Order Code RL30329
Report for Congress
Received through the CRS Web
Current Economic Conditions
and Selected Forecasts
Updated March 27, 2003
Gail Makinen
Specialist in Economic Policy
Government and Finance Division
Anne Vorce
Economist
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Current Economic Conditions and Selected Forecasts
Summary
According to the National Bureau of Economic Research (NBER), the agency
that dates the American business cycle, the longest economic expansion in American
history ended in March 2001. The U.S. recession is now in its 24th month. The final
estimate of its duration may be shorter because the NBER usually dates the end of
a recession after the fact to make sure of the data. The average length of the previous
9 recessions in the post-World War II era is 11 months.
Gross Domestic Product (GDP), our basic measure of economic activity,
increased at a 2.9% rate in 2002 after growing by only 0.1% in 2001. GDP had
contracted in the first 3 quarters of 2001. 2002 growth probably signals that the
recession is over, although the NBER takes additional factors into account when it
declares the end of a downturn.
The unemployment rate during the 1991-2001 expansion reached a low of 3.8%
in April 2000. It has risen since then to a high of 6.0% in December 2002. So far in
2003, it has come down a little and now stands at 5.8% (February). Since the
recession began in March 2001, employment has fallen by around 1.9 million.
During the 1991- 2001 expansion, the inflation rate increased more slowly on
average than at any time since the early 1960s. At the same time, growth was
stronger and the unemployment rate lower than experience would have predicted.
Inflationary pressures slowed further with the recession. The exception is the
acceleration in the Consumer Price Index (CPI) on a 12 month basis, but the pick up
reflected the sharp increase in energy prices. Higher energy prices will be tough for
consumers and businesses for awhile, but they are not expected to be permanent.
Since 1995, nonfarm business productivity has increased on average by 2.6%
annually. The average rate of increase since 1995 is double the average annual rate
from 1973 to 1995 (2.6% versus 1.3%). The rate of increase in 2002 was
particularly strong. If this rate of productivity increase is sustained, overall growth
of the economy will be substantially higher and the standard of living will improve
at a more rapid rate. Fiscal policy was eased during 2001 and 2002. Monetary policy
has been eased over the course of 2001 and late in 2002 and appears to be geared to
supporting a real GDP growth rate of 3.25% to 3.50% this year, a rate thought
compatible with a modest rate of inflation.

Interest rates in 2002 were lower than in 2001, particularly at the short end of
the market. The 3 month Treasury bill averaged 1.64% in 2002, versus 3.48% the
previous year. The yield on 10-year Treasury notes averaged 4.61% in 2002, slightly
lower than in 2001 (5.02%). Recent forecasts by private sector individuals and firms
for 2003 indicate expectations that GDP will grow between 2.1% and 3.1%;
unemployment will range between 5.6% and 6.2%; and inflation will average
between 1.9% and 2.7% (based on the consumer price index).
The dollar has depreciated by around 5% on a broad trade-weighted basis
(inflation-adjusted) over the past year, but remains well above its 1995 low.

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Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Macroeconomic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Posture of Fiscal and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Summary of Current Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Sources of GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Economic Forecasts, 2002-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Promotion of Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Figures
Figure 1. Real Dollar Exchange Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 2. Yield on Selected U.S. Treasury Securities and
Federal Funds (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
List of Tables
Table 1. The Growth Rate of Real GDP v. Final Sales . . . . . . . . . . . . . . . . . . . . 2
Table 2. Civilian Unemployment Rate, 1991 - 2003 . . . . . . . . . . . . . . . . . . . . . . 3
Table 3. Rate of Change in the Consumer Price Index (CPI) . . . . . . . . . . . . . . . . 4
Table 4. Rate of Change in the GDP Deflators . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 5. Rate of Change in Labor Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 6. U.S. Foreign Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . . 8
Table 9. Sources of GDP Growth: 1992 through 2002 . . . . . . . . . . . . . . . . . . . 10
Table 10. Economic Forecasts 2003 - 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 11. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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Current Economic Conditions and
Selected Forecasts
Current Economic Conditions
On November 26, 2001, the National Bureau of Economic Research, the
nonprofit, nonpartisan organization that dates the phases of the business cycle for the
United States, declared that the longest expansion in American history had ended in
March of that year and that the U.S. was now in a recession. Counting the present
recession, the United States has experienced 10 recessions since World War II. The
average length of the nine previous recessions was 11 months. The longest recession
lasted 16 months, the shortest 6 months.
The growth rate of Gross Domestic Product (GDP) has been slow since mid-
2000. In 2001, it was barely positive, as the economy contracted during the first 3
quarters and rebound modestly in the fourth quarter at a 2.7% annual rate. For the
year as a whole, real GDP increased by 0.1% as measured on a fourth quarter-fourth
quarter basis and by 0.3% on an annual (or year-year) basis.1 Positive growth
continued throughout 2002. Quarterly growth was, respectively, at annual rates of
5.0%, 1.3%, 4.0%, and 1.4%.
The unemployment rate reached a 30-year low of 3.8% in April 2000. Since
then, it rose and hit a recession high of 6.0% in December 2002. During 2002, it
fluctuated between 5.6% and 6.0%. Since December, it has edged down to 5.8%
(February).
With the onset of the contraction, the rate of inflation decelerated, as measured
by the broad-based price indexes. In recent months, however, the inflation rate has
accelerated according to some measures, but this largely reflects higher energy prices.
The Consumer Price Index (CPI) in February 2003 was 3.0% above its level in
February 2002. Excluding energy, the CPI rose by 1.7%.
Beginning in January 2001, Federal Reserve policy has shifted to one of ease.
On January 3 and 31, March 20, April 18, May 15, June 27, and August 21, 2001,
1 There are several ways to measure the rate of growth in GDP for a particular year and they
can be quite different. Economists generally prefer measurement of the change in GDP from
fourth quarter to fourth quarter in order to emphasize the point of growth at which the
economy ended the year. In contrast, popular coverage often features “annual GDP,” which
compares the average of the four quarters of GDP for a particular year to a similar average
for the previous year. Because it is an average, annual GDP in fact measures the midpoint
of growth for the year. The year-year comparison is therefore a comparison of growth
midpoints for a given year.

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CRS-2
in the face of a falling rate of GDP growth and limited inflationary pressures, the
target rate for federal funds was reduced to 3.50%. On September 17, in the wake
of the terrorist attacks on the U.S., the target rate was reduced to 3.0%. On both
October 2 and November 6 it was reduced 1/2% and on December 11, 1/4%.
Additional easing took place on November 6, 2002, when the target rate was reduced
to 1-1/4% from 1-3/4%.
Recent Macroeconomic Developments
The U.S. economy continues to recover from the recession which began in
March 2001. Weakness persists in most parts of the economy and growth has not
returned to the pace of the previous expansion. Employment remains below that
achieved in the previous expansion. Nevertheless, it is important to recognize that
growth for the economy as a whole has reentered positive territory. The level of
GDP at the end of 2002 was 3.6% above the recession low. GDP has now surpassed
its previous high point (referred to as the peak of the 1991 - 2001 expansion).
GDP. To understand recent macroeconomic developments, it is important to
understand the context over the medium-run. The growth rate of GDP since 1991 is
shown in Table 1. Its most notable feature is that the growth rate of GDP averaged
more than 4% per year during the second half of the recent expansion. GDP growth
began to slacken during the second half of 2000 and actually contracted during the
first 3 quarters of 2001 at an annual rate of 0.8%. This trend was reversed during the
fourth quarter, when GDP grew positively, at an annual rate of 2.7%. The economy
continued to expand during the 4 quarters of 2002, when real GDP grew at annual
rates of 5.0%, 1.3%, 4.0%, and 1.4%, respectively.
The growth in GDP since the fourth quarter 2001 has not yet translated into a
comparable pick up in production in part because of the inventory cycle. However,
this is not worrying. As Table 1 illustrates, GDP rose far less than Final Sales in
2001 because inventory liquidation was on-going over the course of 2001. Inventory
liquidation is normally a good sign, although in accounting terms, it subtracts from
GDP. When inventories are liquidated, additional sales will come from new
production and this will assist the recovery. In fact, we saw this situation in 2002,
when inventories were built up again after being drawn-down in 2001. GDP rose
by 2.9% (4th quarter-4th quarter), but the annualized growth of final sales rose only
by 1.8%. The difference between the two was the rise in inventories.
Table 1. The Growth Rate of Real GDP v. Final Sales (%)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
GDP
Year Over Year
-0.5
3.0
2.7
4.0
2.7
3.6
4.4
4.3
4.1
3.8
0.3
2.4
4thQ Over 4thQ
0.9
4.0
2.5
4.1
2.3
4.1
4.3
4.8
4.3
2.3
0.1
2.9
Final Sales
Year Over Year
-0.2
2.8
2.6
3.4
3.1
3.6
4.0
4.2
4.3
3.7
1.5
1.8
4thQ Over 4thQ
0.2
4.2
2.6
3.2
2.9
3.9
4.0
4.7
4.2
2.6
1.6
1.7
Source: U.S. Department of Commerce.

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CRS-3
Labor Markets. The civilian unemployment rate fell from its cyclical high
in June 1992 (7.8%) to a low of 3.8% in April 2000, as shown in Table 2. At 3.8%,
the unemployment rate was at a 30-year low. With a weakening of growth and then
contraction, the unemployment rate rose to a recession high of 6.0% in December
2002. Since then, the unemployment rate declined in January to 5.7%, but edged up
to 5.8% in February. It has moved in a narrow band between 5.6% and 6.0% over
the past year.
Since the recession began in March 2001, approximately 1.9 million jobs have
been lost. It is important to understand that this is a net concept. Jobs have
continued to be created during this period, but job creation has not been sufficient to
offset the loss in jobs elsewhere. On balance, this has translated into a net decrease
in employment. Even during the recession, the U.S. economy has remained dynamic,
even though this is not readily apparent from the aggregate figures.
More recently, job growth was positive in January, but the estimated 308,000
decline in February’s payroll employment more than offsetting January’s
improvement. February’s employment level (130.5 million jobs) was around the
level of December 1999. Labor market weakness has persisted even though GDP
is so far 3.6% above its recession low. In the aftermath of a contraction, labor
markets typically improve with a lag after growth picks up because employers are
reluctant to hire until they see that economic recovery is firmly in place.
Table 2. Civilian Unemployment Rate, 1991 - 2003
(in percentages)
Seasonally Adjusted
J
F
M
A
M
J
J
A
S
O
N
D
1991
6.4
6.6
6.8
6.7
6.9
6.9
6.8
6.9
6.9
7.0
7.0
7.3
1992
7.3
7.4
7.4
7.4
7.6
7.8
7.7
7.6
7.6
7.3
7.4
7.4
1993
7.3
7.1
7.0
7.1
7.1
7.0
6.9
6.8
6.7
6.8
6.6
6.5
1994
6.6
6.6
6.5
6.4
6.1
6.1
6.1
6.0
5.9
5.8
5.6
5.5
1995
5.6
5.4
5.4
5.8
5.6
5.6
5.7
5.7
5.6
5.5
5.6
5.6
1996
5.6
5.5
5.5
5.6
5.6
5.3
5.5
5.1
5.2
5.2
5.4
5.4
1997
5.3
5.2
5.2
5.1
4.9
5.0
4.9
4.8
4.9
4.7
4.6
4.7
1998
4.6
4.6
4.7
4.3
4.4
4.5
4.5
4.5
4.6
4.5
4.4
4.4
1999
4.3
4.4
4.2
4.3
4.2
4.3
4.3
4.2
4.2
4.1
4.1
4.0
2000
4.0
4.1
4.0
3.8
4.1
4.0
4.1
4.1
4.0
3.9
4.0
3.9
2001
4.1
4.2
4.2
4.4
4.4
4.6
4.6
4.9
5.0
5.4
5.6
5.8
2002
5.6
5.6
5.7
5.9
5.8
5.8
5.8
5.8
5.7
5.8
5.9
6.0
2003
5.7
5.8
Source: U.S. Department of Labor.
Inflation. The U.S. inflation performance has been remarkable over the past
10 years. The inflation rate decelerated throughout most of the expansion in the

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CRS-4
1990s, as Tables 3 and 4 illustrate. Toward the end of the expansion in 2000, the
inflation rate accelerated, but the pick up was not noticeably different from earlier
years of the cycle.
The deceleration in inflation over the 1990s occurred even as the pace of growth
accelerated. In the postwar experience, it is unusual to have the rates of growth and
inflation moving in the opposite direction, particularly when the unemployment rate
was sustained at a relatively low level close to 4.0% in what was generally considered
to be an economy at or above full employment.
Since the start of the recession, inflation has decelerated. The increase in
consumer prices (the Consumer Price Index or CPI) slowed on a year-year basis from
2.8% in 2001 to 1.6% in 2002. The rate of increase in the GDP deflators, the
broadest measures of inflation in the economy, decelerated from 2.3% in 2000 to
2.0% in 2001 and 1.3% last year. The exception to the deceleration story is the CPI
measured on a December - December basis. It rose by 2.4% during 2002, versus an
increase of 1.6% in 2001. Despite acceleration in 2002, the rate of increase remained
below the pace during most of the 1990s expansion. The acceleration has continued
through February 2003 (an increase of 3.0% as measured from February 2002 to
February 2003). The recent acceleration has reflected a strong increase in energy
prices. While the rise in energy prices will create hardship for many consumers and
businesses for the time being, it is not expected to be permanent. Moreover, the rate
of increase in the price of nonenergy items has been decelerating. This should help
offset higher energy prices.
Table 3. Rate of Change in the Consumer Price Index (CPI)
(in percentages)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Dec. over Dec.
3.1
2.9
2.7
2.7
2.5
3.3
1.7
1.6
2.7
3.4
1.6
2.4
Excluding food
4.4
3.3
3.3
2.6
3.0
2.6
2.2
2.4
1.9
2.6
2.7
1.9
and energy
Year Over Year
4.2
3.0
3.0
2.6
2.8
3.0
2.3
1.6
2.2
3.4
2.8
1.6
Excluding food
4.9
3.7
3.3
2.8
3.0
2.7
2.4
2.3
2.1
2.4
2.6
2.4
and energy
Source: U.S. Department of Labor.
Table 4. Rate of Change in the GDP Deflators
(in percentages)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Implicit Price
Deflator
4.2
3.1
2.3
2.4
2.1
2.1
1.9
1.8
1.1
1.6
2.3
2.0
1.3
Chain Type
Price Index
4.2
3.1
2.3
2.4
2.1
2.1
1.9
1.8
1.1
1.6
2.3
2.0
1.3
Source: U.S. Department of Commerce.

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CRS-5
With the favorable inflation performance of the economy, economists think that
several forces keeping a lid on inflation may be at work:
1.
In the short-run, the acceleration in productivity improvement is regarded by some
economists as an important factor in the slowdown in inflationary pressure at the same
time growth picked up during the 1991-2001 expansion. Since 1995, nonfarm business
productivity has increased on average by 2.6% annually.2 In 2002, productivity rose
by a 4.8% rate, fourth quarter - fourth quarter. To put recent developments into
perspective, the average annual rate of increase since 1995 is double the average
annual rate from 1973 to 1995 (2.6% versus 1.3%). In concrete terms, this important
change means that the same amount of labor will produce higher output. Over time,
a change of this nature will mean substantially stronger growth and a higher standard
of living.
2.
Unit labor costs have been decelerating or falling. With more output produced for
each hour worked, firms have their employee cost per unit of output reduced. The
growth rate of per unit labor costs has been falling or showed no change in the past 2
years, as shown in Table 5.3 This reflects both the pick-up in productivity growth and
slowdown in basic labor costs during the recession. Employee cost trends are also
measured in the Employment Cost Index (ECI). The ECI for private industry
accelerated from 1995 through most of 2001 and early 2002, but began to decelerate
in the course of 2002 as a result of weakened labor market pressures.
3.
Technological advances have led to declining prices for many goods that use certain
information technology components as inputs.
Table 5. Rate of Change in Labor Costs
(in percentages)
1990 1991 1992 1993 1994 1995199619971998199920002001 2002
Unit Labor Costs
5.3
1.7
0.4 1.5 1.1 1.5 0.7 1.1 2.4 1.4 4.9 -0.5
0.1
Employment Cost
4.9
4.3
3.5 3.6 3.1 2.6 3.1 3.4 3.5 3.4 4.4 4.2
3.2
Index
Source: U.S. Department of Labor.
Note: Unit labor costs are for nonfarm business, 4th quarter-4th quarter. The Employment Cost Index
is for private industry, December - December.
The U.S. Foreign Trade Deficit. The U.S. foreign trade deficit (net
imports), as shown in Table 6, recorded a continued and dramatic fall from 1988
through 1991.4 In each of these years the trade deficit declined as export growth
2 Nonfarm business productivity is the measurement of output per hour.
3 On a year over year basis, the rise in per unit labor costs, 1990 - 2002, was respectively,
4.3%, 3.6%, 1.6%, 1.7%, 0.8%, 1.2%, 0.5%, 0.9%, 2.7%, 2.0%, 3.9%, 1.6% and -1.9%.
4 The foreign trade deficit figure analyzed above is different from the headline trade deficit
reported in the press and another trade deficit ratio often used by economists, although they
are all related and can be reconciled. In this report, the “trade deficit” refers to exports and
(continued...)

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CRS-6
exceeded import growth. During 1992 the trade deficit began to grow as a fraction
of GDP and is now running at a rate in excess of its previous high in 1987. The
increase in the U.S. foreign trade deficit during 1992!2002 reminds us that the
United States still receives a substantial net inflow of capital from abroad.
Table 6. U.S. Foreign Trade Deficit
(as a percent of GDP)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Trade
Deficit
1.8
1.2
0.8
0.2
0.3
0.8
1.2
1.0
1.1
1.4
2.6
3.6
4.3
4.4
5.1
Source: Department of Commerce.
Note: Percentages measure the real trade deficit divided by real GDP.
The U.S. Dollar. Figure 1 records the movement in the foreign exchange
value of the dollar measured against a trade-weighted index of the currencies of many
U.S. trade partners over the past 15 years. After a low in the second quarter 1995,
the dollar rose in real or inflation-adjusted terms (that is, it appreciated) by over 34%
to its peak in February 2002. In the past year, the dollar has depreciated by around
Figure 1. Real Dollar Exchange Rate
115
110
105
100
95
90
85
801987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Years
Source: Board of Governors of the Federal Reserve System
4 (...continued)
imports from the U.S. national accounts, which are the basis for the GDP figures. The
underlying data for the figures cited above are released quarterly and annually and are on
an inflation-adjusted basis (“real”). In contrast, foreign trade figures frequently quoted in
the press are different because they released monthly rather than quarterly, not adjusted for
inflation and are defined slightly differently otherwise. These figures are usually not
compared to GDP. To make matters even more confusing, economists often refer by
convention to the quarterly trade figures known as the current account. The current account
position includes components not in the figures above and is not adjusted for inflation.
Based on data for the first three quarters of 2002, the current account deficit annualized was
around 5.0% of GDP.

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CRS-7
5% from its peak on a broad, trade-weighted basis. Its inflation-adjusted value is
around that in October 2000; and it is over 27% above its low in 1995.
The dollar has shown more movement against the major world currencies than
the broad trade-weighted index described above suggests.5 Over the past year, the
dollar has depreciated by nearly 14% against an index consisting of the major
currencies that circulate, adjusted for inflation. Moreover, the dollar has moved in
different directions depending on the currency.
Posture of Fiscal and Monetary Policy
The course of GDP growth can respond significantly to changes in fiscal and
monetary policy.
Fiscal Policy. The posture of fiscal policy depends on how it is measured.
A generally accepted method is to examine the ratio of the structural or full
employment budget deficit to full employment GDP. When that is done, as shown
in Table 7, fiscal policy during 2001 was expansionary as the full employment
surplus fell from 1.3% to 0.6% of potential GNP. An alternative, although inferior
measure, is the ratio of the actual budget deficit to actual GDP. When examined,
fiscal policy in 2001 was also expansionary as the actual surplus fell from 2.4% to
1.3% of actual GDP.
Monetary Policy. Traditionally, the posture of monetary policy has been
judged either by the growth of the monetary aggregates or by movements in interest
rates.6 In fact, neither is an unambiguous indicator. The monetary aggregates, for
example, give a confused picture. Although M1 could explain how the most recent
economic expansion got underway, it could not explain the expansion’s continuation.
It can, however, explain how it ended. The opposite appears to be the case for both
M2 and M3.
Table 7. Alternative Measures of Fiscal Policy
($ in billions per fiscal year)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Standardized
Budget Deficit
$121
$147
$185
$185
$141
$144
$99
$73
$37
$ 3
$+99
$+80
$153
5 In Figure 1, the dollar is measured against an index of the currencies of many of ourmajor
trade partners weighted according to the proportion of trade. This is referred to as the
“broad dollar index”. The Board of Governors also publishes the exchange rate of the dollar
with the currencies of smaller groups of countries or individual countries.
6 For a more comprehensive discussion of monetary policy, see CRS Report RL30354,
Monetary Policy: Current Policy and Conditions, by Gail Makinen.

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CRS-8
Full Employment
GDP
5,706 6,088 6,403 6,713 7,030 7,376 7,740 8,137
8,528
8,945
9,442
9,995 10,428
Ratio
0.021 0.024 0.029 0.028 0.021 0.020 0.013 0.009
0.004
0.000
+0.011 +0.008 0.015
Actual Budget
Deficit
$221
$269
$290
$255
$203
$164
$107
$22
$+69
$+126
$+236
$+127
$158
Actual GDP
5,738 5,928 6,222 6,561 6,949 7,323 7,700 8,194
8,655
9,141
9,715
10,032 10,337
Ratio
0.039 0.045 0.047 0.039 0.029 0.022 0.014 0.003 +0.008 +0.014 +0.024 +0.013 0.015
Source: Congressional Budget Office (January 2003)
Although the contraction of reserves, the basis of money and credit conditions,
could indicate monetary tightening, it is, in fact, compatible with monetary
expansion. This occurs because over much of the most recent expansion, demand
deposits declined and it is against these deposits that banks are legally obligated to
hold reserves. Each dollar of decline frees up about 10 cents in reserves that banks
can lend. Thus, even though reserves declined, they declined by less than the
reserves set free by the contraction of demand deposits. This increased the net
lending powers of banks.
Some of the dollars that were in checking accounts have found their way into
passbook savings and CDs. These shifts can explain why M1 falls without a
commensurate fall in M2 and M3. For the latter to grow, however, funds must be
added to passbook savings and CDs that were not originally in checking accounts.
Table 8. The Growth Rates of the Monetary Aggregates
(annualized rates of change)
Time
Aggregate
Monetary
M1
M2
M3
Period
Reserves
Base
88:12!89:12
0.8%
4.2%
0.8%
5.4%
4.0%
89:12!90:12
3.1
9.5
4.0
3.8
1.6
90:12!91:12
9.0
8.3
8.7
3.0
1.3
91:12!92:12
19.6
10.5
14.3
1.6
0.3
92:12!93:12
11.3
10.5
10.3
1.6
1.4
93:12!94:12
- 1.8
8.2
1.8
0.4
1.7
94:12!95:12
-5.0
3.9
-2.0
4.1
6.0
95:12!96:12
-11.2
4.0
-4.1
4.7
7.3
96:12!97:12
-6.6
6.1
-0.7
5.7
9.1
97:12–98:12
-3.5
7.0
2.2
8.8
11.0
98:12–99:12
-7.6
15.3
2.3
6.0
8.3
99:12–00:12
-7.3
-1.5
-3.0
6.2
8.6
00:12–01:12
6.7
8.7
8.3
10.5
12.9
01:12-02:12
2.8
7.2
3.4
6.5
6.4
02:11-03:01
11.2
8.4
10.0
7.0
4.9
Source: Board of Governors of the Federal Reserve System.

---

CRS-9
The growth in the reserves of depository institutions results to a large degree
from decisions to move the key federal funds’ interest rate (shown in Figure 2).
These moves have been motivated primarily by a desire to bring the economy to full
employment (1990-94) and then keep it growing at a rate sufficient to maintain full
employment. From time to time, other factors may influence the movement of this
rate. For example, the turmoil in both domestic and international financial markets
cause the rate to be reduced 1/4% on September 29, October 15, and November 17,
1998 at which point it stood at 4.75%. In three equal moves of 1/4% during June,
August, and November 1999, the rate was returned to its pre-crisis level of 5.5%. On
both February 2 and March 21, 2000, in the face of mounting evidence that the
economy was growing at an unsustainable rate, the federal funds rate was raised an
additional 1/4%, and on May 16 it was raised1/2%, bringing the rate to 6.5%. In six
equal cuts of 1/2% (January 3 and 31, March 20, April 18, May 15 and June 27), and
a seventh cut of 1/4% (August 21), the rate was reduced to 3.50%. In response to the
terrorist attacks, the rate was reduced to 3.0% on September 17 and in a further move
toward easing, it was reduced to 2.5% on October 2, to 2.0% on November 6, and to
1-3/4% on December 11. On November 6, 2002, the target was reduced to 1-1/4%
in the face of a softening of demand growth.
Figure 2. Yield on Selected U.S. Treasury Securities and
Federal Funds (%)
10
9
8
7
6
5
4
3
2
1
0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Three Month
Federal Funds
Five Year
Thirty-Year
Source: Board of Governors of the Federal Reserve System.
As Figure 2 shows, movements in short-term interest rates mimic closely
movements in the federal funds rate. This is not as true for longer-term rates. Their
rise and fall as well as the magnitude of their shifts is often different from the timing
and magnitude of shifts in the federal funds rate. This is due in part to the fact that
they respond to the longer run outlook for inflation, the financing requirements

---

CRS-10
necessitated by the budget deficit, both current and prospective, and the international
flow of capital.
Summary of Current Developments
The NBER decided on November 26 2001 that the longest economic expansion
in U.S. history was over and that the United States had been in a recession since
March 2001. This decision was unprecedented in the sense that in March the U.S.
economy–according to the data then available–was still expanding. We now know
that GDP was contracting, a contraction that would run 3 quarters. The
unemployment rate reached a low of 3.8% in April 2000. It began to rise and in
December 2002 reached a recession high of 6.0%. After declining to 5.7% in
January, it rose to 5.8% in February. Since the recession began, approximately 1.9
million jobs have been lost. On the positive side, the rate of inflation slowed,
although some of the decline can be attributed to the sharp fall in oil prices. In recent
months, however, oil prices have rebounded. To combat the economic slump, both
fiscal and monetary policies have become expansionary. In eleven separate moves
during 2001, the target for the federal funds rate was reduced to 1-3/4% on December
11, from a high of 6-1/2% on January 3. On November 6, 2002, the rate was reduced
to 1-1/4% in the face of evidence suggesting that demand growth had softened. Signs
of revival are beginning to show. GDP grew during each of the past 5 quarters.
However, signals are mixed. Very recent indicators may suggest some renewed
weakening of activity. To assess the current situation, it is difficult to distinguish
between underlying economic trends and dampening effects from uncertainties
related to the geopolitical situation.
Sources of GDP Growth
Table 9 records the sources of growth in GDP over the 1991-2001 expansion.
These data record two interesting developments. First, investment spending played
an important role in that expansion. And among the categories of investment, outlays
for personal computers were important. This bodes well for the longer run growth
in productivity. Second, purchases by all levels of government played only a small
role in that expansion.
Table 9. Sources of GDP Growth: 1992 through 2002
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Real GDP
100.0%100.0%100.0%100.0%100.0%100.0%100.0%100.0%100.0%
**
100.0%
Growth*
Consumption
71.2
87.7
59.3
86.2
51.5
63.3
71.1
80.0
105.1
65.1
Investment
28.8
41.5
46.7
1.2
42.4
45.5
44.4
30.3
21.6
50.4
Govt. Purchases
6.2
-6.4
0.8
-6.8
12.0
10.2
10.1
16.3
7.3
23.6
Net Exports
-6.3
-25.9
-6.97
19.4
-5.9
-19.0
-25.6
-26.4
-34.0
-39.1
Source: Department of Commerce.
* Computed using real GDP at 1996 chained dollars on a 4th quarter over 4th quarter basis.

** When the small change in GDP is compared with the large change in components, the resulting percentages are so
large as to be meaningless.

---

CRS-11
Economic Forecasts, 2002-2003
The forecasts in Table 10 come from three sources. OMB and CBO are well
known. BC stands for the Blue Chip Economic Indicators, a firm that collects the
forecasts from about 50 forecasters in finance, business, and universities. BC Con
represents the consensus or average forecasts of this group. BC T-10 is the average
of the high ten among these forecasts, while BC B-10 is the average of the low ten
forecasts.
The overall view taken by the forecasts summarized in Table 10 is that a
somewhat higher rate of GDP growth will occur during 2003. The rate of GDP
growth, according to the consensus forecast, will be insufficient to have much of an
effect on the unemployment rate. The inflation rate for the entire economy (as
measured by the GDP price index) is expected to remain below 2.0%. Inflation as
measured by the fixed market basket of the Consumer Price Index for all Urban
Consumers is forecast to accelerate by half a percentage point to slightly above 2%.
Both short-term and long-term interest rates are expected to be at or slightly below
their 2002 levels.
The Wall Street Journal published the results of its survey of 55 economic
forecasters in its January 2, 2003 edition. These forecasters, on average, expect real
GDP to grow at an annual rate of 2.7%, 3.2%, 3.7% and 3.7% over the four quarters
of 2003. The CPI is expected to rise 2.2% for the year ended in May. The 3-month
Treasury bill rate and 10-year note rate are expected to be 1.8% and 4.42% in June
2003 and the unemployment rate in May is expected to be 6.0%.
The Chairman of the Board of Governors of the Federal Reserve presented the
economic projections of the Federal Reserve Board of Governors and Federal
Reserve District Bank Presidents for 2003 in testimony before the Senate Banking
Committee on February 11, 2003 and the House Financial Services Committee on
February 12, 2003. The Federal Reserve projections for 2003 are that from the fourth
quarter 2002 to the fourth quarter 2003, real GDP will grow between 3.25% and
3.50% and that prices7 will increase about 1.25% to 1.50%. The civilian
unemployment rate is projected to be between 5.75% and 6.0% during the fourth
quarter of the year.
Table 10. Economic Forecasts 2003 - 2004
2002
2003
2002*
2003
2004
3*
4*
1
2
3
4
Nominal GDPa
OMB
5.1
3.1
NA
NA
NA
NA
3.6
4.2
5.2
CBO
5.1
3.1
NA
NA
NA
NA
3.6
4.2
5.4
7 In its Monetary Report to Congress, the Board of Governors of the Federal Reserve
System features in its projections a measure of inflation known as the Personal Consumption
Expenditure (PCE) chain-type price index. This price index attempts to measure inflation
with regard to consumer spending.

---

CRS-12
2002
2003
2002*
2003
2004
3*
4*
1
2
3
4
BC T-10
5.1
3.1
6.1
6.6
7.1
7.2
3.6
5
6.5
BC Con.
5.1
3.1
4.4
4.9
5.4
5.6
3.6
4.3
5.5
BC B-10
5.1
3.1
2.9
3.2
3.5
4
3.6
3.7
4.5
Real GDPa
OMB
4
1.4
NA
NA
NA
NA
2.4
2.9
3.6
CBO
4
1.4
NA
NA
NA
NA
2.4
2.5
3.6
BC T-10
4
1.4
3.1
4.2
4.8
4.9
2.4
3.1
4.4
BC Con.
4
1.4
2.2
2.8
3.6
3.8
2.4
2.6
3.6
BC B-10
4
1.4
1.4
1.4
2.6
2.9
2.4
2.1
3
Unemploymentb
OMB
5.7
5.9
NA
NA
NA
5.6
5.8
5.7
5.5
CBO
5.7
5.9
NA
NA
NA
NA
5.8
5.9
5.7
BC T-10
5.7
5.9
6.2
6.3
6.3
6.2
5.8
6.2
6
BC Con.
5.7
5.9
5.9
6
5.9
5.8
5.8
5.9
5.6
BC B-10
5.7
5.9
5.8
5.7
5.6
5.5
5.8
5.6
5.1
GDP Price Index (chain-weighted)a
OMB
1
1.6
NA
NA
NA
NA
1.1
1.3
1.5
CBO
1
1.7
NA
NA
NA
NA
1.1
1.6
1.7
BC T-10
1
1.7
NA
NA
NA
NA
1.1
2.1
2.3
BC Con.
1
1.7
1.9
1.7
1.6
1.6
1.1
1.7
1.8
BC B-10
1
1.7
1.3
1
0.9
1.1
1.1
1.3
1.3
CPI-Ua
OMB
2.2
2
NA
NA
NA
NA
1.6
2.2
2.1
CBO
2.2
2
NA
NA
NA
NA
1.6
2.3
2.2
BC T-10
2.2
2
3.7
3.1
2.6
2.7
1.6
2.7
2.9
BC Con.
2.2
2
2.7
2.2
1.8
2
1.6
2.3
2.3
BC-10
2.2
2.0
1.7
1.3
1.0
1.3
1.6
1.9
1.6
T-BILL Interest Rate (3 month)b
OMB
NA
NA
NA
NA
NA
NA
1.6
1.6
3.4
CBO
NA
NA
NA
NA
NA
NA
1.6
1.4
3.5
BC T-10
1.7
1.3
1.4
1.5
1.7
2.3
1.6
1.7
3.8
BC Con.
1.7
1.3
1.2
1.2
1.4
1.7
1.6
1.4
2.8
BC B-10
1.7
1.3
1.1
1.1
1.1
1.2
1.6
1.2
2
10-year Treasury Noteb
OMB
4.3
4
NA
NA
NA
NA
4.6
4.2
5
CBO
4.3
4
NA
NA
NA
NA
4.6
4.4
5.2
BC T-10
4.3
4
4.1
4.4
4.7
5.1
4.6
4.6
5.9
BC Con.
4.3
4
4
4.1
4.3
4.6
4.6
4.23
5.1
BC B-10
4.3
4
3.8
3.8
3.9
4
4.6
4
4.5
Sources: Blue Chip Economic Indicators, March 10, 2003. Congressional Budget Office,
January, 2003; and, the Office of Management and Budget, February, 2003.

---

CRS-13
* Actual data, subject to revisions. The annual data for nominal GDP, real GDP, the GDP
price index and the CPI are on a year over year basis; and the unemployment and
interest rate data are either quarterly or annual averages.
a Annualized quarterly rates of change.
b Quarterly averages.
Promotion of Economic Growth
Over the longer run, the economic well-being of a nation depends on the growth
of potential output or GDP per capita. Crucial to this growth is the fraction of a
nation’s resources devoted to capital formation. The ability to add to the capital
stock through investment depends on a nation’s saving rate.
Saving comes from several sources. In the private sector individuals
(households) and businesses are responsible for saving. The former save when all
of their after tax income is not used for consumption. Businesses save through
retained earnings and capital consumption allowances. The public sector can also be
a source of national saving and this occurs when government revenues are larger than
expenditures. Budget surpluses, then, can be viewed as a source of national saving.
Table 11 shows the sources of saving for the United States during the past 40
years. There are several things to note about these data. First, except for the decade
of the 1990s, the gross private sector savings rate has averaged a remarkably stable
17%-19% of GDP, with most of the saving being done by businesses. More
significantly, however, the private sector saving rate net of depreciation, representing
saving available for additions to capital, declined considerably in the 1990s. Thus,
even without a federal budget deficit, the United States would have had a “saving
problem.”
Second, over this 40-year period, the saving done by the public sector, as a
whole, has declined. There is, however, diversity as to the contribution made by the
level of government. The large negative contribution made by the federal
government during the 1980s reflects the widely publicized budget deficit. Even
though state and local governments have been running budget surpluses, they have
not been large enough to offset the federal deficits. This has been reversed beginning
in 1993. The improved budget position of the federal government has been adding
to national saving.
Third, the data show that for 20 of these 40 years, the United States exported a
small fraction of its savings to the rest of the world (i.e., was a net exporter of
capital). This changed during the 1980s when the United States started to import the
savings of the rest of the world.
The United States has been able to sustain its growth and standard of living
since the 1980s because we have been able so far to attract sufficient capital (saving)
from international investors. Without these saving, the United States has a
“financing gap” in view of its domestic saving shortfall relative to its demand for
investment capital. In the absence of sufficient capital, U.S. interest rates will have

---

CRS-14
to rise in order to restore balance between investment and a now smaller amount of
saving. Higher interest rates will choke off investment and dampen U.S. growth8.
Table 11. U.S. Saving By Sector
(as percent of GDP)
Private Sector
Public Sector
Net Private
Netb
Year
Net of
State &
Net of
& Pub.a
Foreign
Pers.
Bus.
Total Deprec. Fed.
Local
Total
Deprec.
1960-9
5.7
11.4
17.1
9.6
2.2
1.7
4.0
1.3
10.9
-0.6
1970-9
6.8
11.6
18.4
9.8
-0.5
1.8
1.3
-1.2
8.6
-0.2
1980-9
6.7
12.6
19.2
9.0
-2.2
1.4
-0.8
-3.0
6.0
1.5
1990-9
4.3
12.5
16.9
6.8
-1.0
1.3
-0.3
-2.0
4.8
1.4
1984
7.8
13.2
21.0
11.0
-3.1
1.7
-1.4
-3.7
7.3
2.2
1985
6.7
13.1
19.8
9.8
-3.0
1.6
-1.4
-3.7
6.1
2.6
1986
6.0
12.1
18.1
8.0
-3.1
1.5
-1.6
-3.8
4.2
3.2
1987
5.3
12.3
17.7
7.6
-1.9
1.3
-0.6
-2.9
4.7
3.2
1988
5.7
12.7
18.5
8.4
-1.5
1.4
-0.1
-2.4
6.0
2.2
1989
5.5
11.9
17.4
7.3
-1.2
1.4
0.2
-2.0
5.3
1.6
1990
5.8
11.8
17.5
7.5
-1.8
1.1
-0.7
-2.9
4.6
1.2
1991
6.2
12.1
18.4
8.2
-2.4
1.0
-1.4
-3.7
4.5
-0.2
1992
6.5
12.1
18.4
8.3
-3.5
1.0
-2.5
-4.8
3.5
0.6
1993
5.3
12.1
17.5
7.5
-2.9
1.1
-1.8
-4.1
3.4
1.1
1994
4.5
12.3
17.0
6.9
-1.9
1.2
-0.6
-2.9
4.0
1.5
1995
4.1
12.8
17.1
7.1
-1.5
1.3
-0.1
-2.4
4.7
1.3
1996 3.5
13.0
16.5
6.5
-0.7
1.4
0.8
-1.5
5.0
1.4
1997
3.0
13.1
16.2
6.1
0.4
1.5
1.9
-0.3
5.8
1.5
1998
3.4
12.2
15.6
5.6
1.5
1.6
3.1
1.0
6.6
2.3
1999
1.9
12.7
14.6
4.4
2.2
1.6
3.8
1.6
6.0
3.4
2000
1.8
11.9
13.7
3.6
3.1
1.4
4.5
2.3
5.9
4.4
2001
1.7
12.2
13.9
2.9
1.7
0.9
2.6
0.4
3.3
3.8
2002*
2.8
12.5
15.3
4.2
-0.8
0.7
-0.1
-2.2
2.0
4.5
Source: U.S. Department of Commerce.
a Equal to the sum of private sector saving net of depreciation and total public sector saving net of depreciation.
b Negative sign indicates the export of saving from the United States. Positive sign indicates the import of saving from
abroad.
* Data for the first three quarters of the year.
8 See also CRS Report RL30534, America’s Growing Current Account Deficit: Its Causes
and What It Means for the Economy, by Marc Labonte and Gale Makinen; and CRS Report
RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig Elwell.

---

CRS-15
Should efforts to correct the international trade deficit prove fruitful, the net
inflow of foreign saving will diminish or perhaps on net cease (that is, stabilize).
Should this occur without a significant improvement in either the private sector
saving rate or the negative saving rate of the public sector, the rate of new investment
will fall to a very low level in the United States and with it the means for improving
the well-being of future generations of Americans.
A sudden increase in the national saving rate is, however, not without some
possible adverse consequences. In the short run, a sudden increase in the saving rate
means decreased consumption and/or lower public sector net spending, both of which
depress aggregate demand. Moreover, in either case, the demand for some types of
output would fall to be replaced by an increased demand for other types of output.
As a result, some industries and firms would have to contract while others expand.
Resources would have to transit from declining to growing industries. These short-
run dislocations should be borne in mind if a higher national saving rate becomes the
object of public policy.

---