Greenbook/Tealbook

Prefatory Note

The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

Content last modified 05/27/2010.

Confidential (FR) Class II FOMC

March 12, 2004

CURRENT ECONOMIC AND FINANCIAL CONDITIONS Supplemental Notes

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

Contents The Domestic Nonfinancial Economy . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Consumer Sentiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Federal Government Outlays and Receipts . . . . . . . . . . . . . . . . . . 1 Inventory Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Erratum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Tables University of Michigan Survey Research Center: Survey of Consumer Attitudes . . . . . . . . . . . . . . . . . . . . . . . . 2 Federal Government Outlays and Receipts . . . . . . . . . . . . 4 Changes in Manufacturing and Trade Inventories . . . . . . . 5 Charts Book-Value Inventories Relative to Shipments and Sales 5 Inventory-Consumption Ratios, Flow-of-Goods System . 5

The Domestic Financial Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Tables Commercial Bank Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Selected Financial Market Quotations . . . . . . . . . . . . . . . . 7

The International Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 U.S. Current Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Implications for the Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 U.S. International Financial Transactions . . . . . . . . . . . . . . . . . . . 9 Tables U.S. Current Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Summary of U.S. International Transactions . . . . . . . . . . 10

Supplemental Notes The Domestic Nonfinancial Economy Consumer Sentiment After having spiked sharply in January, the Michigan Survey Research Center’s (SRC) index of consumer sentiment has dropped back noticeably, but to levels that remain above its long-run average and above its readings throughout last year. According to the preliminary report for March, the index was just a touch lower in early March than in February. The slight dip in the SRC index in early March was the result of a decrease in the “expected conditions” component of the index that was mostly offset by an increase in the “current conditions” component. For “expected conditions,” consumers’ appraisals of expected business conditions fell, but their assessments of their expected personal financial situation improved slightly. Regarding “current conditions,” consumers’ assessments of their current personal financial situation and of buying conditions for large household appliances rebounded a bit following last month’s large drops. Among those items not included in the overall index, expectations about the change in unemployment over the next twelve months continued to deteriorate in early March. In contrast, consumers’ appraisals of buying conditions for cars and houses both improved. In early March, the mean and median of expected inflation climbed to 3.7 percent and 3.0 percent, respectively, the highest readings for both measures since last March. In contrast, both the mean and median of expected inflation over the next five to ten years were unchanged at 3.3 percent and 2.9 percent, respectively. Federal Government Outlays and Receipts Adjusting for the timing of outlay payments, the federal government recorded a deficit of $110 billion in February, about $13 billion larger than last year.1 Adjusted receipts were about 5 percent lower than last year, reflecting a surge in individual income tax refunds stemming in large part from last summer’s tax cuts. Adjusted outlays were up about 5 percent over the twelve months ending in February, or about $9 billion. Spending on income security was about $5 billion lower than last year, as a result of the tailing off of extended unemployment insurance benefits and an anomalous reduction in refundable

1. This year, February outlays were lower than average because the first day of February fell on a weekend, shifting outlays into January.

-2March 12, 2004

University of Michigan Survey Research Center: Survey of Consumer Attitudes Indexes of consumer sentiment (Not seasonally adjusted) 2003 Category

Aug.

Sept.

Composite of current and expected conditions1 Current conditions1 Expected conditions1

89.3 99.7 82.5

Personal financial situation Now compared with 12 months ago2 Expected in 12 months2

Oct.

2004 Feb.

Mar.P

103.8 94.4 109.5 103.6 100.1 88.5

94.1 105.7 86.6

Nov.

Dec.

Jan.

87.7 98.4 80.8

89.6 93.7 99.9 102.5 83.0 88.1

92.6 97.0 89.8

109 124

106 133

111 127

107 128

105 122

119 136

111 128

115 131

Expected business conditions Next 12 months2 Next 5 years2

111 97

97 94

108 98

122 104

128 112

143 124

118 110

111 106

Appraisal of buying conditions Cars Large household appliances2 Houses

150 150 165

152 148 158

155 148 165

161 158 170

157 146 163

161 165 164

150 157 158

159 159 168

Expected unemployment change - next 12 months

111

114

117

105

98

95

105

108

Prob. household will lose a job - next 5 years

24

25

25

27

29

26

25

23

Expected inflation - next 12 months Mean Median

2.8 2.5

3.4 2.8

3.1 2.6

3.1 2.7

2.8 2.6

2.9 2.7

2.9 2.6

3.7 3.0

Expected inflation - next 5 to 10 years Mean Median

3.0 2.7

3.0 2.7

3.1 2.8

3.1 2.7

3.1 2.8

3.4 2.8

3.3 2.9

3.3 2.9

Note. Figures on financial, business, and buying conditions are the percent reporting ’good times’ (or ’better’) minus the percent reporting ’bad times’ (or ’worse’), plus 100. Expected change in unemployment is the fraction expecting unemployment to rise minus the fraction expecting unemployment to fall, plus 100. P Preliminary. 1. Feb. 1966 = 100. 2. Indicates the question is one of the five equally-weighted components of the index of sentiment.

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EITC payments.2 Spending on agriculture and net interest was also lower than last year, while spending on Medicare was up sharply. Defense spending was little changed from its January level and was about 20 percent higher than a year earlier, marking a moderate step-up from the plateau in defense spending recorded from last spring through the end of the year. February’s level spending came in higher than we had assumed in the Greenbook, and we have raised our projection of real NIPA defense spending in the first quarter by about $4 billion (annual rate). This change boosts our projection of the first-quarter change in real defense spending by 4 percentage points and lowers the second-quarter change by a similar amount. Inventory Investment The book value of retail inventories increased at an annual rate of $5.1 billion in January following a $31.4 billion accumulation in the fourth quarter. Excluding motor vehicles and parts, retail inventories edged down slightly in January. Sales at non-auto retailers were unchanged that month, and the inventory-sales ratio for the sector decreased to 1.37 months, a new low. For the entire manufacturing and trade sector excluding motor vehicles and parts, book-value inventories increased at an annual rate of $13.6 billion in January, the fifth consecutive month of stockbuilding. Nonetheless, sales in this broad category rose 0.5 percent, and the inventory-sales ratio ticked down to a new low of 1.26 months. On balance, the inventory data for January were on the low side of our expectations. Together with the information on federal spending, discussed above, our projection for real GDP in the first and second quarters is unchanged. Erratum The first sentence of the third paragraph on page I-2 of Greenbook, Part 1, Domestic Developments should read: “Since the January Greenbook, the foreign exchange value of the dollar has increased about 2 percent.”

2. Tax refunds are split into two categories in the unified accounts. Refunds that represent an actual payment to a taxpayer (i.e., those stemming from tax credits, like the EITC and child tax credit, that can reduce a taxpayer’s liability below zero) are labeled as outlays; the remainder are labeled as negative taxes. At this point, the split between these two categories is only an estimate, whereas the sum is actual data. Taken together, individual tax refunds plus refundable tax credits are 8 percent higher than last year.

-4Federal Government Outlays and Receipts (Unified basis; billions of dollars except as noted) February

12 months ending in February

Function or source

2003

2004

Percent change

2003

2004

Percent change

Outlays Financial transactions1 Payment timing2 Adjusted outlays

186.1 .5 .0 185.7

182.0 -.3 -12.5 194.9

-2.2 ... ... 5.0

2074.6 -2.3 11.2 2065.6

2194.5 -1.9 -12.1 2208.5

5.8 ... ... 6.9

Receipts Payment timing Adjusted receipts

89.5 .0 89.5

85.3 .0 85.3

-4.7 ... -4.7

1790.2 .0 1790.2

1787.7 .0 1787.7

-.1 ... -.1

Surplus or deficit (-)

-96.7

-96.7

...

-284.3

-406.8

...

Selected components of adjusted outlays and receipts Adjusted outlays Net interest Non-interest National defense Social security Medicare Medicaid Income security Agriculture Other

185.7 13.2 172.5 29.9 39.0 18.7 12.1 44.5 1.6 26.7

194.9 12.8 182.1 35.9 41.2 20.8 13.3 39.9 .2 30.9

5.0 -3.4 5.6 20.3 5.5 11.1 9.8 -10.4 -86.6 15.8

2065.6 165.6 1900.0 367.1 464.4 240.9 151.9 328.0 23.2 324.6

2208.5 151.8 2056.7 430.6 482.6 253.3 166.7 332.8 22.2 368.6

6.9 -8.3 8.2 17.3 3.9 5.1 9.7 1.5 -4.4 13.6

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

89.5

85.3

-4.7

1790.2

1787.7

-.1

77.1 114.8 2.6 40.3 -1.2 3.9 5.1 13.6

70.0 115.8 3.5 49.3 .8 3.3 2.4 14.4

-9.2 .9 34.7 22.4 ... -16.4 -52.3 6.6

1488.1 1368.4 314.4 194.6 118.0 186.0 68.0 184.0

1451.8 1366.6 287.2 201.9 147.2 201.7 54.5 188.7

-2.4 -.1 -8.6 3.8 24.7 8.4 -19.8 2.5

Adjusted surplus or deficit (-)

-96.2

-109.6

...

-275.4

-420.8

...

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.

-5Changes in Manufacturing and Trade Inventories (Billions of dollars; seasonally adjusted book value; annual rate) 2003 Sector

2004

Q3

Q4

Nov.

Dec.

Jan.

-5.1

49.3

46.6

44.5

19.2

5.8

26.4

27.9

31.1

13.6

-17.5 -14.8

1.2 4.3

-6.6 -.2

5.5 6.0

9.9 8.8

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

6.1 -4.2 10.3

16.7 6.2 10.5

11.8 -1.2 13.0

22.8 10.2 12.6

4.2 .1 4.1

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

6.3 -6.7 13.0

31.4 16.7 14.7

41.4 19.8 21.6

16.2 3.2 13.0

5.1 5.5 -.4

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

Book-Value Inventories Relative to Shipments and Sales Ratio 1.700

1.700

Retail trade ex. motor vehicles & parts 1.525

1.525 Manufacturing

1.350

1.350 Jan.

Wholesale trade ex. motor vehicles & parts 1.175

1.000

1.175

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

1.000

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

64

62

62 Total

60

60

58 56

58 Total ex. motor vehicles & parts

56

54

54

52

52

50

Jan.

48 46

50 48

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

46

-6Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit Total 1. Adjusted1 2. Reported 3. 4. 5. 6.

Securities Adjusted1 Reported Treasury and agency Other2

7. 8. 9. 10. 11. 12. 13. 14.

Loans3 Total Business Real estate Home equity Other Consumer Adjusted4 Other5

Level, Feb. 2004 ($ billions)

2003

Q3 2003

Q4 2003

Dec. 2003

Jan. 2004

Feb. 2004

5.8 5.6

4.5 2.4

-.6 .0

-4.1 -2.3

6.7 8.2

20.5 21.1

6,107 6,316

8.8 7.6 8.7 5.9

-3.7 -10.2 -15.2 -2.1

5.5 6.9 2.5 13.9

-2.8 3.2 -1.2 9.9

-6.4 .1 -1.6 2.4

47.2 46.0 71.5 8.0

1,693 1,902 1,165 736

4.8 -8.7 11.0 30.8 8.7 6.0 6.1 4.4

7.6 -13.6 18.3 24.1 17.6 6.5 3.6 3.8

-2.8 -9.4 -1.7 30.9 -5.9 12.5 8.6 -11.8

-4.6 -5.4 -.5 33.4 -5.2 6.7 1.6 -29.2

11.6 -3.6 10.3 41.4 5.7 7.8 11.4 42.0

10.6 4.0 11.3 27.7 8.8 -2.6 .7 31.0

4,414 878 2,258 297 1,961 636 1,008 643

Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourthquarter. Growth rates are percentage changes in consecutive levels, annualized but not compounded. 1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 2. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains on derivative contracts. 3. Excludes interbank loans. 4. Includes an estimate of outstanding loans securitized by commercial banks. 5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables.

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III-T-1

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

Change to Mar. 11 from selected dates (percentage points)

2004

Instrument June 24

Dec. 31

Jan. 27

Mar. 11

2003 June 24

2003 Dec. 31

2004 Jan. 27

Short-term FOMC intended federal funds rate

1.25

1.00

1.00

1.00

-.25

.00

.00

Treasury bills 1 3-month 6-month

0.81 0.82

0.93 1.00

0.89 0.96

0.95 0.98

.14 .16

.02 -.02

.06 .02

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

0.95 0.91

1.00 1.05

1.02 1.04

1.01 1.02

.06 .11

.01 -.03

-.01 -.02

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

0.96 0.93 0.92

1.06 1.09 1.16

1.03 1.05 1.10

1.03 1.04 1.07

.07 .11 .15

-.03 -.05 -.09

.00 -.01 -.03

Eurodollar deposits 3 1-month 3-month

0.94 0.91

1.04 1.07

1.02 1.04

1.01 1.04

.07 .13

-.03 -.03

-.01 .00

Bank prime rate

4.25

4.00

4.00

4.00

-.25

.00

.00

Intermediate- and long-term U.S. Treasury4 2-year 10-year 30-year

1.14 3.46 4.53

1.83 4.40 5.22

1.70 4.24 5.09

1.52 3.90 4.81

.38 .44 .28

-.31 -.50 -.41

-.18 -.34 -.28

U.S. Treasury 10-year indexed note

1.70

2.00

1.84

1.50

-.20

-.50

-.34

Municipal revenue (Bond Buyer) 5

4.89

5.04

4.94

4.75

-.14

-.29

-.19

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

3.67 3.84 4.13 5.16 8.95

4.66 4.72 5.05 5.74 7.94

4.47 4.54 4.89 5.52 7.60

4.08 4.22 4.53 5.18 7.81

.41 .38 .40 .02 -1.14

-.58 -.50 -.52 -.56 -.13

-.39 -.32 -.36 -.34 .21

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

5.21 3.51

5.81 3.73

5.64 3.56

5.59 3.47

.38 -.04

-.22 -.26

-.05 -.09

Record high

2003

Change to Mar. 11 from selected dates (percent)

2004

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

Level

Date

Dec. 31

Jan. 27

Mar. 11

Record high

2003 Dec. 31

2004 Jan. 27

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

1-14-00 3-24-00 3-10-00 3-9-00 3-24-00

10,454 1,112 2,003 557 10,800

10,610 1,144 2,116 595 11,177

10,128 1,107 1,944 569 10,821

-13.60 -27.54 -61.50 -6.17 -26.64

-3.11 -.46 -2.97 2.12 .20

-4.54 -3.26 -8.14 -4.44 -3.18

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 24, 2003 is the last day before the most recent policy easing. January 27, 2004, is the day before the most recent FOMC meeting. ___________________________________________________________________

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The International Economy U.S. Current Account The U.S. current account deficit was $510 billion (s.a.a.r.) in the fourth quarter of 2003, down $31 billion from the third quarter (revised). The decline was driven by a sizable increase in the surplus on net investment income. The deficit on goods and services and net outflows of unilateral transfers each registered small increases. The deficit on goods and services widened $5 billion in the fourth quarter as a $61 billion increase in imports was nearly matched by a $56 billion increase in exports. The value of imported goods rose $54 billion, largely reflecting strong increases in capital goods, automotive products, and consumer goods. Imports of services rose $7 billion. The value of exported goods increased $42 billion, with capital goods accounting for about half of the rise. Exports of services moved up $14 billion.

U.S. Current Account (Billions of dollars, seasonally adjusted annual rate) Current Other Goods and Investment Period account income, income and services, net transfers, net balance net Annual 2002 -418.0 1.3 -64.1 -480.9 2003 -490.2 21.9 -73.6 -541.8 Quarterly 2003:Q1 Q2 Q3 Q4 Change Q1-Q4 Q2-Q1 Q3-Q2 Q4-Q3

-486.2 -496.4 -486.6 -491.5

4.6 10.5 17.0 55.4

-75.1 -73.5 -71.6 -74.0

-556.6 -559.4 -541.2 -510.2

-21.7 -10.2 9.8 -4.9

-12.6 5.9 6.5 38.3

-8.0 1.6 1.8 -2.4

-42.3 -2.7 18.2 31.0

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

The surplus on net investment income rose $38 billion in the fourth quarter as a $48 billion rise in receipts outweighed a $9 billion rise in payments. The sizable increase in receipts was driven by a surge in earnings on U.S. direct investment assets held abroad; direct investment receipts rose uniformly across all major sectors and regions. The modest rise in payments was mostly due to higher earnings on foreign portfolio holdings of U.S. assets.

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Net unilateral transfers to foreigners rose $2 billion as higher private transfers offset lower government transfers. Implications for the outlook. Receipts of investment income on U.S. direct investment assets held abroad came in notably higher in the fourth quarter than we had anticipated. As a consequence, we have revised upward our projection for net investment income over the forecast period. Compared with the March Greenbook, we have narrowed our projection for the U.S. current account deficit about $25 billion this year and $20 billion next year. We continue to project that the current account deficit will edge above $600 billion at the end of 2005, equivalent to a bit less than 5 percent of GDP. U.S. International Financial Transactions The March 12 balance of payments press release included new data for the fourth quarter of 2003. U.S. direct investment abroad (line 6 of the Summary of U.S. International Transactions table) increased to $50 billion in the fourth quarter, owing to pickups in both reinvested earnings and new equity capital. For the year 2003, direct investment outflows rose to $155 billion from $138 billion in 2002, an increase entirely attributable to reinvested earnings. Foreign direct investment into the United States (line 7) rebounded to $23 billion in the fourth quarter following an anemic third quarter, resulting from a reversal of intra-company debt outflows, as both reinvested earnings and new equity investment were little changed in the quarter. For the year, gains in reinvested earnings led to increased direct investment inflows of $42 billion. During 2003, U.S. direct investment outflows exceeded foreign direct investment inflows by $73 billion. The statistical discrepancy (last line) was negative $53 billion for the fourth quarter and negative $34 billion for the year. A negative statistical discrepancy indicates some combination of over-recorded net capital inflows and underrecorded net exports.

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