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Prefatory Note 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 material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 01/11/2019. Authorized for Public Release Class II FOMC – Restricted (FR) Report to the FOMC on Economic Conditions and Monetary Policy Book A Economic and Financial Conditions: Current Situation and Outlook October 23, 2013 Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Authorized for Public Release (This page is intentionally blank.) Authorized for Public Release October 23, 2013 Domestic Economic Developments and Outlook Based on the news we have received since the previous Tealbook—which is more limited than normal because of the data delays caused by the federal government shutdown—economic activity appears to have been increasing a little more slowly than we had expected. Spending by consumers appears to have risen less than we had anticipated, and we think a portion of this weakness will persist through the end of the year. In addition, the direct and indirect effects of the government shutdown are expected to temporarily reduce economic growth by an annual rate of about ½ percentage point in the current quarter. We now project that real GDP will rise at an annual rate of just over 2 percent in both the third and fourth quarters, which, coupled with the downward revisions to the second quarter, leave real GDP growth in 2013 at 2 percent, ¼ percentage point less than the September forecast. We have slightly revised up our forecast for real GDP growth over the medium term, however, as recent financial market developments have led us to adjust our key conditioning assumptions for the foreign exchange value of the dollar, interest rates, and household wealth to be a bit more supportive of economic growth than in the September Tealbook. Combining the weaker economic growth anticipated for this year and the slightly stronger projected pace of economic expansion in the next two years, the level of real GDP at the end of 2016 is expected to be just a little lower than in the September Tealbook. We read the employment report for September as a bit weaker, on balance, than we expected, but it and the other labor market data remain broadly consistent with our projection of continued gradual improvements in labor market conditions. As in our September Tealbook forecast, the unemployment rate is projected to cross the Committee’s 6½ percent threshold in the first quarter of 2015 and to end 2016 at just under 5½ percent. The limited data that we have received on consumer prices have been largely as we had anticipated.1 With longer-run inflation expectations assumed to remain stable, a 1 The CPI report for September, delayed because of the government shutdown, is now scheduled to be published on October 30, the second day of the FOMC meeting. Page 1 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 projected pickup in import prices over the medium term, and gradually diminishing margins of slack in labor and product markets anticipated over the next few years, we expect core PCE inflation to increase slowly from 1¼ percent in 2013 to 1¾ percent in 2016; this forecast is the same as in the September Tealbook. We continue to expect energy prices to edge down over the forecast period, and thus headline inflation still is projected to run a bit below core inflation over the medium term. As always, numerous risks surround our outlook. We see several risks stemming from federal fiscal policy, including the uncertain repercussions of the ongoing budget consolidation and tax increases put in place at the beginning of this year, the potential for greater fallout from the government shutdown, and the uncertain path for fiscal policy going forward. Regarding private demand, consumer spending growth could remain sluggish and not pick up as we anticipate, and the increase in mortgage rates since the spring could weigh on residential construction by more than we currently expect. Also, the pace of economic activity abroad continues to be a substantial risk, especially given the vulnerabilities of many emerging market economies (EMEs). However, it is possible, as suggested by the most recent four-quarter change in GDI, that economic activity has in fact been rising more rapidly than indicated by the current GDP data. With regard to inflation, the very low rates of core inflation seen earlier this year appear to have passed as expected, but some risk remains that inflation could stay stubbornly low. That said, there is also the risk that inflation could pick up by more than we expect, perhaps stemming from an unanticipated and persistent firming in energy or other commodity prices. Finally, with the federal funds rate at its effective lower bound, monetary policy likely has less capacity to counteract the effects of downside developments with respect to either real activity or inflation. KEY BACKGROUND FACTORS Monetary Policy With the unemployment rate still projected to fall below the Committee’s 6½ percent threshold in the first quarter of 2015, we continue to assume that the federal funds rate will begin to rise from its effective lower bound in the second quarter of 2015. The path of the federal funds rate after liftoff is also about unchanged from the September Tealbook, averaging 2 percent in the final quarter of 2016. Page 2 of 81 Authorized for Public Release October 23, 2013 Our assumption for asset purchases is also broadly unchanged from the September Tealbook, as we continue to assume that purchases of long-term securities under the current LSAP program will end by the middle of 2014. However, we nudged up the cumulative amount of purchases under this program by about $90 billion, to $1.3 trillion. Other Interest Rates The 10-year Treasury yield has fallen about 40 basis points since the September Tealbook. We attribute about half of that decline to a shift in market expectations toward more accommodative paths for both Federal Reserve asset purchases and the federal funds rate. Market participants appear to expect somewhat more accommodative monetary policy than is consistent with staff assumptions, and we anticipate that market expectations will move into line with our forecast over time. The remainder of the decline in Treasury yields since the September Tealbook reflects a reduction in the term premium beyond what we think can be ascribed to a change in expectations for asset purchases and has led us to revise down our projection for the 10-year Treasury yield over the next several quarters. Over the medium term, the forecast still calls for Treasury yields to rise significantly, primarily to reflect the movement of the 10-year valuation window through the period of extremely low short-term interest rates and a gradual waning of the effects of the FOMC’s balance sheet policies. Yields on investment-grade corporate bonds and rates on conventional 30-year fixed-rate mortgages have fallen roughly in line with yields on comparable maturity Treasury securities. As a result, our forecasts for corporate bond yields and mortgage rates in the medium term have been revised essentially in line with Treasury yields. Equity Prices and Home Prices Equity prices have risen about 4 percent since the time of the September Tealbook, about 3 percentage points more than we anticipated. We have carried forward the higher stock prices over the next few quarters, but because we think that the recent gains largely reflect a narrowing of the equity risk premium that we anticipated to occur later in the projection, our forecast for Page 3 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 stock prices is essentially unrevised by the end of 2016. As in the September Tealbook, we expect stock prices to move up at an average annual rate of about 7½ percent over the next few years—a pace that, we think, will move the equity risk premium some way toward more typical levels. House prices have risen by a bit more than we projected in the September Tealbook, and we now expect them to rise at an annual rate of 9½ percent over the second half of this year. We continue to expect a slowing in house price appreciation to an average rate of about 4 percent per year from 2014 to 2016. Fiscal Policy The federal government was partially shut down from October 1 through October 16 because of a temporary lapse in budget appropriations for the current fiscal year. Beyond the near-term effects of the shutdown, the staff’s assumptions for fiscal policy are little changed. (See the box “Fiscal Policy Developments” for a discussion of the continuing budget resolution and the extension of the federal debt limit that ended the shutdown, along with our estimates of the effects of the shutdown on economic activity.) Foreign Economic Activity and the Dollar Our outlook for total foreign economic growth is little changed from the September Tealbook. Real GDP growth in the foreign economies is estimated to have moved up to an annual rate of 2¾ percent in the third quarter, supported by a pickup in the EMEs. Looking ahead, foreign GDP is expected to increase to 3¼ percent next year and 3½ percent in 2015 and 2016, supported by waning fiscal drag and further improvement of financial conditions in the euro area, the effect on EME exports of stronger economic growth in the advanced economies, and a gradual abatement of financial stresses in the most vulnerable EMEs. The broad nominal dollar index depreciated about 1¾ percent since the previous Tealbook, having declined against the currencies of both the advanced foreign economies and the EMEs. We project that the broad real dollar will depreciate at an annual rate of about 2¼ percent over the medium term, in part reflecting a further abatement of financial stress in the euro area. Page 4 of 81 Authorized for Public Release October 23, 2013 (Corrected) Fiscal Policy Developments Political wrangling over budget appropriations for fiscal year 2014 and the federal debt limit led to a partial shutdown of the federal government. The shutdown ended when a temporary continuing resolution was passed to fund the government programs covered by discretionary appropriations through January 15. During the shutdown, about half of defense civilian workers were furloughed for one week and about 40 percent of nondefense civilian workers were furloughed for almost two and a half weeks. We estimate that the reduction in hours worked by these federal employees will reduce real government output, subtracting 0.3 percentage point from the annual rate of real GDP growth in the fourth quarter of 2013 and boosting economic growth by the same amount in the first quarter of 2014 as government output returns to baseline.1 Because government employees will be paid retroactively for the days they were furloughed, nominal compensation will be unaffected by the shutdown and the GDP deflator will be increased by the same amount that real GDP will be decreased. Government purchases for goods and services excluding compensation were also reduced during the shutdown, but we assume that these purchases will be made up before the end of the year. However, there is some risk that the disruptions in federal purchases could last longer than we have assumed. The temporary continuing resolution funds the government at levels consistent with maintaining the full effects of the budget caps and sequestration. We assume that the Congress will pass legislation to fund the government at levels consistent with the sequestration through the rest of the fiscal year without further shutdowns.2 The Congress also reached an agreement to raise the federal debt limit through February 7 (though this limit will likely not be binding until the middle of 2014). We assume that the debt limit will eventually be extended for a longer period before significant market disruptions occur. Our assumptions for fiscal policy beyond the near term are similar to those in the September Tealbook. Specifically, we continue to assume that the sequestration and spending caps from the Budget Control Act will remain in effect and, together with further downward pressure on defense expenditures from reduced overseas military operations, will restrain discretionary federal spending over the medium term. Moreover, we continue to anticipate some small degree of additional fiscal tightening from higher taxes and lower mandatory spending as the bonus depreciation provisions for businesses and the Emergency Unemployment Compensation program end at the beginning of next year. Our estimate of total fiscal impetus, which excludes multiplier effects, indicates that changes in federal, state, and local fiscal policies will subtract 1.1 percentage points from real GDP growth in 2013, 0.6 percentage point in 2014, 0.3 percentage point in 2015, and will be roughly neutral for economic growth in 2016; these assumptions are little changed from the September Tealbook forecast. 1 These direct effects plus the spillover effects of the shutdown into private‐sector spending are expected, in total, to reduce real GDP growth by about ½ percentage point in the fourth quarter and then to add ½ percentage point to GDP growth in the first quarter of next year. 2 Starting January 15, the level of funding consistent with the sequestration will be about $20 billion lower than in 2013. Page 5 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 This pace is a little slower than we had projected in the September Tealbook, but the recent decline in the dollar leaves its level lower throughout the projection. Oil and Other Commodity Prices The spot price for Brent crude oil has declined slightly since the time of the September Tealbook, likely reflecting an easing of geopolitical tensions in the Middle East, although futures prices for oil at longer-dated maturities are a little higher. Consistent with these market developments, the price of imported oil is projected to fall from about $105 per barrel this quarter to $93 per barrel by the end of 2016, a flatter trajectory than in the September Tealbook. A broad index of nonfuel commodity prices has declined about 3 percent since the September Tealbook. From this lower level, we expect prices to move up modestly over the projection period. RECENT DEVELOPMENTS AND THE NEAR-TERM OUTLOOK FOR REAL GDP As a result of the federal government shutdown, we have received fewer economic data releases than usual since the September Tealbook. (See the box “Effects of the Government Shutdown on Economic Data” for more details.) The information we did receive, particularly for consumer spending, in conjunction with our estimates of the direct and spillover effects on economic activity of the government shutdown, led us to reduce our forecast for real GDP growth in the second half of the year by ¼ percentage point to an annual rate of just over 2 percent.2 With incoming data weaker than expected, we now estimate real PCE growth to have slowed in the third quarter to an annual rate of just 1½ percent.3 We continue to anticipate that the increases in net wealth and personal income, along with the waning effects of the tax increases put in place at the beginning of the year, will contribute to a pickup in spending growth in the fourth quarter. However, the recent data on consumer outlays suggest a shallower 2 In addition, real GDP growth in the second quarter was revised down about ½ percentage point to an annual rate of 2½ percent. 3 The retail sales report for September is now scheduled to be published on October 29, the first day of the FOMC meeting. Page 6 of 81 Authorized for Public Release October 23, 2013 trajectory moving into the quarter. Also weighing on our projection for spending this quarter are a sizable drop in September vehicle sales that appears likely to be only slightly reversed this month, the decline in consumer sentiment in September and early October, and a small reduction in outlays related to the government shutdown. In response, we have trimmed the forecast for real PCE growth in the current quarter by ½ percentage point, to 2½ percent. The rise in mortgage rates since the spring appears to be damping housing activity, but not by more than we had anticipated. New home sales and applications for home purchase mortgages decreased modestly, on net, from June to August. In addition, existing home sales edged down in September, though the level remained higher than in the spring. In all, we expect real residential investment to rise at an annual rate of 9½ percent in the second half of this year, somewhat less than the pace seen in the first half of the year. o We anticipate that the decline in mortgage rates since the September Tealbook will, in coming months, reverse part of the recent drag on single-family home sales and construction. o Activity in the multifamily sector appears to have softened somewhat, and we have lowered our near-term forecast for construction of these units. With the latest available readings on orders and shipments somewhat weaker than we had expected, we revised down our estimate of the growth in business spending on equipment and intangibles in the third quarter to an annual rate of 2½ percent, 1 percentage point below our projection in the September Tealbook. Given the generally positive tone of survey measures of business conditions, we still expect the growth of equipment outlays to pick up in the fourth quarter, but at a slower pace than in our previous projection. We reduced our estimate of net exports in the third quarter based on available data showing a larger-than-expected rise in imports, but we anticipate that surprise to be reversed this quarter, leaving the second-half contribution of net exports to real GDP growth at an annual rate of about ¼ percentage point, little revised on net. Page 7 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Effects of the Government Shutdown on Economic Data The federal government shutdown has affected the collection, processing, and publication of key economic data. Here we describe the effects of the shutdown on selected data releases from the Bureau of Labor Statistics (BLS) and the Census Bureau—specifically, the Employment Situation, the Consumer Price Index, Retail Sales, and reports on orders and shipments of capital goods—as well as the implications of delays in data releases for derived data products, such as industrial production and real GDP. The table on the next page lists a broader array of data releases affected by the shutdown and shows their previously scheduled release dates, along with an updated release calendar. The Employment Situation. The September employment report, which comprises the payroll survey (Current Employment Statistics, or CES) and the household survey (Current Population Survey, or CPS), was due to be released on October 4. The September data were collected and mostly processed prior to the shutdown. As a result, the employment report for September was released on October 22, fairly soon after the federal government reopened. The report containing the October data has been postponed by a week to November 8. The quality of the employment and related data in the CES should not be substantially affected, as they are based on employer payroll records.1 However, the CPS for October—including the unemployment rate and participation rate—may be less reliable than usual. Data collection for the October CPS was scheduled to begin on October 13 but was delayed a week. While the reference week for the survey was not changed, the delay in collecting the data could affect the results, for example, because of recall bias. Consumer Price Index (CPI). The CPI data for September were scheduled to be released on October 16 and will instead be released on October 30. However, the collection of the underlying price data was unaffected by the shutdown, so there should be no adverse effects on the quality of the published CPI for September. Data collection for the CPI data occurs throughout the month and concludes on the last business day. Consequently, the government shutdown will affect the timing and number of price quotes included in the sample, and, thus, the October CPI release may not be as reliable as usual.2 Retail Sales. Data on retail sales for September (and the revised data for July and August) were scheduled to be released on October 11 by the Census Bureau. The retail sales data are based on direct mail and Internet surveys of firms, with follow‐up interviews performed by the Census Bureau. While the paper‐copy responses are currently available for tabulation by Census Bureau employees, online responders were unable to submit the requisite information while the Census website was inoperable. Nonetheless, the Census Bureau has indicated that the September data will be released October 29. 1 The BLS Electronic Data Interchange Center did not allow the transmission of data files during the shutdown, but it reopened on the morning of October 17. It is possible that some establishments will be less likely to report because of the downtime. 2 Because some items in the CPI are priced only in alternate months, and rents are only priced every 6 months, some portion of any problems with the October CPI may carry through until April of next year. Page 8 of 81 Authorized for Public Release Manufacturers' Shipments, Inventories, and Orders. The Census Bureau released the August Advance Durables report at the end of September, just prior to the government shutdown. The collection of survey responses for the Bureau’s full report for August—the Manufacturers’ Shipments, Inventories, and Orders Survey—was mostly completed before the shutdown. Although the quality of the August data should be minimally affected, the report, which was scheduled for October 3, will not be issued; instead, the August data for the full manufacturing sector will only be released with the September report on November 4. The September Advance Durables report was scheduled to be released on October 25 and will be released on time. However, the Census Bureau was unable to collect online responses because of server downtime during the shutdown; therefore, response rates and data quality might be affected. Derived data. In addition to the four primary data releases discussed above, several important derived data releases have been delayed because of the government shutdown. The Federal Reserve’s G.17 statistical release on Industrial Production and Capacity Utilization was not published as scheduled on October 17; the production indexes incorporate a range of data from other government agencies that were delayed (notably including manufacturing production worker hours from the employment report). The G.17 release with data for September will be issued on October 28. Finally, the Bureau of Economic Analysis (BEA) estimates of gross domestic product for the third quarter of 2013 and personal income and spending for September also incorporate a range of other data that have been delayed. These BEA releases were scheduled to be published on October 30 and 31, respectively, but with the delays in the underlying source data and the furloughs of BEA staff, these data releases have been postponed until November 7 and 8. Statistical Release Schedule Release dates Release Reference date O ld New C P IP A ug ust 10 /1 10 /2 2 M a n u f a c t u r e r s ’ S h ip m e n t s , In v e n t o rie s , & O rd e rs A ug ust 10 /3 11/4 E m p lo y m e n t S itu a tio n S e p te m b e r 10 /4 10 /2 2 U .S . M e r c h a n d is e T ra d e A ug ust 10 /8 10 /2 4 JO LTS A ug ust 10 /8 10 /2 4 U .S . Im p o rt a n d E x p o rt P rices S e p te m b e r 10 /10 10 /2 3 R e ta il S a le s S e p te m b e r 1 0 /11 10 /2 9 PPI S e p te m b e r 1 0 /11 10 /2 9 C PI S e p te m b e r 10 /16 10 /3 0 H o u s in g s ta rts & p e rm its ( N e w R e s . C o n s t r u c tio n ) S e p te m b e r 10 /17 11 /2 6 In d u stria l P r o d u c tio n ( G .1 7 ) S e p te m b e r 10 /17 10 /2 8 N e w h o m e s a le s ( N e w R e s . S a le s) S e p te m b e r 10 /2 4 12 /4 A d v a n c e D u ra b le s S e p te m b e r 10 /2 5 10 /2 5 R e s id e n tia l v a c a n c ie s Q3 G D P ; P e rso n a l In c o m e a n d O u tla y s Q 3 ( a d v a n c e ) ; S e p te m b e r E m p lo y m e n t C o s t In d e x Q3 M o n t h ly T r e a s u r y S t a t e m e n t S e p te m b e r 10 /2 9 11/5 10 /3 0 ; 10 /3 1 1 1 / 7 ; 1 1 /8 10 /3 1 11/19 la te O c t o b e r late O c t o b e r Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 The available data suggest that manufacturing IP rose at an annual rate of just 1¾ percent in the third quarter, but the pace of production appears to have picked up, on net, in August and September. As a result of its recent trajectory, the new orders components of the latest manufacturing surveys, and the motor vehicle assembly schedules in hand, we expect factory output to rise 3¼ percent this quarter. This increase is a bit less than the September projection, in part from new data on Boeing commercial aircraft schedules. THE MEDIUM-TERM OUTLOOK FOR REAL GDP Our forecast for real GDP growth over the medium term is just a little higher than in the September Tealbook. We expect real GDP growth to step up to 3¼ percent in 2014 and 3½ percent in 2015, then to ease slightly to 3¼ percent in 2016. On the positive side, the lower trajectories for interest rates and the dollar, together with the higher paths for house prices and the stock market, are anticipated to provide a greater lift to real output growth than in the previous projection. In addition, the reversal of the government shutdown effects will boost GDP growth early next year. However, these positive forces were partly offset by our decision to trim the acceleration in real PCE for next year. In particular, we now assume that some of the factors that we believe have been holding down consumer outlays in recent quarters, such as tight credit conditions and pessimism about future income prospects, will weigh on spending over the coming quarters by more than we had previously expected. Coupled with the downward revisions to 2013, these changes leave the level of GDP a touch lower at the end of the medium-term projection. We have made no material changes to our supply-side assumptions this round. Thus, the small revisions we made to the GDP forecast carry through to the GDP gap, leaving the gap just a little wider at the end of the medium term compared with the September projection. Page 10 of 81 Authorized for Public Release October 23, 2013 THE OUTLOOK FOR THE LABOR MARKET The available readings on labor market indicators remain consistent with our projection of a continued gradual improvement in the coming months. Total nonfarm payrolls rose 148,000 in September, in line with our expectations in the September Tealbook.4 However, we took more signal from private payrolls, which rose only 125,000 last month, somewhat lower than expected in the September projection. In response, we marked down our projection for private payroll gains in the fourth quarter to 160,000 per month, 15,000 less than in the September Tealbook.5 The unemployment rate edged down in September to 7.2 percent. We anticipate that the furlough of government employees will temporarily push up the unemployment rate to 7.5 percent in October, but we expect the jobless rate to return to 7.2 percent in November and December. Other labor market indicators that we have received also appear consistent with a gradual ongoing labor market recovery. The staff’s labor market conditions index, which summarizes the movements in 19 labor market indicators, edged up further in September. As in our previous projection, the labor market is anticipated to gradually improve over the medium term in line with the overall pace of economic activity. The path of the unemployment rate is slightly higher than in the previous projection and ends 2016 at just under 5½ percent, a little above the staff’s estimate of the natural rate of unemployment. Our forecast for payroll employment is close to the September Tealbook projection. We expect total payroll gains to step up to a pace of 200,000 per 4 In late September, the BLS released the preliminary estimate of the benchmark revision to the level of payroll employment in March 2013. Abstracting from a change in the scope of the payroll survey, which boosted the level of employment by around 475,000 workers, total nonfarm payroll employment is expected to be revised down by 124,000, or 0.1 percent, a relatively small revision. 5 We anticipate that the government shutdown will reduce private employment gains in October by 25,000 and will provide an offsetting boost in November, leaving no imprint on the quarterly figures. Because the government workers returned before the end of the relevant pay period, we do not expect that government employment will be affected by the shutdown. Page 11 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 month in 2014 and to 250,000 per month in 2015, then to edge back down to about 200,000 per month in 2016. As shown in the “Labor Market Data and Projections” exhibit, compared with our projection in September 2012, when the Committee first tied its asset purchases to an improvement in the outlook for labor market conditions, the current projection for the unemployment rate in mid-2014 is about 1 percentage point lower. By contrast, the monthly change in payrolls currently projected for mid-2014 is little different from the September 2012 forecast. The level of total payroll employment, however, in mid-2014 in this projection is nearly 1 million jobs (roughly ¾ percent) higher than in the September 2012 Tealbook, partly due to faster-than-expected job growth during the second half of last year and the first half of this year and partly reflecting last year’s benchmark revision. THE OUTLOOK FOR INFLATION Our forecast for inflation is little changed from the September Tealbook. After having been held down in the first half of the year by declines in energy prices and by unusually low core inflation, total PCE price inflation is projected to pick up to an annual rate of 2 percent in the third quarter before slowing to 1 percent in the fourth. The available data appear consistent with our view that the low readings on core PCE inflation earlier this year were transitory. We continue to expect core PCE prices to rise 1½ percent in the second half of this year, up from the 1 percent pace registered in the first half of the year. We project consumer energy prices to rise at an annual rate of 3¼ percent over the second half of this year, down 2¾ percentage points from the September Tealbook as a result of the recent decline in oil prices. Given the downward tilt to our projected path for oil prices, we continue to expect that consumer energy prices will move lower over the medium term. Core PCE inflation is anticipated to edge up gradually over the medium term, from 1¼ percent in 2013 to 1¾ percent in 2016. Reflecting the projected Page 12 of 81 Authorized for Public Release October 23, 2013 declines in consumer energy prices, total PCE inflation is expected to run a bit below core price inflation over the forecast period. THE LONG-TERM OUTLOOK In the long-term outlook, the federal funds rate continues to be set according to the prescriptions of an inertial version of the Taylor (1999) rule. As a result, the federal funds rate gradually rises from 2 percent at the end of 2016 to 4 percent by 2020. The Federal Reserve’s holdings of securities continue to put downward pressure on longer-term interest rates, and the process of returning the SOMA portfolio to a normal size is expected to be completed by 2021. Increasing household and business confidence, diminishing uncertainty, further improvements in credit availability, and a declining equity premium support real GDP growth of 2¾ percent in 2017, when the unemployment rate reaches its natural rate of 5.2 percent. Thereafter, the pace of gains in real GDP gradually moves down toward the longer-run growth rate of potential output of 2¼ percent. Despite the low level of the federal funds rate in 2016 and the gradual increase thereafter, the unemployment rate does not fall notably below the natural rate. (See the box “Headwinds and the Federal Funds Rate in 2016” for further discussion.) With long-run inflation expectations assumed to remain well anchored and essentially no margins of slack in labor and product markets, consumer price inflation moves up to 2 percent by 2019. Page 13 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Headwinds and the Federal Funds Rate in 2016 In the staff’s baseline forecast, the federal funds rate stays at its effective lower bound until the second quarter of 2015, one quarter after the unemployment rate moves below the Committee’s 6½ percent threshold; thereafter, it is set according to an inertial version of the Taylor (1999) rule. As a result of this procedure, the federal funds rate in the baseline projection is 2 percent at the end of 2016, well below its assumed long‐run value of 4 percent. This outcome may at first seem surprising because, at the end of 2016, the output gap is nearly closed, the unemployment rate is close to its assumed natural rate, and core inflation is only about ¼ percentage point below its long‐run target. However, in our analysis, important headwinds continue to weigh on economic activity even in 2016, and a continued accommodative stance of monetary policy is required to achieve the economic outcomes we project. Moreover, while the federal funds rate is lower than its assumed long‐run value in 2016, in the staff projection, the unemployment rate falls only slightly below the natural rate and inflation rises gradually to its target level over the 2016–20 period. The lack of any significant undershooting of the unemployment rate or overshooting of inflation suggests that the monetary accommodation in the staff projection is just sufficient to return the economy close to full employment and 2 percent inflation in 2018 and to keep it there going forward. In other words, the projected level of the federal funds rate during those years is running close to a notion of an equilibrium, or neutral, funds rate.1 In the staff’s view, the economy continues to be faced with substantial headwinds that lift only gradually through 2016. Thus, such factors as household and business confidence, perceptions of uncertainty, and credit availability still have some room for improvement, even at the end of 2016. Similarly, although the equity premium is forecast to narrow over the next three years, it is still above our estimate of its longer‐ run value in 2016. Stimulative monetary policy can serve to offset the adverse effects of these factors, and under the staff outlook, with the federal funds rate at only 2 percent in 2016, inflation and employment are closer to their objectives than would be the case under a higher path for the federal funds rate. Fiscal policy has been a factor supporting the level of economic activity since the beginning of the recession, but it has become increasingly less accommodative in recent years—thus restraining economic growth—as the earlier fiscal stimulus policies wind down and policy changes have been implemented to bring the federal budget deficit back toward a sustainable level. These forces are expected to continue over the next several years. As a result, in the staff’s view, fiscal policy will be providing only a small degree of support to the level of economic activity at the end of 2016. After 2016, however, the staff expects pressures from the aging of the population and rising health‐care costs to put the debt‐to‐GDP ratio on a rising trajectory and to put upward pressure on the level of the federal funds rate needed to maintain full employment and price stability. 1 It is worth noting that under a different set of economic conditions, the inertial Taylor (1999) rule with thresholds could deliver an outcome involving substantial undershooting of the unemployment rate or overshooting of inflation. Page 14 of 81 Authorized for Public Release October 23, 2013 Key Background Factors underlying the Baseline Staff Projection Long-Term Interest Rates Federal Funds Rate Percent 6 6 Quarterly average Current Previous Tealbook 5 10 Percent Quarterly average 9 9 8 8 5 4 4 3 3 7 7 BBB corporate yield 6 5 2 2 4 3 1 1 6 5 Conforming mortgage rate 4 10-year Treasury yield 3 2 0 2008 2010 2012 2014 2016 0 1 110 100 Ratio scale, 2007:Q1 = 100 Quarter-end Dow Jones U.S. Total Stock Market Index 2016 1 90 90 100 60 2010 2012 2014 2016 Ratio scale, 2007:Q1 = 100 110 70 100 85 Quarterly 105 100 CoreLogic index 85 80 80 70 75 75 60 70 70 50 65 Crude Oil Prices 2008 2010 2012 2014 2016 65 Broad Real Dollar Dollars per barrel 140 140 2007:Q1 = 100 110 110 Quarterly average Quarterly average Imported oil 120 100 100 West Texas Intermediate 80 80 60 60 40 40 2008 2014 95 80 20 2012 95 80 120 2010 105 90 2008 2008 160 150 140 130 120 90 50 2 House Prices Equity Prices 160 150 140 130 120 10 2010 2012 2014 2016 20 105 105 100 100 95 95 90 90 85 85 80 80 75 75 70 Page 15 of 81 2008 2010 2012 2014 2016 70 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Summary of the Near-Term Outlook (Percent change at annual rate except as noted) 2013:H1 2013:Q3 2013:Q4 Measure Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Real GDP Private domestic final purchases Personal consumption expenditures Residential investment Nonres. private fixed investment Government purchases Contributions to change in real GDP Inventory investment1 Net exports1 Unemployment rate2 PCE chain price index Ex. food and energy 2.0 2.2 2.2 13.3 -.2 -2.3 1.8 2.1 2.0 13.4 -.1 -2.3 2.2 2.3 2.0 2.6 3.7 -2.5 2.2 2.1 1.5 7.8 4.0 -1.7 2.7 3.7 3.1 12.0 5.1 -2.7 2.1 3.0 2.6 11.0 3.6 -4.2 .8 -.1 7.5 .6 1.1 .7 -.2 7.5 .5 1.0 .4 .4 7.3 1.9 1.5 .8 .0 7.3 2.0 1.5 .2 -.1 7.2 1.3 1.3 .0 .4 7.3 1.1 1.4 1. Percentage points. 2. Percent. For 2013:H1, the 2013:Q2 value is shown. Recent Nonfinancial Developments (1) Manufacturing IP ex. Motor Vehicles and Parts Real GDP and GDI 4-quarter percent change 8 6 Gross domestic product Gross domestic income 8 6 3-month percent change, annual rate 15 10 15 10 Aug. 5 5 4 4 0 0 2 2 -5 -5 0 -10 -10 -15 -15 -20 -20 -25 -25 Q2 0 -2 -2 -4 -4 -6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -6 -30 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." Sales and Production of Light Motor Vehicles 18 14 Real PCE Goods ex. Motor Vehicles Millions of units, annual rate 22 Sept. Sales 22 18 14 Sept. 10 10 Production 6 2 -30 6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Ward’s Auto Infobank. 2 3500 3400 3300 3200 3100 3000 2900 2800 2700 2600 2500 2400 2300 Billions of chained (2009) dollars Aug. 3500 3400 3300 3200 3100 3000 2900 2800 2700 2600 2500 2400 2300 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Page 16 of 81 Authorized for Public Release October 23, 2013 Recent Nonfinancial Developments (2) Single-Family Housing Starts Home Sales Millions of units, annual rate 2.1 1.8 2.1 1.8 Millions of units (annual rate) 7.5 1.5 1.5 1.2 1.2 0.9 0.9 4.5 0.6 4.0 Aug. 0.3 0.0 6.0 Sept. 5.5 0.0 Aug. 0.3 2.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 70 65 60 Aug. Nonresidential Construction Put in Place 450 70 400 400 Shipments 350 350 300 55 50 50 45 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: U.S. Census Bureau. Aug. 250 45 200 200 40 150 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Nominal CPIP deflated by BEA prices through 2013:Q2 and by staff’s estimated deflator thereafter. Source: U.S. Census Bureau. 1.7 1.8 1.7 Staff flow-of-goods system Aug. 1.6 1.5 1.4 1.4 1.2 1.1 Census book-value data 1.3 July 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Flow-of-goods system covers total industry ex. motor vehicles and parts, and inventories are relative to consumption. Census data cover manufacturing and trade ex. motor vehicles and parts, and inventories are relative to sales. Source: U.S. Census Bureau; staff calculation. Billions of dollars 220 July 200 180 220 200 180 Non-oil imports 160 1.5 1.3 150 Exports and Non-oil Imports Months 1.6 300 250 Inventory Ratios ex. Motor Vehicles 1.8 450 60 55 40 Billions of chained (2009) dollars 75 65 Orders 0.0 Source: For existing, National Association of Realtors; for new, U.S. Census Bureau. Nondefense Capital Goods ex. Aircraft Billions of dollars 0.6 3.0 Note: Adjusted permits equal permits plus starts outside of permit-issuing areas. Source: U.S. Census Bureau. 3-month moving average 1.2 0.9 New single-family homes (right scale) 3.5 0.3 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 75 1.5 Existing homes (left scale) 5.0 Adjusted permits Starts 1.8 7.0 6.5 0.6 Millions of units (annual rate) 160 140 140 120 120 100 100 1.2 80 1.1 60 Exports 80 60 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; U.S. Census Bureau. Page 17 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Projections of Real GDP and Related Components (Percent change at annual rate from final quarter of preceding period except as noted) 2013 Measure 2013 H1 Real GDP Previous Tealbook 2014 2015 2016 H2 2.0 2.3 1.8 2.0 2.2 2.5 3.2 3.1 3.5 3.4 3.2 3.2 1.5 1.7 1.1 1.3 1.8 2.2 3.3 3.1 3.7 3.6 3.3 3.5 2.0 2.4 2.0 2.2 2.1 2.6 3.4 3.6 3.8 3.8 3.1 3.1 Residential investment Previous Tealbook 11.4 10.2 13.4 13.3 9.4 7.2 17.5 15.8 14.1 14.8 5.8 8.9 Nonresidential structures Previous Tealbook -.1 -1.0 -6.5 -6.4 6.7 4.6 2.5 2.7 2.9 2.7 2.6 2.5 2.4 3.0 1.9 1.7 3.0 4.4 5.6 5.3 6.1 5.9 5.5 5.7 -6.8 -5.8 -5.1 -5.1 -8.6 -6.5 -4.3 -5.4 -3.8 -3.8 .0 .0 State and local purchases Previous Tealbook .2 -.2 -.4 -.4 .9 .1 .3 .3 1.1 1.1 1.5 1.5 Exports Previous Tealbook 3.7 3.5 3.2 3.2 4.2 3.8 5.1 4.4 6.5 6.1 6.9 7.0 Imports Previous Tealbook 3.0 2.8 3.7 3.4 2.3 2.1 3.8 4.4 5.1 5.1 4.7 4.6 Final sales Previous Tealbook Personal consumption expenditures Previous Tealbook Equipment and intangibles Previous Tealbook Federal purchases Previous Tealbook Contributions to change in real GDP (percentage points) Inventory change Previous Tealbook .5 .5 .7 .8 .4 .3 .0 .0 -.1 -.2 -.1 -.2 Net exports Previous Tealbook .0 .0 -.2 -.1 .2 .2 .1 -.1 .0 .0 .2 .2 Real GDP 4-quarter percent change 10 Current Previous Tealbook 8 10 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 18 of 81 2016 -6 October 23, 2013 Components of Final Demand Personal Consumption Expenditures Residential Investment 4-quarter percent change 4-quarter percent change 5 20 4 15 15 3 3 10 10 2 2 5 5 5 Current Previous Tealbook 4 1 1 20 0 0 -5 -5 -10 -10 -15 -15 0 0 -1 -1 -2 -2 -20 -20 -3 -3 -25 -25 -4 -4 -30 2009 2010 2011 2012 2013 2014 2015 2016 Equipment and Intangibles 20 15 15 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 -20 -20 -25 2009 2010 2011 2012 2013 2014 2015 2016 -25 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 Government Consumption & Investment 2011 2012 2013 2014 2015 2016 -30 4-quarter percent change 2009 2010 2011 2012 2013 2014 2015 2016 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 Exports and Imports 4-quarter percent change 5 20 4 4 15 3 3 2 2 1 1 5 5 2010 Nonresidential Structures 4-quarter percent change 20 2009 4-quarter percent change 20 15 10 10 Exports 5 Imports 0 0 0 -1 -1 -5 -5 -2 -2 -3 -3 -10 -10 -4 -4 -15 -15 -5 -20 -5 2009 2010 2011 2012 2013 2014 2015 2016 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 19 of 81 2009 2010 2011 2012 2013 2014 2015 0 2016 -20 Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Aspects of the Medium-Term Projection Personal Saving Rate Wealth-to-Income Ratio Percent 8 Current Previous Tealbook 7 8 7 6 6 5 5 4 4 3 3 2 2 1 1 0 1995 2000 2005 2010 2015 Ratio 6.8 0 6.8 6.4 6.4 6.0 6.0 5.6 5.6 5.2 5.2 4.8 4.8 4.4 4.4 1995 2000 2005 2010 2015 Note: Household net worth as a ratio to disposable personal income. Source: For net worth, Federal Reserve Board, flow of funds data; for income, U.S. Dept. of Commerce, Bureau of Economic Analysis. Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Single-Family Housing Starts Equipment and Intangibles Spending Millions of units Share of nominal GDP 2.00 13 1.75 1.75 12 12 1.50 1.50 11 11 1.25 1.25 10 10 1.00 1.00 9 9 0.75 0.75 0.50 0.50 8 8 0.25 0.25 7 7 0.00 6 2.00 0.00 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 13 6 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Source: U.S. Census Bureau. Current Account Surplus/Deficit Federal Surplus/Deficit Share of nominal GDP Share of nominal GDP 6 1 4 4 0 0 2 2 -1 -1 0 0 -2 -2 -2 -2 -3 -3 -4 -4 -6 -6 -4 -4 -8 -8 -5 -5 -10 -10 -6 -6 -12 -7 6 1 4-quarter moving average -12 1995 2000 2005 2010 2015 1995 Source: Monthly Treasury Statement. 2000 2005 2010 2015 -7 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 20 of 81 Authorized for Public Release October 23, 2013 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Decomposition of Potential GDP (Percent change, Q4 to Q4, except as noted) Measure 1974-95 19962000 2001-11 2012 2013 2014 2015 2016 Potential real GDP Previous Tealbook Selected contributions1 Structural labor productivity2 Previous Tealbook 3.1 3.1 3.4 3.4 2.2 2.2 1.9 1.9 2.1 2.1 2.2 2.2 2.2 2.2 2.1 2.1 1.5 1.5 2.7 2.7 2.2 2.2 1.4 1.4 1.5 1.5 1.7 1.7 1.8 1.8 1.9 1.9 Structural hours Previous Tealbook Labor force participation Previous Tealbook Memo: GDP gap3 Previous Tealbook 1.5 1.5 .4 .4 1.0 1.0 .0 .0 .6 .6 -.3 -.3 .7 .7 -.3 -.3 .7 .7 -.5 -.5 .6 .6 -.3 -.3 .6 .6 -.3 -.3 .5 .5 -.3 -.3 -2.4 -2.4 1.9 1.9 -3.6 -3.6 -3.6 -3.6 -3.6 -3.4 -2.6 -2.5 -1.3 -1.3 -.3 -.2 Note: For multiyear periods, the percent change is the annual average from Q4 of the year preceding the first year shown to Q4 of the last year shown. 1. Percentage points. 2. Because of substantial revisions from the Bureau of Economic Analysis to productive investment as part of the latest comprehensive revision, staff estimates of the components of structural productivity are not available for this Tealbook. 3. Percent difference between actual and potential GDP in the final quarter of the period indicated. A negative number indicates that the economy is operating below potential. Structural and Actual Labor Productivity (Nonfarm business sector) Chained (2009) dollars per hour 68 68 66 66 64 64 62 62 60 60 Structural 58 58 56 56 54 54 52 52 50 50 48 48 46 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 46 Source: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of Commerce, Bureau of Economic Analysis; staff assumptions. GDP Gap Manufacturing Capacity Utilization Rate Percent 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 1995 2000 2005 2010 2015 Note: The GDP gap is the percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Source: U.S. Dept. of Commerce, BEA; staff assumptions. -10 Percent 90 85 90 85 Average rate from 1972 to 2012 80 80 75 75 70 70 65 65 60 1995 2000 2005 2010 2015 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 21 of 81 60 Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 The Outlook for the Labor Market 2013 Measure 2013 H1 2014 2015 2016 H2 Output per hour, nonfarm business1 Previous Tealbook .8 1.1 .0 .3 1.7 1.9 1.4 1.4 1.8 1.5 1.9 1.8 Nonfarm private employment2 Previous Tealbook 173 181 201 201 145 162 199 202 245 241 195 198 Labor force participation rate3 Previous Tealbook 63.2 63.3 63.4 63.4 63.2 63.3 63.2 63.3 63.1 63.2 63.0 63.1 Civilian unemployment rate3 Previous Tealbook 7.3 7.2 7.5 7.5 7.3 7.2 6.6 6.6 5.9 5.8 5.4 5.3 1. Percent change from final quarter of preceding period at annual rate. 2. Thousands, average monthly changes. 3. Percent, average for the final quarter in the period. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Inflation Projections (Percent change at annual rate from final quarter of preceding period) 2013 Measure 2013 2014 2015 2016 1.6 1.6 1.4 1.2 1.5 1.4 1.6 1.6 .9 .9 1.2 1.0 .6 .7 1.3 1.3 1.4 1.4 -2.4 -1.1 -7.8 -7.7 3.2 6.0 -.7 -3.1 -1.1 -1.4 -.5 -.7 Excluding food and energy Previous Tealbook 1.2 1.2 1.0 1.1 1.5 1.4 1.5 1.5 1.6 1.6 1.7 1.7 Prices of core goods imports1 Previous Tealbook -1.1 -1.0 -1.0 -1.0 -1.1 -1.0 1.7 1.5 1.6 1.5 1.6 1.6 H1 H2 1.0 1.1 .5 .6 Food and beverages Previous Tealbook 1.1 .9 Energy Previous Tealbook PCE chain-weighted price index Previous Tealbook 1. Core goods imports exclude computers, semiconductors, oil, and natural gas. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 22 of 81 Authorized for Public Release October 23, 2013 Labor Market Developments and Outlook Measures of Labor Underutilization Percent 12 U-5* Unemployment rate Part time for economic reasons** 11 10 9 8 12 11 10.0 10 9.5 9 9.0 8 7 7 Sept. 6 6 Percent 10.5 Unemployment rate Previous Tealbook September 2012 Tealbook Natural rate of unemployment Natural rate of unemployment with EEB adjustment 8.5 10.5 10.0 9.5 9.0 8.5 8.0 8.0 7.5 7.5 7.0 7.0 5 5 6.5 6.5 4 4 6.0 6.0 3 3 5.5 5.5 2 2 5.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2012 2013 2014 2015 2016 5.0 * U-5 measures total unemployed plus all marginally attached to the labor force, as a percent of the labor force plus persons marginally attached to the labor force. ** Percent of Current Population Survey employment. EEB Extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics. Level of Payroll Employment* 120 Millions Millions Total (right axis) Private (left axis) 135 110 130 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Millions 146 Total Previous Tealbook September 2012 Tealbook 144 Sept. 115 105 140 125 142 146 144 142 140 140 138 138 136 136 134 134 132 2012 2013 2014 2015 2016 132 * 3-month moving averages in history; average levels in each quarter during the forecast period. Source: U.S. Department of Labor, Bureau of Labor Statistics. Change in Payroll Employment* Thousands 400 200 Sept. 0 300 200 250 250 200 200 150 150 0 -200 -200 -400 -400 -600 -600 -800 -1000 Total Private 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Thousands 400 100 -800 50 -1000 0 100 Total Previous Tealbook September 2012 Tealbook 2012 2013 2014 2015 2016 * 3-month moving averages in history; average monthly changes in each quarter during the forecast period. Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: In September 2012, judgmental projections were prepared through 2015 for the Summary of Economic Projections variables, including the unemployment rate, while projections for other variables, including the labor force participation rate and payroll employment, were prepared only through 2014. This exhibit therefore reports a 2015 projection from the September 2012 Tealbook only for the unemployment rate. Page 23 of 81 300 50 0 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Labor Market Developments and Outlook (2) Labor Force Participation Rate* Percent 67.5 67.0 Labor force participation rate Estimated trend** Labor force participation rate Previous Tealbook September 2012 Tealbook Estimated trend** 67.0 66.5 66.5 66.0 66.0 65.5 65.5 65.0 65.0 64.5 64.5 64.0 Sept. 63.5 63.0 Percent 65.0 67.5 64.5 64.0 65.0 64.5 64.0 64.0 63.5 63.5 63.5 2002 2003 2004 2005 2006 2007 20082009 2010 2011 2012 2013 63.0 63.0 2012 2013 2014 2015 2016 63.0 * Published data adjusted by staff to account for changes in population weights. ** Includes staff estimate of the effect of extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Initial Unemployment Insurance Claims* Thousands 700 Private Hires, Quits, and Job Openings 650 650 4.5 600 600 4.0 550 550 500 500 450 450 400 400 350 300 250 2002 2003 2004 2005 2006 2007 20082009 2010 2011 2012 2013 Hires* Quits* Openings** 3.5 5.0 4.5 4.0 3.5 July 3.0 3.0 2.5 2.5 2.0 2.0 300 1.5 1.5 250 1.0 350 Oct. 12 Percent 5.0 700 2002 2003 2004 2005 20062007 2008 2009 2010 2011 2012 2013 1.0 * Percent of private nonfarm payroll employment, 3-month moving average. ** Percent of private nonfarm payroll employment plus unfilled jobs, 3-month moving average. Source: Job Openings and Labor Turnover Survey. * 4-week moving average. Source: U.S. Department of Labor, Employment and Training Administration. Indexes of Selected Labor Market Indicators Index 200 Labor market conditions index Negative unemployment rate Private payroll employment 100 0 200 100 0 Sept. -100 -100 -200 -200 -300 -300 -400 -400 -500 -500 -600 2007 2008 2009 2010 2011 2012 2013 Note: Labor market conditions index estimated by staff; indexes for unemployment rate and private payroll employment are deviation from estimated trend normalized to have mean zero and unit standard deviation over the period July 1976 to September 2008, multiplied by 100. Page 24 of 81 -600 Authorized for Public Release October 23, 2013 Labor Market Data and Projections Projection for mid-20142 in the Tealbook dated: Aug. 20121 Indicator Sept. 2012 Dec. 2012 Sept. 20133 Oct. 20133 Unemployment rate (percent) 8.1 7.8 7.6 6.8 6.9 Labor force participation rate (percent) 63.5 63.7 63.7 63.3 63.2 Monthly change in payroll employment (thousands, three-month averages) Total Private 94 109 212 210 197 195 197 205 194 202 133.3 137.0 137.1 138.0 137.9 1.0 2.3 2.0 2.5 2.4 184.6 190.3 190.8 193.0 193.0 Level of total payroll employment (millions) Total hours worked (percent Total hours worked change)4 (billions)4 1. The figures for August 2012 refer to data as originally published in the September employment situation release along with the staff’s real-time translation of those data into hours worked. These were the latest available data at the time of the September FOMC meeting. 2. Calculated as the mean of the 2014:Q2 and 2014:Q3 projections. 3. Projections of payrolls and hours worked include the effects of the benchmark revision to the payroll survey. 4. Total hours worked are aggregate hours in the nonfarm business sector. Because that series is available only on a quarterly basis, the August 2012 figures refer to the quarterly percent change and level in 2012:Q3. The percent changes and levels in hours are at annual rates. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff projections. Page 25 of 81 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Inflation Developments and Outlook (Percent change from year-earlier period) Headline Consumer Price Inflation Percent 6 5 CPI PCE 4 3 3 2 Aug. 2 1 1 0 0 -1 -1 -2 -2 -3 5 PCE - Current PCE - Previous Tealbook 5 4 Percent 5 6 4 4 3 3 2 2 1 1 -3 0 0 20022003200420052006200720082009201020112012201320142015 2012 2013 2014 2015 2016 Source: For CPI, U.S. Department of Labor, Bureau of Labor Statistics; for PCE, U.S. Department of Commerce, Bureau of Economic Analysis. Measures of Underlying PCE Price Inflation 4.0 3.5 3.0 Percent Trimmed mean PCE Market-based PCE excluding food and energy PCE excluding food and energy 3.5 2.5 2.0 2.0 1.5 1.5 1.0 Aug. 0.5 0.0 3.0 3.0 2.5 Percent 3.5 4.0 1.0 0.5 Core PCE - Current Core PCE - Previous Tealbook 3.5 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 20022003200420052006200720082009201020112012201320142015 2012 2013 2014 2015 2016 Source: For trimmed mean PCE, Federal Reserve Bank of Dallas; otherwise, U.S. Department of Commerce, Bureau of Economic Analysis. 0.0 Labor Cost Growth (Private Industry) 8 7 6 Percent Employment cost index Average hourly earnings Compensation per hour 7 1 0 -1 6 5 4 4 4 3 3 3 2 2 1 1 4 Sept. June Q2 7 5 5 2 6 Compensation per hour - Current Compensation per hour - Previous Tealbook 6 5 3 Percent 7 8 2 1 0 -1 20022003200420052006200720082009201020112012201320142015 Note: The compensation per hour value for 2013:Q2 is a staff estimate. Source: U.S. Department of Labor, Bureau of Labor Statistics. 0 Page 26 of 81 2012 2013 2014 2015 2016 0 Authorized for Public Release October 23, 2013 Inflation Developments and Outlook (2) (Percent change from year-earlier period, except as noted) Commodity and Oil Price Levels 1967 = 100 1967 = 100 Dollars per barrel 220 Brent crude oil history/futures (right axis) 1680 168 CRB spot commodity price index (left axis) 1420 142 1200 120 1000 100 800 80 Oct. 22 600 60 Dollars per barrel 2000 2200 200 Brent crude oil history/futures (right axis) CRB spot commodity price index (left axis) 1600 1400 1200 160 140 120 1000 100 800 80 Oct. 22 400 200 40 600 60 20 400 20022003200420052006200720082009201020112012201320142015 2012 2013 Note: Futures prices are the latest observations on monthly futures contracts. Source: For oil prices, U.S. Department of Energy, Energy Information Agency; for commodity prices, Conference Research Board (CRB). 40 Energy and Import Price Inflation 18 15 12 Percent Percent PCE energy prices (right axis) Core import prices (left axis) 12 60 50 Aug. 3 0 Sept. 20 6 15 10 4 2 -10 5 0 -20 -9 -30 -2 -40 -4 20022003200420052006200720082009201020112012201320142015 10 Aug. -6 -12 25 20 0 -3 30 8 30 6 Percent PCE energy prices (right axis) Core import prices (left axis) 10 40 9 Percent 0 Sept. 2012 -5 -10 2013 Source: For core import prices, U.S. Dept. of Labor, Bureau of Labor Statistics; for PCE, U.S. Dept. of Commerce, Bureau of Economic Analysis. Long-Term Inflation Expectations Percent 4.25 3.75 3.25 5-to-10-year-ahead TIPS Michigan median next 5 to 10 years SPF PCE median next 10 years Oct. (p) 4.25 Percent 4.25 3.75 3.75 3.25 3.25 2.75 2.75 2.25 2.25 5-to-10-year-ahead TIPS Michigan median next 5 to 10 years SPF PCE median next 10 years 4.25 3.75 3.25 Oct. (p) 2.75 Sept. 2.25 Sept. 2.25 Q3 1.75 20022003200420052006200720082009201020112012201320142015 2.75 Q3 1.75 1.75 2012 2013 Note: Based on a comparison of an estimated TIPS (Treasury inflation-protected securities) yield curve with an estimated nominal off-the-run Treasury yield curve, with an adjustment for the indexation-lag effect. p Preliminary. SPF Survey of Professional Forecasters. Source: For Michigan, Thomson Reuters/University of Michigan Surveys of Consumers; for SPF, the Federal Reserve Bank of Philadelphia; for TIPS, Federal Reserve Board staff calculations. Page 27 of 81 1.75 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 The Long-Term Outlook (Percent change, Q4 to Q4, except as noted) Measure 2013 2014 2015 2016 2017 2018 Longer run Real GDP Previous Tealbook 2.0 2.3 3.2 3.1 3.5 3.4 3.2 3.2 2.7 2.6 2.4 2.2 2.3 2.3 Civilian unemployment rate1 Previous Tealbook 7.3 7.2 6.6 6.6 5.9 5.8 5.4 5.3 5.2 5.1 5.1 5.1 5.2 5.2 PCE prices, total Previous Tealbook 1.0 1.1 1.4 1.2 1.5 1.4 1.6 1.6 1.8 1.8 1.9 1.9 2.0 2.0 Core PCE prices Previous Tealbook 1.2 1.2 1.5 1.5 1.6 1.6 1.7 1.7 1.8 1.8 1.9 1.9 2.0 2.0 Federal funds rate1 Previous Tealbook .1 .1 .1 .1 .9 .8 2.0 1.9 2.8 2.8 3.4 3.3 4.0 4.0 2.7 3.1 3.4 3.6 4.0 4.0 4.4 4.4 4.7 4.6 4.8 4.7 4.8 4.8 10-year Treasury yield1 Previous Tealbook 1. Percent, average for the final quarter of the period. Real GDP Unemployment Rate 4-quarter percent change Potential GDP Real GDP 2004 2008 2012 2016 Percent 10 5 4 3 2 1 0 −1 −2 −3 −4 −5 Unemployment rate 8 Natural rate with EEB adjustment 7 6 Natural rate 5 4 2020 2004 PCE Prices 9 2008 2012 2016 2020 Interest Rates 4-quarter percent change Percent 4 Total PCE prices 10-year Treasury 3 BBB corporate 2 PCE prices excluding food and energy 1 0 Federal funds rate −1 2004 2008 2012 2016 2020 2004 2008 2012 2016 2020 Note: In each panel, shading represents the projection period, and dashed lines are the previous Tealbook. Page 28 of 81 10 9 8 7 6 5 4 3 2 1 0 October 23, 2013 Evolution of the Staff Forecast Change in Real GDP Percent, Q4/Q4 5 5 2012 4 4 2015 2013 2014 3 3 2016 2 2 1 1 0 4/20 6/15 8/3 9/14 10/26 12/7 1/18 2011 3/7 4/18 6/13 7/25 9/5 10/17 12/5 1/23 3/13 4/24 2012 6/12 7/24 9/11 10/23 12/11 0 2013 Tealbook publication date Unemployment Rate Percent, fourth quarter 9.5 9.5 9.0 9.0 8.5 8.5 8.0 7.5 8.0 2013 2012 7.5 2014 7.0 7.0 2015 6.5 6.5 6.0 6.0 5.5 5.0 5.5 2016 4/20 6/15 8/3 9/14 10/26 12/7 1/18 2011 3/7 4/18 6/13 7/25 9/5 10/17 12/5 1/23 3/13 4/24 2012 6/12 7/24 9/11 10/23 12/11 5.0 2013 Tealbook publication date Change in PCE Prices excluding Food and Energy Percent, Q4/Q4 2.5 2.5 2.0 1.5 2015 2.0 2016 2012 1.5 2014 2013 1.0 1.0 0.5 0.5 0.0 4/20 6/15 8/3 9/14 10/26 12/7 2011 1/18 3/7 4/18 6/13 7/25 9/5 10/17 2012 12/5 1/23 3/13 4/24 6/12 2013 Tealbook publication date Page 29 of 81 7/24 9/11 10/23 12/11 0.0 Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Authorized for Public Release (This page is intentionally blank.) Page 30 of 81 October 23, 2013 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 International Economic Developments and Outlook We estimate that foreign real GDP growth increased to a near-trend pace of 2¾ percent at an annual rate in the third quarter from 2¼ percent in the second quarter, largely reflecting an acceleration of activity in China, Mexico, and Canada. Growth appears to have moderated in Europe and Japan, but we had expected this slowing in our September Tealbook forecast. Overall, our third-quarter estimate for the foreign unexpectedly strong performance. We expect total foreign growth to rise further over the forecast period, to 3¼ percent next year and 3½ percent in 2015 and 2016. In the advanced foreign economies (AFEs), several factors should support the increase in growth, including accommodative monetary policies, diminishing drag from fiscal consolidation, and further reduction of financial stresses in the euro area. The anticipated recovery in the advanced economies, including the United States, should support an acceleration of output in the emerging market economies (EMEs), as should a fading of the near-term drag from stressed financial conditions in the more vulnerable EMEs. Relative to the previous Tealbook, our foreign growth outlook is up slightly in 2014 on account of stronger activity in the United States, and little changed thereafter. As always, the foreign outlook is subject to important risks. The euro area’s exit from recession has been encouraging, but the recovery remains fragile and any number of shocks could undermine it. In the EMEs, we have been heartened that the financial stresses that emerged in May have eased somewhat in the past two months, but the risk of a generalized emerging market crisis has not gone away. The forecast has some upside risks as well. For example, the welcome rebound in both EME and AFE growth in the past several quarters suggests that a positive, self-reinforcing dynamic could be materializing, engendering a faster rebound in global consumer and investor sentiment, and thus resulting in more vigorous global economic growth than assumed in our baseline. These latter two risks—the upside risk and the risk of a possible crisis in the EMEs—are explored in the Risks and Uncertainty section. With economic resource slack persisting and commodity prices projected to remain quiescent over the forecast period, we expect that foreign inflation will remain Page 31 of 81 Int’l Econ Devel & Outlook economies is slightly higher than we wrote down in September, mainly reflecting China’s Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 subdued at an annual rate of roughly 2½ percent, little changed from our previous forecast. In this low-inflation environment, monetary policy remains generally accommodative. Recent policy guidance has led us to push back our anticipated first policy rate hike for the ECB from mid-2015 to early 2016. In the EMEs, we now expect the Bank of Mexico to cut its policy rate again soon, following last month’s rate cut, to support growth. In contrast, the central banks of Brazil, India, and Indonesia—some of the more vulnerable EMEs—raised policy rates, citing concerns about inflation, and we Int’l Econ Devel & Outlook expect them to raise rates again before the end of the year. ADVANCED FOREIGN ECONOMIES • Euro area. Recent activity indicators support our estimate that GDP growth stepped down in the third quarter to ½ percent after transitory factors boosted growth during the second quarter to 1 percent. Nevertheless, data on PMIs and confidence suggest that the underlying strength of the economy continued to improve. We expect GDP growth to pick up to 1¼ percent in 2014 and then rise to 2 percent in 2015 and 2016, supported by diminishing drag from fiscal consolidation and further reduction of financial stresses. Our near-term projection is a touch higher than in the September Tealbook, reflecting slightly better-than-expected economic data and financial conditions. Recently, the ECB signaled more explicitly its willingness to keep interest rates low for an extended period. Thus with inflation projected to remain comfortably below 2 percent for the foreseeable future, we now expect the ECB to wait until early 2016 (two quarters later than in the September Tealbook) to begin raising its policy rate. • United Kingdom. Third-quarter GDP growth is estimated to be about 2½ percent, down a little from the second-quarter pace, as August data showed surprising pullbacks in industrial activity and construction. Still, PMI readings point to continued strength, and we project that GDP growth will remain around 2½ percent through the rest of the forecast period. Higherthan-expected core consumer prices and announced increases in utility prices led us to revise up our projection of inflation in the second half of the year to 3 percent, but we expect inflation to settle down at an average rate of 2 percent from 2014 onward, amid persistent economic slack. Although the mapping of GDP growth into lower unemployment will depend on the Page 32 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 uncertain path of productivity growth, we continue to expect the unemployment rate to fall to the Bank of England’s 7 percent threshold in mid-2015, with the first rate hike following later that year. • Japan. Following a strong performance in the first half of the year on the back of Abenomics-related exchange rate depreciation and rising confidence, we estimate that growth slowed to a 2 percent pace in the third quarter. Private consumption growth was sluggish through August and merchandise confidence, car registrations, and corporate sentiment, suggest that growth will pick up to 3½ percent in the current quarter. However, growth should decline markedly next year in response to April’s hike in the consumption tax, which Prime Minister Abe recently confirmed will occur as scheduled. Although Abe also announced a new fiscal stimulus package, we estimate that it will boost 2014 GDP by less than ½ percentage point, offsetting only about one-fourth of the drag from the consumption tax hike and the expiration of previous fiscal stimulus measures. All told, we see growth averaging slightly above 1 percent over the next three years. Although this is a paltry performance by the standards of most other economies, it is nearly double the pace of Japan’s estimated potential growth, and thus helps narrow its output gap. Accordingly, and assuming continued monetary policy stimulus in 2014 and 2015, we project that inflation will settle at 1½ percent in 2016, just below the Bank of Japan’s 2 percent target. • Canada. Data on monthly GDP and the manufacturing PMI suggest that growth bounced back to about 2½ percent in the third quarter, as projected in the September Tealbook, following flood-related weakness in the second quarter. As the rebound dissipates, we see growth moderating to 2 percent in the current quarter before rising to 2¾ percent by mid-2015, supported by improvements in global economic conditions. Following a flat reading in the second quarter due largely to falling food and energy prices, inflation rebounded to 1½ percent in the third quarter, and we expect it to edge up to 2 percent in 2016. Page 33 of 81 Int’l Econ Devel & Outlook exports were down for the quarter as a whole. September data on consumer Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 EMERGING MARKET ECONOMIES • China. Third-quarter GDP data suggest that the Chinese economy grew at an annual rate of 9½ percent, up from a 7 percent average pace over the first half of the year and 1¾ percentage point higher than we expected at the time of the September Tealbook. The surge from relatively weak to above-trend growth reflected a strong acceleration in industrial production, as well as solid investment and retail sales growth, which were supported by continued accommodative policy. We expect growth to moderate to a more sustainable Int’l Econ Devel & Outlook 8 percent pace in the current and next quarter. This projection is supported by a somewhat softer tone of the September data and also reflects our belief that authorities will again attempt to rein in the shadow banking sector, damping credit growth. We then see Chinese growth gradually edging down to 7½ percent in 2016 in line with our estimate of downward-trending potential growth. This projection is up a bit in the current quarter from the previous Tealbook and little changed thereafter. Inflation is projected to be around 3 percent throughout the forecast period. • Other Emerging Asia. We estimate that GDP in the rest of emerging Asia expanded at a 3¾ percent pace in the third quarter, about the same rate as in the previous quarter, and ½ percent faster than our previous Tealbook projection. The region appears to have benefited from the strong growth in China, which supported an increase in exports in the third quarter following a second-quarter contraction. Industrial production and the PMIs also have picked up in much of the region. However, in India and Indonesia—where financial stress remained elevated—recent indicators, on balance, point to a further slowing of growth after a weak second quarter. Despite subdued growth, central banks in both countries raised policy rates, primarily to curb inflationary pressures. Going forward, we see growth in the region rising to about 4½ percent in 2015 and 2016, supported by a pickup in external demand from the advanced economies. • Latin America. After contracting in the second quarter, Mexico’s GDP likely grew 2¼ percent in the third quarter. Our expectation of renewed growth is supported by the upbeat tone of several recent Mexican indicators, including the index of overall domestic economic activity, industrial production, and exports. With economic slack still noticeable and inflation pressures Page 34 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 relatively subdued, the Bank of Mexico cut its policy rate early last month and we expect another rate cut soon. Supported by the expansion of activity in the United States, we see Mexican GDP accelerating to 3¾ percent next year, a bit faster than projected in the September Tealbook, before settling at 3½ percent thereafter, broadly in line with the contour of U.S. manufacturing output. After Brazilian GDP growth surged to 6 percent in the second quarter, recent indicators—including industrial production, PMIs, and exports—suggest that We expect GDP growth to rise to 1¾ percent in the current quarter and further to 3½ percent in 2015 and 2016, as the drag from financial stresses wanes and global economic growth picks up. Despite the recent slowdown, the Brazilian central bank raised its main policy rate earlier this month by 50 basis points to 9.5 percent, a cumulative increase of 225 basis points since April, citing concerns about inflationary pressures, and we expect another rate hike before the end of the year. Although 12-month headline inflation moderated to 5.9 percent in September, it remains significantly above 4.5 percent—the midpoint of the inflation target range and the central bank’s ultimate goal. Page 35 of 81 Int’l Econ Devel & Outlook GDP was flat in the third quarter, about as we had expected in September. Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 The Foreign GDP Outlook Real GDP* Percent change, annual rate 2013 Int’l Econ Devel & Outlook 3. 4. 5. 6. 7. 8. 9. 10. 11. 2015 2016 3.3 3.2 3.4 3.4 3.4 3.5 1.8 1.8 2.4 1.2 0.4 2.3 2.1 2.1 2.6 1.5 1.9 2.4 2.2 2.2 2.6 1.9 0.8 2.5 2.3 2.4 2.7 2.0 1.2 2.5 4.4 4.3 7.8 4.0 3.7 2.9 4.5 4.4 7.7 4.4 3.7 3.3 4.6 4.6 7.6 4.6 3.6 3.5 4.6 4.6 7.5 4.6 3.4 3.5 Q2 Q3 Q4 H1 H2 1.7 1.8 2.2 2.1 2.8 2.7 3.0 3.0 3.1 3.0 Advanced Foreign Economies 1.4 Previous Tealbook 1.4 Canada 2.2 Euro Area -0.9 Japan 4.1 United Kingdom 1.5 1.8 1.9 1.7 1.1 3.8 2.7 1.8 1.8 2.6 0.4 2.1 2.4 1.9 1.9 2.1 1.0 3.4 2.5 2.6 2.3 7.5 3.8 -2.9 6.0 3.8 3.5 9.4 3.8 2.2 0.0 4.1 4.1 8.1 4.0 3.0 1.7 1. Total Foreign Previous Tealbook 2. 2014 Q1 Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 2.1 2.1 6.5 1.8 0.1 2.6 * GDP aggregates weighted by shares of U.S. merchandise exports. Total Foreign GDP Foreign GDP Percent change, annual rate 8 Current Previous Tealbook Percent change, annual rate 10 Current Previous Tealbook 6 Emerging market economies 5 4 2 0 0 Advanced foreign economies -2 -5 -4 -6 -10 -8 -10 2009 2010 2011 2012 2013 2014 2015 2016 -15 2009 2010 2011 2012 2013 2014 2015 2016 Page 36 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 The Foreign Inflation Outlook Consumer Prices* 2013 3. 4. 5. 6. 7. 8. 9. 10. 11. 2015 2016 2.5 2.5 2.7 2.7 2.6 2.6 2.1 2.1 1.8 1.3 4.6 1.7 1.5 1.5 1.8 1.4 0.8 2.2 1.8 1.8 1.8 1.5 2.5 2.0 1.8 1.8 2.1 1.7 1.4 1.8 3.3 3.3 3.0 3.4 3.5 5.7 3.3 3.3 3.0 3.4 3.4 5.3 3.3 3.3 3.0 3.4 3.4 5.3 3.3 3.3 3.0 3.4 3.4 5.3 Q2 Q3 Q4 H1 H2 2.2 2.2 1.9 1.9 2.8 2.6 2.6 2.6 2.8 2.8 Advanced Foreign Economies 0.9 Previous Tealbook 0.9 Canada 1.6 Euro Area 0.7 Japan -0.4 United Kingdom 2.3 0.4 0.5 0.0 0.6 0.8 1.5 2.1 1.9 1.6 1.9 2.9 3.1 1.4 1.5 1.7 1.4 0.7 3.0 Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 3.0 3.0 2.1 1.8 5.3 5.8 3.3 3.1 3.4 3.9 2.0 4.6 3.5 3.4 3.0 4.1 3.6 5.5 1. Total Foreign Previous Tealbook 2. 2014 Q1 3.3 3.3 3.2 3.5 3.2 7.0 Int’l Econ Devel & Outlook Percent change, annual rate * CPI aggregates weighted by shares of U.S. non-oil imports. Foreign Monetary Policy AFE Policy Rates AFE Central Bank Balance Sheets Percent Japan Euro area Canada United Kingdom Percent of GDP 3.0 Japan Euro area Canada United Kingdom 2.5 EME Policy Rates Percent 45 Korea Brazil Mexico 40 14 12 35 10 2.0 30 25 8 20 6 1.5 1.0 15 4 10 0.5 2 5 0.0 2009 2011 2013 2015 0 2008 2010 Page 37 of 81 2012 0 2009 2011 2013 2015 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Recent Foreign Indicators Nominal Exports Industrial Production Jan. 2008 = 100 Int’l Econ Devel & Outlook Foreign AFE EME* Jan. 2008 = 100 140 Foreign AFE* EME** 130 115 120 110 110 105 100 100 90 95 80 90 70 85 60 2008 2009 2010 2011 2012 120 2013 80 2008 * Excludes Venezuela. 2009 2010 2011 2012 2013 * Excludes Australia and Switzerland. ** Excludes Colombia, Hong Kong, the Philippines, and Venezuela. Retail Sales Employment 12-month percent change Foreign AFE* EME** 4-quarter percent change 15 Foreign AFE EME* 5 4 10 3 2 5 1 0 0 -1 -5 2008 2009 2010 2011 2012 2013 * Excludes Australia and Switzerland. ** Includes Brazil, China, Indonesia, Korea, Singapore, and Taiwan. Consumer Prices: Advanced Foreign Economies 12-month percent change Headline Core* -2 2008 2009 2010 2011 2012 2013 * Excludes Argentina and Mexico. Consumer Prices: Emerging Market Economies 12-month percent change 10 Headline Ex. food--East Asia Ex. food--Latin America 8 5 4 6 3 4 2 2 1 0 0 -2 -1 2008 2009 2010 2011 2012 2013 -4 2008 Note: Excludes Australia, Sweden, and Switzerland. * Excludes all food and energy; staff calculation. Source: Haver Analytics and CEIC. Page 38 of 81 2009 2010 2011 2012 2013 Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 Evolution of Staff’s International Forecast Total Foreign GDP Percent change, Q4/Q4 6 5 2012 2015 2014 2013 2016 4 2 1 6/15 2011 8/3 9/14 10/26 12/7 1/18 2012 3/7 4/18 6/13 7/25 9/5 10/17 12/5 1/23 2013 3/13 4/24 6/12 7/24 9/11 10/23 12/11 0 Tealbook publication date Total Foreign CPI Percent change, Q4/Q4 4.0 3.5 2012 2016 2015 2014 2013 3.0 2.5 2.0 1.5 1.0 0.5 6/15 2011 8/3 9/14 10/26 12/7 1/18 2012 3/7 4/18 6/13 7/25 9/5 10/17 12/5 1/23 2013 3/13 4/24 6/12 7/24 9/11 10/23 12/11 0.0 Tealbook publication date U.S. Current Account Balance Percent of GDP 0 -1 2012 2013 2016 2015 -2 -3 -4 2014 -5 6/15 2011 8/3 9/14 10/26 12/7 1/18 2012 3/7 4/18 6/13 7/25 9/5 10/17 Tealbook publication date Page 39 of 81 12/5 1/23 2013 3/13 4/24 6/12 7/24 9/11 10/23 12/11 -6 Int’l Econ Devel & Outlook 3 Class II FOMC - Restricted (FR) Authorized for Public Release Int’l Econ Devel & Outlook (This page is intentionally blank.) Page 40 of 81 October 23, 2013 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Financial Developments Largely in response to expectations for more-accommodative monetary policy, conditions in domestic financial markets eased, on balance, over the intermeeting period, with longer-term interest rates lower, stock prices higher, and the foreign exchange value of the dollar down. That said, financial markets—particularly the Treasury bill and shortterm funding markets—were adversely affected for a time by investors’ concerns about the outcome of the fiscal standoff and uncertainty about its effects on the economy; however, strains eased quickly after a deal was reached in the Congress on October 16. (See the box “Financial Market Effects of the U.S. Fiscal Standoff.”) • Investors pushed out their anticipated timing of a change in monetary policy—both the first reduction in the pace of asset purchases and the first hike in the target federal funds rate—in response to three factors: Federal Reserve communications at the time of the September FOMC meeting, which were seen as more accommodative than expected; uncertainty about the economic outlook and the fiscal situation in coming months; and somewhat • Borrowing by nonfinancial businesses slowed somewhat during the fiscal standoff amid increased market volatility; however, access to credit remained ample for large firms, and equity prices rose, on net, over the intermeeting period. • Household financial flows appeared little affected by the fiscal standoff. House prices showed further improvement in August, while mortgage rates declined about 45 basis points over the intermeeting period. • Financial conditions also eased in the advanced foreign economies on balance: Equity prices moved higher, sovereign bond yields fell, and expectations for policy rates declined. In emerging market economies (EMEs), financial conditions continued to improve. Page 41 of 81 Financial Developments weaker-than-expected economic data releases. Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Financial Market Effects of the U.S. Fiscal Standoff Investors began to focus on the U.S. debt ceiling debate as the October 17 deadline announced by the Treasury approached.1 Market participants reportedly anticipated that the Treasury would run out of cash by the end of October if the debt ceiling was not raised. Reflecting these concerns, yields on Treasury bills maturing between mid‐October and early November rose sharply (top‐left figure on the following page), some Treasury bill auctions in early October saw reduced demand, and liquidity in the T‐bill market deteriorated, especially for certain securities that were seen as “at risk” of delayed payment. In addition, one‐ and five‐year U.S. sovereign credit default swap (CDS) spreads rose notably, and the CDS curve inverted, as in 2011.2 In the weeks leading up to the deadline, implied volatility in the equity market rose considerably, but the S&P 500 index declined only marginally and for a brief period, a notable contrast with 2011, when debt ceiling concerns were compounded in part by the escalating fiscal and financial crisis in Europe. Financial Developments Conditions in secured dollar funding markets were particularly strained for a time. Overnight general collateral (GC) repo rates on Treasury and agency MBS collateral rose markedly (top‐right figure on the following page), reaching highs similar to those seen in 2011, and term repo rates also moved higher. Rates implied by general collateral financing futures for October and November also rose notably. Rates on unsecured commercial paper (CP) rose sharply as well, and financial CP outstanding declined in the days immediately before the deadline. By contrast, federal funds and Eurodollar markets showed little reaction to debt ceiling concerns. Outflows from institutional taxable money market funds (MMFs) accelerated in the two weeks leading up to the October 17 deadline, although the magnitude of these outflows, at roughly $70 billion in aggregate, was somewhat smaller than in 2011 (bottom figures on the following page).3 Market participants noted that the sharp rise in short‐dated T‐bill yields likely was due in part to MMFs offloading at‐risk securities, and the funds’ aggregate holdings of Treasury securities declined notably in the two weeks prior to the deadline.4 MMFs also pared back holdings of CP leading up to the deadline. Consistent with these flows, deposit balances appeared to rise sharply at custodian banks.5 1 The Treasury had been operating under a debt issuance suspension period and using extraordinary measures to avoid breaching the debt limit since May 20, 2013. Treasury Secretary Lew stated in a letter to the Congress on August 26, 2013, that the Treasury expected to exhaust extraordinary measures in the middle of October and revised the estimated date to “no later than October 17” in a follow‐up letter on September 25, 2013. 2 U.S. CDS are not very liquid, as indicated by the infrequent quotes and wide average bid–asked spreads in the market. Market participants note that U.S. CDS are often traded to hedge positions or to take macro views rather than for hedging sovereign risk. 3 In the two weeks before the 2011 debt ceiling deadline, institutional U.S. government MMFs had net outflows of $63 billion, while institutional prime funds had $67 billion in net outflows. Over a similar period prior to the October 17, 2013, deadline, institutional government and prime funds had net outflows of $54 billion and $19 billion, respectively. 4 As of September 30, 2013, MMFs’ holdings included $156 billion in securities maturing between October 17 and November 15 and another $125 billion in securities maturing later in 2013. 5 See note 4 in the main text of the Financial Developments section. Page 42 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 The debt ceiling impasse also raised some operational issues. There had been reports of market participants considering amending legal documentation in repo contracts to exclude certain at‐risk securities from eligibility as collateral. Some central clearing counterparties also apparently considered whether to prohibit members from providing as collateral Treasury securities perceived to be at risk of delayed payment. Three exchanges announced other margin and haircut changes.6 In addition, investors expressed some uncertainties about the eligibility of at‐risk securities at the Federal Reserve’s discount window and in open market operations. Financial Developments Shortly after the agreement to raise the debt ceiling was reached on October 16, strains in Treasury bill and secured funding markets eased significantly and institutional MMF assets rebounded smartly. U.S. sovereign CDS spreads also declined somewhat. Nonetheless, market participants noted the potential for financial market strains to reemerge leading up to the next debt ceiling deadline in 2014.7 6 The Hong Kong Exchange increased haircuts on U.S. Treasury bills from 1 percent to 3 percent on October 10, while the Intercontinental Exchange raised haircuts on U.S. Treasury notes and bonds on October 17. On October 15, the Chicago Mercantile Exchange announced a temporary increase in margin requirements on over‐ the‐counter interest rate swaps. 7 The debt ceiling was raised through early February, although the Treasury Department’s use of extraordinary measures could extend the deadline considerably further. Page 43 of 81 Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 Policy Expectations and Treasury and Agency MBS Yields Selected Interest Rates Implied Federal Funds Rate Percent Percent 3.2 Sept. FOMC 10-year Treasury yield (left scale) June 2015 Eurodollar (right scale) 3.0 Percent 4 1.6 Mean: Oct. 22, 2013 Mean: Sept. 17, 2013 Mode: Oct. 22, 2013 Mode: Sept. 17, 2013 1.4 2.8 3 1.2 2.6 2 2.4 1.0 Oct. 22 2.2 1 0.8 2.0 0 0.6 1.8 2014 1.6 0.4 May June July Aug. Sept. 2013 2017 Distribution of Modal Timing of First Rate Increase Percent from the Desk’s Dealer Survey Option-Implied Interest Rate Volatility Basis points 180 Sept. FOMC 2016 Note: Mean is estimated using overnight index swap quotes. Mode is estimated from the distribution of federal funds rate implied by interest rate caps. Both include a term premium of zero basis points per month. Source: Bloomberg; CME Group. Oct. Source: Bloomberg. Long-term rate Short-term rate 2015 50 Recent: 21 respondents Sept. FOMC: 21 respondents 45 160 40 140 35 120 30 25 100 Financial Developments Daily Oct. 22 20 80 15 60 10 5 40 2010 2011 2012 0 2013 Q4 Q1 Q2 2013 Note: Implied volatility of the long-term rate is based on options on the 10-year swap rate that expire in 6 months, while the short-term rate is based on options on the 1-year swap rate that expire in 2 years. Source: Staff calculations from Bloomberg data. Q3 Q4 Q1 2014 Q2 Q3 Q4 Q1 2015 Q2 Q3 Q4 2016 Source: Desk’s dealer survey from October 22, 2013. Treasury Yield Curve Inflation Compensation Percent Percent 4.5 Most recent: October 22, 2013 Last FOMC: September 17, 2013 4.0 4 Daily Sept. FOMC 5 to 10 years ahead 3.5 3 3.0 2.5 2 2.0 Oct. 22 1.5 1.0 1 Next 5 years* 0.5 0.0 1 3 5 7 10 20 Years ahead 0 2010 2011 2012 2013 Note: Estimates based on smoothed nominal and inflationindexed Treasury yield curves. * Adjusted for lagged indexation of Treasury inflationprotected securities (carry effect). Source: Barclays PLC; staff estimates. Note: Smoothed yield curve estimated from off-the-run Treasury coupon securities. Yields shown are those on notional par Treasury securities with semiannual coupons. Source: Federal Reserve Board. Page 44 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 POLICY EXPECTATIONS AND TREASURY AND AGENCY MBS YIELDS Implied rates on money market futures contracts and Treasury yields declined sharply on the September FOMC announcement, the release of results from the Summary of Economic Projections, and the press conference, which market participants viewed as more accommodative than expected. Investors had reportedly put fairly high odds on a reduction in the pace of asset purchases at the September meeting and so were surprised by the FOMC’s decision to “await more evidence that progress will be sustained before adjusting the pace of its purchases.” Implied volatility on interest rate options that expire within three to six months moved markedly lower, while implied volatility on interest rate options that expire at longer horizons declined by less. Intermediate- and longer-term interest rates subsequently fluctuated within narrow ranges amid limited and mixed domestic data releases, as investors increasingly focused on the fiscal standoff and its implications for monetary policy. Toward the end of the period, interest rates declined in response to the delayed and somewhat weaker-thanexpected September employment report. Other FOMC communications during the intermeeting period, including the September FOMC minutes, were reportedly viewed as largely in line with expectations and elicited limited reactions in financial markets. Over quotes shifted down and flattened, with the rate at the end of 2015 falling about 40 basis points. 1 This decline likely reflected, in part, lower term premiums associated with reduced intermediate-term uncertainty on the policy rate, as implied volatilities on swaptions with short-term underlying interest rates and on options on Eurodollar futures moved markedly lower. Based on an assumption of a term premium of zero basis points per month, OIS quotes suggest that investors now expect liftoff to occur around the second quarter of 2015 and the federal funds rate to rise about 20 basis points per quarter for the subsequent two years. Consistent with the market-based quotes, median responses to the Open Market Desk’s October Survey of Primary Dealers, which was closed after the release of the September employment report, indicated that dealers pushed out their projected liftoff date for the federal funds rate and revised down the subsequent path of the policy rate relative to the September survey. The fraction of dealers expecting a liftoff in the first 1 The effective federal funds rate averaged 9 basis points over the intermeeting period, with the intraday standard deviation averaging about 5 basis points. Page 45 of 81 Financial Developments the period as a whole, the federal funds rate path implied by overnight index swap (OIS) Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 Treasury and Agency Finance and Market Functioning Nominal Treasury Issuance and Fed Purchases Agency MBS Issuance and Fed Purchases Billions of dollars Monthly rate Gross issuance Net issuance Fed purchases by settlement date H1 H2 H1 H2 H1 July Sept. H2 Q2 Q1 Aug. 2009 2010 2011 2012 Billions of dollars 400 350 300 250 200 150 100 50 0 -50 -100 2013 250 Monthly rate Gross issuance Net issuance Fed purchases by settlement date 200 150 H2 H1 H2 H1 July Q1 Q2 Aug. Sept. 50 0 -50 2009 2010 2011 2012 2013 Note: Excludes bills. Source: U.S. Department of the Treasury; Federal Reserve Bank of New York. Note: Issuance and purchases of 30-year fixed-rate agency MBS. Source: Federal Reserve Bank of New York. Average Nominal On-the-Run Daily Bid-Asked Cents per 100 dollars Spread Treasury and MBS Trading Volume Trillions of dollars 9 2-year 5-year 10-year 30-year 5-day moving average Sept. FOMC 100 H2 H1 8 3.0 Monthly average of weekly volume 7 2.5 Treasury securities 6 2.0 5 Oct. 22 4 Oct. 1.5 Financial Developments 3 2 1 1.0 MBS 0 2009 2010 2011 2012 2013 0.5 2005 2007 2009 2011 2013 Note: Series contain breaks and are considered more reliable starting on January 1, 2010 (indicated by the dashed vertical line), and going forward. Source: BrokerTec. Note: Excludes bills. Source: Federal Reserve Board, FR 2004, Government Securities Dealers Reports. Agency MBS Fails Dollar-Roll-Implied Financing Rates (Front Month), Percent Fannie Mae 30-Year Billions of dollars Billions of dollars 2500 4-week moving average 200 Fails charge Fails charge announced implemented Fails charge announced 2 Fails charge implemented 160 2000 1 Oct. 22 4.0 percent coupon 120 1500 0 80 1000 Net fails (right scale) 500 40 Gross fails (left scale) 2008 2009 2010 2011 2012 -1 -2 0 Oct. 9 0 3.5 percent coupon -40 2013 -3 2011 Note: Par value. Gross fails are the sum of fails-to-receive and fails-to-deliver, while net fails are the difference. Source: Federal Reserve Board, FR 2004, Government Securities Dealers Reports. Page 46 of 81 Source: J.P. Morgan. 2012 2013 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 half of 2015 declined notably, while the fraction expecting a liftoff in the fourth quarter of that year rose significantly. In addition, survey respondents pushed out the timing of the first reduction in the pace of asset purchases into 2014, consistent with results from recent surveys conducted by private-sector institutions. While dealers placed only a 10 percent probability on a reduction in the purchase pace later this year and an additional 20 percent on a reduction at the January meeting, they assigned about a 35 percent chance on the March 2014 meeting and another 30 percent chance on the meetings later next year. The total amounts of Treasury and MBS purchases during 2013 and 2014 were projected to be around $840 billion and $760 billion, respectively, $200 billion and $175 billion higher than at the time of the September survey and $125 billion and $80 billion higher than at the time of the “flash” survey conducted immediately following the September meeting. Five-, 10-, and 30-year Treasury yields dropped about 30, 30, and 20 basis points, respectively, on net, over the intermeeting period. Decreases in forward rates were particularly pronounced at three- to five-year horizons, suggesting the largest change in expectations about the federal funds rate in that time frame. The reduction in longer-term Treasury yields since the September FOMC meeting than the 10-year Treasury yield, while the option-adjusted spread for production-coupon MBS tightened noticeably. On net, 30-year conforming mortgage rates ended the period about 45 basis points lower at 4.0 percent. In addition, yields on Treasury inflationprotected securities (TIPS) declined about in line with their nominal counterparts, leaving TIPS-based inflation compensation little changed over the intermeeting period. TREASURY AND AGENCY FINANCE AND MARKET FUNCTIONING The Desk conducted outright purchases of Treasury securities and agency MBS as planned, and the operations did not appear to have material adverse effects on market functioning. 2 2 Over the intermeeting period, the Desk purchased $54 billion of Treasury securities under the flow-based Treasury purchase program and $67 billion of agency MBS under the flow-based MBS program and the reinvestment program. Page 47 of 81 Financial Developments was reflected in other longer-term rates. Agency MBS yields declined somewhat more Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 Equity Prices and Business and Municipal Finance S&P 500 Stock Price Index Selected Components of Net Debt Financing, Nonfinancial Firms Billions of dollars Sept. 17, 2013 = 100 Sept. FOMC Daily Oct. 22 120 Monthly rate e Q3 110 H1 100 90 Bonds C&I loans* Commercial paper* 80 70 Total 60 2011 2012 2013 2009 Source: Bloomberg. 2012 2013 Institutional Leveraged Loan Issuance Basis points Daily 2011 e Staff estimate of net corporate bond issuance. * Period-end basis, seasonally adjusted. Source: Depository Trust & Clearing Corporation; Thomson Reuters Financial; Federal Reserve Board. Corporate Bond Spreads 400 2010 100 80 60 40 20 0 -20 -40 -60 -80 -100 Basis points Sept. FOMC 10-year high-yield (right scale) 350 Billions of dollars 900 800 Annual rate Q1 Q2 Refinancing New money 650 750 600 300 500 Q3 450 Financial Developments 250 Oct. 22 200 300 350 150 10-year BBB (left scale) 150 0 200 2011 2012 2013 2001 2003 2005 2007 2009 2011 Note: Spreads over 10-year Treasury yield. Source: Staff estimates of smoothed corporate yield curves based on Merrill Lynch data and smoothed Treasury yield curve. 2013 Source: Thomson Reuters LPC LoanConnector. U.S. CLO Issuance Municipal Bond Yield Ratio Billions of dollars 20-year general obligation 125 Annual rate 100 Weekly Over Treasury+ Ratio Sept. FOMC 1.8 1.6 1.4 75 Oct. 17 50 1.2 1.0 25 0.8 Over corporates++ 0 2001 2003 2005 2007 2009 2011 Note: CLO is collateralized loan obligation. * Annualized year-to-date 2013 data. Source: Thomson Reuters LPC LoanConnector. 0.6 2007 2008 2009 2010 2011 2012 2013 2013* + Bond Buyer GO 20-year index over 20-year Treasury. ++ Bond Buyer GO 20-year index over estimated AAA 20-year yield. Source: Bond Buyer; Merrill Lynch. Page 48 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Notwithstanding the strains in the Treasury bill market during the fiscal standoff, liquidity conditions in the Treasury coupon security market remained within historical ranges over the intermeeting period. In particular, the Desk saw no evidence of a material increase in securities considered at risk of delayed payment being offered into its securities lending or purchase operations during the fiscal standoff. Liquidity conditions in the agency MBS market improved modestly further following the deteriorations seen during the summer, although they remain below long-term averages. Dollar-roll-implied financing rates for 30-year Fannie Mae 3.5 percent and 4 percent coupon securities increased and stayed near their recent high levels, consistent with limited settlement pressures. EQUITY PRICES AND BUSINESS AND MUNICIPAL FINANCE The S&P 500 index increased 2.9 percent over the period despite elevated volatility during the fiscal standoff. Share prices for nonfinancial firms have slightly outperformed the broader market, increasing 3.0 percent over the same period. Thirdquarter earnings reports for nonfinancial firms have been coming in, on balance, about as expected and suggest only modest growth on a seasonally adjusted basis relative to the Despite a temporary slowing of business borrowing during the fiscal standoff, financial markets generally remained accommodative. Issuance of nonfinancial corporate bonds and commercial paper, which had been particularly strong in September, weakened temporarily in October amid the elevated financial market volatility. Nevertheless, financing conditions for larger firms eased somewhat over the intermeeting period, as corporate bond yields declined a little more than longer-term Treasury yields, leaving both investment- and speculative-grade corporate bond spreads moderately narrower over the period. Smoothing through the monthly moves, our most recent data indicate that commercial and industrial (C&I) loans continued to advance, on balance, in the third quarter at about the pace posted in the previous quarter. More recently, C&I loans jumped temporarily in early October as some banks reported funding firms’ precautionary draws on credit lines. In response to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), a modest net fraction of banks indicated they had eased standards on C&I loans over the third quarter, and survey respondents reportedly continued to ease many of the surveyed loan terms on net. Page 49 of 81 Financial Developments second quarter. Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 Household Finance Prices of Existing Homes Mortgage Rate and MBS Yield Index peaks normalized to 100 Percent 110 Monthly Zillow Sept. FOMC 30-year conforming fixed mortgage rate Daily 5.5 5.0 100 4.5 Aug. 90 FHFA 4.0 Sep. Aug. July CoreLogic Oct. 22 80 3.0 MBS yield 70 2.5 20-city S&P/Case-Shiller 60 2005 2007 2009 2011 2.0 2013 2010 Source: For FHFA, Federal Housing Finance Agency; for CoreLogic, CoreLogic; for S&P/Case-Shiller, Standard & Poor’s; for Zillow, Zillow. 2011 2012 2013 Note: The MBS yield is the Fannie Mae 30-year current-coupon rate. Source: For MBS yield, Barclays; for mortgage rate, Loansifter. Consumer Credit Purchase and Refinance Activity Mar. 16, 1990 = 100 600 Percent change from a year ago 12000 MBA Purchase Index (left scale) 500 3.5 24 Monthly 400 20 Student loans 10000 16 12 8000 8 Financial Developments 300 6000 MBA Refinance Index (right scale) 200 Aug. 4 0 4000 Oct. 18 100 Auto -4 -8 2000 -12 Credit cards 0 0 2001 2004 2007 2010 2013 2007 2008 2009 2010 2011 2012 2013 Note: The data are not seasonally adjusted. Source: Federal Reserve Board. Note: The data are weekly and seasonally adjusted by FRB staff. Source: Mortgage Bankers Association. Credit Card Solicitation Mail Volume Gross Consumer ABS Issuance Millions of mailings Billions of dollars 800 Monthly 700 Student loan Credit card Auto Monthly rate 600 400 H1 H2 Q1 Q2 July Sept. Aug. 300 8 4 100 Oct.* 0 2005 *Break in series. Source: Mintel. 2007 2009 12 200 * 2003 20 16 500 Aug. 24 2011 2013 2007 2009 2011 2013 *Month-to-date data as of October 18. Source: Inside MBS & ABS; Merrill Lynch; Federal Reserve Board. Page 50 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 However, banks reported no significant change in demand for C&I loans. (See the memo “The October 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices,” which will be distributed to FOMC participants on October 24, 2013.) Leveraged loan issuance continued to be robust in September, boosted by a number of M&A and LBO transactions. In the first three quarters of the year, issuance of collateralized loan obligations reached $80 billion at an annual rate, similar to the pace seen prior to the financial crisis. Financing conditions in commercial real estate (CRE) markets continued to improve slowly. CRE loans at banks rose moderately in September and early October, and banks again indicated in the SLOOS that they had eased standards on CRE loans over the past three months. CMBS issuance remained strong, as fundamentals in the CRE market continued to improve gradually. Funding conditions in the municipal bond market improved on balance. Outflows from tax-exempt bond funds slowed. Issuance for new capital projects remained solid, while refunding issuance declined amid elevated financial market volatility related to the fiscal standoff. Yields on 20-year general obligation municipal bonds decreased largely in line with long-term Treasury yields, leaving the ratio between the yields of municipal the yield on general obligation bonds issued by Puerto Rico rose to a new high over the intermeeting period as investors continued to avoid those securities amid increasing concern over the territory’s fiscal situation. Tax-exempt bond mutual funds are important investors in bonds issued by Puerto Rican government entities. Money market funds also own Puerto Rican debt, but most of those holdings are insured by large U.S. or global banks. HOUSEHOLD FINANCE Developments affecting financing for the household sector were generally favorable over the intermeeting period. 3 House prices posted further gains in August but increased at a slower pace relative to the beginning of the year. New delinquencies on 3 The government shutdown is expected to have had little impact on mortgage originations and issuance. The effect of scaled-down FHA and Ginnie Mae operations is expected to be modest, and the GSEs temporarily extended the time allowed for income verification through the IRS to the loan delivery date. Page 51 of 81 Financial Developments bonds and Treasury securities of comparable maturities little changed on net. In contrast, Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 July survey Quarterly 100 80 60 40 20 0 -20 -40 Standards Demand -60 -80 -100 Tightening/stronger Net percent Change in Standards and Demand across Net percent Residential Real Estate Loans July survey Standards Demand Quarterly 80 40 20 0 -20 -40 -60 -80 -100 1993 1997 2001 2005 2009 2013 Note: A composite index that represents the net percentage of loans on respondents’ balance sheets that were in categories for which banks reported tighter lending standards or stronger loan demand over the past 3 months, with results weighted by survey respondents’ holdings of loans in each category. Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices. 1993 1997 2001 2005 2009 2013 Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices. Change in Bank Credit Net Unrealized Gains on Available-for-Sale Billions of dollars Securities at Commercial Banks Percent 100 60 Easing/weaker Change in Standards and Demand across Core Loan Categories Easing/weaker Tightening/stronger Banking Developments and Money 50 3-month change, s.a.a.r. Total bank credit C&I loans Oct. 30 Weekly, s.a. Oct. 16 20 10 25 0 -25 0 Financial Developments -50 All commercial banks Banks in top 4 BHCs -10 -75 -20 -100 -30 2005 2007 2009 2011 2013 Note: The data have been adjusted to remove the estimated effects of certain changes to accounting standards and nonbank structure activity of $5 billion or more. C&I is commercial and industrial loans. Source: Federal Reserve Board. 2000 2003 2006 2009 2012 Cumulative Change in Reserve Balances of Custodial Banks around Debt Ceiling Deadlines Growth of M2 and Its Components Percent, s.a.a.r. M2 1997 Note: The top 4 BHCs are Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Source: Federal Reserve Board. Billions of dollars Daily Liquid deposits Small time deposits Retail MMFs Curr. t = Aug. 2, 2011 t = Oct. 17, 2013 Debt ceiling deadline 150 125 100 2012 7.6 11.3 -16.9 -5.3 9.0 2013:H1 4.7 6.4 -14.5 .3 6.0 50 2013:Q3 7.4 9.2 -22.1 11.1 8.1 25 Sept. 5.7 6.7 -19.6 10.0 7.7 0 Note: Retail MMFs are retail money market funds. Source: Federal Reserve Board. 75 -25 t-10 t-8 t-6 t-4 t-2 t t+2 t+4 t+6 Note: Data extend through October 22, 2013. The 2011 crisis period was also affected by typical month-end inflows to custodians. Source: Federal Reserve Board. Note: The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. Page 52 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 mortgages stayed near historical lows, owing in part to the tight underwriting standards for new mortgages that have prevailed over the past several years. Mortgage rates declined about 45 basis points over the intermeeting period but are still about 70 basis points above their early-May lows, and the higher rates continued to weigh on mortgage refinancing applications. Purchase applications moved a bit lower, although, on a seasonally adjusted basis, they remained only about 6 percent below their levels prior to the rise in mortgage rates last spring and summer. Respondents to the SLOOS also indicated that they had experienced a much smaller decline in purchase applications than refinancing applications since the spring. Moreover, a large fraction of banks reported having eased standards on home-purchase loans to prime borrowers, on net, though comments from some banks suggest that the easing was narrowly concentrated in specific sectors. Nonmortgage credit flows were little changed in August relative to earlier in the summer. Auto loans and student loans continued to expand at a robust pace, while credit card debt stayed about flat—a pattern consistent with changes in bank credit through early October. In the October SLOOS, a moderate fraction of banks reported having eased standards on, and experienced stronger demand for, credit card and auto loans on balance. More generally, auto credit remained widely available, even for subprime loans. but underwriting standards for such loans reportedly remained tight compared with longer-term norms. Consumer ABS issuance stayed robust during the third quarter but slowed noticeably in early October, reflecting in part some deals being delayed amid heightened market uncertainty related to the fiscal standoff. BANKING DEVELOPMENTS AND MONEY Bank credit declined slightly during the third quarter. Growth of core loans slowed, primarily because of a sizable decline in outstanding balances of closed-end residential mortgages on banks’ books. The reduction in mortgage refinancing activity likely reduced the stock of loans held by banks prior to securitization. Banks’ securities holdings declined sharply, likely reflecting in part sales in response to the rise in longerterm interest rates in the third quarter. Consistent with the reduction in longer-term interest rates since the September FOMC meeting, unrealized losses on securities held in banks’ available-for-sale portfolios declined. Page 53 of 81 Financial Developments Credit card solicitation mail volume moved sideways at moderate levels through August, Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Foreign Developments AFE 10-Year Nominal Benchmark Yields Percent Sept. FOMC Daily Germany United Kingdom Canada Policy Expectations Based on OIS Rates Percent 1.4 Most recent: October 23, 2013 Previous FOMC: September 17, 2013 1.2 3.5 3.0 1.0 2.5 0.8 Oct. 23 2.0 United Kingdom 1.5 Euro area 0.6 0.4 0.2 1.0 Sep Nov 2012 Jan Source: Bloomberg. Mar May 2013 Jul Sep 0.0 2014 2015 Source: Bloomberg. Flows to Emerging Market Economies Funds Stock Price Indexes Aug. 1, 2012 = 100 Sept. FOMC Daily MSCI Emerging Markets DJ Euro Stoxx Euro Bank Stoxx Billions of dollars 200 185 Sept. FOMC Weekly Equity funds Bond funds 170 Financial Developments 155 140 Oct. 23 125 110 95 80 Sep Nov 2012 Jan Source: Bloomberg. Mar May 2013 Jul Sep Sep Nov 2012 Jan Mar May 2013 Jul 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14 Sep Source: Emerging Portfolio Fund Research. Dollar Exchange Rate Indexes Aug. 1, 2012 = 100 Daily Advanced foreign economies Emerging market economies Broad Sept. FOMC 109 Foreign Net Purchases of U.S. Treasury Securities Billions of dollars, annual rate Official Private 107 H1 Q1 600 500 H2 400 105 Aug. 300 103 200 101 100 Q2 99 Oct. 23 0 97 July 95 Sep Nov 2012 Jan Mar May 2013 Jul Sep -100 -200 2011 2012 Source: TIC data adjusted for staff estimates. Source: Federal Reserve Board; Bloomberg. Page 54 of 81 2013 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Third-quarter earnings reports for large banks generally met or exceeded analysts’ modest expectations. Earnings were reduced by elevated litigation expenses and weak trading income. Banks also reported flat or lower net interest margins and substantially lower revenue in mortgage banking due to lower refinancing volumes, with several announcing sizable reductions in mortgage staff. However, the release of loan loss reserves due to substantial improvements in credit quality, especially for residential mortgages, continued to support bank profitability. Preliminary data indicate that M2 growth picked up temporarily in the days leading up to the debt ceiling deadline, after growing moderately in September. Deposits appeared to increase sharply at major custodian banks as institutional investors shifted from money fund shares to bank deposits, and as money funds liquidated short-dated Treasury securities and increased their bank deposits in anticipation of possible redemptions. 4 These inflows to M2 are estimated to have quickly reversed following the October 16 settlement. FOREIGN DEVELOPMENTS The immediate reaction in foreign financial markets to the September FOMC declining, and the dollar depreciating against most currencies. Although the partial shutdown of the U.S. government and heightened concerns over the debt ceiling temporarily reversed these moves, foreign markets reacted positively to the resolution of the crisis on October 16. Like U.S. Treasury yields, 10-year benchmark yields in Germany, the United Kingdom, and Canada declined, on net, over the period, falling 20 to 30 basis points. Implied future short-term interest rates one to two years ahead also declined for those countries, suggesting that market participants scaled back somewhat their expectations for future monetary policy tightening. Equity market indexes in the advanced foreign economies ended the period higher. Euro-area stock prices outperformed, with bank stock prices rising 10 percent, 4 Reserve balances at major custodian banks rose sharply, which is estimated to have been the result of large deposit inflows, for which data lag. Complete data for the 2011 debt ceiling episode show that increases in deposit and reserve balances at these institutions were synchronous. Page 55 of 81 Financial Developments announcement was substantial, with foreign stock prices rising, yields and spreads Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 led by those in Spain and Italy. In emerging market economies, stock prices have recovered from the financial turmoil of early May and June. Mutual fund flows to emerging markets have stabilized, following large outflows earlier this year. The dollar depreciated about 1 percent over the period, with declines against both advanced economy and emerging market currencies, as market participants pushed out their expectations for the timing of the next change in U.S. monetary policy. In addition, several EMEs continued to intervene to support their currencies, and the central banks of Brazil and India increased their benchmark policy rates. Although demand by some EMEs for U.S. Treasury securities has been weak, particularly in those economies that have been facing depreciation pressures, recent data on custody holdings at the FRBNY suggest that foreign official investors continued to purchase Treasury securities in September and October, notwithstanding concerns about Financial Developments the debt ceiling. Page 56 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Risks and Uncertainty ALTERNATIVE SCENARIOS To illustrate some of the risks to the outlook, we construct a number of alternatives to the baseline projection using simulations of staff models. The first scenario considers the possibility that the substantial decline in the unemployment rate seen over the past year is a more accurate signal of the pace of the recovery than the modest gains in real GDP, and that, going forward, GDP rises more strongly than in the baseline. In the second scenario, by contrast, the combination of steady declines in the unemployment rate and tepid GDP growth in recent years reflects greater damage to the supply side than assumed in the baseline. The third scenario articulates why several of the factors we believe have held down consumer spending growth in the past could be more persistent than we anticipate, preventing the projected acceleration in the baseline from materializing. The fourth scenario considers the risk that the softness in consumer price inflation seen earlier this year reemerges and proves to be more persistent than anticipated. The final two scenarios consider downside and upside risks to the U.S. economy from foreign economic developments—first, that financial stresses experienced by EMEs escalate substantially, and, second, that the pace of economic growth abroad could increase more rapidly than assumed in the baseline. We generate the first four scenarios using the FRB/US model and the last two using the multicountry SIGMA model. In the FRB/US simulations, as in the baseline forecast, the federal funds rate follows an inertial version of the Taylor (1999) rule, subject to the FOMC’s thresholds for the unemployment rate and projected inflation. For the SIGMA simulations, we use a broadly similar policy rule, subject to the same thresholds, but employ an alternative concept of resource utilization. 1 In all cases, we assume that the size and composition of the SOMA portfolio follow their baseline paths. In the staff’s view, recent weakness in GDP growth reflects headwinds that will continue to restrain aggregate demand. However, it is possible that measured GDP may 1 The SIGMA policy rule uses a measure of slack equal to the difference between actual output and the model’s estimate of the level of output that would occur in the absence of slow adjustment of wages and prices. Page 57 of 81 Risks & Uncertainty Faster Recovery Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Alternative Scenarios (Percent change, annual rate, from end of preceding period except as noted) 2013 Measure and scenario Risks & Uncertainty H2 2014 2015 2016 201718 Real GDP Extended Tealbook baseline Faster recovery Supply-side damage Consumer restraint Low inflation EME financial crisis Higher global growth 2.2 2.6 2.1 2.2 2.2 2.1 2.3 3.2 4.0 2.9 2.5 3.0 2.0 3.7 3.5 4.1 2.6 2.3 2.9 3.3 3.8 3.2 3.4 2.0 2.7 3.0 3.6 3.1 2.5 2.4 1.7 2.8 2.9 2.8 2.2 Unemployment rate1 Extended Tealbook baseline Faster recovery Supply-side damage Consumer restraint Low inflation EME financial crisis Higher global growth 7.3 7.3 7.3 7.3 7.3 7.3 7.3 6.6 6.2 6.2 6.8 6.7 7.0 6.4 5.9 5.2 5.1 6.7 6.2 6.5 5.5 5.4 4.6 4.8 6.7 5.9 5.9 5.0 5.1 4.6 5.2 6.2 5.1 5.3 4.9 Total PCE prices Extended Tealbook baseline Faster recovery Supply-side damage Consumer restraint Low inflation EME financial crisis Higher global growth 1.6 1.6 1.6 1.6 1.3 1.3 1.8 1.4 1.4 1.6 1.4 .5 .1 2.1 1.5 1.5 1.9 1.4 .3 1.2 2.2 1.6 1.7 2.0 1.4 .2 1.8 1.9 1.8 1.9 2.2 1.5 .3 2.2 1.7 Core PCE prices Extended Tealbook baseline Faster recovery Supply-side damage Consumer restraint Low inflation EME financial crisis Higher global growth 1.5 1.5 1.5 1.5 1.2 1.5 1.5 1.5 1.5 1.7 1.5 .6 1.1 1.7 1.6 1.6 2.0 1.5 .4 1.3 1.9 1.7 1.8 2.1 1.5 .3 1.7 2.0 1.9 2.0 2.3 1.6 .4 2.1 2.0 Federal funds rate1 Extended Tealbook baseline Faster recovery Supply-side damage Consumer restraint Low inflation EME financial crisis Higher global growth .1 .1 .1 .1 .1 .1 .1 .1 .2 .4 .1 .1 .1 .1 .9 1.7 2.3 .1 .1 .1 1.4 2.0 3.1 3.6 .1 .4 1.2 2.8 3.4 4.5 4.3 1.1 1.3 3.3 4.0 1. Percent, average for the final quarter of the period. Page 58 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 be understating the true strength of the economy, and other indicators—such as GDI and labor market conditions—may be sending a more accurate signal. This scenario adopts a more optimistic view of aggregate demand conditions. With headwinds assumed to be easing more rapidly than in the baseline, a faster, broad-based recovery is able to gain momentum, as improvements in household wealth and consumer and business sentiment boost spending, and the increase in spending, in turn, leads to increased employment, higher incomes, and further spending gains. All told, real GDP rises at an annual pace of 4 percent in 2014 and 2015. The unemployment rate falls below the 6½ percent threshold by the fourth quarter of 2014, prompting liftoff in the federal funds rate one quarter ahead of baseline. Despite tight labor markets, inflation rises only marginally above the baseline, reaching 2 percent in 2018. Supply-Side Damage In this scenario, the observations of sluggish real GDP growth and a falling unemployment rate in recent years indicate not that the estimates of GDP understate the strength of the economy, as in the previous scenario, but rather that the damage to aggregate supply during the past several years is greater than is estimated in the baseline. Accordingly, we assume a slower growth of structural productivity such that potential output has expanded at an annual rate of only 1¼ percent since 2011, ½ percentage point lower than in the baseline, and continues to rise more slowly than in the baseline through 2018. As a result, the current output gap is 1½ percentage points narrower than in the baseline. Real GDP rises at a rate of 2¾ percent per year, on average, through 2015, but the unemployment rate nonetheless continues to decline at roughly the same pace as it has since late 2010—and thus more steeply than in the baseline—and it falls below 6½ percent by the third quarter of 2014. 2 With resource slack substantially narrower and productivity gains smaller than in the baseline, inflation rises to 2 percent in 2016, and the federal funds rate begins to rise from its effective lower bound in the fourth quarter of 2014, two quarters earlier than in the baseline. The staff projects that consumer spending will accelerate appreciably in 2014, based on a judgment that the forces restraining the growth in household expenditures are likely to begin to lift. However, for a number of reasons, the expected acceleration could 2 Although the projection of the unemployment rate is below the baseline, living standards are lower in this scenario as a result of slower productivity growth. Page 59 of 81 Risks & Uncertainty Consumer Restraint Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Forecast Confidence Intervals and Alternative Scenarios Confidence Intervals Based on FRB/US Stochastic Simulations Extended Tealbook baseline Faster recovery Supply−side damage Consumer restraint Low inflation Real GDP EME financial crisis Higher global growth Unemployment Rate 4-quarter percent change Percent 7 10.5 10.0 6 9.5 70 percent interval 5 9.0 4 8.5 8.0 3 7.5 7.0 2 6.5 1 6.0 0 5.5 5.0 −1 4.5 90 percent interval −2 4.0 −3 3.5 3.0 −4 2.5 −5 2008 2010 2012 2014 2016 2.0 2018 2008 PCE Prices excluding Food and Energy 2010 2012 2014 2016 2018 Federal Funds Rate 4-quarter percent change Percent 4.0 8 3.5 7 3.0 6 5 2.5 4 Risks & Uncertainty 2.0 3 1.5 2 1.0 1 0.5 0 0.0 2008 2010 2012 2014 2016 2018 2008 Page 60 of 81 2010 2012 2014 2016 2018 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 be smaller and may not materialize at all. For example, the unexpectedly sluggish recovery to date may indicate that households have become more pessimistic in forming expectations of their permanent income, or less willing to spend out of increases in wealth. In addition, increased financial regulation and the disappearance of certain credit products may permanently reduce credit availability. In this scenario, consumer spending continues to increase at a 2 percent annual pace over the coming years, similar to the pace over the past two years. As a consequence, GDP growth remains subdued relative to the baseline, and the rate of labor market improvement slows significantly. With the unemployment rate lingering above the 6½ percent threshold until 2017, the federal funds rate remains at the effective lower bound for an additional two and a half years. The inflation rate remains almost ½ percentage point below the Committee’s target at the end of the forecast horizon. Low Inflation In the baseline forecast, the low readings on core inflation seen earlier this year are assumed to have been largely transitory, and over the next few years as the recovery continues, inflation gradually moves back toward 2 percent. In this scenario, the recent performance of inflation proves to be a harbinger of a longer-lasting decline in actual inflation, bringing down longer-run inflation expectations and thereby leading to a mutually reinforcing downward dynamic. Inflation is below 1 percent next year and edges down further thereafter, falling close to zero. In this environment, investors become increasingly concerned that the economy is mired in a weak state with price behavior verging on deflation and monetary policy remaining constrained by the effective lower bound for the federal funds rate. As a result, risk premiums rise and put upward pressure on real long-term interest rates, modestly restraining household and business spending and boosting unemployment relative to the baseline over the next few years. The unemployment rate falls below its 6½ percent threshold in the second quarter of 2015, but because inflation is so low, the policy rule does not prescribe the first increase in the federal funds rate until mid-2016. While the unemployment rate is nearing its that inflation remains well below the FOMC’s long-run objective. As a consequence, the pace of rate tightening after liftoff is substantially below that in the baseline. Financial Crisis in the Emerging Market Economies Financial market stresses in the EMEs eased over the intermeeting period and are expected to diminish gradually over the forecast period. However, with investors focused Page 61 of 81 Risks & Uncertainty natural rate by that time, the persistent downward shift in inflation expectations means Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Selected Tealbook Projections and 70 Percent Confidence Intervals Derived from Historical Tealbook Forecast Errors and FRB/US Simulations Measure Real GDP (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations Civilian unemployment rate (percent, Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations PCE prices, total (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations PCE prices excluding food and energy (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations Risks & Uncertainty Federal funds rate (percent, Q4) Projection Confidence interval FRB/US stochastic simulations 2013 2014 2015 2016 2017 2018 2.0 3.2 3.5 3.2 2.7 2.4 1.5–2.5 1.4–2.5 1.5–5.0 1.7–5.0 1.5–5.5 1.7–5.4 ... 1.3–5.2 ... .7–4.8 ... .4–4.6 7.3 6.6 5.9 5.4 5.2 5.1 7.2–7.4 7.1–7.4 5.9–7.3 5.8–7.4 4.9–6.9 4.6–7.2 ... 3.8–7.0 ... 3.5–6.7 ... 3.3–6.7 1.0 1.4 1.5 1.6 1.8 1.9 .8–1.2 .7–1.4 .1–2.6 .5–2.3 .2–2.7 .4–2.5 ... .4–2.7 ... .6–2.9 ... .7–3.1 1.2 1.5 1.6 1.7 1.8 1.9 1.0–1.5 1.0–1.4 .9–2.2 .9–2.1 .8–2.4 .8–2.4 ... .8–2.6 ... .8–2.8 ... .8–3.0 .1 .1 .9 2.0 2.8 3.4 .1–.1 .1–.7 .1–2.4 .1–4.0 .5–5.1 1.1–5.8 Note: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969–2012 set of model equation residuals. Intervals derived from Tealbook forecast errors are based on projections made from 1979 to 2012, except for PCE prices excluding food and energy, where the sample is 1981–2012. . . . Not applicable. The Tealbook forecast horizon has typically extended about 2 years. Page 62 of 81 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 on both EME vulnerabilities and the prospective effects of policy normalization in advanced economies, the risk of a substantial ratcheting up in financial stress in EMEs remains significant. In this scenario, we consider the effects of a financial crisis in one or more of the most vulnerable of these economies, which then spills over to the EMEs more broadly. Sovereign and private borrowing costs in these countries soar, and the confidence of their households and businesses weakens significantly. These events cause EME currencies to depreciate almost 7 percent, on average, against the dollar relative to the baseline, even though EME central banks are assumed to raise policy rates to attenuate capital outflows. All told, real GDP in the EMEs declines 4½ percent relative to the baseline by early 2015. The financial stress in the EMEs is assumed to have some financial spillovers to the rest of the world, including the United States: Corporate bond spreads rise and equity prices decline relative to the baseline, while flight-to-safety flows push down term premiums on government bond yields. In addition, weaker foreign economic activity and the stronger exchange value of the dollar depress U.S. net exports. As a result, U.S. real GDP growth is only 2 percent in 2014, and the unemployment rate stays above 7 percent until the end of 2014 before beginning to gradually decline. With substantially greater resource slack and lower import prices, core U.S. PCE inflation dips to around 1 percent in 2014. Under these conditions, the federal funds rate remains at its effective lower bound through the end of 2015. Higher Global Growth The headwinds facing many of our foreign trading partners—including financial stresses in the EMEs and credit constraints in Europe—may ease more rapidly than envisioned in our baseline, spurring a faster recovery abroad. In this scenario, foreign output expands at an annual pace about 1 percentage point above the baseline through the end of 2015 as improvements in financial conditions and sentiment lead to higher business and household spending. Moreover, the broad real dollar depreciates about 5 percent relative to the baseline as confidence in foreign economies improves and monetary policy abroad tightens. The stronger foreign activity and the weaker dollar rises at a 3¾ percent annual rate in 2014 and 2015, and the unemployment rate falls below 6½ percent by the end of 2014. Higher import prices and stronger activity boost core PCE inflation to close to 2 percent in 2015. The federal funds rate lifts off from its effective lower bound in the first quarter of 2015, one quarter sooner than in the baseline, and rises more quickly thereafter. Page 63 of 81 Risks & Uncertainty cause U.S. real net exports to rise relative to the baseline. As a result, U.S. real GDP Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 Alternative Projections (Percent change, Q4 to Q4, except as noted) 2013 Measure and projection 2014 2015 Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Real GDP Staff FRB/US EDO Blue Chip 2.3 1.7 2.2 2.1 2.0 1.5 2.1 2.0 3.1 1.8 3.0 2.8 3.2 2.2 3.1 2.8 3.4 2.3 3.0 ... 3.5 2.6 3.0 ... Unemployment rate1 Staff FRB/US EDO Blue Chip 7.2 7.4 7.5 7.3 7.3 7.4 7.4 7.3 6.6 7.9 7.3 6.8 6.6 7.4 7.2 6.8 5.8 7.9 7.1 ... 5.9 7.1 7.0 ... Total PCE prices Staff FRB/US EDO Blue Chip2 1.1 1.0 1.1 1.5 1.0 .9 1.1 1.4 1.2 .8 1.4 2.0 1.4 .9 1.3 2.0 1.4 .8 1.5 ... 1.5 1.0 1.5 ... Core PCE prices Staff FRB/US EDO Blue Chip 1.2 1.2 1.2 ... 1.2 1.2 1.2 ... 1.5 1.1 1.4 ... 1.5 1.1 1.3 ... 1.6 1.0 1.5 ... 1.6 1.1 1.5 ... .1 .1 .4 .1 .1 .1 .4 .1 .1 .1 1.4 .2 .1 .1 1.4 .2 .8 .1 2.1 ... .9 .1 2.1 ... Federal funds rate1 Staff FRB/US EDO Blue Chip3 Risks & Uncertainty Note: Blue Chip forecast completed on October 10, 2013. 1. Percent, average for Q4. 2. Consumer price index. 3. Treasury bill rate. ... Not applicable. The Blue Chip forecast typically extends about 2 years. Page 64 of 81 Authorized for Public Release Class II FOMC - Restricted (FR) October 23, 2013 Tealbook Forecast Compared with Blue Chip (Blue Chip survey released October 10, 2013) Real GDP Real PCE Percent change, annual rate 6 Percent change, annual rate 8 5 6 4 5 4 3 3 2 2 1 1 4 4 2 2 0 0 0 0 -2 -2 -1 -1 -2 -2 -3 -3 -4 -4 -5 Blue Chip consensus Staff forecast -4 -6 -4 -6 -8 -8 -5 -10 -10 -6 2008 2009 2010 2011 2012 2013 2014 Note: The shaded area represents the area between the Blue Chip top 10 and bottom 10 averages. 2008 Unemployment Rate 2009 2010 2011 2012 2013 2014 -6 Consumer Price Index Percent 11 10 11 10 Percent change, annual rate 8 8 6 6 4 4 9 9 2 2 8 8 0 0 7 7 -2 -2 -4 -4 -6 -6 -8 -8 6 6 5 5 4 2008 2009 2010 2011 2012 2013 2014 4 -10 2008 Treasury Bill Rate Percent 4 3 3 2 2 1 1 0 0 2008 2009 2010 2011 2010 2011 2012 2013 2014 -10 10-Year Treasury Yield 4 -1 2009 2012 2013 2014 -1 Percent 5.5 5.5 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 2008 2009 2010 2011 2012 2013 2014 Note: The yield is for on-the-run Treasury securities. Over the forecast period, the staff’s projected yield is assumed to be 15 basis points below the off-the-run yield. Page 65 of 81 1.0 Risks & Uncertainty 8 Authorized for Public Release A ssessm en t o f K ey M acroecon om ic R isks (1) Probability of Inflation Events (4 quarters ahead—2014:Q3) Probability that the 4-quarter change in total PCE prices will be ... Staff FRB/US EDO BVAR Greater than 3 percent Current Tealbook Previous Tealbook .03 .02 .01 .01 .06 .06 .05 .04 Less than 1 percent Current Tealbook Previous Tealbook .34 .39 .53 .56 .36 .37 .20 .21 Probability of Unemployment Events (4 quarters ahead—2014:Q3) Probability that the unemployment rate w ill... Staff FRB/US EDO BVAR Increase by 1 percentage point Current Tealbook Previous Tealbook .01 .01 .08 .15 .19 .19 .02 .02 Decrease by 1 percentage point Current Tealbook Previous Tealbook .21 .25 .03 .01 .21 .21 .19 .16 Probability of Near-Term Recession Probability that real GDP declines in each of 2013:Q4 and 2014:Q1 Risks & U n certain ty Current Tealbook Previous Tealbook Staff FRB/US EDO BVAR Factor Model .02 .02 .05 .08 .05 .04 .06 .05 .09 .09 Note: “Staff” represents Tealbook forecast errors applied to the Tealbook baseline; baselines for FRB/US, BVAR, EDO, and the factor model are generated by those models themselves, up to the current-quarter estimate. Data for the current quarter are taken from the staff estimate for the second Tealbook in each quarter; if the second Tealbook for the current quarter has not yet been published, the preceding quarter is taken as the latest historical observation. Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Assessment of Key Macroeconomic Risks (2) Probability that Total PCE Inflation Is above 3 Percent Probability that Total PCE Inflation Is below 1 Percent (4 quarters ahead) (4 quarters ahead) Probability Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 FRB/US BVAR 0 1998 2000 2002 2004 2006 2008 2010 2012 0 1998 Probability that the Unemployment Rate Increases 1 ppt 2000 2002 2004 2006 2008 2010 2012 Probability that the Unemployment Rate Decreases 1 ppt (4 quarters ahead) (4 quarters ahead) Probability Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 0 1998 2000 2002 2004 2006 2008 2010 2012 Probability that Real GDP Declines in Each of the Next Two Quarters Probability 1 .8 .4 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 Note: See notes on facing page. Recession and inflation probabilities for FRB/US and the BVAR are real-time estimates. See Robert J. Tetlow and Brian Ironside (2007), "Real−Time Model Uncertainty in the United States: The Fed, 1996−2003," Journal of Money and Banking , vol. 39 (October), pp. 1533−61. Page 67 of 81 Risks & Uncertainty .6 Class II FOMC - Restricted (FR) Authorized for Public Release Risks & Uncertainty (This page is intentionally blank.) Page 68 of 81 October 23, 2013 2.8 3.7 4.2 4.1 4.2 4.5 4.8 4.8 5.0 5.1 5.2 5.0 3.3 4.1 4.3 4.8 5.1 5.1 3.8 3.7 4.6 5.1 5.0 Quarterly 2013:Q1 Q2 Q3 Q4 2014:Q1 Q2 Q3 Q4 2015:Q1 Q2 Q3 Q4 Two-quarter2 2013:Q2 Q4 2014:Q2 Q4 2015:Q2 Q4 Four-quarter3 2012:Q4 2013:Q4 2014:Q4 2015:Q4 2016:Q4 Page 69 of 81 3.8 3.4 4.7 5.2 5.0 3.0 3.8 4.4 4.9 5.3 5.2 2.8 3.1 4.2 3.3 4.4 4.5 4.9 5.0 5.4 5.2 5.3 5.1 10/23/13 2.0 2.3 3.1 3.4 3.2 2.0 2.5 2.9 3.4 3.4 3.4 1.1 2.9 2.2 2.7 2.7 3.0 3.4 3.3 3.4 3.5 3.5 3.4 09/11/13 2.0 2.0 3.2 3.5 3.2 1.8 2.2 3.1 3.4 3.6 3.5 1.1 2.5 2.2 2.1 3.2 3.0 3.4 3.5 3.6 3.6 3.6 3.4 10/23/13 Real GDP 1.7 1.1 1.2 1.4 1.6 .6 1.6 1.1 1.3 1.4 1.5 1.1 .0 1.9 1.3 1.0 1.2 1.3 1.3 1.4 1.4 1.4 1.5 09/11/13 1.7 1.0 1.4 1.5 1.6 .5 1.6 1.4 1.3 1.4 1.5 1.1 -.1 2.0 1.1 1.5 1.3 1.3 1.3 1.4 1.4 1.5 1.5 10/23/13 PCE price index 1.7 1.2 1.5 1.6 1.7 1.1 1.4 1.5 1.5 1.6 1.6 1.4 .8 1.5 1.3 1.5 1.5 1.5 1.5 1.6 1.6 1.6 1.6 09/11/13 Greensheets 1.8 1.3 1.5 1.6 1.7 1.7 1.2 1.5 1.6 1.7 1.0 1.5 1.6 1.5 1.6 1.6 1.4 .6 1.5 1.4 1.6 1.6 1.5 1.5 1.6 1.6 1.6 1.6 10/23/13 8.1 7.4 6.8 6.1 5.5 -.9 -.6 -.6 -.8 -.5 -.3 -.3 -.3 -.3 -.4 -.4 7.7 7.5 7.3 7.2 7.0 6.9 6.7 6.6 6.4 6.2 6.0 5.8 09/11/13 8.1 7.5 6.9 6.2 5.6 -.9 -.5 -.7 -.7 -.5 -.3 -.2 -.3 -.4 -.4 -.3 7.7 7.5 7.3 7.3 7.1 7.0 6.8 6.6 6.4 6.2 6.1 5.9 10/23/13 Core PCE price index Unemployment rate1 Authorized for Public Release Annual 2012 4.6 4.6 2.8 2.8 1.8 1.8 1.8 2013 3.3 3.1 1.7 1.6 1.2 1.1 1.3 2014 4.3 4.2 2.9 2.8 1.2 1.3 1.4 2015 5.0 5.1 3.4 3.5 1.4 1.4 1.6 2016 5.0 5.1 3.4 3.4 1.5 1.5 1.7 1. Level, except for two-quarter and four-quarter intervals. 2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points. 3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points. 09/11/13 Interval Nominal GDP Changes in GDP, Prices, and Unemployment (Percent, annual rate except as noted) Class II FOMC - Restricted (FR) October 23, 2013 Page 70 of 81 93 97 80 13 87 97 74 13 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Billions of chained (2009) dollars. 94 95 79 15 78 91 65 13 77 90 74 2 74 91 72 2 68 81 66 2 63 69 60 2 65 64 45 18 88 95 75 13 70 83 68 2 59 51 57 2 57 58 33 19 Change in priv. inventories2 Previous Tealbook2 Nonfarm2 Farm2 81 81 62 19 .9 1.0 .0 -.1 .1 1.5 -.8 -.7 -3.8 -4.1 -3.3 1.1 -1.5 -1.9 -4.3 -5.6 -2.2 .3 -2.6 -2.5 -6.8 -7.2 -6.3 .2 -.4 -.5 -3.1 -3.3 -2.7 1.1 -.8 -.7 -3.9 -3.9 -3.9 1.1 -.8 -.8 -3.9 -4.2 -3.4 1.1 -1.0 -.9 -4.2 -4.9 -3.2 1.0 -1.5 -1.5 -4.6 -5.3 -3.6 .4 -1.8 -1.8 -5.1 -5.7 -4.2 .3 -2.1 -2.1 -5.7 -6.3 -4.6 .3 -.6 -2.3 -1.9 -5.4 4.0 .3 -4.2 -2.7 -10.9 -9.5 -13.1 .4 -1.7 -2.5 -6.2 -7.0 -5.0 1.4 -.4 -.4 -1.6 -.6 -3.1 .4 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local Authorized for Public Release 82 75 64 19 -372 -409 6.9 4.7 -394 -428 6.5 5.1 -405 -422 5.1 3.8 -420 -414 3.7 3.0 -389 -426 6.4 4.9 -392 -428 6.7 4.9 -397 -433 6.5 5.8 -395 -425 6.3 4.7 -399 -425 6.0 4.4 -402 -426 5.5 3.7 4.9 5.0 5.5 5.7 2.6 2.5 5.4 5.2 6.1 5.9 2.9 2.7 4.9 4.7 5.6 5.3 2.5 2.7 1.8 2.1 2.4 3.0 -.1 -1.0 5.2 5.3 5.9 6.1 2.9 2.5 5.4 5.2 6.2 6.0 2.9 2.6 5.6 5.2 6.4 5.9 3.0 2.7 5.3 5.1 6.0 5.8 2.8 2.9 5.4 5.3 6.4 6.0 2.3 2.8 5.4 5.6 6.3 6.4 2.1 2.7 5.0 4.9 5.3 5.3 4.0 3.5 3.8 3.2 4.5 3.6 1.6 1.8 3.6 5.1 3.5 5.2 3.9 5.0 4.0 3.7 2.4 3.6 9.6 4.2 -408 -421 4.4 3.3 5.8 8.9 14.1 14.8 17.5 15.8 11.4 10.2 11.2 13.4 13.5 14.6 14.9 15.3 16.8 15.9 18.3 15.9 18.3 16.3 17.7 16.3 15.9 14.7 11.0 12.0 7.8 2.6 -410 -416 4.7 3.9 3.1 3.1 6.3 2.5 2.7 3.8 3.8 8.7 3.0 3.2 3.4 3.6 9.7 2.5 2.6 2.0 2.4 6.7 2.3 1.2 3.6 3.7 8.3 2.9 3.1 3.8 3.8 8.6 3.0 3.2 3.8 3.8 8.7 3.1 3.2 3.8 3.8 9.1 3.0 3.2 3.8 3.8 10.2 2.9 3.1 3.6 3.8 9.8 2.8 2.9 3.2 3.5 9.4 2.4 2.4 2.9 3.3 9.3 2.1 2.2 2.6 3.1 8.1 2.2 1.8 1.5 2.0 6.7 2.6 .3 -410 -408 3.3 .3 3.3 3.5 3.5 3.6 3.7 3.6 4.5 4.4 3.3 3.1 4.2 4.2 1.5 1.7 2.3 2.6 3.6 3.7 4.2 4.4 3.8 3.8 4.4 4.5 3.7 3.5 4.6 4.5 3.8 3.6 4.6 4.5 3.7 3.5 4.6 4.5 3.6 3.4 4.5 4.5 3.0 3.0 4.0 4.2 2.9 2.5 3.5 3.7 2.2 2.5 3.0 3.7 1.4 1.9 2.1 2.3 -425 -406 5.2 4.3 4.7 4.4 1.3 .9 17.6 18.1 Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook 3.2 3.2 3.5 3.4 3.2 3.1 2.0 2.3 3.4 3.4 3.6 3.5 3.6 3.5 3.6 3.4 3.5 3.3 3.4 3.4 3.0 3.0 3.2 2.7 2.1 2.7 2.2 2.2 -424 -420 8.0 6.9 14.2 14.1 Residential investment Previous Tealbook 20161 20151 20141 20131 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 2015 Q3 2014 Net exports2 Previous Tealbook2 Exports Imports 1.8 2.1 6.2 1.6 1.2 2.1 2.4 2.6 2.9 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 2.5 2.9 Q2 Real GDP Previous Tealbook Item 2013 Greensheets Changes in Real Gross Domestic Product and Related Items (Percent, annual rate except as noted) Class II FOMC - Restricted (FR) October 23, 2013 Page 71 of 81 1. Billions of chained (2009) dollars. Greensheets 58 58 66 -7 34 34 40 -4 58 58 69 -7 65 64 45 18 88 95 75 13 70 83 68 2 59 51 57 2 36 36 37 -1 Change in priv. inventories1 Previous Tealbook1 Nonfarm1 Farm1 -148 -148 -146 -2 .9 1.0 .0 -.1 .1 1.5 -.8 -.7 -3.8 -4.1 -3.3 1.1 -1.5 -1.9 -4.3 -5.6 -2.2 .3 -2.6 -2.5 -6.8 -7.2 -6.3 .2 -1.1 -1.1 -2.3 -5.0 2.6 -.3 -3.3 -3.3 -3.9 -4.2 -3.3 -2.8 -1.1 -1.1 3.2 2.0 5.5 -4.0 2.3 2.3 3.9 3.6 4.6 1.3 3.3 3.3 8.4 9.4 6.5 .2 1.8 1.8 2.7 2.5 2.9 1.2 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local Authorized for Public Release -34 -34 -35 1 -372 -409 6.9 4.7 -394 -428 6.5 5.1 -405 -422 5.1 3.8 -420 -414 3.7 3.0 -431 -431 2.4 .1 -446 -446 4.6 3.5 4.9 5.0 5.5 5.7 2.6 2.5 -463 -463 9.8 11.7 5.4 5.2 6.1 5.9 2.9 2.7 -392 -392 .4 -6.2 4.9 4.7 5.6 5.3 2.5 2.7 -547 -547 -2.9 -5.9 1.8 2.1 2.4 3.0 -.1 -1.0 -704 -704 9.8 .7 5.0 5.0 3.9 3.9 9.3 9.3 5.8 8.9 14.1 14.8 17.5 15.8 11.4 10.2 15.5 15.5 5.6 5.6 -5.2 -5.2 -10.8 -10.8 -24.3 -24.3 8.6 8.6 8.7 8.7 8.3 8.3 3.1 3.1 6.3 2.5 2.7 3.8 3.8 8.7 3.0 3.2 3.4 3.6 9.7 2.5 2.6 2.0 2.4 6.7 2.3 1.2 2.0 2.0 7.8 1.6 1.3 2.0 2.0 5.7 .7 1.9 3.1 3.1 9.3 3.3 2.1 -.1 -.1 2.5 .2 -.6 -2.0 -2.0 -12.9 -2.7 .2 8.1 8.1 12.0 12.0 -4.0 -4.0 3.3 3.5 3.5 3.6 3.7 3.6 4.5 4.4 3.3 3.1 4.2 4.2 1.5 1.7 2.3 2.6 2.5 2.5 2.9 2.9 1.8 1.8 3.0 3.0 2.0 2.0 3.5 3.5 -.4 -.4 -2.3 -2.3 -2.2 -2.2 -4.1 -4.1 -12.2 -12.2 -6.0 -6.0 -27.1 -27.1 3.2 3.2 3.5 3.4 3.2 3.1 2.0 2.3 2.0 2.0 2.0 2.0 2.8 2.8 -.2 -.2 -2.8 -2.8 -8.9 -8.9 -11.8 -11.8 -1.2 -1.2 2016 2015 2014 2013 2012 2011 2010 2009 2008 Net exports1 Previous Tealbook1 Exports Imports 7.1 7.1 3.9 3.9 17.1 17.1 -21.3 -21.3 Residential investment Previous Tealbook Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook 1.5 1.5 4.1 .1 1.5 2.0 2.0 .8 .8 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 1.9 1.9 2007 Real GDP Previous Tealbook Item Changes in Real Gross Domestic Product and Related Items (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Class II FOMC - Restricted (FR) October 23, 2013 20161 3.2 3.2 3.3 3.5 3.0 3.1 2.1 2.1 .5 .4 1.2 .2 .4 .6 .6 .5 .6 .1 .1 .2 .2 .9 -.8 .2 .2 .0 .0 .0 .2 -.1 -.2 -.1 .0 20151 3.5 3.4 3.7 3.6 3.8 3.8 2.6 2.6 .7 .5 1.4 .5 .5 .7 .6 .6 .6 .1 .1 .0 .0 .9 -.8 -.1 -.1 -.2 -.2 -.1 .1 -.1 -.2 .0 -.1 20141 3.2 3.1 3.3 3.1 3.5 3.5 2.3 2.5 .7 .4 1.2 .6 .5 .6 .6 .5 .5 .1 .1 .1 -.1 .7 -.6 -.3 -.4 -.3 -.2 -.1 .0 .0 .0 .0 -.1 20131 2.0 2.3 1.5 1.7 2.0 2.2 1.4 1.6 .5 .4 .6 .3 .3 .2 .3 .2 .3 .0 .0 .0 .0 .5 -.5 -.5 -.5 -.5 -.3 -.2 .0 .5 .5 .3 .2 Q4 3.4 3.4 3.6 3.7 3.6 3.7 2.5 2.5 .6 .4 1.4 .4 .5 .7 .7 .6 .6 .1 .1 .1 .0 .9 -.8 -.1 -.1 -.2 -.1 -.1 .1 -.1 -.3 -.1 .0 Q3 3.6 3.5 3.7 3.8 3.8 3.8 2.6 2.6 .7 .5 1.5 .5 .5 .7 .6 .6 .6 .1 .1 .1 .1 .9 -.8 -.1 -.1 -.2 -.2 -.1 .1 -.2 -.2 -.2 .0 Q2 3.6 3.5 3.7 3.5 3.9 3.8 2.6 2.6 .7 .5 1.5 .5 .5 .7 .6 .6 .6 .1 .1 -.1 -.2 .9 -.9 -.1 -.1 -.3 -.2 -.1 .1 -.1 .0 -.1 .0 Q1 3.6 3.4 3.8 3.6 3.9 3.8 2.6 2.6 .7 .5 1.5 .6 .6 .6 .6 .6 .5 .1 .1 .1 .0 .8 -.8 -.2 -.2 -.3 -.2 -.1 .1 -.2 -.2 .2 -.4 Q4 3.5 3.3 3.7 3.5 3.9 3.8 2.6 2.6 .8 .4 1.4 .6 .5 .7 .6 .6 .6 .1 .1 .1 .0 .8 -.7 -.3 -.3 -.3 -.2 -.1 .0 -.3 -.1 -.2 .0 Q3 3.4 3.4 3.5 3.4 3.7 3.8 2.5 2.6 .7 .4 1.3 .6 .5 .7 .7 .6 .6 .1 .1 .1 -.1 .7 -.6 -.3 -.3 -.4 -.2 -.1 .0 -.2 .0 -.2 .0 Q2 3.0 3.0 3.0 3.0 3.3 3.5 2.2 2.4 .7 .4 1.1 .6 .5 .6 .6 .5 .5 .1 .1 .1 -.1 .6 -.5 -.4 -.4 -.4 -.3 -.1 .0 -.1 .0 .0 -.1 Q1 3.2 2.7 2.9 2.4 3.0 3.1 2.0 2.3 .7 .3 1.0 .5 .4 .5 .4 .4 .3 .0 .1 .0 -.2 .6 -.6 -.1 -.4 -.1 -.2 .1 .0 .3 .3 .5 -.2 2.1 2.7 2.1 2.5 2.5 3.1 1.8 2.1 .6 .4 .8 .3 .4 .4 .6 .3 .5 .1 .1 .4 -.1 .4 .0 -.8 -.5 -.8 -.4 -.4 .1 .0 .2 -.1 .0 2.2 2.2 1.4 1.9 1.8 1.9 1.1 1.4 .5 .4 .2 .2 .1 .5 .5 .2 .3 .3 .1 .0 .4 .7 -.7 -.3 -.5 -.5 -.3 -.1 .2 .8 .4 .8 -.1 2.5 2.9 2.1 2.4 2.2 2.4 1.2 1.5 .5 .3 .5 .4 .4 .6 .5 .1 .1 .4 .4 -.1 .0 1.0 -1.1 -.1 -.1 -.1 .0 -.1 .1 .4 .6 .3 .1 Real GDP Previous Tealbook Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services Residential investment Previous Tealbook Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook Net exports Previous Tealbook Exports Imports Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local Change in priv. inventories Previous Tealbook Nonfarm Farm Authorized for Public Release Page 72 of 81 1. Change from fourth quarter of previous year to fourth quarter of year indicated. Item Q4 2015 Q3 2014 Q2 2013 Contributions to Changes in Real Gross Domestic Product (Percentage points, annual rate except as noted) Greensheets Class II FOMC - Restricted (FR) October 23, 2013 2.4 2.4 1.8 2.5 2.3 2.3 .5 -.1 -2.4 -2.5 ECI, hourly compensation2 Previous Tealbook2 Nonfarm business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook Page 73 of 81 Core goods imports chain-wt. price index3 Previous Tealbook3 -3.0 -2.3 2.2 2.7 1.5 2.5 -.7 -.1 2.4 2.4 2.6 2.5 1.8 1.8 2.0 1.9 11.1 10.6 1.5 1.2 1.5 1.5 1.5 1.5 2.0 1.9 Q3 .8 .2 1.1 1.1 2.3 2.6 1.2 1.5 2.4 2.4 1.0 1.5 1.7 1.6 1.1 1.3 -4.2 1.5 .9 .8 1.4 1.3 1.2 1.2 1.2 1.3 Q4 1.9 1.1 .9 1.1 2.7 2.7 1.7 1.6 2.5 2.5 1.7 1.0 1.8 1.8 1.5 1.0 1.3 -5.4 .6 .6 1.6 1.5 1.5 1.5 1.2 1.4 Q1 1.5 1.5 1.4 1.3 2.7 2.7 1.2 1.3 2.5 2.5 1.4 1.3 1.8 1.8 1.3 1.2 -1.5 -3.1 .6 .6 1.6 1.5 1.6 1.5 1.5 1.5 Q2 1.5 1.5 1.6 1.5 2.9 2.9 1.2 1.4 2.6 2.6 1.5 1.4 1.9 1.9 1.3 1.3 -1.2 -1.7 .7 .8 1.5 1.5 1.5 1.5 1.5 1.4 Q4 Greensheets 1.8 1.8 1.6 1.6 2.8 2.8 1.2 1.2 2.6 2.6 1.5 1.4 1.8 1.8 1.3 1.3 -1.2 -2.1 .7 .7 1.5 1.5 1.5 1.5 1.4 1.4 Q3 2014 1.6 1.6 1.8 1.4 3.0 3.0 1.2 1.6 2.7 2.7 1.6 1.6 2.0 2.0 1.4 1.4 -1.0 -1.3 1.0 1.1 1.6 1.6 1.6 1.6 1.7 1.6 Q1 1.6 1.5 1.6 1.6 3.1 3.1 1.5 1.5 2.7 2.7 1.6 1.6 1.9 1.9 1.4 1.4 -1.3 -1.7 1.3 1.3 1.6 1.6 1.6 1.6 1.6 1.6 Q2 1.6 1.5 1.9 1.7 3.1 3.1 1.2 1.4 2.7 2.7 1.6 1.6 1.9 1.9 1.5 1.4 -1.2 -1.5 1.3 1.3 1.6 1.6 1.6 1.6 1.6 1.6 Q3 2015 1.6 1.5 1.8 1.5 3.2 3.2 1.4 1.7 2.7 2.7 1.6 1.5 1.8 1.8 1.5 1.5 -1.0 -1.1 1.4 1.4 1.6 1.6 1.6 1.6 1.6 1.6 Q4 -1.1 -1.0 .8 1.1 .2 .5 -.7 -.6 2.2 2.2 1.3 1.4 1.7 1.7 1.0 1.1 -2.4 -1.1 1.1 .9 1.2 1.2 1.2 1.2 1.3 1.4 20131 1.7 1.5 1.4 1.4 2.7 2.7 1.3 1.4 2.5 2.5 1.5 1.3 1.8 1.8 1.4 1.2 -.7 -3.1 .6 .7 1.5 1.5 1.5 1.5 1.4 1.4 20141 1.6 1.5 1.8 1.5 3.1 3.1 1.3 1.6 2.7 2.7 1.6 1.6 1.9 1.9 1.5 1.4 -1.1 -1.4 1.3 1.3 1.6 1.6 1.6 1.6 1.6 1.6 20151 1.6 1.6 1.9 1.8 3.4 3.4 1.5 1.5 3.0 3.0 1.7 1.7 1.9 1.9 1.6 1.6 -.5 -.7 1.4 1.4 1.7 1.7 1.7 1.7 1.7 1.7 20161 Authorized for Public Release 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Private-industry workers. 3. Core goods imports exclude computers, semiconductors, oil, and natural gas. .0 .0 1.4 1.4 -.1 .0 -11.9 -11.9 .5 .5 .6 .8 .5 .6 .6 .8 Q2 Previous Tealbook Ex. food & energy Previous Tealbook CPI PCE chain-wt. price index Previous Tealbook Energy Previous Tealbook Food Previous Tealbook Ex. food & energy Previous Tealbook Ex. food & energy, market based Previous Tealbook GDP chain-wt. price index Previous Tealbook Item 2013 Changes in Prices and Costs (Percent, annual rate except as noted) Class II FOMC - Restricted (FR) October 23, 2013 3.0 3.0 2.3 2.3 3.9 3.9 1.6 1.6 3.0 3.0 ECI, hourly compensation1 Previous Tealbook1 Nonfarm business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook Page 74 of 81 Core goods imports chain-wt. price index2 Previous Tealbook2 3.9 3.9 -.2 -.2 3.0 3.0 3.2 3.2 2.4 2.4 1.6 1.6 2.0 2.0 1.5 1.5 -8.2 -8.2 6.9 6.9 1.6 1.6 2.2 2.2 1.9 1.9 2008 -1.9 -1.9 5.4 5.4 1.2 1.2 -4.0 -4.0 1.2 1.2 1.5 1.5 1.7 1.7 1.2 1.2 2.3 2.3 -1.8 -1.8 1.4 1.4 1.8 1.8 .4 .4 2009 2.3 2.3 1.9 1.9 1.6 1.6 -.3 -.3 2.1 2.1 1.2 1.2 .6 .6 1.3 1.3 6.4 6.4 1.3 1.3 1.0 1.0 .7 .7 1.8 1.8 2010 4.2 4.2 .4 .4 .9 .9 .5 .5 2.2 2.2 3.3 3.3 2.2 2.2 2.6 2.6 11.7 11.7 5.1 5.1 1.8 1.8 1.9 1.9 1.8 1.8 2011 .1 .1 .9 .9 5.3 5.3 4.4 4.4 1.8 1.8 1.9 1.9 1.9 1.9 1.7 1.7 2.1 2.1 1.2 1.2 1.7 1.7 1.5 1.5 1.8 1.8 2012 -1.1 -1.0 .8 1.1 .2 .5 -.7 -.6 2.2 2.2 1.3 1.4 1.7 1.7 1.0 1.1 -2.4 -1.1 1.1 .9 1.2 1.2 1.2 1.2 1.3 1.4 2013 1.7 1.5 1.4 1.4 2.7 2.7 1.3 1.4 2.5 2.5 1.5 1.3 1.8 1.8 1.4 1.2 -.7 -3.1 .6 .7 1.5 1.5 1.5 1.5 1.4 1.4 2014 1.6 1.5 1.8 1.5 3.1 3.1 1.3 1.6 2.7 2.7 1.6 1.6 1.9 1.9 1.5 1.4 -1.1 -1.4 1.3 1.3 1.6 1.6 1.6 1.6 1.6 1.6 2015 1.6 1.6 1.9 1.8 3.4 3.4 1.5 1.5 3.0 3.0 1.7 1.7 1.9 1.9 1.6 1.6 -.5 -.7 1.4 1.4 1.7 1.7 1.7 1.7 1.7 1.7 2016 Authorized for Public Release 1. Private-industry workers. 2. Core goods imports exclude computers, semiconductors, oil, and natural gas. 4.0 4.0 2.3 2.3 Previous Tealbook Ex. food & energy Previous Tealbook 3.3 3.3 19.1 19.1 4.9 4.9 2.2 2.2 2.1 2.1 PCE chain-wt. price index Previous Tealbook Energy Previous Tealbook Food Previous Tealbook Ex. food & energy Previous Tealbook Ex. food & energy, market based Previous Tealbook 2007 2.5 2.5 Item GDP chain-wt. price index Previous Tealbook CPI Greensheets Changes in Prices and Costs (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Class II FOMC - Restricted (FR) October 23, 2013 Page 75 of 81 -660 -198 17.6 2.4 Net federal saving8 Net state & local saving8 Gross national saving rate3 Net national saving rate3 17.5 3.4 -717 -216 -1.4 12.2 4.2 1.1 1.3 4.5 4.3 .9 15.7 2.2 2.5 1.8 2.2 76.0 76.0 .4 7.3 7.3 5.4 5.4 -3.6 -3.5 Q3 17.7 2.7 -772 -202 5.0 12.2 3.3 -.1 1.0 3.8 3.8 1.0 15.5 4.5 5.6 3.3 4.0 76.3 76.5 .5 7.3 7.2 5.4 5.4 -3.6 -3.4 Q4 17.7 2.8 -708 -203 4.7 12.2 4.4 3.6 3.6 4.0 3.9 1.1 15.8 4.9 5.9 4.2 4.5 76.8 77.0 .5 7.1 7.0 5.3 5.3 -3.4 -3.2 Q1 17.9 3.0 -690 -181 3.8 12.2 4.5 2.8 2.8 3.9 3.7 1.2 15.9 4.7 5.0 4.2 3.9 77.2 77.4 .5 7.0 6.9 5.3 5.3 -3.2 -3.0 Q2 2014 18.0 3.2 -682 -172 7.2 12.3 4.9 3.1 3.1 3.8 3.6 1.3 16.0 3.4 4.0 4.0 3.5 77.6 77.7 .6 6.8 6.7 5.3 5.3 -2.9 -2.7 Q3 18.2 3.3 -672 -158 7.3 12.4 5.0 3.2 3.1 3.6 3.4 1.3 16.2 3.7 3.4 4.1 3.6 78.0 78.1 .6 6.6 6.6 5.3 5.3 -2.6 -2.5 Q4 18.2 3.4 -682 -153 5.5 12.4 5.4 4.1 4.0 3.7 3.5 1.4 16.3 4.4 4.3 4.4 4.1 78.5 78.5 .7 6.4 6.4 5.2 5.2 -2.3 -2.2 Q1 18.4 3.7 -662 -133 6.7 12.4 5.2 3.4 3.3 3.6 3.3 1.5 16.4 4.0 4.1 4.5 4.5 78.9 78.9 .7 6.2 6.2 5.2 5.2 -1.9 -1.9 Q2 2015 18.5 3.8 -650 -128 7.0 12.5 5.3 3.3 3.2 3.4 3.2 1.5 16.5 3.0 3.7 4.0 3.9 79.3 79.3 .8 6.1 6.0 5.2 5.2 -1.6 -1.5 Q3 18.6 3.9 -637 -118 5.5 12.5 5.1 3.2 3.2 3.3 3.1 1.6 16.5 3.5 3.8 3.8 4.1 79.6 79.7 .8 5.9 5.8 5.2 5.2 -1.3 -1.3 Q4 Greensheets 17.7 2.7 -750 -211 2.9 12.2 3.4 -.9 -.7 3.8 3.8 .9 15.5 2.9 3.1 2.4 2.6 76.3 76.5 2.1 7.3 7.2 5.4 5.4 -3.6 -3.4 20131 18.2 3.3 -688 -179 5.7 12.4 4.7 3.2 3.1 3.6 3.4 1.2 16.0 4.2 4.6 4.1 3.9 78.0 78.1 2.2 6.6 6.6 5.3 5.3 -2.6 -2.5 20141 18.6 3.9 -658 -133 6.2 12.5 5.2 3.5 3.4 3.3 3.1 1.5 16.4 3.7 4.0 4.2 4.2 79.6 79.7 2.9 5.9 5.8 5.2 5.2 -1.3 -1.3 20151 18.9 4.4 -700 -101 6.8 12.8 5.0 3.2 3.2 3.4 3.2 1.6 16.6 2.8 3.5 3.2 3.7 80.2 80.8 2.5 5.4 5.3 5.2 5.2 -.3 -.2 20161 Authorized for Public Release 1. Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise indicated. 2. Change, millions. 3. Percent; annual values are for the fourth quarter of the year indicated. 4. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Annual values are for the fourth quarter of the year indicated. 5. Percent change, annual rate. 6. Level, millions; annual values are annual averages. 7. Percent change, annual rate, with inventory valuation and capital consumption adjustments. 8. Billions of dollars; annual values are annual averages. 13.9 12.3 .9 15.5 Housing starts6 Light motor vehicle sales6 Corporate profits7 Profit share of GNP3 .7 .4 -.4 -.7 76.0 75.9 Industrial production5 Previous Tealbook5 Manufacturing industr. prod.5 Previous Tealbook5 Capacity utilization rate - mfg.3 Previous Tealbook3 3.1 3.5 3.4 4.5 4.5 .6 7.5 7.5 5.5 5.5 -3.7 -3.6 Employment and production Nonfarm payroll employment2 Unemployment rate3 Previous Tealbook3 Natural rate of unemployment3 Previous Tealbook3 GDP gap4 Previous Tealbook4 Income and saving Nominal GDP5 Real disposable pers. income5 Previous Tealbook5 Personal saving rate3 Previous Tealbook3 Q2 Item 2013 Other Macroeconomic Indicators Class II FOMC - Restricted (FR) October 23, 2013 Greensheets Page 76 of 81 -267 -73 16.3 1.0 Net federal saving7 Net state & local saving7 Gross national saving rate2 Net national saving rate2 15.0 -1.6 -635 -165 -30.8 6.9 -1.0 1.1 1.1 6.1 6.1 .9 13.1 -8.9 -8.9 -11.6 -11.6 69.9 69.9 -2.8 6.9 6.9 5.3 5.3 -4.1 -4.1 2008 14.7 -1.6 -1,250 -272 54.5 10.7 .1 -.6 -.6 5.7 5.7 .6 10.4 -5.5 -5.5 -6.1 -6.1 67.2 67.2 -5.6 9.9 9.9 6.0 6.0 -5.2 -5.2 2009 15.2 -.4 -1,330 -237 17.0 11.9 4.6 2.5 2.5 5.5 5.5 .6 11.5 6.2 6.2 6.4 6.4 72.9 72.9 .8 9.5 9.5 6.0 6.0 -3.9 -3.9 2010 15.8 .5 -1,248 -213 8.4 12.4 3.9 1.4 1.4 5.0 5.0 .6 12.7 3.3 3.3 3.3 3.3 74.8 74.8 2.0 8.7 8.7 5.8 5.8 -3.6 -3.6 2011 16.9 1.7 -1,110 -253 2.7 12.3 3.8 3.6 3.6 6.6 6.6 .8 14.4 2.8 2.8 2.8 2.8 75.7 75.7 2.2 7.8 7.8 5.7 5.7 -3.6 -3.6 2012 17.7 2.7 -750 -211 2.9 12.2 3.4 -.9 -.7 3.8 3.8 .9 15.5 2.9 3.1 2.4 2.6 76.3 76.5 2.1 7.3 7.2 5.4 5.4 -3.6 -3.4 2013 18.2 3.3 -688 -179 5.7 12.4 4.7 3.2 3.1 3.6 3.4 1.2 16.0 4.2 4.6 4.1 3.9 78.0 78.1 2.2 6.6 6.6 5.3 5.3 -2.6 -2.5 2014 18.6 3.9 -658 -133 6.2 12.5 5.2 3.5 3.4 3.3 3.1 1.5 16.4 3.7 4.0 4.2 4.2 79.6 79.7 2.9 5.9 5.8 5.2 5.2 -1.3 -1.3 2015 18.9 4.4 -700 -101 6.8 12.8 5.0 3.2 3.2 3.4 3.2 1.6 16.6 2.8 3.5 3.2 3.7 80.2 80.8 2.5 5.4 5.3 5.2 5.2 -.3 -.2 2016 Authorized for Public Release 1. Change, millions. 2. Percent; values are for the fourth quarter of the year indicated. 3. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Values are for the fourth quarter of the year indicated. 4. Percent change. 5. Level, millions; values are annual averages. 6. Percent change, with inventory valuation and capital consumption adjustments. 7. Billions of dollars; values are annual averages. -9.0 9.9 1.4 16.1 Housing starts5 Light motor vehicle sales5 Corporate profits6 Profit share of GNP2 2.7 2.7 2.9 2.9 78.4 78.4 Industrial production4 Previous Tealbook4 Manufacturing industr. prod.4 Previous Tealbook4 Capacity utilization rate - mfg.2 Previous Tealbook2 4.4 1.2 1.2 2.9 2.9 1.2 4.8 4.8 5.0 5.0 .6 .6 Employment and production Nonfarm payroll employment1 Unemployment rate2 Previous Tealbook2 Natural rate of unemployment2 Previous Tealbook2 GDP gap3 Previous Tealbook3 Income and saving Nominal GDP4 Real disposable pers. income4 Previous Tealbook4 Personal saving rate2 Previous Tealbook2 2007 Item Other Macroeconomic Indicators (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Class II FOMC - Restricted (FR) October 23, 2013 Page 77 of 81 -.7 -1.0 -1.4 -1.0 -1.1 -1.1 -.7 -.7 -2.0 -2.0 -.1 -.4 -.4 -.6 -.7 -1.3 -1.2 -.4 .2 .3 -1.1 -1.6 .4 -.1 -.9 -2.2 -480.8 -555.1 -510.9 -582.1 -491.1 -493.0 -632.7 70 8 -48 -30 956 887 69 69 16 53 70 131 0 -30 763 864 -101 -99 -70 -31 Q4 70 226 0 -30 739 935 -196 -196 -219 23 Not seasonally adjusted Q3 -.8 -.8 -.1 -467.0 -676 -.6 -.6 .0 -469.1 -662 -.4 -.4 .0 -473.8 -648 -699 -460.9 -770 -724 -670 -860 -642 -636 -702 -838 2014 Q2 Seasonally adjusted annual rates 3,134 3,169 3,208 3,253 3,842 3,860 3,890 3,925 940 931 923 916 595 590 586 581 345 341 337 334 2,902 2,929 2,967 3,010 -708 -690 -682 -672 261 257 254 250 22 62 58 158 630 908 -278 -270 -262 -16 Q1 -649.4 3,007 3,779 951 600 350 2,829 -772 268 3,085 3,802 961 606 355 2,841 -717 275 80 291 8 -97 670 872 -202 -201 -229 27 3,160 3,820 976 616 360 2,844 -660 277 88 64 46 40 688 839 -151 -143 -123 -27 Q4 2,900 3,753 982 620 363 2,771 -853 273 135 -17 -56 -18 891 800 91 91 36 55 Q3 3,523 4,208 912 579 333 3,296 -685 239 79 336 14 -43 581 888 -307 -307 -303 -4 2013 Q2a 3,336 4,003 913 580 332 3,090 -667 246 70 566 0 -120 -450 4 3,444 3,890 -446 Q1a 3,130 3,843 936 593 343 2,907 -713 260 70 556 0 -120 3,241 3,677 -436 -428 -454 19 2016 2,964 3,791 978 618 360 2,812 -827 277 70 492 18 1 3,019 3,531 -512 -500 -546 34 2015 Fiscal year 2014 -.6 -.6 .1 -494.5 -652 3,317 3,998 917 583 335 3,081 -682 247 70 302 0 -30 665 937 -272 -269 -253 -19 Q1 -.4 -.4 .0 -494.4 -629 3,363 4,026 912 580 332 3,114 -662 245 70 -64 0 -30 1,012 918 94 99 45 49 70 93 0 -30 825 888 -63 -62 -28 -34 Q3 -.2 -.2 .0 -501.9 -613 3,412 4,062 906 577 329 3,156 -650 242 2015 Q2 -.2 -.2 .0 -508.2 -597 3,457 4,094 902 575 327 3,192 -637 240 70 217 0 -30 778 965 -187 -188 -205 18 Q4 Greensheets Authorized for Public Release 1. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus and the Postal Service surplus are excluded from the on-budget surplus and shown separately as off-budget, as classified under current law. 2. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities. 3. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises. 4. HEB is gross saving less gross investment (NIPA) of the federal government in current dollars, with cyclically sensitive receipts and outlays adjusted to the staff’s measure of potential output and the natural rate of unemployment. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. FI is the weighted difference of discretionary changes in federal spending and taxes in chained (2009) dollars, scaled by real GDP. The FI estimates are calendar year contributions to Q4/Q4 real GDP growth. Also, for FI and the change in HEB, positive values indicate aggregate demand stimulus. Quarterly figures for change in HEB and FI are not at annual rates. a Actual. Fiscal indicators4 High-employment (HEB) surplus/deficit Change in HEB, percent of potential GDP Fiscal impetus (FI), percent of GDP Previous Tealbook NIPA federal sector Receipts Expenditures Consumption expenditures Defense Nondefense Other spending Current account surplus Gross investment Gross saving less gross investment3 88 697 -3 -34 Means of financing: Borrowing Cash decrease Other2 Cash operating balance, end of period 2,776 3,436 -660 -653 -701 40 2013 Unified budget Receipts1 Outlays1 Surplus/deficit1 Previous Tealbook On-budget Off-budget Item Staff Projections of Federal Sector Accounts and Related Items (Billions of dollars except as noted) Class II FOMC - Restricted (FR) October 23, 2013 2.2 2.2 .9 1.6 -.4 2.3 .7 1.4 3.3 3.3 .6 3.2 3.5 3.2 7.0 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil Page 78 of 81 2 2.8 2.6 2.1 1.6 2.9 3.1 1.9 2.7 3.3 3.5 1.4 3.4 2.6 2.0 4.6 2.8 2.7 1.8 2.6 2.1 2.4 .4 1.3 3.8 5.7 4.0 9.4 1.9 2.2 .0 GDP aggregates calculated using shares of U.S. exports. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. 1.9 1.9 .4 .0 .8 1.5 .6 .7 3.0 2.0 .3 2.1 5.4 5.3 5.8 2.2 2.1 1.8 1.7 3.8 2.7 1.1 2.9 2.6 5.1 4.5 7.5 .1 -2.9 6.0 Q2 2.6 2.6 1.4 1.7 .7 3.0 1.4 1.7 3.5 3.4 2.4 3.0 3.9 3.6 5.5 3.0 3.0 1.9 2.1 3.4 2.5 1.0 1.7 4.1 5.4 3.7 8.1 2.8 3.0 1.7 2.5 2.4 1.3 1.8 .7 1.7 1.3 1.6 3.3 3.2 3.0 3.0 3.8 3.5 5.7 3.2 3.2 2.1 2.3 3.9 2.3 1.1 1.8 4.3 5.3 3.6 7.9 3.5 3.7 2.8 3.1 3.1 2.8 1.8 8.7 1.6 1.3 1.7 3.3 3.1 3.0 3.0 3.7 3.4 5.6 2.9 2.9 1.5 2.4 -2.9 2.2 1.4 1.9 4.4 5.4 3.9 7.8 3.5 3.7 3.1 2.5 2.5 1.4 1.8 .7 1.7 1.4 1.7 3.3 3.1 3.0 3.0 3.7 3.4 5.4 3.3 3.2 2.1 2.6 1.9 2.3 1.4 2.0 4.5 5.5 4.1 7.8 3.6 3.7 3.3 2.5 2.5 1.5 1.8 .9 2.7 1.4 1.8 3.3 3.1 3.1 3.0 3.7 3.4 5.3 3.3 3.3 2.2 2.6 2.0 2.5 1.6 2.1 4.5 5.5 4.2 7.7 3.6 3.7 3.3 2.5 2.5 1.5 1.8 1.0 1.7 1.5 1.8 3.3 3.2 3.2 3.0 3.7 3.4 5.3 3.4 3.4 2.2 2.5 1.6 2.5 1.8 2.2 4.6 5.6 4.3 7.7 3.5 3.6 3.5 2.5 2.5 1.5 1.8 1.1 1.7 1.5 1.8 3.3 3.2 3.2 3.0 3.7 3.4 5.3 3.4 3.4 2.2 2.6 1.1 2.5 1.9 2.4 4.6 5.7 4.5 7.7 3.5 3.6 3.5 2.6 2.6 1.6 1.9 1.2 1.8 1.6 1.8 3.3 3.2 3.2 3.0 3.7 3.4 5.3 3.5 3.5 2.4 2.7 2.2 2.6 1.9 2.5 4.6 5.6 4.6 7.6 3.5 3.6 3.5 3.0 3.0 2.7 1.9 6.7 2.8 1.6 1.8 3.3 3.2 3.1 3.0 3.7 3.4 5.3 3.3 3.3 2.0 2.7 -1.7 2.6 2.0 2.5 4.6 5.6 4.6 7.6 3.5 3.6 3.5 -----------------------------------------------Projected----------------------------------------------2014 2015 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Authorized for Public Release 1 Foreign 1.7 1.8 1.4 2.2 4.1 1.5 -.9 .0 2.1 3.4 3.4 6.5 .7 .1 2.6 Q1 Real Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil GDP 1 Measure and country 2013 Foreign Real GDP and Consumer Prices: Selected Countries (Quarterly percent changes at an annual rate) Greensheets Class II FOMC - Restricted (FR) October 23, 2013 Page 79 of 81 3.3 3.3 2.0 1.8 1.1 3.9 2.3 1.7 4.6 3.7 4.5 2.5 6.6 6.2 6.2 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 1.2 1.2 .2 .8 -2.0 2.2 .4 .3 2.1 1.3 2.4 .6 3.9 4.0 4.2 .9 .9 -1.5 -1.4 -.5 -2.5 -2.3 -2.2 3.9 8.0 6.3 11.3 -.1 -1.2 5.3 3.2 3.2 1.7 2.2 -.2 3.4 2.0 1.6 4.3 4.3 3.2 4.7 4.4 4.3 5.6 4.6 4.6 3.0 3.6 3.5 1.8 2.3 4.2 6.3 7.8 5.0 9.7 4.7 4.4 5.3 2010 2 Foreign 3.4 3.4 2.2 2.7 -.3 4.6 2.9 2.6 4.3 4.5 3.9 4.6 4.0 3.5 6.7 3.0 3.0 1.5 2.4 .1 1.1 .7 2.2 4.5 4.9 3.4 8.7 4.0 4.1 1.4 2011 Greensheets Foreign GDP aggregates calculated using shares of U.S. exports. CPI aggregates calculated using shares of U.S. non-oil imports. -.7 -.7 -1.5 .1 -4.8 -4.3 -2.1 -1.8 .3 .8 -3.2 7.6 -.4 -1.3 .9 Real GDP 1 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 2009 2.3 2.3 1.3 .9 -.2 2.6 2.3 2.0 3.1 2.6 1.7 2.1 4.3 4.1 5.6 2.2 2.2 .3 1.0 .3 -.2 -1.0 .3 4.2 5.3 1.4 7.8 3.1 3.2 1.4 2012 2.4 2.3 1.2 1.2 1.0 2.5 1.2 1.6 3.3 3.0 1.2 2.9 3.9 3.5 5.7 2.4 2.4 1.7 2.2 3.3 2.3 .4 1.5 3.1 4.9 3.9 7.8 1.4 .6 2.5 2.6 2.6 1.8 1.8 2.7 1.9 1.3 1.7 3.3 3.1 3.0 3.0 3.7 3.4 5.5 3.2 3.1 2.0 2.5 1.2 2.3 1.3 1.9 4.5 5.4 3.9 7.8 3.5 3.7 3.1 2.7 2.7 1.8 1.8 2.5 2.0 1.5 1.8 3.3 3.2 3.2 3.0 3.7 3.4 5.3 3.4 3.4 2.2 2.6 .8 2.5 1.9 2.4 4.6 5.6 4.5 7.6 3.5 3.6 3.5 1.8 2.1 1.4 1.8 1.7 1.9 3.3 3.2 3.2 3.0 3.7 3.4 5.3 2.6 2.3 2.7 1.2 2.5 2.0 2.5 4.6 5.6 4.5 7.5 3.4 3.4 3.5 3.4 --------------------Projected--------------------2013 2014 2015 2016 Authorized for Public Release 1 2008 Measure and country Foreign Real GDP and Consumer Prices: Selected Countries (Percent change, Q4 to Q4) Class II FOMC - Restricted (FR) October 23, 2013 Page 80 of 81 U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net -681.3 -681.3 -4.6 -4.6 -702.3 157.8 284.3 -126.5 -136.9 2008 -419.6 -420.5 -2.5 -2.5 -490.5 211.6 276.6 -65.0 -140.6 Q1 Q3 2009 -449.5 -449.5 -3.0 -3.0 -499.4 185.7 288.0 -102.3 -135.8 2010 Q2 Q3 -457.7 -457.7 -2.9 -2.9 -556.8 240.7 310.6 -69.8 -141.6 2011 2012 -426.9 -474.9 -2.4 -2.7 -477.0 194.8 300.0 -105.1 -144.7 -440.4 -440.4 -2.7 -2.7 -534.7 232.3 293.5 -61.2 -138.0 -459.7 -514.3 -2.6 -2.9 -482.7 181.2 308.1 -127.0 -158.1 Q1 -432.5 -494.3 -2.4 -2.7 -463.6 172.3 312.3 -140.1 -141.1 Q2 -446.6 -505.9 -2.4 -2.7 -465.3 163.4 318.0 -154.6 -144.7 Q3 -458.7 -518.2 -2.5 -2.8 -472.5 155.1 324.9 -169.8 -141.3 Q4 -430.8 -471.1 -2.5 -2.7 -483.9 199.5 301.1 -101.5 -146.3 -449.4 -508.2 -2.4 -2.8 -471.0 168.0 315.8 -147.9 -146.3 Authorized for Public Release -451.4 126.5 338.8 -212.3 -146.3 -2.4 -471.2 --------------------Projected--------------------2013 2014 2015 2016 -435.3 -487.7 -2.4 -2.7 -482.6 188.6 303.6 -115.0 -141.3 Q4 -415.0 -414.8 -2.5 -2.5 -487.8 217.1 286.6 -69.5 -144.3 Billions of dollars -413.2 -448.5 -2.4 -2.6 -474.5 202.4 300.0 -97.6 -141.1 Billions of dollars, s.a.a.r. Q1 -447.6 -473.3 -2.6 -2.8 -501.7 212.2 300.7 -88.5 -158.1 Annual Data -423.9 -438.6 -2.5 -2.6 -498.1 215.5 300.1 -84.6 -141.3 Q4 -----------------------------------------------Projected----------------------------------------------2014 2015 -421.0 -406.9 -2.5 -2.4 -491.3 220.1 289.6 -69.5 -149.8 -381.6 -381.6 -2.6 -2.6 -383.7 132.3 257.7 -125.4 -130.2 -395.6 -393.4 -2.4 -2.4 -471.1 221.1 279.9 -58.9 -145.5 Q2 2013 Quarterly Data U.S. Current Account Greensheets Class II FOMC - Restricted (FR) October 23, 2013 Class II FOMC - Restricted (FR) Authorized for Public Release October 23, 2013 Abbreviations ABS asset-backed securities AFE advanced foreign economy BLS Bureau of Labor Statistics C&I commercial and industrial CMBS commercial mortgage-backed securities CPI consumer price index CRE commercial real estate Desk Open Market Desk ECB European Central Bank EME emerging market economy FOMC Federal Open Market Committee; also, the Committee GDI gross domestic income GDP gross domestic product IP industrial production LBO leveraged buyout LSAP large-scale asset purchase M&A mergers and acquisitions MBS mortgage-backed securities OIS overnight index swap PCE personal consumption expenditures PMI purchasing managers index SLOOS Senior Loan Officer Opinion Survey on Bank Lending Practices SOMA System Open Market Account S&P Standard & Poor’s TIPS Treasury inflation-protected securities Page 81 of 81 Authorized for Public Release (This page is intentionally blank.)
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