Order Code RL30329
CRS Report for Congress
Received through the CRS Web
Current Economic Conditions
and Selected Forecasts
Updated August 6, 2003
Gail Makinen
Economic Policy Consultant
Government and Finance Division
Anne Vorce
Economist
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

---

Current Economic Conditions and Selected Forecasts
Summary
U.S. real GDP has been positive for 7 consecutive quarters and the economy is
considered to be in an “expansion” phase. As of the second quarter 2003, inflation-
adjusted growth was 3.9% above its previous high at the end of the 1991 - 2001
expansion. Real growth picked up in the second quarter to 2.4% from 1.4% (quarter-
quarter, annualized).
Formally confirming the good news, the National Bureau of Economic Research
(NBER), has just declared that the recession which began in March 2001 ended in
November 2001.1 The recession lasted 8 months, which is slightly shorter than the
postwar average (10 months). The NBER’s decision was based importantly on trends
in inflation-adjusted GDP, personal income and sales, all of which had started to turn
upward again during the fourth quarter 2001. As usual, the NBER waited awhile to
make its determination until it was confident of positive developments.
Yet the rebound in growth since the end of the recession has not translated into
higher payroll employment. Payroll employment has continued to contract (- 2.7
million since February 2001). The unemployment rate has risen and now stands at
6.2% (July). Many have referred to this as a “jobless recovery”.
There are positive elements of the economic picture:
(1) A pick-up in output at the same time as employment is declining means that
productivity (or output per worker) is increasing.
As we saw in the 1990s,
productivity growth is the key to raising our standard of living and is not necessarily
associated with weak labor markets over time. We eventually experienced both rapid
productivity and strong employment growth as the recovery broadened and deepened
throughout the decade. In the short run while adjustment is taking place, however,
there is a human toll from the continuing payroll employment losses.
(2) Inflation decelerated in the second quarter. This has raised concerns about
deflation. A low inflation environment is favorable for economic activity.
(3) While overall investment has not yet recovered, information technology-related
investment has been on the rise since early 2002.
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 until businesses are sufficiently confident of
conditions ahead so that they increase hiring. Inflation is expected to remain low as
upward pressure from previous oil price hikes dissipate and as long as considerable
slack remains in the economy. Fiscal and monetary policies have both been eased
since 2001 and the easing has continued into this year. They are having a positive
effect on spending. The external deficit is large and expected to remain so.
1 The NBER is the nonpartisan group that dates U.S. business cycles. For its July 17,
2003, announcement of the end of the 2001 recession, see [http://www.nber.org/cycles].

---

Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The U.S. Foreign Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The U.S. Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Posture of Fiscal and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Economic Forecasts, 2002-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Accounting for GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Promotion of Economic Growth: The Importance of Saving . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . 10
Table 9. Economic Forecasts 2003 - 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 10. Accounting for GDP Growth: 1994 through 2003 . . . . . . . . . . . . . . 14
Table 11. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

---

Current Economic Conditions and
Selected Forecasts
Current Economic Conditions
Overview
The U.S. economy is considered to be in an expansionary phase again because
it has more than recovered its recession-related losses in real GDP. This situation
was formally recognized on July 17 by the National Bureau of Economic Research
(NBER), which declared that the recession starting in March 2001 had ended in
November 2001. As of the second quarter 2003, U.S. real GDP was 4.6% above its
recession low point in the third quarter 2001, and had grown 3.9% beyond its
previous high at the end of the 1991-2001 expansion. U.S. real growth has now been
positive for 7 consecutive quarters.
According to the most recent GDP report, growth in the second quarter 2003
accelerated by a full percentage point to 2.4% from 1.4% in each of the two previous
quarters (quarter - quarter, at a seasonally adjusted annualized rate).
Growth
excluding inventories looked even more buoyant in the second quarter.2
Contributions to GDP came mainly from consumption and to a lesser extent from
defense spending, but other activities boosted growth as well. Business investment
increased: investment in information technology was positive for the 6th quarter in
a row and has now exceeded its previous peak; investment in structures was positive
for the first time in almost two years. A widening trade deficit was a drag on growth.
2 The accounting framework that governs the calculation of GDP isn’t always straight-
forward. In the GDP accounting rules, inventories subtract from growth if they are drawn
down more in a particular quarter. However, in some circumstances, the drop in inventories
might point to stronger growth ahead. For example, if domestic demand (defined as GDP
other than inventories) accelerates at the same time inventories are drawn down, the
standard interpretation is that growth will probably be higher in the near future. The reason
why a pick-up is anticipated would be at least technical:
with demand on the rise,
inventories will not be sufficient after a while and new production will eventually be
required to keep up with demand.
New production increases GDP, according to the
accounting framework. A pick-up may also signal underlying acceleration in the economy.
Based on this standard interpretation, recent second quarter data may signal stronger growth
in the months ahead, which would be consistent with consensus forecasts. Caution must be
exercised however because of the complexities of the U.S. economy.

---

CRS-2
Yet, despite the recovery in growth, concerns remain. The rebound has not
translated into an upswing in payroll employment.3 Employment has continued to
c o n t r a c t
a n d
t h e
Many people are referring to the present expansion
as a “jobless recovery” and parallels have been
unemployment rate has risen
made to the “jobless recovery” after the 1990-91
further,
even
as
growth
recession. How do the two compare?
picked up. Since the start of
the recession in March 2001,
Payroll
employment
losses
in
the
present
payroll
employment
has
expansion are larger than in 1991-92, measured
fallen by around 2.7 million
from several important turning points in the
people. Employment levels
business cycle:
in July 2003 were around
those in October 1999. The
- Between the start of the recession and now
unemployment rate stood at
(March 2001- July 2003), payroll employment has
6.2% in July, well above the
declined by 2.7 million. At the same point in the
1991 recovery (March 1992), employment had
3.8% low of the 1990s
declined by over 1 million.
expansion.
- By this point in the previous recovery, payroll
Measured inflation continues
employment had started to head up again
to be low.
The broadest
(+663,000 as of November 1992, 20 months after
measure of inflation for the
the end of the recession in March 1991). In
economy, the GDP price
contrast, payroll employment has continued to
index, decelerated from 2.4%
decline in the current expansion (-1 million since
in the 1st quarter 2003 to
the recession ended in November 2001).
+1.0% in the 2nd quarter
2003. The Consumer Price
Index (CPI) followed a similar path. It fell in April, was unchanged in May, and rose
modestly in June. This pattern has been heavily influenced by sharp movements in
the price of energy. Some economists fear that the recent U.S. experience may mean
that a period of deflation lies ahead which could have a negative effect on growth and
employment.
The most recent data are difficult to interpret. The key questions are: to what
extent does recent slow growth reflect continuing adjustment in the business sector,
particularly in the telecommunications industries, but also in transportation-related
industries affected by security concerns; and/or normal cyclical adjustment in the
aftermath of a contraction ? Alternatively, the pattern during the 4th quarter 2002
and the first half of 2003 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.4
3 The other major employment survey by the Bureau of Labor Statistics (BLS) indicates that
employment has risen. According to the BLS household survey, employment has increased
by 1.7 million during the same period.
4 In July, the Bureau of Economic Analysis (BEA) usually publishes 3-year revisions of the
GDP figures and its components (known as the “national accounts”). This year, however,
BEA will not publish revisions until December, when it will incorporate them into more
comprehensive benchmark revisions. The revisions can often alter the picture of the
(continued...)

---

CRS-3
Monetary Policy
Beginning in January 2001, Federal Reserve policy has shifted to one of ease.
Since then, the Federal Open Market Committee (FOMC) of the Federal Reserve
System has lowered the federal funds target rate in 13 steps by a cumulative 550
basis points (5.50 percentage points), from 6.5% to, most recently, 1.0% on June 25,
its lowest level since April 1961.
The recent FOMC decision was related to
continuing growth disappointment and the need to add further support to economic
activity from monetary policy. Inflationary pressures remain subdued, and concerns
have turned to disinflation.
Details
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 1.4% in the first quarter, and 2.4% in the second.
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. We saw the process at work
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
by 2.5%. The difference between the two was the rise in inventories. Inventories
were liquidated again in the first two quarters of 2003 as production could not keep
up with the demand for goods and final sales accelerated, rising at annual rates of
2.3% and 3.2%, respectively.
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 -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 - 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
4 (...continued)
economy. For example, in the late 1990s, GDP revisions indicated that the economy was
considerably stronger than had been thought.

---

CRS-4
Final Sales
Year - 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 - 4thQ
0.2
4.2
2.6
3.2
2.9
3.9
4.0
4.7
4.2
2.6
1.6
2.5
Source: U.S. Department of Commerce.
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 modest recovery, the unemployment rate reversed course
and rose. After moving in a narrow band mainly between 5.6% and 5.9% since the
end of 2001, the unemployment rate increased sharply beginning in March 2003. It
stood at 6.4% in June and eased slightly to 6.2% in July.
Since the recession began in March 2001, payroll employment has fallen by
approximately 2.7 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. The U.S. economy has remained dynamic, even though
this is not readily apparent from the aggregate figures. Following a contraction, labor
markets typically improve with a lag after growth picks up because employers are
reluctant to hire until they see that an economic recovery is firmly in place.
Table 2. Civilian Unemployment Rate, 1991 - 2003
(%, 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
5.8
6.0
6.1
6.4
6.2
Source: Department of Labor.

---

CRS-5
An interesting and perhaps important feature of the present economic recovery is the divergence
between the two main measures of employment. It is well-known that the payroll survey shows
that job losses (some 2.7 million) have increased despite the rise in GDP growth so far in this
expansion. Less well-known is the fact that the other main measure of employment (the
household survey of the Bureau of Labor Statistics) indicates that employment has increased
by 1.7 million since its low point in January 2002. Is the difference between the two measures
of employment a statistical problem ? Experts do not know. The Census Bureau’s annual
adjustment to population estimates in January 2003 boosted household survey employment that
month by some 575,000, but no adjustments were made to previous months. Some economists
also note that self-employment trends are more accurately captured by the household survey and
that household employment trends have often been reliable forward indicators of coming
improvement in payroll employment in the aftermath of a recession.
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 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 deflator,
the broadest measures of inflation in the economy, decelerated from 2.3% in 2000 to
2.0% in 2001 and 1.3% last year, on a fourth quarter-fourth quarter basis.
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

---

CRS-6
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 1.5% 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,
measured on a month-month basis, the CPI fell absolutely in April, was unchanged
in May and rose in June. Overall, during the second quarter, the CPI declined
absolutely at an annual rate of 0.7%, based on the three month measurement
calculated by the Bureau of Labor Statistics. Measured on a year-year basis, the CPI
rose by 2.1% from June 2002 to June 2003, a slowdown from the year-year pace in
the first quarter. “Core prices” (i.e., prices excluding food and energy) rose by 1.5%
on a June 2002-2003 basis. 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.
Table 4. Rate of Change in the GDP Deflators
(in percentages, 4Q-4Q)
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. So
far in 2003, first quarter productivity was 2.4% above productivity
in the first quarter 2002.
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 over the past two
years, although one measure suggests a modest pick-up in the first
quarter, as shown in Table 5. With more output produced for each
hour worked, firms have their employee cost per unit of output
reduced. Recent trends reflect the pick-up in productivity growth
5 Nonfarm business productivity is the measurement of output per hour.

---

CRS-7
and slowdown in basic labor costs during the recession plus
continuing labor market weakness in the recovery-expansion phase
to-date. 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. However, both components eased
considerably in the second quarter and the first quarter may have
been a blip.
! 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 -0.9 0.8
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 3.5
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, they
are the rates for the years ending in the 1st quarter (unit labor costs); and in June (ECI).
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 1991.6 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 half of 2003, it was 5.6% of GDP (in inflation-adjusted terms). The increase
in the U.S. foreign trade deficit during 1992!2003 reminds us that the United States
still receives a substantial net inflow of capital from abroad.
6 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.

---

CRS-8
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 2003
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
5.6
Source: Department of Commerce. Note: Percentages measure the real trade deficit divided by real GDP.
2003 = 1st half.
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.
From then until mid-June 2003, it
depreciated by more than 9% on an inflation-adjusted basis. It has appreciated
slightly since then. The dollar is now around its April-May 2000 level and remains
well above its 1995 low (23%) even after the depreciation.
The dollar has
depreciated by about the same percentage on a nominal basis (that is, not adjusted for
inflation).
Figure 1. Real Dollar Exchange Rate
115
110
105
100
95
90
85
8019871988198919901991199219931994199519961997199819992000200120022003
Years
Source: The Board of Governors of The Federal Reserve System

---

CRS-9
The dollar has shown more movement against the major world currencies than
the broad trade-weighted index described above suggests.7 From its high in February
2002 until June 2003, the dollar has depreciated by over 18% against an index
consisting of the major currencies that circulate, adjusted for inflation.
After
depreciating steadily against these currencies since February 2002, the dollar reversed
course in June 2003 and appreciated by 1.8% from June 3 to July 3. In the Federal
Reserve’s weighted currency index, the euro area is slightly more heavily weighted
in U.S. trade than Canada. On a nominal basis, the dollar has depreciated against the
euro by 28% since April 2002, with some modest dollar appreciation from mid-June
to early July. The dollar has fallen by over 12% against the Canadian dollar since
January 2002, including some dollar appreciation since mid-June. The dollar has
moved differently against other trade partners whose currencies are not substantially
traded. Until March, it had appreciated in both nominal and inflation-adjusted terms.
Source: Board of Governors of the Federal Reserve System
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.8 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.
7 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.
8 For a more comprehensive discussion of monetary policy, see CRS Report RL30354,
Monetary Policy: Current Policy and Conditions, by Gail Makinen and Anne Vorce.

---

CRS-10
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).
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
02:12-03:06
13.3
6.3
10.5
9.0
5.8
Source: Board of Governors of the Federal Reserve System.

---

CRS-11
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,
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. For most of
2002, the FOMC did not make additional cuts in its federal funds target rate because
it wanted to wait and see how strong economic activity would be following the
dramatic cuts in 2001. Toward the end of the year (November 6, 2002), the target
was reduced to 1.25% in the face of a softening in demand growth. For most of the
first half of 2003, assessment of the underlying strength of the economy was
obscured by temporary dampening effects related to the geopolitical tensions earlier
in the year. With these effects diminishing, it became apparent that sustained growth
had not yet resulted. On June 25, 2003, the target federal funds rate was lowered to
1% in order to provide further support to the economy.
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.

---

CRS-12
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.
Economic Forecasts, 2002-2003
The forecasts in Table 9 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 9 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
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 and 2004 in testimony before the House
Financial Services Committee on July 15, 2003, and the Senate Banking Committee
on July 16, 2003. The Federal Reserve projections for 2003 are that from the fourth
quarter 2002 to the fourth quarter 2003, real GDP will grow between 2.5% and
2.75% and that prices9 will increase about 1.25% to 1.50%.
The civilian
unemployment rate is projected to be between 6.0% and 6.25% during the fourth
quarter of the year. For 2004, real GDP is expected to grow between 3.75% and
4.75%, prices to rise between 1.0% and 1.5% and the unemployment rate in the
fourth quarter to average from 5.5% to 6.0%.
From its June 2003 survey of 54 economic forecasters, the Wall Street Journal
reported that, on average, they expect GDP to grow at annual rates of 3.5%, 3.8%,
3.8% and 3.7% over the last two quarters of 2003 and the first two quarters of 2004.
9
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-13
For the year ending in November 2003, the CPI, on average, is expected to rise by
1.9% and the unemployment rate is expected to average 6.1% in November.
Table 9. Economic Forecasts 2003 - 2004
2002
2003
2002*
2003
2004
3*
4*
1*
2
3
4
Nominal GDPa
OMB
5.1
3.1
3.8
NA
NA
NA
3.6
4.0
5.0
CBO
5.1
3.1
3.8
NA
NA
NA
3.6
4.2
5.4
BC T-10
5.1
3.1
3.8
4.9
6.8
6.9
3.6
4.5
6.2
BC Con.
5.1
3.1
3.8
3.3
4.9
5.2
3.6
3.9
5.2
BC B-10
5.1
3.1
3.8
1.8
2.9
3.3
3.6
3.6
4.3
Real GDPa
OMB
4.0
1.4
1.4
NA
NA
NA
2.4
2.3
3.7
CBO
4.0
1.4
1.4
NA
NA
NA
2.4
2.5
3.6
BC T-10
4.0
1.4
1.4
2.6
4.7
4.8
2.4
2.6
4.3
BC Con.
4.0
1.4
1.4
1.9
3.6
3.8
2.4
2.3
3.7
BC B-10
4.0
1.4
1.4
1.2
2.4
2.9
2.4
2.0
3.1
Unemploymentb
OMB
5.7
5.9
5.8
6.2
NA
5.6
5.8
5.9
5.6
CBO
5.7
5.9
5.8
6.2
NA
NA
5.8
5.9
5.7
BC T-10
5.7
5.9
5.8
6.2
6.3
6.3
5.8
6.1
6.1
BC Con.
5.7
5.9
5.8
6.2
6.1
6.1
5.8
6.0
5.8
BC B-10
5.7
5.9
5.8
6.2
6.0
5.9
5.8
5.9
5.5
GDP Price Index (chain-weighted)a
OMB
1.0
1.6
2.4
NA
NA
NA
1.1
1.6
1.2
CBO
1.0
1.7
2.4
NA
NA
NA
1.1
1.6
1.7
BC T-10
1.0
1.7
2.4
2.3
2.1
2.1
1.1
1.9
2.1
BC Con.
1.0
1.7
2.4
1.4
1.3
1.4
1.1
1.6
1.5
BC B-10
1.0
1.7
2.4
0.6
0.5
0.4
1.1
1.3
0.8
CPI-Ua
OMB
2.2
2.0
3.8
NA
NA
NA
1.6
2.3
1.7
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
1.7
2.2
2.4
1.6
2.5
2.5
BC Con.
2.2
2.0
3.8
0.6
1.4
1.7
1.6
2.2
1.8
BC-10
2.2
2.0
3.8
-0.6
0.5
0.9
1.6
1.9
1.1
T-BILL Interest Rate (3 month)b
OMB
1.7
1.3
1.2
1.1
NA
NA
1.6
1.2
2.0
CBO
1.7
1.3
1.2
1.1
NA
NA
1.6
1.4
3.5
BC T-10
1.7
1.3
1.2
1.1
1.2
1.3
1.6
1.2
2.2
BC Con.
1.7
1.3
1.2
1.1
1.0
1.0
1.6
1.0
1.6
BC B-10
1.7
1.3
1.2
1.1
0.8
0.8
1.6
1.0
0.9
10-year Treasury Noteb

---

CRS-14
2002
2003
2002*
2003
2004
3*
4*
1*
2
3
4
OMB
4.3
4.0
3.9
3.6
NA
NA
4.6
3.7
4.1
CBO
4.3
4.0
3.9
3.6
NA
NA
4.6
4.4
5.2
BC T-10
4.3
4.0
3.9
3.6
3.9
4.2
4.6
3.9
5.1
BC Con.
4.3
4.0
3.9
3.6
3.6
3.7
4.6
3.7
4.3
BC B-10
4.3
4.0
3.9
3.6
3.3
3.2
4.6
3.5
3.5
Sources: Blue Chip Economic Indicators, July 10, 2003. Congressional Budget Office, January, 2003; and, the
Office of Management and Budget, July 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 the 2003 first quarter data is actual, but subject to revision.
a Annualized quarterly rates of change.
b Quarterly averages.
Special Topics
Accounting for GDP Growth
Table 10 records contributions to growth in GDP from 1994 - 2003. These data
record two interesting developments. First, investment spending played an important
role in the 1991 - 2001 expansion. Its contribution to GDP growth was unusually
large during most of that period. 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. The relative contribution of consumption did not change
significantly during this period, although it continued to be the largest single
contributor to GDP growth.
Table 10. Accounting for GDP Growth: 1994 through 2003
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
105.9
Investment
46.7
1.2
42.4
45.5
44.4
30.3
21.6
50.4
-20.3
Govt.
0.8
-6.8
12.0
10.2
10.1
16.3
7.3
23.6
40.1
Purchases
Net Exports
-6.9
19.4
-5.9
-19.0
-25.6
-26.4
-34.0
-39.1
-25.7
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 half.
** When the small change in GDP is compared with the large change in components, the resulting percentages are so large as to be
meaningless.
Promotion of Economic Growth: The Importance of Saving
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

---

CRS-15
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. The
drop in the household (personal) savings rate has been the major factor in the decline
in the private sector saving rate. 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. growth10.
10 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-16
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.

---

CRS-17
Table 11. U.S. Saving By Sector
(as percent of GDP)
Private Sector
Public Sector
Net Private
Netb
Year
Net of
& Pub.a
Foreign
Depre
State &
Net of
Pers. Bus. Total
c.
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
2.7
12.5 15.2
2.9
-1.0
0.7
-0.3
-2.4
0.5
4.7
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.

---