IV-7

Two recent developments — the return of most of the lost production at Alaska's Prudhoe
Bay oil field and a lack of damaging storms this hurricane season — will likely allow for
higher than expected U.S. production over the near term. However, a continuing supply
disruption in Nigeria and risks to oil production in Iraq and Iran continue to support oil
prices at historically elevated levels.
Exports. In September, prices of U.S. exports of total goods and core goods fell 0.5 and
0.6 percent, respectively. These were the first declines in these indexes since November
2005. The September decline was driven by a 1.8 percent fall in prices for
nonagricultural industrial supplies, reflecting lower prices for petroleum. Chemical
prices were also down in September, although metals prices were up. Agricultural export
prices fell 0.7 percent. In contrast, export prices for finished goods increased 0.1 percent
in September. Prices of exported computers rose 0.7 percent, whereas prices for
semiconductors fell 0.6 percent.
The average level of core export prices in the third quarter was 6½ percent at an annual
rate above the second-quarter average, as prices increased in all major sub-categories.
Much of the increase can be attributed to the 12½ percent increase in the prices of
material-intensive goods, as prices of both agricultural products and nonagricultural
industrial supplies rose sharply in July and August.
U.S. Current Account
The U.S. current account deficit was $874 billion (a.r.) in the second quarter of 2006,
about $21 billion wider than recorded in the first quarter of 2006 (revised). The trade
deficit widened $11 billion, as increased exports of goods and services were more than
offset by increased imports. A $4 billion net increase in outflows from unilateral
transfers contributed to the widening of the deficit.
The investment income balance was negative $10 billion (a.r.) in the second quarter, and
the first-quarter investment income balance was revised down by $18 billion to negative
$4 billion. Although interest, dividend, and direct investment income receipts increased
in the second quarter, there were even larger increases in interest, dividend, and direct
investment payments. As revised, the investment income balance was negative in the
past three quarters, suggesting that the large negative net international investment
position is finally beginning to add to the financing needs of the current account.

IV-8

U.S. Current Account
(Billions of dollars, seasonally adjusted annual rate)
Goods and
Investment
Other
Current
Period
services,
income,
income and
account
net
net
transfers, net
balance
Annual
2004
-611.3
33.6
-87.6
-665.3
2005
-716.7
17.6
-92.4
-791.5
Quarterly
2005:Q3
Q4
2006:Q1
Q2
Change
Q3-Q2
Q4-Q3
Q1-Q4
Q2-Q1

-727.2
-779.1
-764.6
-775.3

37.9
-2.3
-3.6
-10.1

-44.3
-111.0
-84.7
-88.3

-733.7
-892.4
-852.8
-873.6

-38.9
-51.9
14.5
-10.7

23.7
-40.2
-1.3
-6.5

54.7
-66.7
26.4
-3.6

39.4
-158.8
39.6
-20.8

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

U.S. International Financial Transactions
The financial flows associated with the current account are highlighted in bold in the
Summary of U.S. International Transactions table. Recorded net private financial inflows
decreased slightly in the second quarter and, at $80 billion, were well below the levels
recorded in the second half of 2005. Measured official financial inflows were little
changed from the first quarter and total financial flows, official and private, were $154
billion, or $17 billion less than in the first quarter. The decrease in recorded total net
inflows, combined with a small increase in the current account deficit to $218 billion,
increased the size of the statistical discrepancy to an unusually large $65 billion for the
quarter. This positive statistical discrepancy indicates some combination of underrecorded net financial inflows or over-recorded net imports of goods and services and
other transactions measured in the current account balance.
The second-quarter reduction in net private financial inflows reflected in part a $46
billion drop in foreign purchases of U.S. securities (line 4). Foreign private investors
continued to acquire agency and corporate securities at a substantial pace (lines 4b and
4c) but showed little interest in Treasuries (line 4a) or equities (line 4d). U.S. purchases
of foreign securities (line 5) were little changed from the prior three quarters.

IV-9

Flows of foreign direct investment into the United States (line 7) remained strong in the
second quarter as reinvested earnings remained high. Direct investment inflows from
Europe were above their trend level and accounted for more than 75 percent of total
inflows in the quarter. U.S. direct investment abroad (line 6), after recording atypical
inflows in the second half of last year as foreign earnings were repatriated under the
Homeland Investment Act, returned to their normal pattern of outflows in the first half of
this year and were roughly equal to the level of foreign direct investment into the United
States during the second quarter. Reinvested earnings remained strong in the quarter, but
outflows associated with new equity investment slowed from their first-quarter level. As
usual, the majority of U.S. direct investment went to Europe and Asia. Foreign
acquisition of U.S. currency (line 8) has been unusually low in the past two quarters,
primarily because Russia, typically a major purchaser of U.S. currency, was a net seller
during the first half of 2006.
In more recent monthly data, net foreign private purchases of U.S. securities rebounded
sharply in August (line 4) after unusually modest inflows in July. While there were only
small net purchases of U.S. equities (line 4d) during the month, foreign acquisitions of
Treasury, agency, and corporate debt securities (lines 4a-c) were all well above their
recent norms. Prior to the substantial net purchases in August, foreign private investors
had reduced their holdings of Treasuries during the first seven months of the year. U.S.
acquisitions of foreign securities decreased sharply from recent levels during the month
(line 5), with purchases of debt securities (line 5a) only slightly exceeding net sales of
equities (line 5b). Through the first eight months of the year, both foreign private
acquisitions of U.S. securities and U.S. acquisitions of foreign securities have maintained
paces similar to last year.
Foreign official inflows (line 1) continued at a high level in August and remain on a pace
about midway between the record level of 2004 and last year’s much smaller total.

. Partial and confidential data on custody

IV-10

holdings at FRBNY indicate very modest foreign official acquisitions during the
September to mid-October period;
.
The volatile banking sector (line 3) recorded modest net inflows during August.

IV-11

Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)
2004
Official financial flows
1. Change in foreign official assets
in the U.S. (increase, +)
a. G-10 countries + ECB
b. OPEC
c. All other countries

2005

2005
Q3
Q4
40.1
78.5

Q1
76.2

2006
Q2
Jul
73.8
33.0

Aug
27.3

388.2

214.6

385.4
161.7
12.1
211.6

200.5
-21.3
7.5
214.4

35.3
-4.0
-3.7
43.0

73.7
-4.8
10.6
67.8

75.7
-8.5
12.0
72.2

74.4
-18.2
13.7
78.9

32.7
.4
4.6
27.6

26.7
-4.1
2.8
28.0

2.8

14.1

4.8

-.6

194.3

570.8

216.2

164.2

95.3

80.2

...

-3.8

15.8

15.3

61.3

41.7

27.7

11.3

489.5
104.2
67.9
255.0
62.4

610.4
178.5
67.1
274.4
90.5

175.3
35.7
34.6
73.7
31.4

184.6
59.8
16.6
83.2
25.0

183.5
-6.6
42.0
92.6
55.6

137.1
10.0
27.8
98.8
.6

12.6
-6.8
-.6
11.2
8.8

67.7
17.1
15.4
31.0
4.2

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

-146.2
-60.9
-97.6
12.2

-197.0
-53.1
-139.9
-4.0

-47.3
-12.1
-35.3
.0

-48.7
-5.7
-43.0
.0

-54.4
-12.0
-38.5
-4.0

-53.5
-36.1
-15.0
-2.4

-23.4
-19.4
-4.0
.0

-4.5
-10.5
6.1
.0

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

-244.1
133.2
14.8
-49.1

-9.1
109.8
19.4
21.5

30.3
44.5
4.7
-6.6

25.8
26.5
9.2
-94.5

-61.3
45.3
1.9
-20.6

-47.1
48.4
1.1
-47.5

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

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

-665.3
-2.3
85.1

-791.5
-4.4
10.4

-183.4
-.6
-72.2

-223.1
-.5
-19.1

-213.2
-1.8
43.4

-218.4
-.9
65.2

...
...
...

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

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

IV-12

Foreign Financial Markets
After moving little on balance during the second half of September, the dollar’s
weighted-average exchange value against other major currencies moved up in early
October; on net, it rose about 1¼ percent over the intermeeting period. The dollar
appreciated following speeches by Fed officials that were interpreted by market
participants as suggesting a lower likelihood of policy easing in early 2007, following the
release of the September U.S. employment report, and following the release of the
minutes of the September 20 FOMC meeting. On a bilateral basis, the dollar appreciated
1½ percent against the euro and the yen, and slightly more than 1 percent against sterling
and the Canadian dollar. After decreasing in late September, the options-implied
volatility of the dollar-euro and yen-dollar exchange rates increased slightly in early
October during the period of rapid dollar appreciation, but remains close to historically
low levels.
Headline equity indexes rose about 4½ percent in the euro area, the United Kingdom, and
Japan. Market participants attributed the rise in share prices in these countries to falling
oil prices and a scaling back of expectations of future policy tightening by several central
banks. Equity prices in Europe also rose following the release of a better-than-expected
IFO German business climate survey on September 26. Beginning on October 3, the
Dow Jones Industrial Average index eclipsed its former closing record, set on January 14,
2000, on several successive days. Broader U.S., European, and U.K. stock market
indexes, however, are still trading 10 to 20 percent below their early-2000 record highs.
The S&P500 and DJ Euro Stoxx indexes began to exceed their early-May year-to-date
highs late in the intermeeting period, but the TOPIX still stands about 7 percent below its
early-April high. Realized volatilities on headline equity indexes remained low during
the intermeeting period.
On October 5, the European Central Bank increased its policy rate 25 basis points, to 3.25
percent, in a move that had been fully anticipated. The Bank of England, the Bank of
Japan, and the Bank of Canada all kept their respective policy rates unchanged.
Three-month spot interest rates were little changed in Japan, Canada, and increased 8 and
16 basis points in the United Kingdom and Germany, respectively. Ten-year nominal
and indexed sovereign yields are up about 10 basis points on balance in Japan and
Canada, but are little changed in the United Kingdom and Germany. Long-term interest
rates in most major developed countries fell substantially in late September, with
fluctuations in foreign yields generally tracking declines in dollar-based yields. The drop
in U.S. yields in late September was triggered by a much lower than expected

IV-13

Philadelphia Fed business activity index, which reportedly raised concerns over a
possible U.S. economic slowdown. Nominal and real long-term interest rates in most
major developed countries followed U.S. rates up again in early October, in response to
speeches by Fed officials, the September employment report, and the release of the
FOMC minutes. Realized volatility of ten-year government bonds changed little in most
industrial economies over the intermeeting period, and remains very low by recent
historical standards.
On September 19, Thailand’s military leaders staged a coup d’etat and ousted the civilian
government. In the days that followed, the Thailand headline equity index declined about
2¾ percent, but the Thai baht depreciated only modestly. Thai share prices have more
than retraced and are now almost 2 percent higher since the coup.
Following news that North Korea carried out an underground nuclear test on October 8,
the Korean won depreciated 1½ percent against the dollar, the Kospi stock index fell
almost 2½ percent, and the headline Singapore and Hong Kong stock market indexes
each fell over 1 percent. Subsequently, share prices in Korea, Singapore, and Hong Kong
reversed part or all of these losses. Nevertheless, the Kospi is down 0.9 percent on
balance over the intermeeting period. Most other major equity indexes in emerging Asia
have, in contrast, risen 3 to 6 percent on balance.
The dollar’s trade-weighted exchange value against the currencies of our other important
trading partners declined ½ percent on balance over the intermeeting period. The dollar
depreciated 2 percent against the Brazilian real, over 1 percent against the Mexican peso,
and also depreciated some against the currencies of several East-Asian emerging market
economies. The Brazilian Bovespa index and the Mexican Bolsa index rose over 9 and
5 percent, respectively. Brazilian financial indicators outperformed in part on
expectations that President Lula will be forced to moderate spending plans to prevail in a
runoff vote on October 29 against Alckmin, the opposition candidate. The overall
EMBI+ spread rose 22 basis points, to 218 basis points, between September 19 and
September 25. Market participants suggested that this was in part due to a general retreat
from risk, reflecting both concerns over a potential U.S. economic slowdown and to
concerns over current account imbalances and rising political tensions in specific
emerging market countries. Following the first round of Brazil’s presidential elections,
and as concerns over a potential U.S. slowdown moderated, the EMBI+ spread more than
retraced the earlier increases, and on balance it is currently down about 10 basis points
over the intermeeting period.

IV-14

On net, the renminbi appreciated ¼ percent against the dollar over the intermeeting
period. It reached a high against the dollar on September 28, around the time of
Secretary Paulson’s visit to China, but it partially retraced this rise subsequently.

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

IV-15

Exchange Value of the Dollar and Stock Market Indexes

Percent change since
September FOMC

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

1.2511
119.0
1.8679
1.1400

1.5
1.5
1.2
1.1

Nominal dollar indexes*
Broad index
Major currencies index
OITP index

108.8
83.1
134.6

0.5
1.3
-0.5

377.7
1638.7
6152.6
1364.7

4.3
4.4
4.9
3.5

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

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

Exchange Value of the Dollar
Weekly

September 20, 2006 = 100
Major Currencies Index
Euro
Yen

130

Daily

105

FOMC

120
110
100
100
90

2003

2004

2005

2006

Jul

Aug

Sep

Oct

Stock Market Indexes
Weekly

September 19, 2006 = 100

DJ Euro Stoxx
TOPIX
S&P 500

2003

2004

2005

2006

120

Daily

110

FOMC

100

105

100

Jul

Aug

Sep

Oct

IV-16

Industrial Countries: Nominal and Real Interest Rates

Percent

3-month LIBOR
Latest
Change since
September FOMC

10-year nominal
Latest
Change since
September FOMC

10-year indexed
Latest
Change since
September FOMC

Germany

3.51

0.16

3.81

0.04

1.77

0.05

Japan

0.44

0.02

1.79

0.12

1.00

0.15

United Kingdom

5.13

0.08

4.64

0.04

1.65

0.06

Canada

4.28

-0.01

4.18

0.10

...

United States

5.37

-0.02

4.78

0.04

2.48

0.10

Nominal 10-Year Government Bond Yields
3

Weekly
Germany
Japan (left axis)
United States

Percent

Daily

2003

2004

2005

2006

FOMC

Jul

Aug

Sep

Oct

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

2003

Percent

2004

2005

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

2006

Daily

FOMC

Jul

Aug

Sep

Oct

IV-17

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

Percent
1-month
3-month

Daily

FOMC

12
10

2003

2004

2005

2006

Jul

Aug

Sep

Oct

*Derived from at-the-money options.

Yen-Dollar Options-Implied Volatility*
Weekly

Percent

1-month
3-month

Daily

FOMC

12
10

2003

2004

2005

2006

Jul

Aug

Sep

Oct

*Derived from at-the-money options.

Realized Stock Market Volatility*
Weekly

Percent

Daily

FOMC

20
20
15
10

DJ Euro Stoxx
TOPIX
S&P 500

2003

2004

2005

2006

10
Jul

Aug

Sep

Oct

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

Realized 10-Year Bond Volatility*
Weekly

Percent
Germany
Japan
U.S.

Daily

FOMC

10
4
5

2003

2004

2005

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

2006

Jul

Aug

Sep

Oct

IV-18

Emerging Markets: Exchange Rates and Stock Market Indexes

Exchange value vs. dollar
Latest
Percent change since
September FOMC*
Mexico
Brazil
China
Hong Kong
Korea
Taiwan
Singapore
Thailand
India

10.8130
2.1298
7.9066
7.7848
955.2
33.18
1.5762
37.38
45.31

Stock market index
Latest
Percent change since
September FOMC

-1.2
-2.0
-0.2
-0.0
0.5
0.8
-0.5
-1.1
-1.1

22901
39370
1787
18048
1354
7151
685
719
12858

5.7
9.7
3.2
3.1
-0.9
4.0
4.2
2.3
6.2

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

Exchange Value vs. Dollar
Weekly

September 20, 2006 = 100
Mexico
Brazil
Korea
China

180

Daily

104

FOMC

160

102

140
100
120
98

100

2003

2004

2005

2006

Jul

Aug

Sep

Oct

Stock Market Indexes
Weekly

September 19, 2006 = 100
Mexico
Brazil
Korea
Hong Kong

140

Daily

110

FOMC

120
100

100

80
60

2003

2004

2005

2006

Jul

Aug

Sep

Oct

IV-19
Emerging Markets: Short-Term Interest Rates and Dollar-Denominated Bond Spreads

Percent

Latest
Mexico
Brazil
Argentina
China
Korea
Taiwan
Singapore
Hong Kong

Short-term
interest rates*
Change since
September FOMC

7.07
13.99
9.75
...
4.53
1.82
3.50
4.21

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

0.15
0.01
-0.19
...
-0.03
0.03
0.00
0.15

1.09
2.10
2.90
0.64
...
...
...
...

-0.03
-0.15
-0.33
-0.02
...
...
...
...

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

EMBI+ Spreads
Weekly

Percent

Daily

FOMC

Overall
Mexico
Brazil

2003

2004

2005

2006

Jun

Jul

Aug

Sep

Oct

EMBI Global Spreads
Weekly

Percent
China
Malaysia
Indonesia*

Daily

FOMC

4
2
3

2
1
1

2003
*Begins May 2004.

2004

2005

2006

Jun

Jul

Aug

Sep

Oct

IV-20

Developments in Advanced Foreign Economies
According to incoming data, economic activity in the foreign industrial economies
continued to expand at a relatively solid pace in the third quarter. Indicators of
investment spending suggest that the Japanese economy accelerated from the very slow
second-quarter expansion. Euro-area industrial production and retail sales have exceeded
expectations but lower exports probably slowed GDP. In the United Kingdom, business
confidence improved while consumer sentiment declined, suggesting that the pace of
economic activity remained near trend. Strong import data and a decline in housing starts
point to moderate Canadian growth in the third quarter.
The drop in oil prices brought down headline inflation in most advanced foreign
economies. In September, twelve-month inflation declined to 1.7 percent and 2.4 percent
in the euro area and the United Kingdom, respectively. In Japan, by contrast, a surge in
food prices led headline inflation to climb to 0.9 percent in August. As expected, the
ECB raised its policy interest rate ¼ percentage point on October 5.
In Japan, household demand appears to have weakened in the third quarter. Average
real household spending and retail sales for July and August fell 2.2 percent and
0.5 percent, respectively, from their levels in the second quarter despite a sharp rise in the
reported real incomes of working households. Although private machinery orders and
housing starts also fell on average over the same period, there are indications that
investment spending remained solid. Production of capital goods rose 0.6 percent over
July and August, and the Bank of Japan’s September Tankan survey revealed that firms
expect to increase capital spending by 8.3 percent in the current fiscal year, while large
manufacturers reported plans to increase investment by 16.9 percent. The external sector
also appeared to positively contribute to growth as the average level of real exports over
July and August rose 3.4 percent above its level in the second quarter, while real imports
fell 0.8 percent over the same period.

IV-21

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

Quarterly
5
4
3
2
1
0
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-1

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

CPI Inflation
12-month percent change
Monthly

Japan
Euro Area
Canada
United Kingdom

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-2

Official or Targeted Interest Rates
Percent

8
7

Japan
Euro Area
Canada
United Kingdom

6
5
4
3
2
1
0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-1

IV-22

The unemployment rate held steady at 4.1 percent in August as the economy added
80 thousand jobs and the labor force increased by 150 thousand workers. The job
openings-to-applications ratio (the number of officially posted job openings relative to
the number of officially registered job seekers) fell slightly but remained at an elevated
level. The healthy state of the job market was also reflected in the September Tankan
survey, in which the number of firms reporting labor shortages increased across all
corporate size categories and sectors. Despite these improvements, gross earnings, which
include bonuses, fell 0.3 percent in the year to August while contractual earnings
declined 0.1 percent.
The headline consumer price index rose 0.6 percent in August and was 1 percent higher
than a year earlier. However, this increase was almost entirely due to a jump in food
prices. Twelve-month core inflation (excluding fresh food only) was 0.3 percent and
consumer prices excluding both fresh food and energy fell 0.4 percent from a year earlier.
Year-over-year domestic wholesale goods inflation ticked up to 3.6 percent in August,
and the wholesale service price index for August rose 0.3 percent from a year earlier, the
first positive reading in eight years.
Shinzo Abe was elected Japan's new prime minister on September 26, scoring
comfortable majorities in both houses. Abe appointed Yasuhisa Shiozaki, a former senior
vice minister for foreign affairs, to the key post of chief cabinet secretary, and also picked
Liberal Democratic Party veteran Koji Omi as finance minister and former Cabinet
Office official Hiroko Ota as minister in charge of economic and fiscal policy. Minister
Omi stated that the government will not begin a full-fledged debate on possible increases
in the consumption tax until fall next year, vowing instead to focus on cutting
government spending. Although he is expected to concentrate on foreign policy issues in
the near term, in his inaugural policy speech to the lower house of Parliament Prime
Minister Abe stressed his resolve to continue the structural reform programs initiated by
his predecessor, Junichiro Koizumi, and pledged to draw up a long-term strategy to
promote technology, innovation, and economic growth.

IV-23

Japan
Economic Activity

Real Trade
2000 = 100

2000 = 100

110

150

105

Tertiary activity

125
100
Real imports
95
100
90

Industrial production

1998

2000

2002

2004

Real exports

2006

1998

Labor Market

2000

2002

2004

2006

Consumer Price Inflation

Ratio

Percent

Percent, 12-month basis

1.6
1.4

Unemployment rate
(right scale)

CPI
5

1.2
Core*

1.0

0
4

Job openings
to applications
(left scale)

0.8

-1

0.6
0.4

1998

2000

2002

2004

2006

1998

2000

2002

2004

*Excludes fresh food (n.s.a.)

Economic Indicators

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

Indicator
Housing starts
1

Machinery orders

2006
Q2

June

2006
July Aug.

1.7

2.5

n.a.

-0.9

-5.7

7.2

n.a.

-0.4

8.9

n.a.

8.5

-16.7

6.7

n.a.

Sept.

Machinery shipments

-0.2

3.6

n.a.

1.1

1.3

2.1

n.a.

New car registrations

2.7

-3.9

-3.8

2.0

-6.7

4.3

-0.6

Business sentiment2

5.0

6.0

...

2.8

3.1

3.5

3.4

3.5

3.6

Wholesale prices

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

2006

-2

IV-24

Available indicators suggest that the euro-area economy continued to expand at a robust
pace in the third quarter, even if a less dynamic external sector likely led to some
moderation in the growth rate of overall activity.
In September, the European Commission survey of euro-area economic sentiment rose to
its highest level in five and half years, with increased confidence in all sectors. Industrial
confidence bounced back from a dip the previous month, with production expectations
rebounding sharply and the reported volume of order books rising to within a hair of the
previous business cycle peak in June 2000. Consumer confidence was buoyed by
improvement in consumers' perceptions of both the general economic situation and their
own financial situation. Similarly, Germany's IFO Business Climate Index edged down
less than had been expected, to 104.9 in September from 105 in August. The current
conditions component of the index reached a fifteen-year peak, indicating a continuation
of the robust economic activity in the current quarter, but business expectations for the
next six months declined for the third straight month.
The domestic sector appears to be on relatively solid footing. Euro-area industrial
production rose 1.8 percent in August, more than reversing the 0.5 percent fall posted in
July. In Germany, the volume of industrial orders surged 3.7 percent in August, the
fourth rise in five months and the biggest since April. In addition, euro-area retail sales
rose 0.7 percent in August, and average sales for July and August were up 0.9 percent
from the second quarter.
By contrast, the merchandise trade deficit in the euro area widened from a monthly
average of about $2.1 billion in the second quarter to an average $7.4 billion over July
and August. After having surged in the first half of the year, exports were flat on average
in the first two moths of the third quarter with respect to the second-quarter average,
while imports grew 1.5 percent over the same period.
Labor market conditions remain on a gradual improving trend. However, the euro-area
unemployment rate ticked up to 7.9 percent in August, as the number of jobless in
Germany rose, in part because of the end of the World Cup games.

IV-25

Euro Area
Industrial Production

Economic Sentiment
2000 = 100

Percent balance

110

10
5

105

0
Industrial confidence

100

-5
-10

-15
90
Consumer confidence -20
1998

2000

2002

2004

2006

1998

Unemployment Rate

2000

2002

2004

2006

-25

Consumer Price Inflation
Percent

Percent, 12-month basis

10.5
3
9.5
2
CPI
8.5

1
Core*

1998

2000

2002

2004

2006

7.5

1998

2000

2002

2004

*Excludes energy and unprocessed food (n.s.a.)

Economic Indicators

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

Indicator
1

Producer prices
4

June

2006
July Aug.

Sept.

1.2

n.a.

0.1

-0.5

1.8

n.a.

0.3

0.6

n.a.

0.3

0.7

n.a.

8.1

7.9

n.a.

7.9

7.8

7.9

n.a.

2.3

2.5

2.1

2.5

2.4

2.3

1.7

5.2

5.8

n.a.

5.8

6.0

5.7

n.a.

8.5

n.a.

8.5

7.8

8.2

n.a.

Unemployment rate
4

1.2

Retail sales volume

CPI

2006
Q2

Industrial production

1. Excludes construction.
2. Excludes motor vehicles.
3. Percent. Euro-area standardized to ILO definition. Includes Eurostat estimates in some cases.
4. Eurostat harmonized definition. Percent change from year earlier.
n.a. Not available. ... Not applicable.

2006

IV-26

In September, the headline index of consumer prices edged down 0.1 percent from the
previous month, and twelve-month rate of inflation dropped to 1.7 percent from
2.3 percent in August, the first reading below 2 percent since May 2005. The sharp
decline was mostly due to the combined result of a favorable base effect, given the strong
rise in energy prices in September 2005, as well as the recent drop in oil prices. Core
inflation (excluding energy and food prices) remained steady at 1.5 percent. As expected,
the ECB hiked its policy rate 25 basis points, to 3.25 percent, at its October 5 meeting. In
addition, the ECB signaled that it will tighten again in December and used language that
hinted at a pause thereafter.
In the United Kingdom, most data point to a slowdown of private consumption.
Consumer confidence, which hit a three-year low in August, further deteriorated in
September. Surveys of businesses providing services to consumers also showed a
deterioration of optimism in the third quarter. On a more positive note, retail sales
expanded 0.3 percent in August after losing momentum in July.
There are signs that the moderating effects of this slower consumption growth have been
partly offset by a mild resurgence in investment. Business confidence continued to
improve in the third quarter. In August, new construction orders recorded their second
highest level since 1988. Industrial production stayed put in August as the decline in
mining and quarrying activities was offset by an overall good performance in the
manufacturing sector. According to the Bank of England Agent’s Survey, investment
intentions ticked up in August in the manufacturing sector, indicating mild growth, while
they remained strong in the service sector. The service sector PMI ticked up to 56.7 in
September while the manufacturing PMI firmed to 54.4 (where 50 is threshold for
expansion), offsetting most of its decline since June. Readings in house prices collected
by Nationwide and Halifax, two leading British lenders, both point to 8¼ percent
increases in the year to September.
The claimant count as well as the unemployment rate held steady at 3 percent in
September and 5.5 percent in August, respectively. A noticeable rise in the participation
rate has imparted an upward drift to the Labor Force Survey measure of the
unemployment rate since mid-2005, even as employment growth has been relatively
solid.

IV-27

United Kingdom
Retail Sales and Industrial Production
106

Jan. 2003=100

House Price Inflation

12-month percent change

Percent, 12-month basis

Industrial production
(left scale)

35
30

104

8
25

102
6

100
4

Nationwide*

10
2

Retail sales
(right scale)

5
Halifax*

0
1997

1999

2001

2003

2005

1997

1999

2001

2003

2005

*Nationwide and Halifax are two of Britain’s largest mortgage lenders.

Unemployment Rates

Consumer Price Inflation
Percent

Percent, 12-month basis

3
6
2
CPI
Labor force
survey

1
4

Claimant
count

1997

Core*

1999

2001

2003

2005

1997

1999

2001

2003

*Excludes energy and unprocessed food (n.s.a.)

Economic Indicators

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

Indicator
1

Producer prices

Average earnings

Business confidence

Consumer confidence
4

Trade balance

Current account

2006
Q2

June

2006
July Aug.

14.5

13.3

7.9

11.1

10.6

7.9

5.1

4.1

4.3

n.a.

5.0

3.9

n.a.

8.0

12.0

13.0

14.0

11.0

14.0

-3.8

-4.7

-6.0

-5.2

-5.5

-5.8

-6.8

-25.1

-24.5

n.a.

-7.5

-8.2

-8.4

n.a.

-15.3

-12.8

n.a.

...

1. Percent change from year earlier.
2. Confederation of British Industry, percent balance.
3. Eurostat, percent balance.
4. Level in billions of US Dollars.
n.a. Not available. ... Not applicable.

Sept.

2005

-1

IV-28

The twelve-month inflation rate declined from 2.5 percent in August to 2.4 percent in
September, pushed down by a negative 0.4 percentage point contribution from the fuels
and lubricants component. Mounting price pressure remains a concern, however. Core
inflation (excluding energy and unprocessed food) was up 0.3 percentage point to
1.6 percent in September. A survey conducted by the British Chambers of Commerce in
the third quarter found that 32 percent of manufacturing firms and 28 percent of service
firms expected to raise their prices. Moreover, British universities are allowed to charge
up to £3,000 a year in tuition fees this academic year, up from the previous level of
£1,175. The Bank of England expects this measure, which applies only to incoming
cohorts of students, to increase headline inflation ¼ percentage point in October.
In Canada, real GDP by industry rose 2.3 percent (a.r.) in July, as increased activity in
the energy, retail trade, and wholesale trade sectors more than offset a third consecutive
monthly decline in output of the construction sector. Strong automobile and automotive
product sales were behind much of the advances in wholesale and in retail trade. By
contrast, sales at home centers and hardware stores were down substantially, consistent
with the decline in the construction sector; especially steep was the decline of
construction of single-family homes. Output of the manufacturing sector, which has been
weak all year, was essentially unchanged from the previous month.
Other indicators also suggest that growth remained somewhat subdued in the third
quarter. Housing starts slipped again in September, putting third-quarter housing starts
three percent below their second-quarter level. The volume of manufacturing shipments
rose in August, but new and unfilled orders both declined. Although the nominal
merchandise trade balance expanded in August, its average level in July and August was
about 6 percent below the second-quarter average, with nominal exports about
2.5 percent higher than and nominal imports nearly 4 percent higher than their respective
second-quarter averages. By contrast, after declining for three straight months, the Ivey
Purchasing Managers Index rose in September. In addition, the composite index of
leading indicators accelerated in September.
In September, total employment edged up slightly after three months of little change.
Full-time employment, which has seen strong growth all year, (even through the recent
lull in top-line employment growth) fell a bit in September. The unemployment rate
inched down to 6.4 percent in September, but remained a bit higher than the 32-year-low
of 6.1 percent touched in June.

IV-29

Canada
Real GDP by Industry

Real Trade
Percent change from year earlier

1997 = 100

175

6
150

5
Real exports
4

125
3
Real imports
2

100

1
1998

2000

2002

2004

2006

1998

Unemployment Rate

2000

2002

2004

2006

Consumer Price Inflation
Percent

Percent, 12-month basis

6
5

4
8

CPI
3

7
2
6

Core*
1998

2000

2002

2004

2006

1998

2000

2002

2004

2006

*Excludes 8 volatile components and effects of indirect taxes (n.s.a.)

Economic Indicators

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

2006
Q2

June

Industrial production

-0.4

-0.7

n.a.

0.1

0.5

n.a.

New manufacturing orders

-1.5

-1.6

n.a.

2.9

0.8

-1.1

n.a.

2.3

2.0

n.a.

0.0

0.4

n.a.

0.4

0.8

0.1

-0.0

-0.1

0.1

120.9 122.4 121.0

...

146.0 142.9

...

Indicator

Retail sales
Employment
1

Consumer attitudes

Business confidence

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

n.a.

2006
July Aug.

Sept.

IV-30

The twelve-month rate of consumer price inflation fell to 2 percent in August, the third
consecutive month of decline. The recent deceleration of prices is in large part
attributable to the retreat of gasoline prices. The twelve-month rate of core inflation
(excluding the eight most volatile components and the effects of indirect taxes) held
steady at 2 percent in August.

Economic Situation in Other Countries
Across the emerging market economies, incoming data generally point to moderating, but
robust, growth in the third quarter. Activity appears to be decelerating in China and
Korea, but rebounded in the ASEAN region, notably in Singapore, and remains strong in
India. In Latin America, indicators point to a moderation of growth in Mexico and
Argentina, and to some pick up of activity in Brazil. Inflation has edged down in Asia
but increased in Latin America of late. Emerging market economies appear to be
resilient to the recent deterioration of the political environment in some countries.
In China, economic activity appears to be decelerating, owing to recent administrative
and other measures taken to slow investment. Investment in fixed assets rose 20 percent
over the twelve months ended August, down significantly from the growth rates in the
range of 26 to 33 percent seen in the previous few months. However, the monthly
investment series can be very noisy. The slowdown is also reflected in decreasing
twelve-month growth of imports of machinery and transport equipment, and in a modest
deceleration of M2 money supply and bank lending in August and September. China’s
trade surplus for the first nine months of this year amounted to $160 billion (at an annual
rate) compared with a surplus of $102 billion for all of last year, reflecting a growth rate
of exports that was significantly higher than that of imports.

IV-31

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

2004

2006

2005
Q2

Real GDP1
Industrial production
Consumer prices2
Merch. trade balance3
P

9.6
9.9
14.4 17.1
2.5
1.6
32.1 102.0

12.1
4.2
1.4
160.2

July

n.a. …
n.a. -1.8
n.a.
.9
187.4 174.1

Aug.

Sept.

…
…
2.7
n.a.
1.3
n.a.
198.4 189.7

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

In Hong Kong, recent data suggest a rebound in activity following a lethargic second
quarter. The quantity of exports and imports are now growing after falling in the second
quarter, a potential indication of rising output growth in this entrepôt economy. The
unemployment rate continued to edge down in the third quarter. Twelve-month inflation
was 2.5 percent in August, largely reflecting rising food prices and housing rents.
Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2004

2006

2005
Q2

Real GDP1
Unemployment rate2
Consumer prices3
Merch. trade balance4
P

7.3
6.9
.4
-12.0

7.4
5.7
1.3
-10.5

.0
5.0
2.0
-21.7

July

Aug.

Sept.

n.a.
4.7
n.a.
n.a.

…
4.9
2.3
-4.2

…
4.8
2.5
-21.4

…
4.7
n.a.
n.a.

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

IV-32

In Taiwan, recent data suggest a moderation in real GDP growth from its strong
second-quarter pace. The value of exports and imports fell in the third quarter after
registering positive growth in the second. Similarly, the growth rates of industrial
production and export orders for electronic products have edged down in the third
quarter. Twelve-month inflation remained negative in September. The recent bout of
deflation has been largely attributed to declines in food prices (as weather conditions
improved this year) and to lower energy prices.

Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Unemployment rate2
Industrial production
Consumer prices3
Merch. trade balance4
Current account5
P

2004
2.6
4.4
9.8
1.6
6.1
18.5

2006

2005
6.5
4.1
4.1
2.2
7.8
16.1

July

Aug.

Sept.

4.6
3.9
.6
1.5
12.7
18.8

n.a.
n.a.
n.a.
-.3
15.0
n.a.

…
3.9
-.2
.8
14.6
…

…
3.9
1.1
-.6
5.3
…

…
n.a.
n.a.
-1.2
24.9
…

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

IV-33

IV-34

The Korean economy has continued to expand at a moderate pace. Industrial production
partially rebounded in August after strikes and poor weather depressed July levels.
Recent sentiment indicators are up a touch from their earlier lows, but do not yet reflect
the impact of North Korea’s nuclear test. Although the merchandise trade balance for
August improved, the current account balance declined further as the service deficit
widened. Consumer price inflation fell back to 2.4 percent over the 12 months ended
September, reflecting a dip in food prices following an earlier weather-related spike.
Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Merch. trade balance4
Current account5
P

2004
2.9
10.0
3.5
3.0
37.6
28.2

2006

2005
5.3
5.9
3.7
2.6
33.5
16.6

July

Aug.

Sept.

3.4
-.4
3.5
2.3
24.9
2.8

n.a.
n.a.
3.5
2.5
n.a.
n.a.

…
-4.0
3.5
2.3
14.1
-4.7

…
3.7
3.5
2.9
29.1
-6.1

…
n.a.
3.5
2.4
n.a.
n.a.

IV-35

Indian real GDP growth slowed to 7 percent in the second quarter from its blistering
first-quarter pace. Sizable gains in manufacturing and services were tempered by
weakness in construction and agriculture, and the trade balance and current account
deteriorated significantly. More recently, average industrial production for July and
August rose 1.4 percent above the second-quarter level, and the trade deficit has
worsened so far in the third quarter. Twelve-month inflation of the closely watched
wholesale price index remained near 5 percent in the third quarter. The high level of the
central government’s fiscal deficit through August suggests that, without a sharp
improvement in September, the government will likely violate the mid-year targets set by
the Fiscal Responsibility and Budget Management Act, thus requiring corrective
measures and an explanatory statement to parliament.
Indian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2004

2006

2005
Q2

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

7.0
8.5
3.8
6.7
-21.7
.8

7.5
7.9
5.6
4.4
-39.8
-8.3

6.9
5.2
5.9
4.6
-42.7
-24.4

July

n.a. …
n.a. -2.0
n.a.
6.3
4.9
4.8
n.a. -46.2
n.a. …

Aug.
…
.6
5.0
5.0
-39.2
…

Sept.
…
n.a.
n.a.
4.8
n.a.
…

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

IV-36

IV-37

Incoming data for the ASEAN region suggest that economic activity expanded at a solid
pace in the third quarter. In Singapore, the advance unofficial estimate of third-quarter
real GDP growth (not shown) indicate that growth jumped to 6.0 percent, twice the pace
in the second quarter, due in part to a rebound of activity in the volatile biomedical
sector. Elsewhere in the region, industrial production was up recently and trade balances
improved from second-quarter levels in Indonesia, Malaysia, and Thailand.
Twelve-month consumer price inflation in the region continued to decline due in part to
waning effects of earlier energy price increases, although previous tightening of monetary
policy across the region also contributed. Citing the moderation in inflation and the need
to stimulate domestic demand, Bank Indonesia lowered interest rates 50 basis points on
October 5, the fifth rate reduction since May. Separately, Bank Indonesia announced on
October 11 that it has repaid the remainder of the country’s debt to the IMF (around
$3.2 billion), nearly four years ahead of schedule, amid an improved balance of payments
and a strengthening of economic fundamentals.
In Thailand, Army Chief General Sonthi Boonyaratkalin led a military coup that ousted
Prime Minister Thaksin on September 19. Since then, the Council for National Security
(the group of army officers who staged the coup) has appointed retired General Surayud
Chulanont as Prime Minister to lead the new government; the central bank governor,
Pridiyathorn Devakula, became Deputy Prime Minister and Finance Minister. His deputy
governor in charge of the financial institutions stability, Tarisa Watanagase, replaced him
on October 17. Following the appointment, she issued a statement indicating continuity
in monetary policy going forward. The government is expected to, among other things,
administer the 2007 budget, help craft a new constitution, and prepare elections by
October of next year. Market reaction to the coup has been benign, with little signs of
spillover to other countries in the region, and risks of a financial or economic crisis
appear low.

IV-38

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

2004

2006

2005
Q1

June

July

Aug.

…
…
…
…
…

4.3
9.0
-2.3
19.6
.6

6.3
-6.6
-2.5
-1.9
-1.1

Real GDP1
Indonesia
Malaysia
Philippines
Singapore
Thailand

7.0
5.9
5.5
6.6
5.4

5.0
5.2
5.5
8.5
4.7

3.5
10.5
4.6
7.6
3.4

7.0
1.4
6.8
3.0
4.2

Industrial
production2
Indonesia3
Malaysia
Philippines
Singapore
Thailand

3.3
11.7
1.0
13.9
11.8

1.3
4.1
2.2
9.5
9.0

-3.9
3.9
-15.8
1.6
2.7

8.1
.2
1.5
-1.7
1.5

n.a.
4.9
n.a.
-11.0
2.9

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

ASEAN Economic Indicators: Merchandise Trade Balance
(Billions of U.S. dollars, s.a.a.r.)
Indicator
Indonesia
Malaysia
Philippines
Singapore
Thailand

2004
25.1
21.2
-4.4
25.1
1.5

n.a. Not available.

2006

2005
28.0
26.4
-6.2
29.6
-8.5

July

34.2
27.4
-3.6
30.4
-3.0

n.a.
n.a.
n.a.
29.9
n.a.

40.4
34.8
-4.6
25.5
1.3

Aug.
39.1
30.1
n.a.
30.6
5.2

Sept.
n.a.
n.a.
n.a.
33.6
n.a.

IV-39

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

2006

20041 20051

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

6.6
2.2
8.6
1.3
2.9

17.0
3.3
6.7
1.3
5.8

July

Aug.

Sept.

15.5
4.1
6.9
1.2
6.0

14.8
3.6
6.1
n.a.
3.6

14.9
4.1
6.4
1.1
4.4

15.0
3.3
6.3
.7
3.8

14.3
3.3
5.7
n.a.
2.7

IV-40

IV-41

Recent indicators for Mexico point to a step-down in growth in the third quarter after two
consecutive exceptionally strong quarters. The index of overall economic activity (a
monthly proxy for real GDP) rose only 0.2 percent in July from the previous month.
Industrial production was down in July and flat in August. Twelve-month headline
inflation was 4.1 percent in September, slightly above the target range of 2 to 4 percent.
The higher-than-expected inflation reading was the result of some food prices increases,
mainly for tomatoes. On the political front, the radical opposition from the losing leftist
party to the declaration of conservative Felipe Calderon as president-elect appears to have
abated.
Mexican Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2004

2006

2005
Q2

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

4.8

2.7

6.1

3.8
3.9
3.9
5.2
-8.8
196.8
188.0
-6.6

3.3
1.9
3.6
3.3
-7.6
221.8
214.2
-4.6

1.0
1.3
3.4
3.1
-5.2
256.7
251.6
4.6

Q3
n.a.

July

Aug.

Sept.

…

n.a.
.2
n.a.
-.6
n.a.
3.6
3.5
3.1
n.a.
-4.4
n.a. 259.8
n.a. 255.4
n.a. …

n.a.
.0
3.6
3.5
-5.3
265.5
260.2
…

n.a.
n.a.
n.a.
4.1
n.a.
n.a.
n.a.
…

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

Recent indicators for Brazil have been mixed, but generally point to a rebound in activity
from a tepid second quarter. Industrial production was up in July and August, and the
trade balance improved considerably in the third quarter, but September vehicle sales
disappointed. Twelve-month consumer price inflation was 3.7 percent in August and
September, well below its 2005 level. Inflation is at its lowest level since inflation
targeting was launched in 1999 aided, in recent months, by declines in prices of food and
fuel ethanol. In late September, the government removed a requirement that outward
investments be intermediated by banks in Brazil, thereby easing controls on outward
movement of capital by residents.

IV-42

In the October 1 presidential election, President Lula fell short of achieving a simple
majority, forcing him to go into a runoff against conservative Geraldo Alckmin on
October 29. Lula is expected to win the election, but there are concerns that he will have
difficulties pushing reform proposals through an uncooperative congress.
Brazilian Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Merch. trade balance4
Current account5
P

2004
4.8
8.3
11.5
7.6
33.7
11.7

2006

2005
1.5
3.1
9.8
5.7
44.8
14.2

1.8
.9
10.0
4.3
38.7
5.2

n.a.
n.a.
n.a.
3.8
49.8
n.a.

July

Aug.

Sept.

…

.7
10.9
4.0
59.6
36.5

.7
10.6
3.8
47.2
25.1

…
n.a.
n.a.
3.7
42.6
n.a.

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

Indicators for Argentina suggest that growth may moderate a bit in the third quarter from
the strong pace in the second. Industrial production in July and August was just
1.4 percent on average above its level in the previous quarter. Twelve-month inflation
remained elevated in August, but lower than last year, due in part to the voluntary price
agreements the government has secured in several sectors.

IV-43

Argentine Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production
Unemployment rate2
Consumer prices3
Merch. trade balance4
Current account5
P

2004
9.0
10.7
13.6
5.9
12.1
3.4

2006

2005
8.9
7.7
11.6
12.2
11.4
5.8

July

Aug.

8.8
2.5
10.4
11.4
14.2
10.0

n.a.
n.a.
n.a.
10.6
n.a.
n.a.

…

…
.3

…
10.6
10.8
…

…
10.8
13.3
…

Sept.
…
n.a.
…
10.5
n.a.
…

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

In Venezuela, available information suggests that economic activity has remained strong
in the third quarter. Auto sales in September were up 90 percent from a year earlier.
Expansionary fiscal and monetary policies lifted twelve-month inflation to 15½ percent
in September despite government measures to rein in inflation, including price controls
on food.
Venezuelan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2004

2006

2005
Q2

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

12.1
15.1
19.2
-10.5
21.4
13.8

10.2
12.2
14.4
-16.5
31.5
25.4

15.2
10.1
11.2
-26.7
41.8
33.1

July

n.a.
n.a.
14.6
n.a.
n.a.
n.a.

…
9.5
13.5
n.a.
n.a.
…

Aug.
…
n.a.
14.9
n.a.
n.a.
…

Sept.
…
n.a.
15.4
n.a.
n.a.
…

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

IV-44

In Turkey, incoming data suggest a slowdown in activity from its strong second-quarter
pace. Industrial production was down on average in recent months, and the trade and
current account balance continued to deteriorate. Twelve-month consumer prices edged
up to 10.5 percent in September, opening the possibility of additional interest rate
increases. Turkey remains on-track with its IMF program.
Turkey Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2004

2006

2005
Q2

Real GDP1
Industrial production
Consumer prices2
Merch. trade balance3
Current account4
Unemployment rate
P

9.0
9.8
9.4
-34.4
-15.6
10.3

7.4
5.4
7.7
-43.3
-23.1
10.3

7.4
6.8
9.6
-59.2
-35.5
9.7

July

Aug.

Sept.

n.a. …
n.a. -5.1
10.8
11.7
n.a. -49.5
n.a. -30.9
n.a. …

…
1.1
10.3
-57.8
-34.4
…

…
n.a.
10.5
n.a.
n.a.
…

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

IV-45

IV-46

In South Africa, real GDP rose nearly 5 percent in the second quarter, due mostly to a
rebound in government expenditures that more than offset a contraction in the external
sector. More recently, average production was up from second-quarter levels, notably in
the mining sector, but the trade balance continues to deteriorate due to excess growth of
imports over exports. Twelve-month consumer price inflation has been rising of late,
reaching 5.1 percent in August. The higher inflation owes to a weakening currency,
rising food prices, and strong consumer spending, and has raised concern that it might
exceed the central bank’s 3-6 percent target range in coming months. Citing the need to
contain inflation, the South African Reserve Bank raised its key interest rate 50 basis
points to 8.5 percent on October 12.
The current account has widened significantly in the first half of this year, mostly
reflecting a deterioration of the trade balance, but also large dividend payments to foreign
shareholders. The wider current account deficit, among other factors, has put pressure on
the currency, which has depreciated about 20 percent against the US dollar since January
of this year.
South African Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
1

Real GDP
Manuf. Production
Mining Production
Consumer Prices2
Merch. trade Balance3
Current Account3
P

2004
5.6
4.2
3.7
4.3
-1.3
-7.5

2006

2005
4.3
3.6
1.2
4.1
-2.9
-10.1

June

July

Aug.

4.0
1.0
-1.0
4.4
-9.9
-14.2

4.9
1.5
3.4
4.3
-9.7
-16.9

…
1.7
5.8
4.9
-12.8
…

…
-.4
-4.3
5.0
-11.6
…

…
-.7
3.1
5.1
-9.0
…

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

Last Page of Part 2

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, October 24-25, 2006 : Greenbook Part 2

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