Order Code RL30329
CRS Report for Congress
Received through the CRS Web
Current Economic Conditions
and Selected Forecasts
Updated June 19, 2003
Gail Makinen
Economic Policy Consultant
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
The recession that began in March 2001 has not yet been declared over.1
However, it is important to recognize that U.S. real growth has been positive for 18
months (6 consecutive quarters). The economy has now exceeded its previous high
at the end of the 1991 - 2001 expansion.
Yet the rebound in growth has not translated into higher employment.
Employment has continued to contract. The unemployment rate has remained high.

Moreover, the most recent data suggests that the economy continues to go
through a “rough patch”. Growth remained positive in the first quarter 2003 , but
subdued for the second quarter in a row. Real GDP rose by 1.9%, versus 1.4% in the
fourth quarter, on an annualized quarter-quarter basis, seasonally adjusted.
Employment losses picked up in the first quarter and the civilian unemployment rate,
after declining to 5.7% in January, rose to 6.1% in May, a rate last observed during
May-June , 1994. Measured inflation increased in the first quarter and decreased
during April and May, a pattern due in large part to energy prices.
While quarterly growth typically has its ups and downs, the recent weakness in
household spending, limited pick up in business investment and continuing
employment contraction has raised concerns.2 Recent data offer limited guidance
because it is difficult to separate immediately arising issues from the underlying
trends. Key questions to keep in mind are to what extent do recent slow growth and
employment contraction reflect (1) continuing after effects of geopolitical tensions
and their effects on business and consumer sentiment; (2) continuing adjustment to
imbalances in the business sector, particularly in the telecommunications industries;
and/or (3) normal recovery trends in the aftermath of a recession ?
Despite these concerns, most economists expect the economy to pick up
throughout the year, with the second half growing at an annualized pace at or above
3.5%. The unemployment rate is expected to show little change for the time being
until businesses are sufficiently confident of conditions ahead so that they increase
hiring. Inflation is expected to slow as oil prices decelerate. Fiscal and monetary
policies were both eased in 2001 and 2002 and additional fiscal easing is now in
place for 2003. The external deficit is large and expected to remain so.
1 The recession has not been declared over yet by the National Bureau of Economic
Research (NBER), which is the nonprofit, nonpartisan organization that dates the starting
and ending points of U.S. business cycle. The NBER declared March 2001 to be the start
of the recession. Typically, the NBER dates the end of a recession with a lag in order to
make sure of trends and to take major data revisions into account. In the present situation,
the absence of a recovery in employment is also a factor which the NBER is weighing
heavily in its assessment.
2 Even during the fast-growing years of the 1990s, a quarter of rapid growth often
followed a quarter of slow growth.

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Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Macroeconomic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Posture of Fiscal and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Summary of Current Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Sources of GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Economic Forecasts, 2003-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Promotion of Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. Real Dollar Exchange Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 2. Yield on Selected U.S. Treasury Securities and Federal Funds (%) . . 11
List of Tables
Table 1. The Growth Rate of Real GDP v. Final Sales (%) . . . . . . . . . . . . . . . . . 3
Table 2. Civilian Unemployment Rate, 1991 - 2003 . . . . . . . . . . . . . . . . . . . . . . 4
Table 3. Rate of Change in the Consumer Price Index (CPI) . . . . . . . . . . . . . . . . 5
Table 4. Rate of Change in the GDP Deflators . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 5. Rate of Change in Labor Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 6. U.S. Foreign Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . 10
Table 9. Sources of GDP Growth: 1992 through 2003:Q1 . . . . . . . . . . . . . . . . 12
Table 10. Economic Forecasts 2003 - 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 11. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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Current Economic Conditions and
Selected Forecasts
Current Economic Conditions
While the recession that began in March 2001 has not yet been declared over,
it should be recognized that U.S. real growth has been positive for 18 months (6
consecutive quarters).3 Since hitting its low point in the third quarter 2001, the level
of real GDP has rebounded by 4.0%. The economy has now gone beyond its
previous high at the end of the 1991 - 2001 expansion. In comparison to the
previous business cycle, the level of GDP is higher now than it was at the same time
in the previous recovery.
Yet despite the recovery in growth, legitimate concerns remain. The rebound
in growth has not translated into an upswing in employment. Employment has
continued to contract and the unemployment rate has remained high. Since the
recession began in March 2001, employment has fallen by around 2.3 million people.
The civilian unemployment rate rose to a high of 6.1% in May 2003 from a low of
3.8% (April 2000) during the 1991-2001 expansion. So far in 2003 the rate has
tended to rise. While it fell below 6.0% for the first 3 months of the year, in April
it returned to that rate and, as noted, in May rose to 6.1%.
Moreover, despite the positive recovery of real growth in the past 18 months,
the past two quarters have been subpar. The most recent data suggests that the
economy continues to go through a “rough patch”:
! Growth remained positive in the first quarter 2003, but subdued for
the second quarter in a row: real GDP rose by 1.9%, versus 1.4%
in the fourth quarter, on an annualized quarter-quarter basis,
seasonally adjusted. Although the first quarter estimate was slightly
higher than the fourth quarter, most components contributing to
growth were weaker in the first quarter. A notable exception was
the narrowing of the inflation-adjusted international trade deficit. (In
national accounting terms, this change adds to growth.)
3 The recession has not been declared over yet by the National Bureau of Economic
Research (NBER), which is the nonprofit, nonpartisan organization that dates the
starting and ending points of U.S. business cycle. The NBER declared March 2001
to be the start of the recession. Typically, the NBER dates the end of a recession
with a lag in order to make sure of trends and to take major data revisions into
account. In the present situation, the absence of a recovery in employment is also a factor
which the NBER is weighing heavily in its assessment.

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CRS-2
! Employment losses picked up in the first five months. Employment
losses during the final 5 months of 2002 were about 250,000 vs.
losses of 600,000 during the first 5 months of 2003. The civilian
unemployment rate stood at 6.1% in April, a rate last observed in the
May-July period of 1994.
! Measured inflation presents a mixed picture. The broadest measure
of inflation for the economy, the GDP price index, accelerated from
+1.8% in the 4th quarter 2002 to +2.5% in the 1st quarter 2003. The
Consumer Price Index (CPI) rose sharply during the first quarter of
2003. However, the CPI fell in April and was unchanged in May.
This pattern has been heavily influenced by sharp movements in the
price of energy. Undoubtedly, a similar pattern will show up in the
second quarter GDP indexes. Nevertheless, some economists fear
that the U.S. may experience a period of deflation which will have
a negative effect on growth and employment.
The most recent data are difficult to interpret. The key questions are: to what
extent does relatively slow growth reflect geopolitical tensions and their effects on
business and consumer sentiment; continuing adjustment in the business sector,
particularly in the telecommunications industries; and/or normal cyclical adjustment
in the aftermath of a contraction ? Alternatively, a weak first quarter may simply
reflect the typical ups and downs of quarterly growth. Growth is not an even
process. Even during the fast-growing years of the 1990s, a quarter of rapid growth
often followed a quarter of slow growth.
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,
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 1.25% from 1.75%.
Recent Macroeconomic Developments
GDP. To understand the most 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. In 2003, real GDP
increased by an annualized rate of 1.9% in the first quarter.

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CRS-3
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 should not be worrisome. 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.
Inventories were liquidated again in the first quarter 2003 as production could not
keep up with the demand for goods and final sales rose at an annual rate of 2.4%.
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
-0.5
3.0
2.7
4.0
2.7
3.6
4.4
4.3
4.1
3.8
0.3
2.4
Year
4thQ Over
0.9
4.0
2.5
4.1
2.3
4.1
4.3
4.8
4.3
2.3
0.1
2.9
4thQ
Final Sales
Year Over
-0.2
2.8
2.6
3.4
3.1
3.6
4.0
4.2
4.3
3.7
1.5
1.8
Year
4thQ Over
0.2
4.2
2.6
3.2
2.9
3.9
4.0
4.7
4.2
2.6
1.6
1.7
4thQ
Source: U.S. Department of Commerce.
The Recession. On November 26, 2001, the National Bureau of Economic
Research (NBER), the agency that dates the American business cycle, announced that
the longest economic expansion in American history ended in March 2001. The U.S.
recession is now in its 25th 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. 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 relative to the
pace of the second half of the 1990s. 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-

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CRS-4
year) basis.4 Positive growth continued throughout 2002. Quarterly growth was,
respectively, at annual rates of 5.0%, 1.3%, 4.0%, and 1.4%.
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 a
contraction followed by a weak recovery, the unemployment rate rose to a high of
6.1% in May 2003. Over the past 18 months, it has moved in a narrow band between
5.6% and 6.1%.
Since the recession began in March 2001, payroll employment has fallen by
approximately 2.3 million. 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 353,000
(revised) decline in February’s payroll employment more than offset January’s
improvement. In March, April and May, payroll employment dropped cumulatively
by an additional 453,000. 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
4 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-5
J
F
M
A
M
J
J
A
S
O
N
D
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
5.8
6.0
6.1
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
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.
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.
With the start of the recession in March 2001, inflation 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 continued
through March 2003 (an increase of 3.0% as measured from March 2002 to March
2003). However, the CPI fell absolutely in April and was unchanged in May. While
this pattern reflects, in large measure, the behavior of energy prices, some economists
fear that it portends the on-set of deflation. This, they translate into falling GDP and
rising unemployment.

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CRS-6
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 GDPDeflators
(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.
With the favorable inflation performance of the economy, economists think that
several forces keeping a lid on inflation may be at work:
! 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.5 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 in per-capita income and a higher standard of living.
! 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 in the past 2 years, as shown in Table 5.6 This reflects
5 Nonfarm business productivity is the measurement of output per hour.
6 On a year over year basis, the rise in per unit labor costs, 1990 - 2002, was respectively,
(continued...)

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CRS-7
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. In the first quarter of 2003, however, it
accelerated from the third and fourth quarters due to increases in
both the (1) wage and salary and (2) benefits components.
! 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)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Unit Labor Costs
0.4 1.5 1.1 1.5 0.7 1.1 2.4 1.4 4.9 -0.5 -1.0 2.1
Employment Cost Index 3.5 3.6 3.1 2.6 3.1 3.4 3.5 3.4 4.4 4.2 3.2 3.8
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. For 2003, it is the annualized rate for the 1st quarter.
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 1991.7 In each of these years the trade deficit declined as export growth
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. During
the first quarter of 2003, it reached 5.1% of GDP (nominal basis). 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.
6 (...continued)
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%.
7 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
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. For
2002, the current account deficit was approximately 4.8% of nominal GDP.

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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
5.2
Source: Department of Commerce.
Note: Percentages measure the real trade deficit divided by real GDP.
Figure 1. Real Dollar Exchange Rate
115
110
105
100
95
90
85
801987 1988 1989 1990 1991 1992 19931994 1995 19961997 19981999 200020012002 2003
Years
Source: Board of Governors of the Federal Reserve System
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 hitting 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. Since then, it has
depreciated by more than 9% on an inflation-adjusted basis, and is now around its April 2000 level.
Even after the depreciation, the dollar remains well above its 1995 low (23%). The dollar has
depreciated by about the same percentage on a nominal basis (that is, not adjusted for inflation).
The dollar has shown more movement against the major world currencies than the broad trade-
weighted index described above suggests.8 Since its high in February 2002, the dollar has
depreciated by approximately 18% against an index consisting of the major currencies that circulate,
8 In Figure 1, the dollar is measured against an index of the currencies of many of the major
trade partners of the United States 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.

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CRS-9
adjusted for inflation. The dollar has moved differently against other trade partners whose currencies
are not substantially traded. Until recently, it had appreciated.
The dollar has depreciated considerably in recent months. In the Federal Reserve’s weighted
currency index, the euro area is slightly more heavily weighted in U.S. trade than Canada. The dollar
has depreciated considerably against both the currencies of both trade partners. Since the end of
March, the dollar has declined by 8.2% against the euro and by over 9% against the Canadian dollar.
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 2002 was
expansionary as the full employment surplus fell from 0.8% to a deficit of 1.5% of potential GNP.
An alternative, although inferior measure, is the ratio of the actual budget deficit to actual GDP.
When examined, fiscal policy in 2002 was also expansionary as the actual surplus fell from 1.3%
to a deficit of 1.5% 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.9 In fact, neither is an
unambiguous indicator. The monetary aggregates, for example, give a confused picture. All three
M’s grew more slowly over 2002 compared to 2001. However, the growth of M1 and M2 has
accelerated during the first 4 months of 2003. Not so for M3. It is unclear what this implies for the
future growth of GDP.
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
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)
9 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-10
The positive growth in aggregate reserves over 2001-2003 to-date is in response
to the aggressive easing of monetary policy by the Federal Reserve as it attempts to
accelerate the growth in aggregate demand. The continued rapid growth of the
monetary base reflects in part the growth in reserves. However, it mainly reflects the
growth in paper currency in circulation since about 90% of the base is accounted for
by currency (the great portion of which does not circulate in the United States).
Thus, it is not clear how much information on the future condition of the economy
can be read by looking at the growth rate of the monetary aggregates.
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
3.2
6.5
6.5
02:12-03:05
4.6
7.2
9.8
8.8
4.7
Source: Board of Governors of the Federal Reserve System.

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), the
principal tool of monetary policy. These moves have been motivated primarily by
a desire to bring the economy to full employment 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,

---

CRS-11
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 9/11 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 1.75% on December 11. On
November 6, 2002, the target was reduced to 1.25% in the face of a softening in
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
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
May 2003 reached a high of 6.1%, even as positive GDP growth resumed. Since the
recession began, employment has declined by approximately 2.3 million. On the
positive side, the rate of inflation slowed, although some of the decline can be

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CRS-12
attributed to the sharp fall in oil prices. 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 1.75% on December 11,
from a high of 6.5% on January 3. On November 6, 2002, the rate was reduced to
1.25% 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 6 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
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Real GDP
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
**
100.0% 100.0%
Growth*
Consumption
59.3
86.2
51.5
63.3
71.1
80.0
105.1
65.1
72.0
Investment
46.7
1.2
42.4
45.5
44.4
30.3
21.6
50.4
-28.6
Govt.
0.8
-6.8
12.0
10.2
10.1
16.3
7.3
23.6
2.6
Purchases
Net Exports
-6.97
19.4
-5.9
-19.0
-25.6
-26.4
-34.0
-39.1
54.1
Source: Department of Commerce.
* Computed using real GDP at 1996 chained dollars on a 4th quarter over 4th quarter basis. For 2003, data for first
quarter.

** When the small change in GDP is compared with the large change in components, the resulting percentages are so
large as to be meaningless.
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, with a strong pick-up
coming in the second half of the year. The rate of GDP growth, according to the

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CRS-13
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 over half a percentage point to slightly below 2.5%. Both short-term
and long-term interest rates are expected to be at or slightly below their 2002 levels.
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 prices10 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
4.4
NA
NA
NA
3.6
4.2
5.2
CBO
5.1
3.1
4.4
NA
NA
NA
3.6
4.2
5.4
BC T-10
5.1
3.1
4.4
5.0
6.8
6.8
3.6
4.4
6.1
BC Con.
5.1
3.1
4.4
3.5
4.9
5.2
3.6
4.1
5.3
BC B-10
5.1
3.1
4.4
2.2
3.0
3.4
3.6
3.7
4.4
Real GDPa
OMB
4.0
1.4
1.9
NA
NA
NA
2.4
2.9
3.6
CBO
4.0
1.4
1.9
NA
NA
NA
2.4
2.5
3.6
BC T-10
4.0
1.4
1.9
2.8
4.8
4.7
2.4
2.6
4.1
BC Con.
4.0
1.4
1.9
2.0
3.5
3.7
2.4
2.4
3.6
BC B-10
4.0
1.4
1.9
1.4
2.3
2.6
2.4
2.1
3.0
Unemploymentb
OMB
5.7
5.9
5.8
NA
NA
5.6
5.8
5.7
5.5
CBO
5.7
5.9
5.8
NA
NA
NA
5.8
5.9
5.7
BC T-10
5.7
5.9
5.8
6.1
6.2
6.3
5.8
6.1
6.1
BC Con.
5.7
5.9
5.8
6.0
6.1
6.0
5.8
6.0
5.7
BC B-10
5.7
5.9
5.8
6.0
5.8
5.7
5.8
5.8
5.4
GDP Price Index (chain-weighted)a
OMB
1.0
1.6
2.5
NA
NA
NA
1.1
1.3
1.5
10 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-14
2002
2003
2002*
2003
2004
3*
4*
1*
2
3
4
CBO
1.0
1.7
2.5
NA
NA
NA
1.1
1.6
1.7
BC T-10
1.0
1.7
2.5
2.2
2.0
2.1
1.1
1.9
2.1
BC Con.
1.0
1.7
2.5
1.5
1.4
1.6
1.1
1.7
1.7
BC B-10
1.0
1.7
2.5
0.8
0.7
0.8
1.1
1.4
1.1
CPI-Ua
OMB
2.2
2.0
3.8
NA
NA
NA
1.6
2.2
2.1
CBO
2.2
2.0
3.8
NA
NA
NA
1.6
2.3
2.2
BC T-10
2.2
2.0
3.8
2.3
2.4
2.6
1.6
2.7
2.6
BC Con.
2.2
2.0
3.8
1.1
1.5
1.8
1.6
2.3
1.9
BC-10
2.2
2.0
3.8
-0.2
0.5
1.0
1.6
1.9
1.1
T-BILL Interest Rate (3 month)b
OMB
1.7
1.3
1.2
NA
NA
NA
1.6
1.6
3.4
CBO
1.7
1.3
1.2
NA
NA
NA
1.6
1.4
3.5
BC T-10
1.7
1.3
1.2
1.2
1.3
1.4
1.6
1.3
2.6
BC Con.
1.7
1.3
1.2
1.1
1.1
1.2
1.6
1.1
1.9
BC B-10
1.7
1.3
1.2
1.0
0.9
0.9
1.6
1.0
1.2
10-year Treasury Noteb
OMB
4.3
4.0
3.9
NA
NA
NA
4.6
4.2
5
CBO
4.3
4.0
3.9
NA
NA
NA
4.6
4.4
5.2
BC T-10
4.3
4.0
3.9
4.0
4.2
4.5
4.6
4.2
5.3
BC Con.
4.3
4.0
3.9
3.7
3.8
4.0
4.6
3.9
4.5
BC B-10
4.3
4.0
3.9
3.5
3.4
3.5
4.6
3.6
3.8
Sources: Blue Chip Economic Indicators, June10, 2003. Congressional Budget Office,
January, 2003; and, the Office of Management and Budget, February, 2003.
* 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. Some of the2003 first quarter
data is actual, but subject to revision.
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.

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CRS-15
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
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. growth11.
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
11 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.

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CRS-16
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.
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.

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