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Confidential (FR) Class III FOMC

Part 2

September 15, 2004

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Confidential (FR) Class III FOMC

September 15, 2004

Recent Developments

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

Domestic Nonfinancial
Developments

Domestic Nonfinancial Developments
Overview
The economic expansion appears to have regained some vigor after having
slowed in late spring. The August labor market report showed a small upturn in
hiring, and other indicators suggest a pickup in the pace of production and sales
over the past couple of months. Consumer spending rose sharply in July and
appears to have held steady in August, and housing starts bounced back in July
after having dipped in June. Orders and shipments of capital goods remained on
a solid uptrend through July despite some softening in demand for high-tech
equipment. Core price inflation moderated in June and July, and overall
inflation in July was further damped by a decline in energy prices.
Labor Market Developments
The labor market continued to improve in August, with private payrolls rising
120,000 and the unemployment rate ticking down to 5.4 percent—nearly
1 percentage point below its recent peak in June 2003. In addition, the payroll
figures for June and July were revised up, and as a result the deceleration in
hiring no longer seems as abrupt as it appeared a month ago. Still, private
employers have added only 97,000 jobs per month on average over the past
three months, a pace well below the 293,000 jobs per month over the three
months ending in May. In addition, survey evidence and the low level of the
labor force participation rate both suggest that households remain concerned
about a lack of employment opportunities.
Manufacturing employment rose again in August, as producers of durable goods
continued to post gains. Employment also increased last month in construction,
financial activities, and both business and nonbusiness services. However,
payrolls in the retail trade and information sectors fell again last month; job
losses in these industries in July and August largely reversed the gains of the
second quarter.
The average workweek of production or nonsupervisory workers was 33.8 hours
in August, unchanged from the upward-revised July level and a touch higher
than the average workweek in the second quarter. Consequently, even with the
relatively modest payroll gains in recent months, the level of aggregate hours of
production or nonsupervisory workers in August stood 0.8 percent above the
second-quarter average (not at an annual rate).
In addition to the unemployment rate, a number of other indicators suggest that
significant slack remains in the labor market. The employment-population ratio,
which combines the unemployment rate and the participation rate, is up only a
little from its relatively low level in mid-2003. In addition, the number of
persons working part-time for economic reasons as a share of total employment
has remained elevated.

II-2
Changes in Employment
(Thousands of employees; seasonally adjusted)
2004
Measure and sector

2003

June

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

July

Aug.

Monthly change

-5
-1
-1
-48
7
-3
-5
-5
-10
6
23
15
34
-4
168

198
195
195
7
26
8
46
14
-2
7
26
8
59
3
-60

209
218
211
16
19
5
14
8
4
15
73
23
60
-8
244

96
112
93
-3
2
3
7
10
5
20
25
-2
45
-16
259

73
60
32
6
4
10
-14
6
-6
-10
47
5
12
13
629

144
120
...
22
15
3
-11
-3
-10
18
32
10
56
24
21

-.8
33.7
40.4

2.3
33.8
41.0

2.2
33.7
40.9

-.5
33.6
40.8

.7
33.8
40.9

.2
33.8
40.9

1. Nonbusiness services comprises education and health, leisure and hospitality, and "other."
2. Establishment survey. Annual data are percent changes from Q4 to Q4. Quarterly data are percent changes from preceding
quarter at an annual rate. Monthly data are percent changes from preceding month.
3. Establishment survey.
... Not applicable.

Changes in Private
Payroll Employment

Thousands
500

500

Aggregate Hours of Production or
Nonsupervisory Workers
106

2002 = 100
106

104

3-month moving average
400

400

300

200

100

Aug.

102

100
Aug.

100

-100

-200

-300

-400

102

1997

1998

1999

2000

2001

2002

2003

2004

-400

1997

1998

1999

2000

2001

2002

2003

2004

II-3
Selected Unemployment and Labor Force Participation Rates
(Percent; seasonally adjusted)
2004
Rate and group

2003

June

July

Aug.

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

6.0
17.4
10.0
5.1
4.6

5.6
16.6
9.6
4.5
4.5

5.6
17.0
9.5
4.5
4.4

5.6
16.8
9.8
4.4
4.5

5.5
17.6
9.3
4.4
4.5

5.4
17.0
9.0
4.4
4.3

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

66.2
44.5
75.4
75.5
59.6

66.0
43.6
74.7
75.4
59.2

65.9
43.6
75.1
75.2
59.3

66.0
43.3
75.1
75.3
59.4

66.2
44.1
75.2
75.4
59.5

66.0
44.1
74.9
75.4
59.2

Labor Force Participation Rate
and Unemployment Rate

Percent
67.4

Percent
7.0

67.2

6.5

67.0

6.0
Participation rate (left scale)

66.8

5.5
66.6

Aug.

5.0

66.4
4.5

66.2
66.0
65.8

4.0

Unemployment rate (right scale)
1994

1995

1996

1997

1998

1999

2000

65.0
64.5

64.5

64.0

2002

2003

(Percent of household employment)

4.0

3.5

2004

Persons Working Part-Time
for Economic Reasons

Employment-Population Ratio
Percent
65.0

2001

Percent
4.0

3.5

3.5
Aug.

63.5

63.0

3.0

2.5

Aug.
62.5

62.5

62.0

61.5

61.0

1994

1996

1998

2000

2002

2004

61.0

2.0

1994

1996

1998

2000

2002

2004

2.0

II-4
Labor Market Indicators

Current Labor Market Conditions

Expected Labor Market Conditions
Index
140

150

Index
150

130

120

110

100

110

Index
120

Michigan SRC
(right scale)

100

Aug.
90

60
Conference Board
(left scale)

1992

1994

1996

1998

2000

2002

2004

Unemployment Insurance

1994

1996

1998

2000

2002

Thousands
550

Sept. 4
Insured unemployment
(left scale)

500

400

2.5

350

250

Thousands
250

200

150

150
Aug.

100

1.5

Aug. 28
Initial claims
(right scale)
1992

1994

1996

300

1998

450

3.0

2.0

2004

Layoff Announcements

Millions
4.5
4-week moving average

3.5

1992

Note. The proportion of households expecting labor
market conditions to improve, minus the proportion
expecting conditions to worsen, plus 100.

Note. The proportion of households believing jobs
are plentiful, minus the proportion believing jobs are
hard to get, plus 100.
Source. Conference Board.

4.0

2000

2002

2004

250

100

2000

2001

2002

2003

2004

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

Job Openings and Help Wanted Index

Hires and Separations
Percent of private employment
4.1

4.2
4.0

Separations

3.9

3.7
3.6
July

3.5

3.4
3.3

3.2

3.0

2002

2003

2004

Source. Job Openings and Labor Turnover Survey.

3.1

100
Openings*
(left scale)

2.8

2.6

2.4

60
July

2.2
2.0

2001

1999 = 100
110

3.2

Hires

3.8

3.0

Percent of private employment
3.4

1.8

Help wanted index**
(right scale)
2001

2002

50
40

2003

*Job Openings and Labor Turnover Survey.
**Conference Board.

2004

II-5

Survey evidence suggests that households perceive that the labor market
remains soft. According to the Conference Board, households’ appraisals of
current employment conditions have recovered a little from the low levels of last
year but still are only at the levels that prevailed in 1994 and 1995. However,
households have become more optimistic that labor market conditions will
improve over the next twelve months, according to both the Michigan and
Conference Board surveys.
Meanwhile, layoffs have continued to run substantially below their cyclical
peaks, but the pickup in hiring is still modest. The four-week moving average
of initial claims for unemployment insurance has changed little, on net, in the
past several months, and layoff announcements have fluctuated within a narrow
range well below their highs of a few years ago.1 Similarly, the Job Openings
and Labor Turnover Survey (JOLTS) shows that the separations rate has stayed
at a low level since falling sharply in 2001. However, since the spring, the
JOLTS hiring rate has been only a little above its average of the past two years.
In addition, the JOLTS job openings rate has come up from the lows of 2003 but
remains well below the levels of 2001. On a more positive note, both the
Manpower survey and the National Federation of Independent Businesses
survey of small businesses indicate a net improvement in hiring plans over the
past year (not shown).
The Bureau of Labor Statistics reported that output per hour in the nonfarm
business sector increased at an annual rate of 2-1/2 percent in the second quarter
and has risen 4-1/2 percent over the past year; based on more-recent data, we
expect productivity growth in the second quarter to be revised up to an annual
rate of 3 percent.2 The BLS estimates that output per hour in the nonfinancial
corporate sector rose at an annual rate of 1-1/2 percent in the second quarter and
4 percent over the past year.

1. For the week ending September 4, the four-week moving average of initial claims was
339,000. Recent volatility in initial claims is due in part to the effects of Hurricane Charley and
the difficulty in seasonally adjusting the initial claims series at the end of summer and the start of
the school year.
2. The staff estimates that upward revisions to business inventory investment and net exports
will raise the growth of output in the nonfarm business sector in the second quarter to an annual
rate of approximately 4 percent, compared with an increase of 3-1/2 percent in the most recent
BLS release.

II-6
Selected Components of Industrial Production
(Percent change from preceding comparable period)
Proportion
2003

Component

2004

20031

(percent)

2004
Q2

June

Annual rate
Total
Previous

July

Aug.

Monthly rate

100.0
100.0

1.5
1.5

6.6
6.6

4.8
4.9

-.4
-.5

.6
.4

.1
...

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

82.3
75.6
70.7

1.9
1.7
.3

6.3
6.0
4.6

7.1
8.9
7.8

-.2
.0
-.1

.9
1.0
.9

.5
.2
.1

Mining
Utilities

7.6
10.1

.4
-.6

-1.8
15.6

-2.5
-7.6

-.9
-1.8

1.3
-2.0

-1.1
-2.4

Selected industries
High technology
Computers
Communications equipment
Semiconductors2

4.9
1.2
1.3
2.4

21.3
14.1
5.8
34.3

27.3
28.1
1.2
41.4

24.4
17.4
1.7
39.6

1.4
1.1
1.7
1.5

1.4
2.0
3.2
.3

1.8
1.9
1.3
1.9

Motor vehicles and parts

6.7

3.8

9.9

-10.4

-2.0

-.1

3.8

Market groups excluding
energy and selected industries
Consumer goods
Durables
Nondurables

22.6
4.3
18.3

.2
1.1
.0

3.6
6.9
2.8

6.6
-.1
8.3

-.8
-1.2
-.7

.5
.7
.5

.1
-.4
.2

Business equipment
Defense and space equipment

7.3
1.9

1.0
4.8

12.1
-.7

13.3
10.3

.5
-.2

3.0
2.2

-1.8
.1

Construction supplies
Business supplies

4.2
8.5

1.1
.2

2.3
5.6

8.2
9.9

-.2
.0

.4
.7

.4
.6

24.8
13.6
11.2

-.3
-.1
-.5

4.0
5.2
2.4

6.3
6.6
6.1

.2
.5
-.1

.7
.8
.6

.5
.1
1.0

Materials
Durables
Nondurables

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

Capacity Utilization
(Percent of capacity)
19722003
average

19901991
low

2003

1982
low

July

Aug.

Total industry

81.1

70.9

78.6

75.5

76.5

77.1

77.3

Manufacturing
High-tech industries
Excluding high-tech industries

80.0
78.8
80.1

68.7
75.4
68.2

77.2
74.5
77.3

74.1
67.0
75.2

75.1
69.1
76.1

76.1
69.7
77.2

76.6
69.4
77.8

76.8
69.3
78.2

Mining
Utilities

86.9
86.9

78.6
77.6

83.4
84.1

85.3
83.1

84.9
85.5

84.3
83.5

84.8
81.5

83.9
79.5

Sector

2004

II-7

Labor Output per Hour
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
2003
Sector

2001

2002

2004

2003
Q3

Nonfarm businesses
All persons
All employees1

3.3
3.4

3.5
3.7

5.6
6.1

9.0
10.0

3.1
3.3

3.7
2.9

2.5
1.9

Nonfinancial corporations2

2.0

5.1

6.6

9.4

5.0

1.4

Note. Annual changes are from fourth quarter of preceding year to fourth quarter of year
shown.
1. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of
all employees.
2. All corporations doing business in the United States except banks, stock and commodity
brokers, and finance and insurance companies. The sector accounts for about two-thirds of
business employment.

Industrial Production
Total industrial output has increased moderately so far in the third quarter after a
drop in June.3 In August, industrial production was 5.2 percent above its yearearlier level and a bit above the cyclical peak reached in 2000. Within total IP,
manufacturing output rose 0.9 percent in July and 0.5 percent in August.4 In
contrast, the output of electric utilities declined significantly in each of these
months for weather-related reasons.
The increases in manufacturing production since the end of the second quarter
have been widespread. The output of motor vehicles and parts jumped in
August as assemblies rose from an annual rate of 11-1/2 million units in June
and July to 12 million units in August. In the high-tech sector, computer
production continued to expand in August—albeit less rapidly than earlier in the
year—and the output of communications equipment posted its fourth
consecutive monthly increase. However, production of semiconductor chips is
now estimated to have risen only modestly in June and July, and the increase in
August was well below the pace earlier in the year as bloated inventories at Intel
likely took a toll on production.
Production in other market groups (that is, excluding high-tech and motor
vehicles) has increased, on balance, in recent months. The output of business

3. Hurricane Charley did not have a measurable effect on total industrial production for
August, and we do not see any significant evidence of effects at the industry level. Preliminary
indications are that Hurricane Frances had little effect on industrial production for September.
4. Manufacturing output for July was originally estimated to have increased 0.6 percent.

II-8
Indicators of Manufacturing Activity

Electric Utilities Production

Motor Vehicle Assemblies
1997=100

125

Millions of units
15

15
Annual rate

120

115

115
Aug.

110

105

2002

2003

110

105

2004

+ Sept. 12

1999

2000

2001

2002

2003

2004

Note. September value is based on Ward’s schedules.

Business Equipment IP
Excluding High-Tech and Motor Vehicles

Consumer Durable Goods IP
Excluding High-Tech and Motor Vehicles
Percent

Percent
2

3-month moving average

2
3-month moving average

Aug.
0

0
Aug.

-1

-2

1999

2000

2001

2002

2003

2004

-1

-2

-1

1999

2000

2001

2002

2003

2004

-2

New Orders: ISM and
FRB Philadelphia Surveys

Real Adjusted Durable Goods Orders

Diffusion index

Billions of chained dollars
165

165
3-month moving average

160

70
July

155

150

145

140

FRB Philadelphia survey

65
Aug.

60
55
50
45

ISM
135

135

130

1999

2000

2001

2002

2003

2004

40
35

1999
2000
2001
2002
2003
2004
Note. The diffusion index equals the percentage of
respondents reporting greater levels of new orders, plus
one-half the percentage of respondents reporting that
new orders were unchanged.

II-9
New Orders for Durable Goods
(Percent change from preceding period except as noted; seasonally adjusted)

Component

Proportion,
2004: H1
(percent)

2004

May

Annual Rate
Total orders
Adjusted orders1
Computers
Communication equipment
Other capital goods
Other2
Memo:
Real adjusted orders
Excluding high tech

June

July

Monthly Rate

100.0

8.8

8.6

-.9

1.3

1.6

75.6
4.4
3.4
23.9
43.9

13.4
-14.8
48.3
18.5
11.7

8.2
36.9
13.5
2.4
8.4

-.6
.9
-17.3
.0
.5

.3
.2
-7.0
3.3
-.7

-.6
-5.4
6.2
1.2
-1.5

...
...

10.7
10.1

1.8
-1.1

-1.0
-.6

-.1
.4

-.9
-.5

1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle parts.
2. Primary metals; most fabricated metals; most stone, clay, and glass products; household
appliances; scientific instruments; and miscellaneous durable goods.
... Not applicable.

Total IP and Capacity Utilization
1997=100

Percent

117

84
Aug.

116
82
115
Total IP
(left scale)

114

113
78
112

Aug.

111

76
Capacity utilization
(right scale)

110

74
109

108

1999

2000

2001

2002

2003

2004

II-10
Indicators of High-Tech Manufacturing Activity

Communication Equipment
Industrial Production

Microprocessor Unit (MPU) Shipments
and Intel Revenue

210

1997 = 100, ratio scale
210

200

190

180

8.0

170

7.5

160

7.0

150

6.5

140

6.0

130

Aug.

170

120

1999

2000

2001

2002

2003

2004

120

U.S. Personal Computer Sales
Millions of units, ratio scale

Q2
Intel revenue

1999
2000
2001
2002
2003
2004
Note. Q3 is the range of Intel’s guidance as of Sept. 2, 2004.
FRB seasonals.
Source. Intel and Semiconductor Industry Association.

Millions of units, ratio scale

4.5
4.0

3.5

11.5
Mobile
(right scale)

3.0

10.5

2.5

0.80
0.75
0.70
0.65
0.60
0.55
0.50

10.0

2.0

Desktop
(left scale)

9.5

0.45
0.40

1.5

9.0

0.35

8.5
1999
2000
2001
2002
2003
2004
Note. FRB seasonals. Value for Q3 is a Gartner forecast.
Source. Gartner.

1.0

Days’ Supply of Computers and Peripherals,
Communications Equipment, and Semiconductors
January 1999 = 100
150

150

1999
2000
2001
2002
2003
2004
Note. FRB seasonals. Value for Q3 is a Gartner forecast.
Source. Gartner.

140

130

0.30

Semiconductor Manufacturing
Equipment Orders and Shipments
Billions of dollars, ratio scale
3.5
3.0

Communications equipment

120

5.0

U.S. Server Shipments

12.0

8.0

9.5
9.0
8.5

5.5

Worldwide MPU shipments

Millions of units, ratio scale

12.5

11.0

Billions of dollars, ratio scale

2.5
Shipments

2.0
July

Semiconductors

120
Aug.

1.5
Orders

110

100

1.0

90
80

Computers and peripherals
1999
2000
2001
2002
2003
Source. Board staff’s flow-of-goods system.

2004

1999
2000
2001
2002
2003
Source. Semiconductor Equipment and Materials
International.

2004

0.5

II-11

equipment, which had risen sharply over the first half of the year, surged in July;
it fell back in August but was still appreciably above its second-quarter average.
Elsewhere, the output of durable consumer goods has been soft in recent
months, while the production of construction supplies, business supplies, and
materials have all moved up, as is consistent with expanding production in
downstream industries.
Despite the relatively steady rise in industrial production over the past year, the
industrial sector as a whole continues to exhibit considerable slack. The overall
capacity utilization rate, at 77.3 percent in August, is still 3.8 percentage points
below its 1972–2003 average. But conditions vary considerably across the
industrial sector. The rate of capacity utilization for industries in the finished
goods stage of processing has come up from the record lows reached in
mid-2003 but is still more than 4 percentage points below its long-run average.
In contrast, the utilization rates among industries in the earlier stages of
processing are closer to their long-run averages, and the rates in some
significant crude and primary processing industries—iron ore mining, organic
chemicals, pulp and paperboard, and petroleum refining—exceeded 90 percent
last month and are well above historical averages. Outside the industrial sector,
anecdotal information continues to indicate tight capacity for truck and rail
shipping, which is not expected to abate in the near term.5
The near-term indicators of high-tech manufacturing activity suggest that
conditions in this sector have softened somewhat. In particular, Intel sharply
lowered the midpoint of its revenue guidance for the third quarter as a result of
both a weaker outlook for demand and an inventory correction by its customers.
Intel and others in the industry have suggested that the back-to-school season for
personal computers (PCs) has been softer than anticipated; Intel has also
indicated that the slackening in demand for its products is worldwide and
concentrated in the consumer segment. Gartner, an IT research and analysis
company, expects unit shipments of servers to be flat in the third quarter, and
although it has revised down its forecast for third-quarter unit shipments of
desktop and mobile PCs, it still expects a pickup relative to the second quarter.
The forward-looking indicators of manufacturing production and reports from
the staff’s industry contacts have generally been positive. Preliminary data
suggest that electricity generation for early September was up significantly
relative to the previous month, and motor vehicle assemblies apparently are
holding close to the elevated August pace. The new orders diffusion index from
the Institute for Supply Management (ISM), which is useful for forecasting
near-term changes in industrial production, declined in August but remained
5. The manufacturing purchasing managers surveyed by the Institute for Supply
Management have noted rising prices for freight transportation in every month since March.

II-12
Sales of Light Vehicles
(Millions of units at an annual rate, FRB seasonals)
2003
Category

2003

Total

2004
Q1

2004
Q2

June

July

Aug.

16.6

16.8

16.5

15.4

17.2

16.5

7.6
9.0

7.5
9.3

7.4
9.1

7.5
9.1

7.0
8.3

7.5
9.7

7.2
9.4

North American1
Autos
Light trucks

13.3
5.5
7.8

13.6
5.5
8.1

13.3
5.4
7.8

13.1
5.3
7.9

12.1
5.0
7.1

13.9
5.5
8.4

13.3
5.2
8.2

Foreign-produced
Autos
Light trucks

3.3
2.1
1.2

3.2
2.1
1.2

3.3
2.0
1.2

3.4
2.2
1.2

3.3
2.1
1.2

3.3
2.0
1.3

3.2
2.0
1.2

.33

.37

.40

.44

Autos
Light trucks

Memo:
Medium and heavy trucks

Note. Components may not sum to totals because of rounding. Data on sales of trucks and imported autos for the most
recent month are preliminary and subject to revision.
1. Excludes some vehicles produced in Canada that are classified as imports by the industry.

Sales of Light Vehicles

Average Value of Incentives on Light Vehicles

Millions of units, annual rate

Current dollars per vehicle
2600

19.0
Aug.

18.5

Aug.

2002

2003

2400

18.0

2200

17.5

2000

17.0

1800

16.5

1600

16.0

1400

15.5

1200

15.0

2004

2002

2003

1000

2004

Note. FRB seasonals. Adjusted for shifts in reporting
periods.

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

Michigan Survey Index of Car-Buying Attitudes

Days’ Supply of Light Vehicles

Index

Days
165

160
Aug.

155
150
Aug.

80
70

145
60

140
135

130
2000

2001

2002

2003

2004

125

1998

1999

2000

2001

2002

2003

2004

II-13
Production of Domestic Autos and Trucks
(Millions of units at an annual rate except as noted; FRB seasonals)
2004
Item
U.S. production
Autos
Trucks
Days’ supply 2
Autos
Trucks
Inventories3
Autos
Trucks

2004

2003
12.1
4.5
7.6
73
63
80
3.17
1.13
2.04

July

Aug.

Sept.1

12.4
4.4
8.0

11.9
4.2
7.7

11.9
4.3
7.6

11.5
4.1
7.4

12.0
4.3
7.7

12.1
4.5
7.6

75
63
84
3.26
1.11
2.14

78
63
88
3.33
1.09
2.24

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

74
59
83
3.33
1.05
2.28

78
65
87
3.41
1.09
2.32

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

Note. Components may not sum to totals because of rounding.
1. Production rates for the third quarter and September reflect the latest
schedules from Ward’s Communications.
2. Quarterly and annual values are calculated with end-of-period stocks and
average reported sales; excludes medium and heavy trucks.
3. End-of-period stocks; excludes medium and heavy trucks.
n.a. Not available

Medium and Heavy Truck Orders
(FRB seasonals)

Thousands
800
3-month moving average, annual rate
700
+ Aug.

600
500
400
300

1998

1999

2000

2001

2002

2003

200

2004

Note. August value is a preliminary estimate.
Source. ACT Research Co.

Medium and Heavy Truck Sales
(FRB seasonals)

Thousands
600
Annual rate
550
500
Aug.

450
400
350
300

1998

1999

2000

2001

2002

2003

2004

250

II-14
Retail and Food Services Sales
(Percent change from preceding period; seasonally adjusted current dollars)
Category
Total sales
Previous estimate
Retail control1
Previous estimate
GAF2
Gasoline stations
Food services
Other retailers3

2003
H2

3.7
3.7
4.0
4.0
3.9
5.3
5.3
3.3

2.3
2.3
2.7
2.7
2.7
6.5
3.0
1.6

2004
June

July

Aug.

1.6
1.7
1.4
1.4
.2
6.1
.8
1.6

-.7
-.5
.1
.2
.0
.3
.0
.3

.8
.7
.5
.4
.8
-.4
1.1
.2

-.3
...
.2
...
-.4
.3
-.3
.9

1. Total retail trade and food services less sales at building material and supply stores and automobile
and other motor vehicle dealers.
2. Furniture and home furnishing stores; electronics and home appliance stores; clothing and
accessories stores; sporting goods, hobby, book, and music stores; and general merchandise stores.
3. Health and personal care stores, food and beverage stores, electronic shopping and mail order
houses, and miscellaneous other retailers.
... Not applicable.
Real PCE Goods Excl. Motor Vehicles
2900

Quarterly average

Real PCE Services

Billions of chained (2000) dollars
2900

4360
Quarterly average

Aug.

2850

Billions of chained (2000) dollars
4360
July

2850

4325

2800

4290

2750

4255

2700

4220

2650

4185

2600

4150

2600

2003

2004

2003

2004

4150

Note. August value is a staff estimate.

Change in Real Personal Consumption Expenditures and Real DPI
Percent, annual rate
12

12
9

Real Peronal Consumption Expenditures
Real DPI

-3

-6

-6
H1

H2
2003

Apr. May June July
2004

II-15

well above 50; more recently, the new orders diffusion index in the Empire State
survey turned back up in September. And although the staff’s series on real
adjusted durable goods orders has slipped since the spring, it was still at a high
level in July.
Motor Vehicles
Sales of light vehicles fell in August to an annual rate of 16.5 million units after
having surged to 17.2 million units in July. Taken together, the average pace of
sales in July and August was nearly 1/2 million units above that in the first half
of the year, an increase likely reflecting some strengthening in demand as well
as a further sweetening of incentives. The latest report from J.D. Power and
Associates showed that the average incentive per vehicle was $183 larger in
August than in the second quarter. Industry contacts anticipate that sales in
September will be at an annual rate of about 17 million units (confidential).
Business-sector demand for motor vehicles remains strong. Sales of medium
and heavy trucks climbed in July and August to their highest levels in four
years, and industry contacts expect sales of these vehicles to remain vigorous
over the remainder of the year. Indeed, orders for medium and heavy trucks
have been at an annual rate of about 600,000 units since the spring, nearly
50 percent above the pace for 2003 as a whole. Fleet sales of light vehicles
declined about 200,000 units in August, but their pace so far this year is still
above the average of 2003.
Despite the relatively robust pace of sales in recent months, inventories of light
vehicles (especially trucks) have remained high, and at the end of August, days’
supply stood at 78. The automakers have scheduled production in the fourth
quarter at a 12.2 million annual rate; however, given the elevated level of
inventories, an underbuild would not be surprising.
Consumer Spending
After a slowdown in the spring, consumer spending appears on track to
accelerate in the current quarter. Real PCE rose sharply in July, and the
available data suggest that spending held fairly steady in August. Although
sales of light vehicles dropped back last month from July’s heady pace, nominal
spending in the control category of retail sales—which excludes auto dealers
and building material and supply stores—increased 0.2 percent. After
accounting for the staff’s projection of price changes, we estimate that real
spending on goods excluding cars and trucks rose 0.2 percent in August after
having jumped 0.9 percent in July. Real expenditures on services moved up
0.2 percent in July, according to the latest available data.
Real disposable income has increased at a sluggish rate so far this year. On the
basis of unemployment insurance tax records for the first quarter and labor
market data for the second quarter, the BEA now estimates that real DPI rose at

II-16
Household Indicators

Household Net Worth and Wilshire 5000
Index
15000

Ratio
7.0

13000

6.5
Aug.

Wilshire 5000
(left scale)

11000
9000

5.5
Q2

7000

5.0

Ratio of household net worth to DPI
(right scale)

5000
3000

6.0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

4.5
4.0

2004

Personal Saving Rate
7

Percent
7

1
July

0
-1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

0
-1

2004

Consumer Confidence
1985 = 100
160

1966 = 100
120
Michigan SRC
(right scale)

140

110

120

Aug.

100

Aug.

60
40

Conference Board (left scale)
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

II-17

an annual rate of just under 2-1/2 percent in the first half of the year,
1/2 percentage point below its earlier estimates. In July, real DPI inched up just
0.1 percent as increases in compensation were largely offset by declines in
proprietors’ income and transfer payments.6 As a result of the revisions to
income, the personal saving rate was marked down over the first half of the
year, and it fell to 0.6 percent in July. Household net worth has been rising
about in line with income so far this year, although the lagged effects of the
substantial increase in wealth in 2003 should be providing support to consumer
spending. Consumer sentiment has exhibited relatively small movements in
recent months after having moved up in the first half of the year.
Housing Markets
Housing activity rebounded in July after a dip in June. Starts of new singlefamily homes bounced back to an annual rate of 1.65 million units, the same as
in May. Permit issuance—adjusted for activity in areas where permits are not
required—stayed at a high level in July, and the backlog of permits increased;
these data suggest that single-family starts were probably strong in August.
Indicators of activity in the multifamily sector followed much the same contour,
with starts recovering in July from a June stumble and with the permit backlog
rising.
Home sales remained robust in July, although sales of both existing and new
homes were below the monthly peaks of earlier this year. Sales of existing
homes in July were about 3-1/2 percent above the average pace during the first
half of the year. Sales of new homes, which tend to lead sales of existing homes
by a month or two, set a record in May but then fell sharply in the following two
months.7 Although sales of new homes in July were below their average in the
first half of the year, they were about 3-1/2 percent above the pace for 2003 as a
whole.
Recent indicators suggest that housing demand will stay relatively brisk in the
near term. Rates on thirty-year conventional mortgages, which had risen above
6 percent in the spring, have receded over the past couple of months and now
stand at 5.83 percent, around the middle of the low range that has prevailed
since early 2003. In addition, the four-week moving average of mortgage
applications to purchase homes moved up sharply in early September. And
although consumers’ home-buying attitudes have deteriorated a bit of late, they
are still in the favorable range that has persisted for the past couple of years.

6. The drop in transfer payments primarily reflected the BEA’s assessment that the
expiration on June 30 of the temporary increase in the federal share of Medicaid costs that went
into effect during 2003 would result in a sharp drop in payments to individuals in July.
7. New home sales are recorded when a contract is signed, which generally occurs before
the sale is closed. In contrast, most sales of existing homes are recorded at closing.

II-18
Private Housing Activity
(Millions of units; seasonally adjusted annual rate, except where noted)
2003
2004
Sector
All units
Starts
Permits
Single-family units
Starts
Permits
Adjusted permits1
Permit backlog2
New home sales
Existing home sales
Multifamily units
Starts
Permits
Permit backlog2
Mobile homes
Shipments

2003

May

June

July

1.85
1.89

2.04
1.97

1.94
1.93

1.92
2.02

1.98
2.10

1.83
1.95

1.98
2.06

1.50
1.46
1.50
.115
1.09
6.10

1.66
1.54
1.60
.115
1.12
6.30

1.57
1.52
1.55
.123
1.20
6.20

1.60
1.57
1.60
.135
1.22
6.79

1.65
1.61
1.64
.118
1.28
6.81

1.52
1.55
1.59
.135
1.21
6.92

1.65
1.57
1.59
.136
1.13
6.72

.35
.43
.061

.38
.44
.061

.37
.42
.054

.33
.45
.057

.33
.49
.056

.30
.40
.057

.33
.49
.066

.131

.126

.127

.126

.127

.125

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.
2. Number outstanding at end of period. Seasonally adjusted by Board staff. Excludes permits that have
been cancelled, abandoned, expired, or revoked. Not at an annual rate.

Private Housing Starts
(Seasonally adjusted annual rate)
Millions of units
2.5

2.5

2.0

July

2.0

Total
July
1.5

1.5

Single-family

1.0

Multifamily

.5
July

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

II-19
Indicators of Single-Family Housing
Existing Home Sales

Prices of Existing Homes
Thousands of units
7500

7500
7000

7000
July

6500

6000

5500

5000
4500

1998

1999

2000

2001

2002

2003

2004

Percent change from year earlier
14

Repeat transactions
Average price of homes sold

12
July
Q2

10
8

5000

4500

Source. National Association of Realtors.

1998

1999

2000

2001

2002

2003

2004

Source. Freddie Mac Conventional Mortgage Home
Price Index and National Association of Realtors.

New Home Sales

Prices of New Homes
Thousands of units
1500

1500

Percent change from year earlier
25

Constant quality
Average price of home sales

20
1300

1300
15
July

1100

900

700

1100

15
July
Q2

900

1998

1999

2000

2001

2002

2003

2004

700

-5

Source. Census Bureau.

1998

1999

2000

2001

2002

2003

2004

-5

Source. Census Bureau.

Mortgage Rates

Homebuying Indicators
Percent
9

9
Fixed rate

Diffusion index
120
MBA purchase index (right scale)
Michigan homebuying attitudes (left scale)
100

Index
550
500
450

Sept. 10
400

Sept.

Aug.

300

Adjustable rate
4
3

Sept.
1998

1999

2000

2001

2002

2003

2004

Note. The September readings are based on data
through Sept. 9.
Source. Freddie Mac.

350

250
1998

1999

2000

2001

2002

2003

2004

2005

200

Note. MBA index is a 4-week moving average. Michigan
Survey data are not seasonally adjusted.
Source. Mortgage Bankers Association and Michigan Survey.

II-20
Equipment and Software Investment Fundamentals

Real Business Output
Percent change, annual rate
12

6
Q2

-3

-6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-6

Real Corporate Cash Flow
Percent change, annual rate
72

-18
-36

0
-18

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-36

User Cost of Capital
(Excludes the effects of the partial expensing tax incentive)

High-Tech

2000 = 100, ratio scale

Non-High-Tech

2000 = 100, ratio scale

240

108

196

104

162

100

128

128
92

240

108

88
Q2

Q2
60

1990

1992

1994

1996

1998

2000

2002

2004

1990

1992

1994

1996

1998

2000

2002

2004

II-21

Home prices have continued to rise rapidly. In July, the average prices of both
new and existing homes sold were about 10 percent higher than a year earlier.
Measures that are less affected by changes in the composition of homes sold
have also registered large increases. For example, in the second quarter, the
repeat-transactions price index for existing homes was 10 percent higher than a
year earlier, and the constant-quality price index for new homes was
8-1/4 percent higher.8 As has been true for some time, the largest increases in
home prices over the past year generally have been in cities near the East and
West coasts.
Equipment and Software
Real business outlays for equipment and software increased at an annual rate of
13-1/2 percent in the second quarter, and the data in hand point to another
sizable advance in the current quarter. Although high-tech spending seems to
have decelerated, outlays for transportation equipment are rising briskly, and
spending on other capital goods is on track for a significant increase this quarter.
In general, investment in equipment and software has been supported by the
continued gains in business output, low financing costs, ongoing price declines
for high-tech capital, and the corporate sector’s large cushion of liquid assets.
In the high-tech sector, nominal shipments of both computing and
communications equipment rose in July, but the increases reversed only part of
the declines in these series over the preceding two months. Orders for high-tech
equipment have also been on the soft side in recent months; several bellwether
companies—including Intel, Cisco, and Hewlett-Packard—have become less
optimistic about their near-term sales prospects. In contrast, orders and
shipments of capital goods outside of high-tech moved up substantially in June
and July, particularly in the machinery sector. Orders have exceeded shipments
in this broad category for six consecutive months, and the resulting upward
trend in unfilled orders shows no signs of abating.
As noted, a sizable ramp-up in outlays for medium and heavy trucks appears to
be under way this quarter, partly in response to high levels of freight demand
and a faster pace of replacement of aging fleets. Business spending on aircraft,
while still far below its peak of a few years ago, rose in the second quarter, and
July data on shipments by domestic producers of aircraft suggest that the aircraft
component of equipment and software investment is holding up in the current
quarter.

8. The repeat-transactions price index, which is sometimes referred to as a "repeat sales"
price index, is based on repeated observations of the value of a home, either through sales prices
or appraisals.

II-22
Orders and Shipments of Nondefense Capital Goods
(Percent change; seasonally adjusted current dollars)
2004
Indicators

May

Annual rate

June

July

Monthly rate

Shipments
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

10.5
12.1
-4.3
2.6
17.1

9.0
9.2
8.9
8.7
9.4

-2.0
-2.8
-9.8
-1.9
-1.5

1.8
2.6
-.8
-2.8
4.0

1.0
1.5
4.7
1.5
.9

Shipments of complete aircraft1

29.2

25.7

25.8

26.8

27.0

Orders
Excluding aircraft
Computers and peripherals
Communications equipment
All other categories

10.4
15.8
-14.8
48.3
18.5

15.1
7.8
36.9
13.5
2.4

-1.4
-2.0
.9
-17.3
.0

1.5
1.8
.2
-7.0
3.3

9.2
.7
-5.4
6.2
1.2

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

Computers and Peripherals

Communications Equipment

Billions of dollars, ratio scale

12
Shipments
Orders

12
11

9
July

1999

2000

2001

2002

2003

2004

Billions of dollars, ratio scale

21
18

Shipments
Orders

9
July

1999

2000

Aircraft Shipments
5

21
18

2001

2002

2003

2004

Other Equipment

Billions of dollars, ratio scale

5
4

Billions of dollars, ratio scale

51
Shipments
Orders

51
48

July
45

July
2

1999
2000
2001
2002
2003
2004
Source. Census Bureau, Current Industrial Reports.

1999

2000

2001

2002

2003

2004

II-23

Nonresidential Construction
In broad terms, real business investment in nonresidential structures has
remained around the depressed levels that have prevailed since the steep decline
in 2001 and 2002. However, the most recent data may be hinting that some
improvement is starting to take hold. Real nonresidential construction spending
rose at an annual rate of 7 percent in the second quarter and apparently increased
further in July.
Indicators of market conditions for nonresidential structures continued to be
mixed in the second quarter. In the office sector, the vacancy rate was only a
little below its recent peak, and rents continued to decline, although property
values have inched up recently. The vacancy rate for industrial space also
remained near its high. Conditions were brighter in the retail sector: The
vacancy rate stayed low, and rents and property values both rose further.
Spending on drilling and mining structures likely has continued to increase at a
robust pace in the current quarter, mainly because of the continued uptrend in
the number of natural gas drilling rigs in operation.
Business Inventories
We now estimate that real nonfarm NIPA inventories excluding motor vehicles
increased at an annual rate of $48 billion in the second quarter, and the data for
July suggest that inventory rebuilding is continuing apace in the current quarter.
Led by accumulations at aircraft manufacturers and at producers of petroleum
and coal products, the book value of manufacturing inventories rose at an annual
rate of $45 billion in July; given the rise in oil prices, the nominal figures for the
latter category likely overstate real inventory investment. The book value of
wholesale and retail trade inventories excluding motor vehicles increased at an
annual rate of $41 billion in July, although these gains were also likely inflated
by price movements in the petroleum sector.
Some of the stockbuilding in recent months may have been the unintended
consequence of slower-than-expected sales. Nevertheless, the recent
accumulation may not have been entirely unwelcome. In particular,
manufacturers likely built stocks, especially at earlier stages of processing, to
keep up with the ongoing rise in factory production. And although the ISM’s
index of customer inventories rose dramatically in August, the percentage of
purchasing managers who reported that their customers’ inventories were too
low continued to exceed the percentage that characterized them as too high.
According to the staff’s flow-of-goods system, days’ supply of inventories
edged down in July. Among industry groups, the inventories of motor vehicles
and paper remain elevated. Inventories of communications equipment also
remained high, although days’ supply has fallen nearly 20 percent since early
2002.

II-24
Nonresidential Construction
(Seasonally adjusted, annual rate)
Total Structures

Office

290

Billions of dollars, ratio scale
290

268

251

234

234
July

217

200

1997 1998 1999 2000 2001 2002 2003 2004

Billions of dollars, ratio scale
65

July

217

200

Manufacturing

1997 1998 1999 2000 2001 2002 2003 2004

Commercial

Billions of dollars, ratio scale
47

Billions of dollars, ratio scale
70

July

1997 1998 1999 2000 2001 2002 2003 2004

July

1997 1998 1999 2000 2001 2002 2003 2004

Note. Includes retail, wholesale, and "other" establishments.

Power and Communication

Other

Billions of dollars, ratio scale
65

Billions of dollars, ratio scale
80
July

July
33

1997 1998 1999 2000 2001 2002 2003 2004

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

II-25
Indicators of Nonresidential Construction
Office Buildings
Vacancy Rate

Rent and Property Values

Percent change from previous period
10

10
Rent
Property values

-2

-4

-6

-8

-8
1994

1996

1998

2000

2002

-2

1992

Q2
14

-10

2004

Source. National Real Estate Index.

Percent change from previous period
5
4
Q2

1996

1998

2000

2002

2004

Percent
11

-1

-2

-3

1994

Retail Buildings
Vacancy Rate

Rent
Property values

1992

Source. National Council of Real Estate Investment
Fiduciaries.

Rent and Property Values
5

Percent
18

1992

1994

1996

1998

2000

2002

2004

6
Q2

Source. National Real Estate Index.

5
1992

1994

1996

1998

2000

2002

2004

Source. National Council of Real Estate Investment
Fiduciaries.

Drilling Activity
Rigs in Operation

Industrial Buildings
Vacancy Rate
Number
1200

1200

Percent
18

Sept.
1000

1000

800

800
Natural gas

600

400

400
Petroleum

200

200
Sept.

1992

1994

1996

1998

2000

2002

2004

Note. Sept. values are averages through Sept. 10.
Source. DOE/Baker Hughes.

1992

1994

1996

1998

2000

2002

2004

Source. National Council of Real Estate Investment
Fiduciaries.

II-26
Changes in Manufacturing and Trade Inventories
(Billions of dollars; seasonally adjusted book value; annual rate)
2003
Sector

2004

May

June

July

48.1

82.0

120.4

98.0

159.9

129.0

25.1

55.6

94.1

111.0

85.2

1.2
4.3

24.0
24.0

38.9
39.3

39.0
41.5

52.4
52.9

44.6
34.3

Wholesale trade
Motor vehicles and parts
Ex. motor vehicles and parts

16.7
6.2
10.5

23.5
3.2
20.3

33.7
1.3
32.4

50.9
3.9
47.0

42.2
2.5
39.7

48.6
7.4
41.2

Retail trade
Motor vehicles and parts
Ex. motor vehicles and parts

30.2
16.9
13.4

34.5
23.1
11.4

47.7
25.0
22.7

8.1
-16.9
25.0

65.3
46.4
18.9

35.9
36.5
-.5

Manufacturing and trade
Ex. wholesale and retail
motor vehicles and parts
Manufacturing
Ex. aircraft

Book-Value Inventories Relative to Shipments and Sales
Ratio
1.700

1.700
Retail trade ex. motor vehicles and parts

1.525

1.525
Manufacturing

1.350

1.350
July

1.175

1.000

1.175

Wholesale trade ex. motor vehicles and parts

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

1.000

2004

Inventory-Consumption Ratios, Flow-of-Goods System
Days’ supply
64

62
Total

58
56

Total ex. motor vehicles and parts

52
Aug.

50
48
46

50
48

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

II-27

Federal Government Sector
The federal budget picture continues to show modest improvement. Adjusted
for payment-timing shifts, the federal budget recorded a deficit of $111 billion
in July and August combined, $11 billion lower than for the same period last
year. Receipts were about 14 percent above their year-earlier level. While most
of the increase relative to a year ago can be traced to the drain on revenue last
July and August from the mail-out of individual-income-tax rebate checks, other
tax receipts did increase robustly over the past year. Withheld and FICA taxes,
which were unaffected by the rebate checks, were 6 percent higher in July and
August than in the same period last year.
Outlays in July and August, adjusted for payment-timing shifts, were
7-1/2 percent over year-earlier levels. Defense spending once again posted large
increases—averaging 14 percent over the year-earlier level—after a brief lull in
June. Outlays for net interest and Medicare also rose sharply. Nevertheless,
Medicaid spending in July and August fell below year-earlier levels with the
expiration on June 30 of the temporary increase in the federal matching rate.
According to the Congressional Budget Office’s (CBO) midyear update of the
budget outlook, the federal budget will post a deficit of $422 billion in fiscal
year 2004, about $56 billion lower than projected last January. Nevertheless,
the CBO’s longer-term baseline deficit outlook has deteriorated a bit, with the
cumulative deficit from 2005 to 2014 now projected to equal 1.5 percent of
nominal GDP, compared with 1.3 percent of GDP in last January’s projection.
However, much of the deterioration in the outlook since January is the result of
the rules governing the way in which the CBO puts together its baseline
projections; under these rules, the CBO is required to assume that the budget
authority for discretionary spending will increase with inflation throughout the
forecast period. Thus, the recently passed Department of Defense
Appropriations Act, which provided an additional $28 billion for spending in
Iraq in 2004, boosted the CBO’s projection of defense spending through 2014.
State and Local Government Sector
Indicators of spending by state and local governments have been positive in
recent months. Employment was up 18,000 in August, about the same as in
July. Nominal construction spending edged up in July after having risen at a
5 percent quarterly rate in the second quarter, the largest quarterly advance since
the second quarter of 2001. All major categories of state and local construction
spending have posted solid gains in recent months.
The improvement in aggregate spending by the sector is consistent with reports
of strengthening fiscal positions among the states. Revenue collections in the
final months of the last fiscal year (which ended on June 30 in all but a few
states) came in strong. As a result, many states ended fiscal 2004 with higherthan-expected balances and were able to begin rebuilding rainy-day funds. All

II-28
Federal Government Outlays and Receipts
(Unified basis; billions of dollars except as noted)
July-August

Function or source

2003

2004

Outlays
Financial transactions1
Payment timing2
Adjusted outlays

368.6
-.1
6.7
362.0

382.4
-.7
.0
383.2

Receipts
Payment timing
Adjusted receipts

237.8
.0
237.8

Surplus or deficit (-)
Selected components
of adjusted outlays
and receipts
Adjusted outlays
Net interest
Non-interest
National defense
Social security
Medicare
Medicaid
Income security
Agriculture
Other
Adjusted receipts
Individual income and
payroll taxes
Withheld + FICA
Nonwithheld + SECA
Less: Refunds
Corporate
Gross
Less: Refunds
Other
Adjusted surplus or deficit (-)

12 months ending in August
Percent
change

Percent
change

2003

2004

3.7
...
...
5.8

2141.3
-1.7
.4
2142.7

2274.7
-2.2
-6.7
2283.7

6.2
...
...
6.6

272.1
.0
272.1

14.4
...
14.4

1783.2
.0
1783.2

1864.1
.0
1864.1

4.5
...
4.5

-130.8

-110.3

...

-358.2

-410.6

...

362.0
26.2
335.8
68.9
79.4
42.1
28.6
50.0
2.5
64.2

383.2
31.3
351.8
78.8
83.2
47.0
27.2
47.7
1.4
66.6

5.8
19.4
4.8
14.3
4.8
11.6
-5.1
-4.5
-44.8
3.7

2142.7
155.4
1987.3
397.9
473.2
247.0
159.9
334.3
23.7
351.4

2283.7
160.7
2123.0
453.6
494.1
267.7
175.1
335.9
18.6
378.1

6.6
3.4
6.8
14.0
4.4
8.4
9.5
.5
-21.7
7.6

237.8

272.1

14.4

1783.2

1864.1

4.5

201.9
212.6
10.0
20.7
3.9
9.2
5.3
32.0

229.2
225.6
10.4
6.8
6.7
10.2
3.5
36.2

13.5
6.1
3.8
-67.1
73.0
11.6
-34.0
13.1

1467.6
1369.5
291.4
193.3
132.3
195.4
63.1
183.3

1489.7
1392.5
285.2
188.0
177.4
219.5
42.1
196.9

1.5
1.7
-2.1
-2.7
34.2
12.4
-33.3
7.4

-124.2

-111.0

...

-359.5

-419.6

...

Note. Components may not sum to totals because of rounding.
1. Financial transactions consist of deposit insurance, spectrum auction and sales of major assets.
2. A shift in payment timing occurs when the first of the month falls on a weekend or holiday, or
when the first three days of a month are nonworking days. Outlays for defense, Social Security,
Medicare, income security, and "other" have been adjusted to account for these shifts.
... Not applicable.

II-29

II-30
Measures of Consumer Price Inflation
(Percent)
12-month change

3-month change

1-month change

Annual rate

Monthly rate

July
2003

July
2004

Apr.
2004

July
2004

June
2004

July
2004

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

2.1
2.1
9.0
1.5
1.5
-1.8
2.9
1.9
1.2

3.0
4.0
14.3
1.8
1.8
-1.2
3.0
2.4
1.3

3.9
2.0
16.0
3.3
3.4
1.4
4.1
...
...

3.7
5.5
22.9
1.6
1.6
-.9
2.5
...
...

.3
.2
2.6
.1
.1
.0
.2
...
...

-.1
.3
-1.9
.1
.1
-.3
.3
...
...

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

1.7
1.9
9.0
1.3
1.3
-2.1
2.7
1.2
1.6

2.4
3.4
15.2
1.5
1.5
-.9
2.5
1.5
1.5

2.8
2.8
16.7
2.0
2.0
1.5
2.2
2.3
.7

2.5
4.1
22.6
1.1
1.0
-1.3
2.1
1.5
-.9

.2
.1
2.7
.1
.1
.0
.2
.2
-.2

.0
.2
-2.0
.0
.0
-.4
.2
.1
-.1

Measures

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted.
... Not applicable.

Measures of Producer Price Inflation
(Percent)
12-month change

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

Aug.
2003

Aug.
2004

3.5
5.0
14.7
.4
.9
.3
.7
4.4
1.6
20.8
8.2

3.4
4.0
9.9
1.5
1.6
1.6
1.4
8.1
7.3
22.4
32.3

3-month change

1-month change

Annual rate

Monthly rate

May
2004
8.5
17.7
16.0
3.2
3.5
3.1
4.1
13.1
11.2
23.0
-23.4

Aug.
2004

July
2004

Aug.
2004

-1.1
-9.2
3.2
.5
.5
.0
.9
9.3
8.5
2.8
63.0

.1
-1.6
2.3
.1
.1
.1
.1
.8
.5
-.2
8.6

-.1
-.2
.2
-.1
-.1
-.2
-.1
1.0
1.0
-.7
4.5

II-31

states except Kentucky have enacted fiscal 2005 budgets. State officials appear
to be generally upbeat about the prospects for the current year, although some
have expressed concern about budgets in 2006 and beyond in light of anticipated
increases in Medicaid caseloads, school enrollments, and prison populations.
Many cities are still dealing with serious fiscal problems. According to a survey
soon to be released by the National League of Cities, the percentage of cities
reporting deteriorating fiscal conditions remained high in fiscal 2004, and
officials in more than half of the reporting cities think that their fiscal situations
will remain strained in 2005. Although these governments are benefiting from
the boom in real estate values, they remain under pressure from rapidly rising
health-care and pension costs, increased spending on public safety, and marked
declines in state aid. In fiscal 2004, many cities raised or instituted new fees
and charges and cut spending on services.
Prices and Labor Costs
The overall CPI edged down 0.1 percent in July as energy prices fell and the
core component rose just 0.1 percent for a second month. Over the twelve
months ending in July, the overall CPI rose 3 percent, nearly 1 percentage point
faster than over the preceding year. The acceleration in part reflected a sharper
increase in energy prices, but food prices also rose more rapidly, and the twelvemonth change in the core CPI moved up from 1-1/2 percent in July 2003 to
1-3/4 percent in July 2004.
Retail energy prices fell nearly 2 percent in July after large increases in a
number of earlier months; a drop of 4-1/4 percent in gasoline prices led the
decline. As summer began, gasoline inventories were quite lean by historical
standards, but during the summer, lower demand and increased imports pushed
inventories above the levels usually seen at that time of year. The resulting
downward pressure on margins led gasoline prices to fall even as crude oil
prices moved higher. Available survey evidence points to an additional small
decline in the CPI for gasoline in August. Retail prices apparently continued to
fall through early September, though the declines lagged the drop in crude oil
prices since mid-August and thus resulted in a small uptick in margins. With
inventories of natural gas remaining high through August, the spot price for
natural gas at Henry Hub fell sharply last month. This week, Hurricane Ivan
caused a temporary shutdown of oil and gas rigs in the Gulf of Mexico, and spot
natural gas prices rose 13 percent on September 14. However, the level of spot
natural gas prices remains below the August average.
Consumer food prices rose 0.3 percent in July after an increase of 0.2 percent in
June. Prices for meats and poultry have moved up sharply for several months,
although recent large declines in the spot prices for livestock and poultry should
help to reverse some of these increases. Retail dairy prices had also accelerated
in the spring, but suppliers subsequently boosted milk production and, as a

II-32
Energy Prices and Inventories

Total Gasoline Margin
110
105

Cents per gallon
110

Retail price less WTI spot price

105

100

75
Sept. 13

70
65

2001

2002

2003

2004

Note. Average of all grades (DOE) seasonally adjusted, less West Texas intermediate spot price.

Gasoline Price Decomposition
Cents per gallon
195

195
Retail price*

Sept. 13

155

155
Sept. 13

115

WTI spot price
75

2001

2002

2003

2004

* Average of all grades (DOE) seasonally adjusted.

Gasoline Inventories

Natural Gas Inventories
Millions of barrels
235

235
Average historical range
Present year

230

3000
225

220

215

210

205

200

195

190

190
F

Historical range, 1999-2003
Present year

230

225

Billions of cubic feet
3500

3500

2004
Note. Average historical range calculated by Energy
Information Administration.

3000

2500

2000

1500

1000

500

500
J

2004
Note. Historical range calculated by FRB staff.

II-33

result, dairy prices declined 0.6 percent in July. Food away from home—which
accounts for about 40 percent of the CPI for food—rose 0.4 percent in July after
smaller increases in May and June. Over the twelve months ending in July,
consumer food prices rose 4 percent, compared with a year-earlier rate of
increase of about 2 percent. The main effect of the recent hurricanes on foodrelated products has been damage to the citrus crop in Florida, where groves of
oranges used for juice apparently were hard hit; futures prices for frozen
concentrated orange juice are up more than 20 percent since just before the first
storm.
Excluding food and energy, the CPI edged up 0.1 percent in July after a similar
increase in June. On a three-month-change basis, core CPI inflation stood at an
annual rate of 1-1/2 percent in July, down from 3-1/4 percent over the three
months ending in April. Both goods and services contributed to this
moderation: Core commodity prices declined at an annual rate of 1 percent over
the three months ending in July after increasing 1-1/2 percent over the preceding
three-month period, and core services prices rose 2-1/2 percent after climbing
4 percent during the earlier period. We had interpreted the sharp step-up in core
inflation earlier this year as partly reflecting the pass-through of higher energy
and import costs into core consumer prices and partly as payback for 2003’s
unusually modest price increases. While, on our estimates, the contribution of
these pass-through effects is only just starting to crest, the moderation in
inflation evident in the recent data suggests that much of the payback from the
unusually modest increases last year is complete.
Core PCE prices were flat in July. These prices rose 1-1/2 percent over the
twelve months ending in July, an acceleration of 1/4 percentage point relative to
the preceding year. Both the market-based and nonmarket components of the
core PCE price index rose 1-1/2 percent over the past twelve months; for the
market-based index, this increase represented a small pickup from a year ago,
while core nonmarket price inflation was little changed.
The PPI for core finished goods edged down 0.1 percent in August after a
0.1 percent increase in July. Over the year ending in August, the core PPI
increased 1-1/2 percent, about 1 percentage point faster than the year-earlier
increase, as both core consumer and capital goods prices accelerated. At the
earlier stages of processing, the prices for core intermediate materials—led by
large increases for building materials, chemicals, and nitrogenates—rose
1 percent in August. Prices for core crude materials increased 4-1/2 percent last
month and are up more than 32 percent over the past year, in large part because
of a surge in prices for iron and steel scrap (although spot prices for scrap have
eased a little in recent weeks). Since the PPI’s reporting date, commodity prices
have moved up again, with the CRB spot industrials index (which excludes
energy items) rising more than 5 percent over the past five weeks.

II-34
Core Consumer Price Inflation
(12-month change except where noted)

CPI and PCE excluding Food and Energy

PCE excluding Food and Energy

Percent
3

Current methods
CPI
Core PCE
2

July

July
PCE
1

CPI
chained

1
Market-based components

1998

1999

2000

2001

2002

2003

2004

CPI excluding Food and Energy
(Current Methods)

1998

1999

2000

2001

2002

2003

2004

CPI Services and Commodities
Percent

Percent
4

Services ex. energy

July

2
Commodities ex. food and energy

July
1

1
3-month change, annual rate

1998

1999

2000

2001

July

-1

-2

2002

2003

2004

-3

-1

-2

1998

1999

2000

2001

2002

2003

2004

-3

II-35
Broad Measures of Inflation
(Percent change, Q2 to Q2)
Measure

2001

2002

2003

2004

Product prices
GDP price index
Less food and energy

2.5
2.0

1.5
2.0

1.9
1.6

2.3
1.9

Nonfarm business chain price index

2.0

1.2

1.5

Expenditure prices
Gross domestic purchases price index
Less food and energy

2.3
1.8

1.3
1.8

1.9
1.6

2.5
1.9

PCE price index
Less food and energy

2.4
1.8

1.2
1.8

1.8
1.4

2.3
1.5

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

2.3
1.7

.9
1.6

1.8
1.2

2.4
1.5

CPI
Less food and energy

3.4
2.7

1.3
2.4

2.2
1.5

2.8
1.8

Chained CPI
Less food and energy

2.7
2.0

1.0
1.9

1.9
1.3

2.3
1.3

Median CPI
Trimmed mean CPI

3.5
2.9

3.6
2.2

2.2
1.9

2.5
2.1

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

5 to 10 years 3

Actual
CPI
inflation 1

Mean

Median

Mean

Median

Professional
forecasters
(10-year) 4

2002:Q4

2.2

2.7

2.5

3.3

2.8

2.5

2003:Q1
Q2
Q3
Q4

2.9
2.1
2.2
1.9

3.2
2.6
2.8
3.0

2.8
2.2
2.3
2.6

3.0
3.1
3.1
3.1

2.7
2.7
2.7
2.8

2.5
2.5
2.5
2.5

2004:Q1
Q2
Q3

1.8
2.9
n.a.

3.1
4.0
n.a.

2.7
3.3
n.a.

3.4
3.3
n.a.

2.9
2.8
n.a.

2.5
2.5
2.5

2004:Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.

1.9
1.7
1.7
2.3
3.1
3.3
3.0
n.a.

2.9
2.9
3.4
4.0
3.9
4.0
3.5
3.1

2.7
2.6
2.9
3.2
3.3
3.3
3.0
2.8

3.4
3.3
3.4
3.2
3.3
3.4
3.1
3.1

2.8
2.9
2.9
2.7
2.8
2.9
2.8
2.7

...
...
2.5
...
...
2.5
...
...

Period

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

II-36

Commodity Price Measures
Total

Journal of Commerce Index
Ratio scale, 1996=100

Sept.

120

130

116

120

112

Metals
110

Jul

Aug
2004

Sep

108

100
Metals

124

90
Total

120

116
70

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Jul

Aug
2004

Sep

112

CRB Spot Industrials
Ratio scale, 1967=100

360

CRB Industrials
Sept.

320

310
280
Jul

Aug
2004

Sep

300

240

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

200

CRB Futures
Ratio scale, 1967=100
Sept.

290
270

CRB Futures

250

280
270

230
210

290

Jul

Aug
2004

Sep

260

190

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

170

Note. Larger panels show monthly average of weekly data through last available week. Smaller panels show weekly data, Tuesdays. Vertical
lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost entirely on industrial commodities, with
a small weight given to energy commodities, and the Commodity Research Board (CRB) spot price index consists entirely of industrial commodities,
excluding energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly equally
among energy commodities, industrial commodities, and precious metals. Copyright for Journal of Commerce data is held by CIBCR, 1994.

II-37
Spot Prices of Selected Commodities
(Percent change except as noted)

Commodity

Current
price
(dollars)

2002 1

2003 1

12/30/03
to
8/3/04 2

8/3/04 2
to
9/14/04

Memo:
52-week
change to
9/14/04

Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)

1.360
203.667
.763

5.6
49.2
2.8

47.9
66.8
16.7

27.8
45.8
7.5

-1.4
-13.7
-.2

65.9
58.3
20.9

Precious metals
Gold (oz.)
Silver (oz.)

405.250
6.280

24.3
3.8

20.7
24.6

-6.1
11.1

3.7
-5.4

8.2
20.4

Forest products 3
Lumber (m. bdft.)
Plywood (m. sqft.)

450.000
555.000

-8.9
.7

44.5
36.7

52.2
26.6

2.3
11.0

27.5
3.7

Petroleum
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)

41.680
1.254
1.224

66.9
69.2
63.8

-7.4
12.5
6.3

43.5
28.7
26.7

-2.0
2.3
5.1

70.6
40.4
68.9

Livestock
Steers (cwt.)
Hogs (cwt.)
Broilers (lb.)

82.630
53.250
.661

16.5
-13.2
6.5

4.1
18.3
10.9

12.2
59.2
14.6

-1.8
-5.8
-13.1

-5.8
29.9
2.9

Farm crops
Corn (bu.)
Wheat (bu.)
Soybeans (bu.)
Cotton (lb.)

1.995
4.000
5.430
.483

18.1
37.7
32.2
52.1

1.7
-2.1
37.1
42.5

-11.3
-8.1
-23.6
-35.6

-3.6
7.0
-7.5
10.0

-3.4
13.5
-8.6
-16.7

Other foodstuffs
Coffee (lb.)

.688

1.1

23.1

2.6

22.2

25.0

116.900
117.200
273.390
319.690

16.8
9.7
24.4
13.7

22.3
38.1
9.1
24.0

12.8
15.9
5.3
-.5

1.0
-3.4
1.5
4.2

21.1
37.6
15.0
17.3

Memo:
JOC Industrials
JOC Metals
CRB Futures
CRB Spot Industrials

1. Changes are from the last week of the preceding year to the last week of the year indicated.
2. August 3, 2004, is the Tuesday preceding publication of the August Greenbook.
3. Prices shown apply to the Friday before the date indicated.

II-38
Hourly Compensation and Unit Labor Costs
(Percent change from preceding period at compound annual rate; based on seasonally adjusted data)
2003
Category

2004

2003:Q2
to

2002

2003

Compensation per hour
Nonfarm business
Nonfinancial corporations 1

2.9
2.5

5.4
5.0

6.1
6.2

4.4
4.2

2.0
2.3

4.3
4.0

4.2
4.1

Unit labor costs
Nonfarm business
Nonfinancial corporations 1

-.6
-2.4

-.2
-1.5

-2.7
-3.0

1.2
-.8

-1.6
2.1

1.8
2.6

-.3
.2

2004:Q2

Note. Annual changes are from fourth quarter of preceding year to fourth quarter of year shown.
1. All corporations doing business in the United States except banks, stock and commodity brokers, and finance and insurance
companies. The sector accounts for about two-thirds of business employment.

Markup, Nonfinancial Corporations

Markup, Nonfarm Businesses
1.66

1.66

1.59

1.64

1.57

1.62

1.55

1.60

1.53

1.58

1.51

1.56

1.49

1.54

1.47

1.52

1.45

1.51
Average, 1968-present

Average, 1968-present

1990

1992

1994

1996

1998

2000

2002

2004

1990

1992

1994

1996

1998

2000

2002

2004

1.45

Note. Markup defined as ratio of output price to unit
labor costs.

Labor Costs for Production or Nonsupervisory Workers
(12-month change)
4.5

Percent
4.5

4.0

3.5

3.0

3.0
ECI wages and salaries

June

2.5

Aug.
Average hourly earnings

2.0

1.5
1.0

2.5

1.5
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

1.0

II-39

Inflation expectations as measured by the Michigan survey edged lower in
August. Median year-ahead expected inflation was 2.8 percent last month,
down 0.2 percentage point from July and similar to its first-quarter readings.
Median expected inflation over the next five to ten years ticked down
0.1 percentage point, to 2.7 percent; this series has remained in a relatively
narrow range over the past several years.
On labor costs, the BLS reported that hourly compensation in the nonfarm
business sector rose at an annual rate of 4-1/4 percent in the second quarter; this
rate was considerably higher than the downward-revised first-quarter pace but
was in line with the average rate of increase seen over the preceding four
quarters. After factoring in the anticipated revision to productivity growth, we
estimate that unit labor costs rose at an annual rate of 1-1/4 percent in the second
quarter and almost reversed their first-quarter decline. (The published data
showed an increase of 1-3/4 percent in unit labor costs in the second quarter.)
Taking a longer perspective, unit labor costs have edged lower over the past
several years, and with prices in the nonfarm business sector increasing at a slow,
but steady, rate, the markup of prices over unit labor costs has risen to a level
significantly above the long-term average. The markup in the nonfinancial
corporate sector has not risen as rapidly and is currently only little above its
historical mean.
Average hourly earnings of production or nonsupervisory workers rose
0.3 percent in August, a pace in line with the average rate of increase over the
past several months but well above the very low readings over much of 2003. As
a result, the twelve-month change in this series has moved back up since the start
of the year and stood at 2-1/4 percent in August.
Recent indicators suggest that health insurance costs are continuing to rise
rapidly, although some slowing from the outsized increases of the past few years
appears to be in train. The Survey of Employer-Sponsored Health Benefits
conducted annually by the Kaiser Family Foundation and the Health Research
and Educational Trust (HRET) showed that health insurance premiums
increased 11-1/4 percent, on average, between the spring of 2003 and the spring
of 2004 after having risen about 14 percent over the preceding year. For 2005,
premiums in the Federal Employees Health Benefits Program are expected to
rise a bit less than 8 percent, compared with an increase of 9-1/2 percent in
2004. Earlier this year, the California Public Employees Retirement System
announced that its premiums (for non-Medicare enrollees) would go up about
10 percent, on average, in 2005 after having risen 16-1/2 percent in 2004.

Domestic Financial
Developments

III-T-1

Selected Financial Market Quotations
(One-day quotes in percent except as noted)
2003

Change to Sept. 14 from
selected dates (percentage points)

2004

Instrument
Dec. 31

June 28

Aug. 9

Sept. 14

2003
Dec. 31

2004
June 28

2004
Aug. 9

Short-term
FOMC intended federal funds rate

1.00

1.25

1.50

.50

.25

Treasury bills 1
3-month
6-month

0.93
1.00

1.36
1.74

1.49
1.69

1.64
1.84

.71
.84

.28
.10

.15
.15

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

1.00
1.05

1.28
1.45

1.50
1.58

1.68
1.78

.68
.73

.40
.33

.18
.20

Large negotiable CDs 1
1-month
3-month
6-month

1.06
1.09
1.16

1.30
1.53
1.82

1.54
1.61
1.75

1.74
1.84
2.01

.68
.75
.85

.44
.31
.19

.20
.23
.26

Eurodollar deposits 3
1-month
3-month

1.04
1.07

1.29
1.51

1.50
1.60

1.71
1.82

.67
.75

.42
.31

.21
.22

Bank prime rate

4.00

4.25

4.50

.50

.25

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

1.83
4.40

2.88
4.90

2.44
4.42

2.46
4.28

.63
-.12

-.42
-.62

.02
-.14

U.S. Treasury 10-year indexed note

2.00

2.23

1.85

1.81

-.19

-.42

-.04

Municipal revenue (Bond Buyer) 5

5.04

5.37

5.24

5.07

.03

-.30

-.17

Private instruments
10-year swap
10-year FNMA6
10-year AA 7
10-year BBB 7
5-year high yield 7

4.66
4.72
5.05
5.74
7.94

5.21
5.30
5.59
6.18
8.30

4.71
4.77
5.12
5.71
8.01

4.59
4.62
4.94
5.53
7.69

-.07
-.10
-.11
-.21
-.25

-.62
-.68
-.65
-.65
-.61

-.12
-.15
-.18
-.18
-.32

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

5.81
3.73

6.25
4.13

5.99
4.08

5.83
4.00

.02
.27

-.42
-.13

-.16
-.08

Record high

Change to Sept. 14
from selected dates (percent)

2004

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

Level

Date

June 28

Aug. 9

Sept. 14

Record
high

2004
June 28

2004
Aug. 9

11,723
1,527
5,049
606
14,752

1-14-00
3-24-00
3-10-00
4-5-04
3-24-00

10,357
1,133
2,020
584
11,056

9,815
1,065
1,775
518
10,312

10,318
1,128
1,915
571
10,982

-11.98
-26.13
-62.06
-5.84
-25.55

-.38
-.44
-5.17
-2.25
-.66

5.13
5.92
7.93
10.14
6.50

1. Secondary market.
2. Financial commercial paper.
3. Bid rates for eurodollar deposits collected around 9:30 a.m. Eastern time.
4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities.
5. Most recent Thursday quote.
6. Constant maturity yields estimated from Fannie Mae domestic noncallable coupon securities.
7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data.
8. For week ending Friday previous to date shown.
_______________________________________________________________________
NOTES:
June 28, 2004, is the day before the beginning of the current tightening period.
August 9, 2004, is the day before the most recent FOMC meeting.
_______________________________________________________________________

III-C-1

Policy Expectations and Treasury Yields
Futures Contract Rates
Percent

Percent
August
employment
report

July
employment August
FOMC
report

2.3

3.8
3.6

2.2
3.4
December 2005 Eurodollar (right scale)

3.2

2.1

3.0
2.0

2.8
2.6

1.9
December 2004 federal funds (left scale)

2.4

1.8
8/3

8/6

8/11

8/16

8/19

8/24

8/27

9/1

9/6

9/9

9/14

Note. 5-minute intervals.

Expected Federal Funds Rate

Percent
4.5

September 14, 2004
August 9, 2004

4.0

Implied Distribution of Federal Funds Rate
about Six Months Ahead
Percent
September 14, 2004 (bars)
August 9, 2004 (dashed line)

3.5

3.0

2.5

2.0

1.5

1.0

0
1.00

0.5
Sept.
2004

Feb.

June Oct.
2005

Feb.

June
2006

2.50

3.50

4.00

Note. Based on the distribution of the three-month Eurodollar
rate five months ahead (adjusted for a risk premium), implied
by options on Eurodollar futures contracts.

Percent
3.8

June August
FOMC FOMC

Daily

6
10 year

3.00

Inflation Compensation

Percent

Daily

2.00

Target Rate

Oct.

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

Treasury Yields

1.50

3.6
3.4
3.2

5
Sept.
14

3.0

5 to 10 years
ahead

2.8
Sept.
14

3
5 year

2 year

2.6
2.4
2.2

2.0
1
2002

2003

2004

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

1.8
Jan.

Mar.

May
2004

July

Sept.

Note. Estimates based on smoothed nominal and inflationindexed Treasury yield curves.

Domestic Financial Developments
Overview1
Near-term policy expectations firmed over the intermeeting period, as investors
apparently placed greater weight on the relatively optimistic August FOMC
announcement, comments by Federal Reserve officials expressing confidence in
the economic outlook, and the reassuring August employment report than on
other economic data that came in on the soft side of expectations. Federal funds
futures rates now suggest that market participants are nearly certain of a 25 basis
point tightening at the September FOMC meeting. At the same time, the
anticipated path of policy further ahead edged lower as investors apparently
marked down their outlook for inflation. Longer-term Treasury yields dropped
with the lower path for policy expectations beyond the middle of next year.
Corporate risk spreads narrowed over the intermeeting period, and broad equity
price indexes posted solid gains.
Corporate borrowing has strengthened somewhat in recent months from its
fairly sluggish first-half pace. Household debt growth stayed robust in the
second quarter, although it was a bit below the first quarter’s double-digit pace,
and low mortgage rates suggest that household borrowing has remained strong
in the current quarter. Growth in M2 has ebbed in recent months, a decrease
reflecting in part the typical widening of opportunity cost that accompanies
rising short-term market rates.
Policy Expectations and Interest Rates
The FOMC’s decision at the August meeting to increase the funds rate target by
25 basis points, maintain a balanced assessment of risk, and retain the "measured
pace" language was widely anticipated, but investors reportedly viewed the tone
of the accompanying statement as optimistic and marked up their expectations
for the path of policy. The employment report released earlier this month and a
series of comments from Federal Reserve officials expressing confidence about
the economic expansion helped to solidify the view that the economy was likely
emerging from a “soft patch,” even though the economic data releases over the
intermeeting period were seen as mixed. At the same time, subdued readings on
core price inflation and comments by the Chairman suggesting that inflation
pressures were well contained appeared to ease concerns about the inflation
outlook. The estimated path for the funds rate implied by futures contracts

1. This review focuses on the period since the last FOMC meeting, as is standard practice
for the Greenbook. Accordingly, the effects of the employment report for July, which was
released on the Friday between the August Greenbook publication date and the August FOMC
meeting, are omitted from the discussion that follows. Nonetheless, we would note that, on the
release of the report, the market’s expected path for the federal funds rate flattened substantially,
and intermediate- and longer-term yields fell as much as 1/4 percentage point. In addition, broad
stock price indexes fell about 3 percent between the Greenbook publication date and the FOMC
meeting.

III-2

III-3
moved up slightly through the first quarter of next year but shifted down
somewhat at longer horizons: Investors now expect the funds rate to reach
almost 2 percent by the end of this year and about 2-3/4 percent by the end of
2005. All of the respondents to the New York Fed’s Primary Dealer Survey
anticipate a 25 basis point hike accompanied by a statement of balanced risks to
growth and inflation at the upcoming FOMC meeting.
The Treasury yield curve flattened in line with the shallower slope of the funds
rate path and, given the decline in implied volatilities on bond futures, perhaps
lower term premiums. The two-year Treasury yield edged up 2 basis points and
the ten-year yield fell 14 basis points. TIPS yields were unchanged at the short
end and declined less than nominal yields further out, reducing inflation
compensation 12 basis points over the next five years and 6 basis points over the
subsequent five years.
Yields on investment-grade corporate bonds fell a touch more than those on
comparable-maturity Treasury securities over the intermeeting period. Yields
on speculative-grade bonds fell about 30 basis points, narrowing risk spreads
somewhat. Conditions in commercial paper markets remained accommodative.
Stock Prices, Earnings, and Credit Quality
Broad stock price indexes were up about 6 percent, on net, over the intermeeting
period, in part because of a pullback of oil prices from their recent peaks,
leaving stock prices still shy of recent highs in late June. The rise in stock
prices brought the twelve-month forward earnings-price ratio for S&P 500 firms
down a touch, and its spread over a real long-run Treasury yield, a rough
measure of the equity premium, narrowed a bit. Implied volatility on both the
Nasdaq 100 and S&P 500 indexes touched eight-year lows.
Operating earnings per share for S&P 500 firms rose 25 percent over the four
quarters ended in the second quarter. Analysts’ forecasts in August of yearahead corporate earnings were little changed from their July levels, which
marked the end of an unusually long run of sizable upward revisions. August
year-ahead forecasts imply a considerable slowdown in earnings growth over
the next few quarters, albeit to a pace that is still relatively strong.
The credit quality of nonfinancial firms continued to improve. The ratio of
interest expense to cash flow declined further in the second quarter, dropping to
its lowest level in more than two decades. Net upgrades of corporate bonds
turned positive in the second quarter, the first positive quarterly reading since
1998, and in July, upgrades outpaced downgrades by an even wider margin.
Delinquencies on C&I loans continued to decline in the second quarter, and the
six-month trailing default rate on corporate bonds held steady in August at a

III-4

III-5

III-6

III-7
very low level. The forecast of aggregate year-ahead default rates based on the
KMV model also stayed relatively low in July.
Business Finance
On net, debt growth of nonfinancial firms in recent months has been above the
pace of the first half of the year. Gross bond issuance by nonfinancial firms
jumped in early August as bond yields dropped substantially. A few firms
issued bonds to pay down commercial paper, prompting a small decline in
commercial paper in August; most of the decline was reversed early this month.
C&I loans expanded briskly in July and August after a moderate gain in the
second quarter—the first quarterly increase in more than three years. Responses
to the Survey of Terms of Business Lending conducted in August indicated that,
adjusted for loan characteristics, the average spread of C&I loan rates was
essentially unchanged from the narrow reading in the May survey.
Gross public equity issuance by nonfinancial firms has been sluggish in recent
months. Seasoned equity offerings in August were at the lower end of their
recent range, and initial public offerings were minimal apart from Google’s
highly anticipated debut. In contrast to the slow pace of gross public issuance,
second-quarter equity retirements picked up on the strength of continued robust
corporate profits and ample cash on firms’ balance sheets. Both cash-financed
mergers and share repurchases increased in the second quarter and will likely be
even stronger in the third quarter given the recent pace of announcements. As a
result, net equity issuance is estimated to have dropped in the second quarter and
is likely to come in even more negative in the current quarter.
Commercial Real Estate
Commercial mortgage debt expanded at a rapid annual rate of 11-1/2 percent in
the second quarter, and the available information points to continued strength in
the third quarter. Meanwhile, credit quality remained favorable, with the
delinquency rate on commercial-mortgage-backed securities (CMBS)
maintaining its downward trend in July and the delinquency rates on commercial
mortgages held by banks and insurance companies remaining at low levels in
the second quarter. CMBS spreads have stayed low, and REIT equity prices
have now fully reversed their spring decline.
Household Finance
Interest rates on adjustable-rate and thirty-year fixed-rate home mortgages fell
slightly over the intermeeting period. With rates at attractive levels and
mortgage applications well maintained, it appears likely that mortgage debt
growth will remain robust through the current quarter. While still relatively
high, the spread between rates on fixed-rate and adjustable-rate mortgages has
declined about 10 basis points since the last FOMC and more than 60 basis

III-8

III-9

III-10

III-11
points since its recent high in May. Accordingly, the ARM share of originations
has likely continued to decline after its tick down in July.
The ratio of households’ financial obligations to their disposable income edged
down further in the second quarter. This ratio had declined 2/3 percentage point
since the end of 2002, in part because of slow growth in rent payments relative
to income. The relative slowing of rent payments suggests some easing of
financial pressure for renters, who tend to have more burdensome financial
obligations than other households. Indeed, the estimated financial obligations
ratio for renters declined by 2 percentage points since the end of 2002.
Measures of household credit quality held steady over the intermeeting period.
Delinquency rates on auto loans at captive finance companies remained low in
July, while those on consumer loans and residential mortgages at commercial
banks were little changed during the second quarter. Estimated year-to-date
household bankruptcy filings were nearly 5 percent lower than they were over
the same period last year, but they remained somewhat elevated compared with
the pace in previous years.
Modest gains in stock prices, brisk house-price appreciation, and moderate
income growth resulted in an essentially unchanged ratio of household net worth
to disposable income over the second quarter. The only available indicator of
household net worth for the third quarter is stock prices, which are at about the
same level as they were at the end of the second quarter.
Aggregate estimated inflows to capital market mutual funds were tepid in
August and slightly off July’s pace. Sharp increases in flows to bond funds in
August were balanced by declines in flows to equity funds.
State and Local Government Finance
Gross issuance of long-term municipal bonds was moderate in July and August,
holding at a level considerably below the elevated pace seen over the preceding
few years. Short-term debt issuance rose in August, but the bulk of the increase
came from a single $6.6 billion issue by the state of Texas, which typically
issues short-term bonds in late summer to cover funding needs at the start of its
fiscal year until tax revenues arrive in January. Aside from this deal, the level of
short-term issuance remained low, reflecting the improved budget situations in
many states.
Municipal bond credit quality continued to strengthen. Upgrades of municipal
bonds again outpaced downgrades in August and early September, as they have
since February. In particular, S&P upgraded California’s general obligation

III-12

III-13
bonds from BBB to A. Risk spreads of BBB-rated municipal bond yields over
AAA yields were little changed and remained near multiyear lows.
Treasury and GSE Finance
After a somewhat larger-than-anticipated monthly federal budget surplus in
June, the deficits for July and August were close to market expectations. The
Treasury’s midquarter refunding was reportedly well received by investors, and
the continuing solid level of indirect bidding indicated that foreign demand for
Treasury securities remained strong.
The level of federal debt again has begun to approach its statutory limit, and
current staff estimates suggest that the ceiling will be reached by the middle of
October. If, as expected, the Congress fails to raise the debt limit by then, the
Treasury will likely be forced to employ accounting maneuvers similar to those
used in past years to keep debt under the limit for a few weeks.
Despite uncertainty about the outcomes of ongoing investigations into their
accounting practices, the spreads of yields of Fannie Mae and Freddie Mac
bonds over comparable Treasury securities were little changed over the
intermeeting period. Their stock prices rose slightly more than those of
commercial banks.
Money and Bank Credit
Growth in M2 was essentially flat over July and August, a sharp deceleration
from the rapid growth in the second quarter. This slowing apparently resulted
from increases in the opportunity cost of M2 with the move to tighter monetary
policy and the lingering effects of the late-spring dropoff in mortgage
refinancing. In particular, retail money funds and liquid deposits, whose rates of
return are slow to adjust to increases in market rates, posted minimal growth or
outright declines. In contrast, small time deposits, whose rates of return adjust
more promptly, posted positive growth in July for the first time in more than two
years and strengthened further in August.
After stalling in July, bank credit increased at an annual rate of almost 4 percent
in August as a contraction in banks’ securities holdings was more than offset by
moderate loan growth.2 C&I loans originated by banks grew for the third
consecutive month. Real estate loan growth slowed from its second-quarter
pace, partly reflecting securitizations. Consumer loans adjusted for
securitizations edged down.

2. In July, the composition of bank credit was affected by a $30 billion reclassification; two
institutions reclassified the seller’s interest portion of securitized credit card loans from other
securities to consumer loans.

III-14

III-15

International Developments

International Developments
U.S. International Transactions
Trade in Goods and Services
Since the August Greenbook, trade data were released for June and July. In
June, the U.S. international trade deficit reached a record high of $55.0 billion,
(revised down from a preliminary estimate of $55.8 billion). The trade deficit
shrank to $50.1 billion in July, but was still much larger than May’s deficit.

In June, the value of exports of goods and services decreased 3.9 percent, with
exports of goods accounting for the entire fall, as exports of services edged up.
The decrease in the value of exported goods was widespread. The largest
declines occurred in capital goods, industrial supplies, and agricultural products.
Within capital goods, aircraft and “other” capital goods showed the steepest
declines, though computers and semiconductors also fell. Overall, for the
second quarter, the value of exported goods and services was about 12½ percent
at an annual rate above its first quarter level. The quarterly increase was
concentrated in services, industrial supplies, and capital goods. Exports of
automotive products and consumer goods also rose, but exports of agricultural
products fell.
After the sharp fall in June, the value of exports of goods and services partially
recovered in July, increasing 3.0 percent. Exports of goods more than accounted
for the entire rise, as exports of services edged down slightly. The increase in
the value of exported goods was driven by increases in capital goods
(particularly aircraft), industrial supplies, and automotive products. Exports of
agricultural products also increased. However, the category of automotive
products was the only one for which July’s recovery was sufficient to result in
exports being greater than May’s value. For the fourth consecutive month,
exports of consumer goods declined.

IV-2

IV-3

IV-4

The value of imports of goods and services rose 2.9 percent in June, as imports
of goods surged and imports of services rose modestly. Within goods, the
largest increases were in imports of petroleum (mostly from higher quantity, but
also from higher prices), capital goods, and non-oil industrial supplies. Imports
of consumer goods and of foods, feeds and beverages edged down. Imports of
automotive products (particularly from non-NAFTA partners) fell more sharply.
At an annual rate, the value of imported goods and services in the second quarter
was nearly 21 percent above its first quarter level. The quarterly rise was driven
largely by increases in imports of non-oil industrial supplies, capital goods, and
consumer goods.
Following the sizable increase in June, the value of imports of goods and
services fell 1.4 percent in July, with declines in both imports of goods and
services. Within the major categories of goods, only imports of automotive
products increased in July. Imports of foods and consumer goods had the
sharpest percentage declines. Imports of capital goods and industrial supplies
also edged downward. In July, the value of oil imports fell as a sharp decline in
volume was reinforced with a small decline in price.
Prices of Internationally Traded Goods
Since the August Greenbook, price data for traded goods were released for July
and August.
Non-oil imports.
In July, the prices of U.S. imports of non-oil goods were unchanged, but prices
of core goods increased 0.1 percent. Prices of imported core goods rose slightly
faster than in June, but still below the rates of increase seen earlier in the year.
The largest contribution to core import prices came from prices of imported
capital goods (excluding computers and semiconductors), which, after having
been about flat throughout most of this year, rose 0.4 percent in July (mostly
from higher prices for imported industrial and service machinery). Prices of
imported foods also increased 0.4 percent in July. Import prices for consumer
goods and automotive products saw little change in July. Prices of imported
computers and semiconductors continued to decline in July.
In August, the prices of U.S. imports of non-oil goods and of core goods
increased 0.4 and 0.5 percent, respectively. Prices of imported core goods
picked up noticeably from July and rose at the fastest monthly rate since April.
After increasing only 0.2 percent in July, prices of imported non-oil industrial
supplies contributed the most to the acceleration, rising 2.0 percent in August,
largely reflecting a surge in lumber prices. Import prices of capital goods
(excluding computer and semiconductors) rose 0.2 percent in August, the
second consecutive month of price increases. Prices of imported foods,

IV-5

IV-6

following a strong July, edged up just 0.1 percent in August. Import prices of
computers continued to decline in August, whereas prices of imported
semiconductors edged up 0.1 percent. Import prices for consumer goods and
automotive products were unchanged in August.
Overall, the average level of imported core goods prices in July and August was
2¼ percent at an annual rate above the second-quarter level. This rate of
increase is much smaller than the increases in the first and second quarters. In
July and August, the rise was concentrated in non-oil industrial supplies and, to
a lesser extent, capital goods (excluding computers and semiconductors), and
foods.
Oil. After increasing 2 percent in July, the BLS price of imported oil rose
nearly 10 percent in August, in line with the average monthly increase in the
spot price of West Texas Intermediate (WTI) crude oil. The spot price of WTI
surged to a record high of $48.70 per barrel in mid-August amid concerns about
the availability of supply to meet surprisingly strong demand. Since then, the
spot price of WTI has dropped back to about $44 per barrel, but remains
volatile. Factors influencing oil prices include ongoing violence in Iraq,
uncertainty about future oil production and exports by Yukos in Russia, recent
declines in U.S. crude oil inventories, and storm activity in the Gulf of Mexico.
Exports.
In July, the prices of U.S. exports of total goods and of core goods rose 0.5 and
0.6 percent, respectively. Rising 1.9 percent in July, prices for exported nonagricultural industrial supplies (particularly steel and iron products) contributed
to most of the increase. Export prices of consumer goods also contributed,
rising 0.5 percent. These increases more than offset a 1.0 percent drop in the
price of agricultural exports, the second consecutive month of price declines.
Prices of exported capital goods (excluding computers and semiconductors)
ticked up 0.1 percent. Export prices of computers fell 0.5 percent, whereas
export prices of semiconductors increase 0.1 percent.
In August, the prices of U.S. exports of total goods and of core goods retraced
their increases in July, falling 0.5 and 0.6 percent, respectively. The fall in
export prices is entirely attributable to a fall in the prices of U.S. agricultural
exports, particularly soybeans and corn. Following strong increases in July,
prices of exported non-agricultural industrial supplies rose 0.8 percent in
August. Export prices of consumer goods and capital goods (excluding
computers and semiconductors) each rose 0.2 percent. In August, prices of
exported automotive products ticked up 0.1 percent. Export prices of computers
fell 0.1 percent, whereas export prices of semiconductors were unchanged.

IV-7

The average level of exported core goods prices in July and August was about
unchanged from the second-quarter level, which is a considerable step-down
from the price increases that occurred earlier this year. A decline in prices of
exported agricultural products offset moderate increases in industrial supplies
and small increases in other categories.
Current Account
The U.S. current account deficit was $665 billion (s.a.a.r.) in the second quarter
of 2004, up from $589 billion in the first quarter of 2004 (revised). The change
was driven by a widening of the trade deficit on goods and services and a fall in
the surplus on investment income.
The deficit on goods and services widened $47 billion in the second quarter, as
an $80 billion increase in imports was only partially offset by a $33 billion
increase in exports. The increase in the value of imported goods largely
reflected strong increases in industrial supplies, capital goods, and consumer
goods. Imports of services rose $4 billion. The value of exported goods
increased $22 billion, with much of the increase concentrated in industrial
supplies, capital goods and consumer goods. Exports of services moved up
$11 billion.
U.S. Current Account

(Billions of dollars, seasonally adjusted annual rate)
Goods and Investment
Current
Other
Period
services,
income,
account
income and
net
net
transfers, net balance
Annual
2002
-421.7
12.6
-64.8
-473.9
2003
-496.5
38.8
-72.9
-530.7
Quarterly
2003:Q3
Q4
2004:Q1
Q2
Change
Q3-Q2
Q4-Q3
Q1-Q4
Q2-Q1

-489.0
-502.0
-554.4
-601.1

34.5
70.1
54.3
16.7

-72.0
-76.0
-88.5
-80.3

-526.5
-507.8
-588.7
-664.7

4.5
-13.0
-52.4
-46.7

5.4
35.6
-15.8
-37.6

-0.9
-4.0
-12.5
8.2

9.0
18.7
-80.8
-76.1

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

The surplus on net investment income fell $38 billion in the second quarter, as a
$13 billion rise in receipts was swamped by a $52 billion rise in payments. The
sizable increase in payments reflects a $27 billion increase in direct investment
payments and a $24 billion increase in portfolio payments. The rise in receipts

IV-8

was a result of a $10 billion increase in portfolio income and a $4 billion
increase in direct investment receipts.
Net unilateral transfers to foreigners fell $9 billion as a result of a $11 billion
decline in U.S. government grants being only partially offset by a $2 billion
increase in private remittances. The decline in government grants follows a
$12 billion increase in U.S. government grants in the first quarter.
U.S. International Financial Transactions
Private foreign net purchases of U.S. securities (line 4 of the Summary of U.S.
International Transactions table) remained very strong in July. Inflows were
driven by foreign purchases of corporate bonds (line 4c), which continued at an
elevated pace, and Treasury securities (line 4a), which remained robust. Private
purchases of agency bonds (line 4b) and equities (line 4d) moved up from their
modest levels of recent quarters. Euro-area countries increased their holdings of
U.S. securities in July, while private inflows from Japan, which picked up
substantially in the second quarter, remained elevated.
Net foreign official inflows (line 1) slowed to $13 billion in July, following
monthly averages of roughly $25 billion in the second quarter and $43 billion in
the first quarter.
. Total
holdings at the FRBNY increased for August, and averaging this increase with
the inflows recorded for July yields a significant inflow, similar to the rate of the
second quarter.
U.S. acquisition of foreign securities picked up a bit in July (line 5). The
increase was primarily driven by U.S. investors’ demand for equities (line 5b),
but U.S. investors bought foreign bonds (line 5a) for the second consecutive
month as well.
The banking sector (line 3), which is volatile, recorded modest outflows in July.
The recently released balance of payments data for the second quarter show that
U.S. direct investment abroad (line 6) moved up to nearly $61 billion while
foreign direct investment in the United States (line 7) jumped up to $32 billion.
The disparity between these flows is mainly attributable to differing levels of
reinvested earnings in the U.S. and abroad rather than difference in new crossborder acquisitions.
The statistical discrepancy was positive for the second consecutive quarter,
indicating some combination of overreporting of the current account deficit or
underreporting of net capital inflows.

IV-9

IV-10

Foreign Financial Markets
The dollar’s trade-weighted exchange value changed little, on net, over the
intermeeting period. The dollar depreciated in mid-August following the release
of data showing a much larger than expected trade deficit for June, but later
retraced much of that decline. Although the price of the NYMEX front-month
crude oil futures contract fluctuated widely over the period, reaching an intraday
peak near $50 per barrel on August 20, oil prices did not appear to be
systematically associated with exchange rate movements.

On a bilateral basis, the dollar appreciated more than 3 percent on balance
versus sterling, as the Bank of England held its policy stance unchanged and
market participants scaled back expectations for future tightening. The dollar
depreciated about ¾ percent against the Canadian dollar. The Bank of Canada
raised its main policy rate 25 basis points, to 2.25 percent, on September 8,
citing concerns about inflation arising in part from oil prices. The dollar
appreciated 1 percent against the euro and Swiss franc, and depreciated about
¾ percent vis-a-vis the yen.
Movements in short-term spot interest rates in foreign industrial countries were,
with the exception of Canada, generally modest over the period. Market
measures of expected future short-term interest rates declined moderately for
sterling, in part on reports showing a slowdown in the rate of increase of

IV-11

housing prices. Implied rates rose slightly for the euro; several ECB Governing
Council members expressed concerns about the potential impact of rising oil
prices on inflation. However, in the absence of salient economic news, ten-year
benchmark yields for the United Kingdom and the euro area were little changed
on net. In Japan, benchmark yields and money market futures rates for 2005 and
2006 declined on new concerns about the strength of the current economic
recovery, as GDP and machinery orders data came in well below market
expectations. Japan’s benchmark equity index nevertheless rose about 2
percent. Equity prices rose about 5 percent in the euro area and the United
Kingdom.
Asset prices rose substantially over the period in a number of emerging-market
countries. The Brazilian real appreciated 4 percent against the dollar and
Brazil’s EMBI+ spread over Treasuries fell about 90 basis points. These price
movements appeared to be driven in part by renewed optimism about the
government’s ability to implement fiscal reforms following a favorable decision
by Brazil’s supreme court regarding the government’s authority to tax pensions
of public sector employees. The Mexican peso depreciated about 1¼ percent on
balance versus the dollar, but equity prices in Mexico rose almost 8 percent.

IV-12

There was little market reaction to news in mid-August that a referendum to
recall Venezuela’s President Chavez had failed by a wide margin. In emerging
Asia, equity prices, led by the technology sector, rose sharply in a number of
countries, more than reversing the declines registered in the previous
intermeeting period. Prices appeared to be also supported by abating concerns
about the likelihood of a hard landing for China’s economy and by the
moderation in crude oil prices in late August. Stock prices rose about 9 percent
on net in Taiwan and close to 14 percent in Korea. Korean financial assets were
also supported by an unexpected 25-basis-point cut in the Bank of Korea’s
policy rate on August 12. In Russia, equity prices were up about 12 percent and
the sovereign yield spread over Treasuries declined slightly, despite a series of
terrorist attacks and continued uncertainty over the future of Yukos, Russia’s top
oil producer.

IV-13

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

IV-14

Developments in Foreign Industrial Countries
Economic activity in the major foreign industrial economies continued to
expand in the second quarter, though growth slowed in Japan and the euro area.
Indicators for the third quarter have been mixed. In Japan, growth stepped down
appreciably in the second quarter, and recent readings on activity have been soft.
Growth in the euro area slowed a bit in the second quarter, with domestic
demand remaining sluggish, and indicators for July and August suggest a
continued lackluster recovery. Real GDP accelerated in Canada, largely
reflecting a boom in exports. In the United Kingdom, domestic demand
continued to expand briskly.
Driven by the sharp rise in energy costs, headline rates of consumer price
inflation have moved up sharply since the first quarter, before weakening a bit
recently. In Canada, headline inflation eased to 2.3 percent in July. Inflation in
the euro area is edging down gradually but remains above the ECB’s 2 percent
ceiling. In the United Kingdom, inflation inched down to 1.3 percent in August,
well below the Bank of England’s 2 percent inflation target. Slight deflation
persisted in Japan.
On September 8, the Bank of Canada raised its key policy interest rate 25 basis
points to 2.25 percent.
In Japan, revised estimates show that real GDP rose 1.3 percent during the
second quarter. Personal consumption advanced about 2½ percent, and business
fixed investment rose 5 percent. However, growth was depressed by a steep
drop in government investment, which plunged 25 percent. In addition, a
deceleration in inventory accumulation subtracted 1 percentage point from
growth. Exports surged 15 percent, outpacing an 8 percent increase in imports,
and net exports added about 1 percentage point to growth. Nominal GDP
declined 2.1 percent, following four consecutive quarters of increases. The
GDP deflator fell 2.7 percent below its year-ago level.
Indicators suggest an anemic start to the third quarter. Industrial production was
flat in July, after falling sharply in June. Data on consumer spending were
mixed; household expenditures fell for a third straight month in July, though
new car registrations rebounded in July and August. Real exports fell roughly
1½ percent in July, and real imports were down about 3 percent. Core
machinery orders, a leading indicator of business fixed investment, dropped
about 11 percent in July from the previous month.
The unemployment rate rose to 4.9 percent in July, with employment retracing
only some of the steep losses recorded in June. Conversely, the

IV-15

Japanese Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
2003
Component
GDP

2002

2003

2004
Q4

1.8

3.5

2.2

7.6

6.4

1.3

Total domestic demand

2.6

1.5

6.2

5.4

Consumption

1.8

2.6

4.4

4.2

2.6

Private investment

-1.0

11.9

1.8

23.4

7.3

4.4

Public investment

-4.1

-12.5

-21.7

-6.9

-13.7

-25.2

1.6

1.1

2.4

1.7

2.1

1.3

-.1

-.8

1.8

-1.0

Exports

17.3

11.5

15.4

22.6

19.2

14.8

Imports

8.7

4.9

11.0

11.2

12.8

7.9

Net exports2

1.0

1.6

1.2

1.1

Government consumption
Inventories2

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

job-offers-to-applicants ratio, a leading indicator of employment, moved up to
0.83 in July, marking an eleven-year high. Nominal wages continued to fall
through July, depressed by cuts in summer bonuses. Consumer price deflation
remained mild. Core consumer goods prices in the Tokyo area (which exclude
fresh food but include energy) were unchanged in August from the previous
month and were down 0.2 percent from a year earlier. Higher commodity prices
helped to push wholesale prices up 1.7 percent in August compared with the
same month a year ago, the largest twelve-month increase since 1991.
The government has begun the budget process for FY2005. It aims to keep
overall spending fairly close to the FY2004 level. Debt-servicing costs will
likely increase, but the government hopes to cut discretionary spending 2
percent. Spending on public works is slated for a reduction of about 3 percent.

IV-16

Japanese Economic Indicators
(Percent change from previous period, except as noted, s.a.)
2003
Indicator

2004
Q1

May

June

July

Aug.

Industrial production1

3.9

2.7

-1.3

n.a.

All-industries index

1.1

-.1

1.8

-.8

n.a.

Housing starts

4.9

2.8

-4.4

4.7

5.4

n.a.

Machinery orders2

8.5

-5.6

10.3

-2.1

3.9

-11.3

n.a.

Machinery shipments3

7.6

-.4

4.3

2.4

-1.4

-.8

n.a.

New car registrations

-1.5

12.2

-8.4

-.3

3.3

4.1

1.0

Unemployment rate4

5.1

4.9

4.6

4.9

n.a.

Job offers ratio5

.73

.77

.80

.82

.83

n.a.

-11.0

-5.0

...

CPI (Core, Tokyo area)7

-.1

-.2

-.1

-.2

Wholesale prices7

-.4

1.0

1.4

1.6

1.7

Business sentiment6

1. Mining and manufacturing.
2. Private sector, excluding ships and electric power.
3. Excluding ships and railway vehicles.
4. Percent.
5. Level of indicator.
6. Tankan survey, diffusion index.
7. Percent change from year earlier, n.s.a.
n.a. Not available. ... Not applicable.

Euro-area real GDP rose 2.1 percent in the second quarter, slightly below the
first-quarter pace. Growth in total domestic demand slowed to 0.6 percent. Net
exports accounted for most of the GDP growth, with a surge in exports
outpacing a large increase in imports. Growth among the major member
countries was varied. German GDP accelerated slightly, but domestic demand
made a negative contribution to growth. Growth in France remained robust, and
was almost entirely attributable to domestic demand. Italian real GDP rose 1.1
percent.
Early indicators of activity for the third quarter have been generally positive.
Euro-area retail sales rose 0.4 percent in July, with most member countries
showing an increase. After falling sharply in June, German orders of
manufacturing goods increased 3 percent in July, returning to near their May

IV-17

Euro-Area Real GDP1
(Percent change from previous period, except as noted, s.a.a.r.)
2003
Component

2002

2003

2004
Q4

GDP

1.1

1.9

1.5

2.6

2.1

Total domestic demand

1.2

1.3

-.1

3.8

1.0

2.4

1.1

-1.4

-.1

3.3

-.7

2.4

2.0

2.5

1.8

2.3

-1.2

2.6

-.4

-.6

Exports

3.4

10.4

1.4

5.6

15.7

Imports

3.8

2.4

5.2

7.6

1.4

12.3

Net exports3

-.6

2.0

-2.2

1.6

1.5

Memo: GDP
France
Germany
Italy

1.5
.5
.8

1.0
.0
.1

3.0
1.1
1.6

2.1
1.2
.0

3.4
1.7
2.1

3.4
1.9
1.1

Consumption
Investment
Government consumption
Inventories3

1. Includes Greece as of 2001 Q1.
2. Q4/Q4.
3. Percentage point contribution to GDP growth, s.a.a.r.

level, boosted by a jump in foreign orders. German industrial production
followed a similar pattern, increasing 1.6 percent in July.
In contrast, third-quarter sentiment indicators have been somewhat
disappointing. The German IFO business climate index resumed its downward
trend in July. The IFO index peaked in January and has fallen considerably
since. The current conditions component of the survey has been more robust
and has risen over the course of the year. The euro-area manufacturing PMI fell
to 53.9 in August, marking its lowest level since March.
Labor market conditions remained weak in the euro area, with the
unemployment rate unchanged at 9 percent in July. The German unemployment
rate increased slightly to 10.6 percent in July and remained at that level in
August.

IV-18

Euro-Area Economic Indicators
(Percent change from previous period except as noted, s.a.)
2003
Indicator

2004
Q1

May

June

July

Aug.

Industrial production1

1.0

-.4

n.a.

Retail sales volume2

-.1

-.4

-2.6

2.1

n.a.

Unemployment rate3

8.9

9.0

n.a.

Consumer confidence4

-16.0

-14.3

-14.7

-16.0

-14.0

n.a.

Industrial confidence4

-7.3

-6.7

-4.7

-5.0

-4.0

n.a.

Mfg. orders, Germany

3.4

1.7

1.5

-3.3

3.0

n.a.

CPI5

2.0

1.7

2.3

2.5

2.4

2.3

Producer prices5

1.0

2.0

2.4

2.8

n.a.

M35

7.1

6.2

5.4

4.8

5.4

5.5

n.a.

1. Excludes construction.
2. Excludes motor vehicles.
3. Percent. Euro area standardized to ILO definition. Includes Eurostat estimates in some
cases.
4. Diffusion index based on European Commission surveys in individual countries.
5. Eurostat harmonized definition. Percent change from year earlier.
n.a. Not available.

Twelve-month consumer price inflation in the euro area remained at 2.3 percent
in August, still above the ECB’s 2 percent target ceiling. The pickup in
inflation since the first quarter has been mainly the result of a surge in energy
and administered prices. The ECB is closely monitoring price developments for
second-round effects of these increases. In June, core inflation, excluding
energy and processed food, edged down to 2.1 percent.
Real GDP in the United Kingdom expanded 3.8 percent in the second quarter,
led by substantial rises in consumption, investment, and government spending.
These increases were partly offset by a small negative contribution from
inventories.
Limited indicators point to somewhat slower growth in the third quarter. The
manufacturing PMI fell back in August, after several months of increases, and
industrial production declined in July. Business confidence, which has been
especially volatile of late, jumped in August. August’s services PMI recovered

IV-19

U.K. Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
2003
Component

2002

2003

2004
Q4

GDP

1.9

2.9

3.8

4.2

2.9

3.8

Total domestic demand

3.4

2.7

5.1

6.1

2.7

3.6

Consumption

3.1

2.2

3.2

2.5

4.4

Investment

6.8

1.7

4.5

7.9

6.8

5.8

Government consumption

2.4

5.6

6.4

8.6

4.9

4.1

Inventories2

-.0

1.4

1.6

-1.1

-.7

Exports

-1.4

4.3

6.7

-3.4

9.1

Imports

4.2

3.5

5.8

13.1

-3.3

7.8

-1.6

-1.5

-2.1

-.0

Net exports2

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

slightly, but remains below its level during the first half of the year. Retail sales
edged down in July, though one of the leading surveys of retail sales suggests
that sales moved up a touch in August.
According to the two main private surveys, the monthly increase in housing
prices dropped sharply, and perhaps even turned slightly negative in August.
Household net mortgage and consumer borrowing slowed in July, though to a
still rapid rate.
The labor market continued to be tight, as the official-claims-based measure of
the unemployment rate remained near its lowest points since 1975 and the laborforce-survey measure stayed close to its nadir. The twelve-month rate of
consumer price inflation edged down to 1.3 percent in August, well below the
Bank of England’s 2 percent target.

IV-20

U.K. Economic Indicators
(Percent change from previous period except as noted, s.a.)
2003
Indicator

2004

Industrial production
1

Retail sales volume

May

Jun.

Jul.

Aug.

-.4

1.2

-.3

n.a.

1.6

2.0

1.7

1.0

-.3

n.a.

2.9

2.8

2.7

4.9

4.8

4.7

n.a.

-.3

16.7

16.3

22.0

15.0

6.0

19.0

-3.3

-2.3

-4.3

-5.0

-6.0

-4.0

n.a.

1.3

1.4

1.5

1.6

1.4

1.3

2.9
3.5

-.4
5.2

3.8
4.3

5.3
4.2

3.5
4.1

3.7
3.3

4.8
n.a.

Unemployment rate2
Claims-based
Labor force survey
Business confidence4
5

Consumer confidence
Consumer prices6

Producer input prices
Average earnings7

1. Excludes motor vehicles.
2. Percent.
3. Three-month average centered on month shown.
4. Percentage of firms expecting output to increase in the next four months less percentage
expecting output to decrease.
5. Average of the percentage balance from consumers’ expectations of their financial
situation, general economic situation, unemployment, and savings over the next 12 months.
6. Consumer prices index (CPI). Percent change from year earlier.
7. Percent change from year earlier.
n.a. Not available.
... Not applicable.

In Canada, real GDP accelerated to 4.3 percent in the second quarter, as a
broad-based surge in exports more than offset a slowing of final domestic
demand. Exports of machinery, equipment, and forestry products were
especially strong, and net exports contributed 3.4 percentage points to growth.
Domestic demand was depressed by a deceleration in both residential
investment and personal consumption.
Indicators for the third quarter suggest some slowing in activity. Average
housing starts in July and August were 1.1 percent below the second-quarter
average, pulling back from a fourteen-year high. Total employment was
roughly unchanged in August, and the unemployment rate held steady at 7.2
percent. The trade surplus narrowed in July as rising imports outpaced exports.
The growth in the composite index of leading indicators moderated in July after
very strong increases in the second quarter. New manufacturing orders
continued to move up in July.

IV-21

Canadian Real GDP
(Percent change from previous period, except as noted, s.a.a.r.)
2003
Component

2002

2003

2004
Q4

GDP

3.8

1.7

1.4

3.3

3.0

4.3

Total domestic demand

5.9

3.9

5.7

1.6

1.4

Consumption

3.6

2.8

4.4

6.4

1.3

Investment

3.6

7.0

12.9

5.3

7.2

3.3

Government consumption

3.2

3.5

3.9

3.2

1.2

Inventories2

2.2

-4.1

3.2

-4.1

-.3

Exports

2.0

-.8

-1.9

9.4

6.1

21.6

Imports

7.1

5.0

-3.0

17.8

3.8

13.3

-1.7

-2.1

-2.5

1.0

3.4

Net exports2

1. Q4/Q4.
2. Percentage point contribution to GDP growth, s.a.a.r.

In July, the twelve-month rate of headline CPI inflation eased to 2.3 percent
from 2.5 percent in June. The decrease reflected a moderation of the year-overyear rise in the price of gasoline, as twelve-month core inflation, excluding
food, energy, and indirect taxes, moved up to 1.5 percent.
On September 8, the Bank of Canada increased the targeted overnight rate (its
key policy rate) and the Bank Rate 25 basis points each, to 2.25 percent and 2.5
percent, respectively. The move was the Bank’s first since the end of an easing
cycle in April. The Bank stated that its decision was based on
stronger-than-expected growth in the first half of the year, particularly in the
external sector, that brought the economy close to full capacity. The increase
was also characterized as needed to “avoid a buildup of inflationary pressures.”
The statement added that headline inflation “has remained above expectations,
primarily because oil prices have been persistently higher than the Bank had
assumed.”

IV-22

Canadian Economic Indicators
(Percent change from previous period except as noted, s.a.)
2003
Indicator
GDP by industry

2004
Q1

May

June

July

Aug.

1.1

n.a.

1.5

n.a.

5.7

5.1

-.9

1.9

1.4

n.a.

Retail sales

-.9

1.9

-.3

n.a.

Employment

Unemployment rate1

7.5

7.4

7.3

7.2

7.3

7.2

Consumer prices2

1.7

2.2

2.5

2.3

n.a.

Core Consumer Prices2,3

1.7

1.2

1.3

1.2

1.4

1.5

n.a.

Consumer attitudes4

124.1

123.2

n.a.

...

Business confidence4

146.3

144.8 145.6

...

Industrial production
New mfg. orders

1. Percent.
2. Percent change from year earlier, n.s.a.
3. Excluding food, energy, and indirect taxes.
4. Level of index, 1991 = 100.
n.a. Not available. ... Not applicable.

IV-23

External Balances
(Billions of U.S. dollars, s.a.a.r.)
Country
and balance

2003

2004

June

July

Aug.

Trade
Current account

114.1
157.8

120.4
184.1

116.5
173.1

103.0
143.8

106.4
152.1

n.a.
n.a.

Euro area
Trade
Current account

88.9
56.9

133.8
82.4

114.0
68.6

106.4
-7.3

n.a.
n.a.

Germany
Trade
Current account1

160.5
90.0

200.2
105.6

205.1
126.2

195.2
112.4

188.1
45.0

n.a.
n.a.

France
Trade
Current account

.8
-.3

1.4
.6

-.9
-.8

-1.1
-1.1

-1.0
n.a.

n.a.
n.a.

Italy
Trade
Current account1

5.7
-16.5

-.7
-20.7

-1.2
-26.3

-9.7
-36.2

n.a.
38.2

n.a.
n.a.

-111.0 -114.0

n.a.

Japan

United Kingdom
Trade
Current Account
Canada
Trade
Current Account

-88.5 -105.0 -105.0
-36.4 -39.1
n.a.
42.8
20.2

1. Not seasonally adjusted.
n.a. Not available. ... Not applicable.

49.6
25.0

56.4
30.7

...

66.7

56.7

n.a.

...

IV-24

IV-25

IV-26

Economic Situation in Other Countries
In emerging Asia, the pace of economic performance has varied markedly across
countries in recent months. While Hong Kong enjoyed strong growth, China
registered mixed indicators; activity in Taiwan and Korea slowed. Economic
performance in Latin America remained robust, particularly in Mexico and
Brazil. Inflation in the developing world moved upward, mainly as a result of
increases in energy and food prices, but the level of inflation remained
moderate.
Recent indicators of Chinese economic performance have been mixed.
Administrative and quantitative measures to control investment and bank
lending remain in place, and lending has contracted in the last two months.
Money supply growth has also slowed and industrial production has cooled a
tad. However, investment surged in July, after decelerating for several months,
and import growth has slowed only modestly. Exports continue to rise at a
breakneck pace. Inflation inched up further, with consumer prices rising
5.3 percent in the twelve months ending in July. However, excluding food
prices, consumer prices have been little changed over that period.
Chinese Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
Industrial production2
2

Consumer prices
Trade balance3

2004

2002

2003

8.3

10.0

14.4

2.8

...

14.2

18.6

14.8

17.8

16.4

16.8

16.0

-.4

3.2

2.8

4.4

5.0

5.3

30.4

25.5

1.0

12.8

19.3

21.5

50.3

June

July

Aug.

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

Real GDP in Hong Kong rose almost 11 percent at an annual rate in the second
quarter, supported by strong exports and tourism. Private consumption also
moved up, in line with recent increases in consumer confidence. While
consumer prices have been rising on a monthly basis for almost a year, in July
twelve-month inflation turned positive for the first time in almost six years. A
recent turnaround in property prices, rising fuel prices, and strong domestic
demand have helped push prices into positive territory.

IV-27

Hong Kong Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1
2

Unemployment rate
Consumer prices3
4

Trade balance

2004

2002

2003

4.7

4.9

10.8

...

7.2

7.9

7.2

6.9

7.0

6.9

-1.6

-1.8

-1.9

-.9

-.1

-7.7

-8.5

-13.0

-15.9

-15.8

-12.7

-11.1

May

June

July

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

Real GDP in Taiwan fell 4.5 percent in the second quarter, as consumption
spending contracted in the wake of the confusion surrounding the March
presidential election results. While overall production fell in July, indicators of
high-tech production were down only slightly, and new export orders for hightech goods reached record highs in June and July. Twelve-month consumer
price inflation rose 2.5 percent in August on the back of increases in food and
energy prices.
Taiwan Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2002

Real GDP1

2003

2004
Q1

June

July

Aug.

4.3

5.6

5.0

-.6

...

Unemployment rate

5.2

5.0

4.6

4.5

n.a.

Industrial production

7.9

7.1

1.0

2.5

-.1

-1.1

n.a.

-.1

1.2

1.7

3.3

2.5

18.1

16.9

9.6

10.5

-.6

19.6

6.1

25.6

29.2

23.4

20.6

...

Consumer prices
Trade balance4
5

Current account

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

IV-28

For Korea, data since the last Greenbook have been relatively weak. GDP
growth continued to decelerate in the second quarter, with output up just
2.3 percent at an annual rate. Industrial production for July was roughly
unchanged after a sizable drop in June, reflecting further poor performance in
the automobile and high-tech sectors. Output in the services industries also
declined in July from a year earlier. The unemployment rate ticked up in July
and consumer price inflation climbed in July and August as a result of higher
food and oil prices. The trade balance soared in July but indications are for
some moderation in August. In response to the anemic economic performance,
the Bank of Korea lowered its target interest rate 25 basis points to 3.50 percent
in mid-August and the government recently announced a series of stimulus
measures, including a 1 percent reduction in income taxes starting in 2005.
Korean Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator

2004

2002

2003

7.7

4.1

3.0

2.3

...

Industrial production

8.3

5.0

3.8

1.2

-2.0

-.1

n.a.

Unemployment rate

3.1

3.4

3.3

3.5

3.6

n.a.

Consumer prices3

3.8

3.4

3.3

3.4

3.6

4.4

4.8

14.8

22.2

40.1

33.0

27.9

58.3

n.a.

5.4

12.3

24.6

28.1

26.2

38.8

n.a.

Real GDP1

Trade balance

Current account5

June

July

Aug.

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

Incoming data from the ASEAN countries suggest that economic activity
continued to grow, but performance varied. In Singapore, real GDP rose nearly
12 percent in the second quarter, the fourth consecutive quarter of double-digit
growth, on the back of strong performance in electronics. Industrial production
was volatile, growing 3 percent in July after a 3½ percent decline in June.
Second-quarter real GDP growth increased to 8 percent in Malaysia and to
5½ percent in Indonesia, while growth was about 3 percent in the Philippines
and Thailand. Indonesia, Malaysia, and Singapore continued to record large
trade balances in the second quarter, while in Thailand the balance shifted to
deficit. Average monthly inflation over July-August moderated relative to the
second quarter, apparently as the effects of earlier oil price and food price
increases wane, although twelve-month inflation continued to rise.

IV-29

ASEAN Economic Indicators: Growth
(Percent change from previous period, s.a., except as noted)
Indicator and country
Real GDP1
Indonesia
Malaysia
Philippines
Singapore
Thailand
Industrial production2
Indonesia3
Malaysia
Philippines
Singapore
Thailand

2002

2003

4.9
5.5
5.5
2.8
6.0
-1.1
4.6
-6.1
8.4
8.5

2004
Q1

May

June

July

4.2
6.6
4.8
4.9
7.8

4.7
7.4
8.9
11.2
3.1

5.6
7.9
2.9
11.9
3.1

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

-1.1
9.3
.0
3.0
12.3

3.8
3.6
4.5
3.3
3.8

-4.4
3.4
5.6
5.1
-.3

-4.0
2.3
-2.5
-.7
-1.3

-.6
-1.5
-4.7
-3.5
1.4

n.a.
-1.2
n.a.
2.9
1.3

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

ASEAN Economic Indicators: Trade Balance
(Billions of U.S. dollars, s.a.a.r.)
Country

2002

2003

Indonesia

25.9

Malaysia

2004
Q1

28.5

20.7

21.7

26.2

20.2

n.a.

14.3

21.4

20.2

22.5

15.2

27.2

Philippines

-.2

-1.5

-1.7

-.2

2.4

-2.1

n.a.

Singapore

8.7

16.2

14.1

14.6

9.4

27.4

14.9

Thailand

2.7

4.2

2.5

-1.0

-3.8

7.1

n.a. Not available.

May

June

July

IV-30

ASEAN Economic Indicators: CPI Inflation
(Percent change from year earlier, except as noted)
2004

20021

20031

Indonesia

9.9

5.2

4.8

6.4

6.8

7.2

6.7

Malaysia

1.7

1.2

1.3

1.4

Philippines

2.5

3.1

3.5

4.5

5.1

6.0

6.3

Singapore

1.4

1.8

2.3

1.6

n.a.

Thailand

1.6

1.8

1.9

2.6

3.0

3.1

Country

June

July

Aug.

1. December/December.
n.a. Not available.

In Mexico, GDP expanded at a 4.9 percent annual rate in the second quarter, the
third consecutive quarter of growth near or above 5 percent. Other recent
indicators of economic activity have been mixed. Industrial production rose
about 1 percent in July after declining in May and June. In contrast, Mexican
exports decreased in July for the second month in a row, with manufacturing
exports particularly weak. Imports of intermediate goods (which are mostly for
assembly and re-export) also fell in July. Imports of consumer and capital
goods remained at high levels in July, consistent with continued strength in
domestic demand; however, retail sales data showed a 1½ percent decline in
June. Government spending also has supported domestic demand; high oil
prices have boosted government revenues, and part of that has been allocated to
increased infrastructure spending and transfers to the states.
The Bank of Mexico tightened monetary policy on August 27. The move came
after data from the first half of August showed twelve-month inflation rising to
nearly 5 percent, well above the 2 to 4 percent target. The Bank said that,
although largely due to temporary factors, the rise in inflation "contributed to
the perception that it will be difficult to reach the target established for this
year." The Bank is apparently concerned about surveys showing that the rise in
inflation has fed into an increase in inflation expectations.

IV-31

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

2002

2003

1.9

2004
Q1

June

July

Aug.

2.0

5.5

4.9

...

1.4

1.8

n.a.

Industrial production

-.4

-.7

1.1

1.5

-.2

n.a.

Unemployment rate2

2.7

3.3

3.7

n.a.

5.7

4.0

4.3

4.4

4.5

4.8

-7.9

-5.6

-5.2

-6.1

-8.2

-7.4

n.a.

168.7

170.5

183.3

194.0

196.0

193.6

n.a.

160.8

164.9

178.0

187.9

187.8

186.2

n.a.

-13.7

-8.9

-7.1

-2.0

...

Real GDP1
Overall economic activity

Consumer prices
Trade balance4
4

Imports

Exports4
5

Current account

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

In Brazil, real GDP rose 6 percent in the second quarter, supported by strength
in private consumption. Data releases for the third quarter point to continued
expansion; July industrial production was up 0.5 percent and August vehicle
sales reached record highs for the month. Brazil also continued to record sizable
trade surpluses, reflecting strong export growth. Monthly consumer price
inflation has been rising since the first quarter and reached 0.9 percent in July,
driven in part by increases in domestic prices of energy and governmentregulated prices. Twelve-month inflation reached 7.2 percent in August, well
above the 5½ percent midpoint inflation target for end-2004.
The Brazilian central bank maintained its benchmark interest rate at 16 percent
in its late August meeting; the rate has been at this level since April. Robust
growth has quelled concerns that monetary policy has been too tight. Brazil’s
EMBI+ spreads decreased about 90 basis points, apparently driven in part by
renewed optimism about the government’s ability to implement fiscal reform
following a mid-August decision by the supreme court that allows the
government to tax the pensions of retired civil servants.

IV-32

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

2004

2002

2003

Real GDP1

3.8

-.1

7.2

6.1

...

Industrial production

2.7

-1.1

3.1

n.a.

Unemployment rate2

12.5

12.4

11.6

11.7

11.4

11.1

n.a.

Consumer prices

12.5

9.3

6.8

5.5

6.1

6.8

7.2

Trade balance4

13.1

24.8

29.3

33.0

39.9

40.8

39.5

-7.6

4.1

6.7

11.2

24.7

21.8

n.a.

Current account

June

July

Aug.

1. Annual rate. Annual figures are Q4/Q4.
2. Percent. Break in October 2001 as a result of change in methodology.
3. Percent change from year-earlier period, except annual figures, which are Dec./Dec. Price
index is IPC-A.
4. Billions of U.S. dollars, annual rate.
5. Billions of U.S. dollars, n.s.a., annual rate.
n.a. Not available. ... Not applicable.

In Argentina, recent data releases continue to point to a moderation in the pace
of economic recovery. Industrial production fell slightly in July, following a
soft performance in previous months. The energy shortages earlier in the year
appear to have had a moderate impact on economic activity. Twelve-month
consumer price inflation increased in recent months, and now stands at about 5
percent. The country has continued to run sizable trade surpluses.
In mid-August, Argentina announced that the delayed third review of its
agreement with the IMF would be rescheduled to December or January, after the
country restructures its debt with private creditors. Argentine authorities argued
that this postponement would ensure that talks between the IMF and Argentina
would not interfere with the accord that the country aims to reach with its
private creditors. The Argentine government stated that it would continue
making its scheduled payments to the IMF of about $2 billion for the rest of this
year. The IMF will not make its scheduled disbursements, since they are
conditional on the approval of program reviews.

IV-33

Argentine Economic Indicators
(Percent change from previous period, s.a., except as noted)
Indicator
Real GDP1

2002

2003

2004
Q1

June

July

Aug.

-3.3

12.1

6.8

n.a.

...

Industrial production

-10.7

16.2

5.7

-1.4

-.2

n.a.

Unemployment rate2

22.5

17.3

14.4

n.a.

...

Consumer prices

41.4

3.8

2.5

4.0

4.9

5.2

Trade balance4

16.7

15.7

10.6

15.4

8.5

13.7

n.a.

9.1

7.8

1.5

n.a.

...

Current account

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

In Venezuela, President Hugo Chavez survived the August 15 recall
referendum, winning 58 percent of the popular vote. This result will enable him
to complete his term, which expires at the end of 2006. The vote culminated
nearly a year of efforts by the opposition to remove Chavez by peaceful means
after a failed coup attempt and national strikes in 2002. Chavez’s victory seems
to have quelled concerns about political instability. Oil production is still about
15 percent below the level prevailing before the national strike in late 2002,
when Chavez fired much of the national oil company’s skilled personnel.

IV-34

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

2004

2002

2003

-15.8

7.0

7.9

16.0

18.0

31.2

Non-oil trade balance
Trade balance4

Real GDP1
2

Unemployment rate
Consumer prices3

Current account

June

July

Aug.

n.a.

...

16.0

15.5

15.2

15.1

n.a.

27.1

24.0

22.4

21.8

21.9

-8.1

-5.5

n.a.

13.4

16.5

n.a.

7.6

11.5

14.9

13.5

...

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

Recent data from Russia suggest waning growth in the third quarter. Industrial
production declined 0.3 percent in July, due in part to the inability of some firms
to access credit during this summer’s bank runs, and early indicators suggest
that August production was also weak. Twelve-month inflation increased to
more than 11 percent in August, raising concerns that Russia will fail to meet its
year-end 10 percent inflation target.
In the oil sector, the Kremlin-Yukos standoff continued. In August, the Justice
Ministry contracted with a private firm to assess the value of Yukos’ main oil
production facility, increasing the possibility of a transparent auction of Yukos’
assets. Russian courts froze more of Yukos’ accounts in early September,
prompting the company to warn that it may be forced to cease operations.
Despite this warning, President Vladimir Putin stated that Russia would increase
its oil output this year.

IV-35

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

2002

2003

5.9

Industrial Production
2

2004
Q1

June

July

Aug.

7.5

6.6

n.a.

...

3.8

6.7

2.8

2.2

3.5

-.3

n.a.

Unemployment Rate

8.0

8.5

7.6

8.3

7.5

n.a.

Consumer Prices3

15.3

12.1

10.7

10.1

10.3

11.3

Trade Balance4

46.3

60.5

72.6

76.0

66.9

n.a.

Current Account4

28.9

36.0

47.3

n.a.

...

....

Real GDP1

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

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 21, 2004 : Greenbook Part 2

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