Order Code RL30329
CRS Report for Congress
Received through the CRS Web
Current Economic Conditions
and Selected Forecasts
Updated October 17, 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
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 4.2% above its previous high near the end of the 1991 - 2001
expansion. Real growth picked up in the second quarter to 3.3% from 1.4% (quarter-
quarter, annualized). Most forecasters expect growth to accelerate in the second half.
Formally confirming the good news in July, the National Bureau of Economic
Research (NBER) 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.
Yet the rebound in growth since the end of the recession has not translated into
higher payroll employment. Payroll employment has declined by 1.0 million since
November 2001. The unemployment rate rose as well, and hit 6.4% in July 2003.
It has since eased to 6.1% (September). Many call this a “jobless recovery”.
There are however 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 in the second half. Growth
forecasts have been revised upward to at least at 3.9%. Some estimate that third
quarter GDP may be as high as 7%. However, 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 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.
This report will be updated monthly.
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].

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Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The U.S. Foreign Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The U.S. Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Posture of Fiscal and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Economic Forecasts, 2002-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Accounting for GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Promotion of Economic Growth: The Importance of Saving . . . . . . . . . . . 18
List of Figures
Figure 1. Real Dollar Exchange Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 2. Yield on Selected U.S. Treasury Securities and
Federal Funds (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Tables
Table 1. The Growth Rate of Real GDP v. Final Sales,1991 - 2003 (%) . . . . . . . 4
Table 2. Civilian Unemployment Rate, 1991 - 2003 . . . . . . . . . . . . . . . . . . . . . . 6
Table 3. Rate of Change in the GDP Deflators, 1992 - 2003
. . . . . . . . . . . . . . 7
Table 4. Rate of Change in the Consumer Price Index (CPI), 1992 - 2003 (%) . . 7
Table 5. Selected GDP Price Indexes, 2002 - present . . . . . . . . . . . . . . . . . . . . . 8
Table 6. Rate of Change in Labor Costs, 1992 - 2003 . . . . . . . . . . . . . . . . . . . . . 9
Table 7. U.S. Foreign Trade Deficit, 1988 - 2003
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 8. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 9. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . 13
Table 10. Economic Forecasts 2003 - 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table 11. Accounting for GDP Growth: 1994 through 2003 . . . . . . . . . . . . . . 18
Table 12. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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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 4.8% above its
recession low point in the third quarter 2001, and had grown 4.2% beyond its
previous high near 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
more than doubled, rising to 3.3% from 1.4% in each of the two previous quarters
(quarter - quarter, at a seasonally adjusted annualized rate).2 Growth excluding
inventories looked even more buoyant in the second quarter.3 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 is now nearly
4.5% above its previous peak at the end of 2000; investment in structures was
positive for the first time in almost two years. A widening trade deficit was a drag
2 The most recent GDP estimate (the third estimate, referred to as the “final estimate”)
reflected a substantial upward revision since the first estimate in July (the “advance”
estimate). The first estimate (2.4%) had been revised upward to 3.1% in the second
(“preliminary estimate”) in August.
3 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.

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CRS-2
on growth. Another positive sign is that profit data have been strong for the first time
since the recovery began. Profits rose by nearly 10% (almost 50% at an annualized
rate) in the second quarter.
Yet, despite the recovery in growth
The second jobless recovery ? Many
and other positive signs, concerns remain.
people are referring to the present
expansion as a “jobless recovery” and
The rebound has not translated into an
parallels have been made to the
upswing
in
payroll
employment.4
“jobless recovery” after the 1990-91
Employment
has
contracted
and
the
recession. How do the two compare?
unemployment rate has risen and remained
high, even as growth picked up. Since its
Payroll employment losses in the
peak in February 2001, payroll employment
present expansion are far larger than
has fallen by around 2.7 million people.
in 1991-92, measured from several
Employment levels in September 2003
important
turning
points
in
the
were around those in September 1999.
business cycle:
- Between the start of the recession
However, payroll employment is
and
now
(from
March
2001-
estimated to have increased slightly in
September 2003), payroll employment
September (+57,000). This was the first
has declined by 2.7 million. At the
monthly increase since January. It is still
same point in the 1991 recovery (30
too soon to know if it marks a turning point.
months out), employment had shown
The unemployment rate stood at 6.1% in
a decline of 48,000, but had already
September, well above the 3.8% low of the
started to turn up.
1990s expansion.
- Since the end of the recession in
Measured inflation continues to be
November 2001 (22 months ago),
payroll employment has continued to
low. The broadest measure of inflation for
decline (-1.0 million). By this point in
the economy, the GDP price index,
the
previous
recovery,
payroll
decelerated from 2.4% in the 1st quarter
employment had increased by 1.2
2003 to +1.0% in the 2nd quarter 2003
million.
(annualized rates). The Consumer Price
Index (CPI) followed a similar path.
Measured on a year-year basis, the CPI
decelerated from nearly 3% in the first quarter to 2.1% in the second. The CPI in the
third quarter has showed a slight upward trend (2.2%), but this pattern has been
heavily influenced by sharp movements in the price of energy. Excluding energy
prices, the CPI has decelerated over the quarter. 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.
4 The other major employment survey by the Bureau of Labor Statistics (BLS) indicates that
employment has risen since the end of the recession.
According to the BLS household
survey, employment has increased by 1.4 million in contrast to a 1 million decline in payroll
employment. See the forthcoming report by Anne Vorce.

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CRS-3
The most recent data are difficult to interpret.5 The key questions are: To what
extent does the recent improvement in several key indicators point to the long-
awaited acceleration of the economy ? How will this translate in the labor markets
? Will employment pick up strongly with a lag, as it did in the 1990s ?
To what
extent will a drag on growth continue from adjustment in the business sector,
particularly in the telecommunications industries, but also in transportation-related
industries affected by security concerns ?
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 June 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
The FOMC did not change its monetary policy stance at its most
recent meeting on September 16.
Details
GDP. To understand the most recent macroeconomic developments, it may be
important to understand aspects of the previous business cycle. The growth rate of
GDP since 1991 is shown in Table 1. Its most notable feature is that after a weak
start, 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 3.3% in the second.
Productivity gains have been an important part of the current expansion.6 Most
economists refer to recent trends as reflecting a “productivity-led” recovery. In 2002,
productivity rose by 5.4% at an annual rate; and quarterly growth this year has been,
respectively, 2.1% and 6.8% on a quarter-quarter annualized basis. To put these
numbers into perspective, the underlying productivity trend from 1973-1995 was for
5 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
economy. For example, in the late 1990s, GDP revisions indicated that the economy was
considerably stronger than had been thought.
6 Productivity is measured by output per hour. In the current situation, change in both the
numerator and denominator of this ratio have been contributing to higher productivity:
output (the numerator) has been rising and hours (denominator) have been declining.

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CRS-4
1.4% annual growth; and the “step-up” in productivity from 1995-2000 was to a
2.5% annual rate of growth. In the previous expansion, strong productivity gains
were not part of the initial recovery phase after March 1991 and did not show up in
the aggregate data until 1995.
The Importance of the Inventory Cycle. 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 necessarily be worrisome because adjustment
is taking place. As Table 1 illustrates, GDP growth rose far less than Final Sales growth
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 1.7%. The difference between the two
was the rise in inventories, which added to growth. 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.
Table 1. The Growth Rate of Real GDP v. Final Sales,
1991 - 2003 (%)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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
2.5
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
1.7
2.7
Source: U.S. Department of Commerce.
Note: 2003 is 2nd quarter 2002-2003.
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 only a modest recovery, the unemployment rate reversed
course and rose. After moving in a narrow band mainly between 5.6% and 5.9%
starting at 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 and then to
6.1% in August and September.
Payroll employment has continued to decline despite the pick-up in growth and
income. Measured from the end of the recession in November 2001, payroll
employment has fallen by approximately 1.1 million. This is unprecedented. Payroll
employment has never continued to decline 22 months after the end of the recession

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CRS-5
in any postwar business cycle.7 Even in the previous business cycle in the early
1990’s (which was also referred to initially as a “jobless” recovery”), employment
had turned substantially upward by this point. (See Box, above.)
To analyze labor market conditions, it is important to understand that
employment is a net concept that reflects considerable “churning” in the labor
markets, measured as the flows of gross job gains and gross job losses. At any given
time, the U.S. economy is creating and destroying jobs — although this is usually not
readily apparent from the aggregate net figure.8 In this sense, the U.S. is considered
the most “dynamic” labor market in the world.
In the present situation, jobs have continued to be created, but job creation has
not been sufficient to offset the loss in jobs elsewhere. This description raises further
questions about the underlying components (ie, the gross flows): do net job losses
reflect that (1) gross job losses have been so large that they have offset “normal”
gross job gains; (2) while gross job losses have been small, they have nevertheless
been larger than weak gross job gains; or (3) weakness in both components has been
driving the new number, as gross job losses have been large and gross job gains
small?
The argument has been made that gross job creation has been weaker in this
recovery than in the early 1990s recovery.9 This argument appears to have been
confirmed by the new data series on Business Employment Dynamics released by the
Bureau of Labor Statistics. In the current expansion, gross job losses appear to have
returned to pre-recession levels, but gross job gains have not recovered at all. More
specifically, as of December 2002 (the latest data available), gross job creation has
continued to decelerate since the recession and is taking place at only 1995 levels.
On balance, this has translated into a net decrease in employment.10 Intuitively, the
7 The small September increase in payroll employment (+57,000), the first increase since
January, was a preliminary estimate. It is too soon to know whether this marks an upturn
in payroll employment.
8 For example, according to the Bureau of Labor Statistics (BLS), while net employment
was only 0.1% lower in December 2002 than in September 2002 (quarterly rate), this small
change reflected considerable churning in the labor market: 7.2% of the jobs in December
were newly created since September, while 7.3% of the jobs in September no longer existed
in December because they had disappeared. BLS comments: “These gross job gains and
job losses statistics demonstrate that a sizable number of jobs appear and disappear in the
relatively short time frame of one quarter.” See Bureau of Labor Statistics, New Quarterly
Data on Business Employment Dynamics from BLS, September 30, 2003, pp. 2-3.
9 See Erica L. Groshen and Simon Potter, “Has Structural Change Contributed to a Jobless
Recovery ?” Current Issues in Economics and Finance, Federal Reserve Bank of New York,
Vol.1, Number 8, August 2003. Available at [http://www.newyorkfed.org].
10 Bureau of Labor Statistics, New Quarterly Data on Business Employment Dynamics from
BLS, September 30, 2003. The new BLS series is useful for investigation of trends in gross
jobs flows — an area in which there has been little data because of the difficulties in
following jobs over time. There are some limitations to the series. The data starts at
September 1992, after the recession (July 1990 - March 1991). As a consequence, a full
(continued...)

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CRS-6
weakness on the gross job creation side is appealing: 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.
However, some economists argue that recent trends reflect structural changes in the
economy.11
Divergence in payroll and household surveys ? 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 job losses (some 1.0 million) have continued 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 1.4 million since then. Is the difference between the two measures
of employment a statistical problem ? Experts do not know. Even if recent and recently announced
adjustments are taken into account, the basic trend does not look any different. (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. In
its latest employment release, BLS announced that it will revise payroll employment down by
145,000 for the March 2003 reference month.) 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.
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
6.1
6.1
Source: Department of Labor.
10 (...continued)
comparison to the recent recession and early recovery phase is not possible. In addition, the
new BLS series is not collected from the same survey as the payroll employment data and
so they are not precisely comparable.
11 Groshen and Potter, op. cit.

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CRS-7
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.
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. Moreover, the deceleration
in inflation over the 1990s occurred even as the pace of growth accelerated. In the
postwar experience, this combination of developments is unusual. The rates of
growth and inflation have not typically moved 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.
Table 3. Rate of Change in the GDP Deflators, 1992 - 2003
(%, 4Q-4Q)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Implicit Price
Deflator
2.3
2.4
2.1
2.1
1.9
1.8
1.1
1.6
2.3
2.0
1.3
1.5
Chain Type
Price Index
2.3
2.4
2.1
2.1
1.9
1.8
1.1
1.6
2.3
2.0
1.3
1.5
Source: U.S. Department of Commerce.
Note: 2003 is 2nd quarter 2002-2003.
With the start of the recession in March 2001, inflation decelerated, excluding
energy prices. 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 4. Rate of Change in the Consumer Price Index (CPI),
1992 - 2003 (%)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Dec. over Dec.
2.9
2.7
2.7
2.5
3.3
1.7
1.6
2.7
3.4
1.6
2.4
2.3
Excluding food and
3.3
3.3
2.6
3.0
2.6
2.2
2.4
1.9
2.6
2.7
1.9
1.2
energy
Year Over Year
3.0
3.0
2.6
2.8
3.0
2.3
1.6
2.2
3.4
2.8
1.6
-
Excluding food and
3.7
3.3
2.8
3.0
2.7
2.4
2.3
2.1
2.4
2.6
2.4
-
energy
Source: Department of Labor.
Note: 2003 is latest data, August 2002- August 2003.

---

CRS-8
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 this acceleration, the rate of increase remained below the pace during most
of the 1990s expansion and the price of all items excluding food and energy
decelerated.
The index for all prices continued to accelerate through March 2003 (an increase
of 5.2% for the first quarter, at a seasonally adjusted annual rate), but then actually
fell in the second quarter (-0.7%). Consumer prices then rose by 3.1% in the third
quarter. This volatility reflects, in large measure, the behavior of energy prices.
“Core prices” (i.e., prices excluding food and energy) gradually accelerated from the
first to third quarters and rose by, respectively, 0.8%, 1.0% and 1.5%. Some
economists however fear that price trends this year portend the on-set of deflation.
This, they translate into falling GDP and rising unemployment.
In its past three public statements,12 the FOMC has indicated concern over
disinflation. Table 5 presents some of the indicators which have prompted the
FOMC statements.
Table 5. Selected GDP Price Indexes, 2002 - present
(% change, quarter-quarter, annualized)
2002
2003
1q
2q
3q
4q
1q
2q
GDP less food
1.6
1.5
1.1
1.6
1.8
0.6
and energy
Gross
1.2
2.3
1.2
1.8
3.4
0.4
domestic
purchases
Personal
1.1
2.7
1.7
1.8
2.7
0.8
consumption
expenditures*
Source: Department of Commerce.
*The PCE Price Index measures price changes for items purchased by consumers. It is frequently
cited by Federal Reserve Board Chairman Greenspan in his Congressional testimony and is one of the
economic indicators projected by the Federal Reserve Board and Federal Reserve Bank Presidents in
the Federal Reserve’s Semi-Annual Monetary Policy Report.
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
12 June 25, August 12, and September 16.

---

CRS-9
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.13 In 2002,
productivity rose by 5.4% (annual average of each quarter’s growth)
and by 4.4%, fourth quarter - fourth quarter. So far in 2003, first
quarter productivity was 2.6% and second quarter productivity was
4.1% above comparable periods in 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 6. 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
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 6. Rate of Change in Labor Costs, 1992 - 2003
(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
-1.6
-1.0
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
2nd quarter (unit labor costs); and in June (ECI).
13 Nonfarm business productivity is the measurement of output per hour.

---

CRS-10
The U.S. Foreign Trade Deficit. The U.S. foreign trade deficit (net
imports), as shown in Table 7, recorded a continued and dramatic fall from 1988
through 1991.14 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 averaged 5.5% 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.
Table 7. U.S. Foreign Trade Deficit, 1988 - 2003
(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
5.5
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-October 2003, it has
depreciated on balance by around 10% on an inflation-adjusted basis, with some ups
and downs. As of mid-October, the dollar is now around its February 2000 level and
remains well above its 1995 low (21%) even after the depreciation. The dollar has
depreciated by about the same percentage on a nominal basis (that is, not adjusted for
inflation) since its peak in early 2002.
14 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-11
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.
The dollar has shown more movement against the major world currencies than
the broad trade-weighted index described above suggests.15
From its high in
February 2002 until October 2003, the dollar has depreciated by nearly 20% 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 , but the appreciation has so far been short-lived. Since
August, the dollar has depreciated by over 5% and, in mid-October, stodd at around
July 1997 levels. 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 37% since late January 2002. In mid-
October, the dollar was close to the euro:dollar rate at which the euro was introduced
in 1999. The dollar has fallen by nearly 20% against the Canadian dollar since
January 2002, including some dollar appreciation since mid-June.
Posture of Fiscal and Monetary Policy
The course of GDP growth can respond significantly to changes in fiscal and
monetary policy.
15 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.

---

CRS-12
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.
In its latest monthly budget review, the Congressional Budget Office (CBO)
estimated that the total fiscal deficit for Fiscal Year 2003, which ended on September
30, would be about $374 billion, more than twice the recorded deficit in FY 2002 and
around 3.5% of GDP.16
Monetary Policy
Traditionally, the posture of monetary policy has been judged either by the
growth of the monetary aggregates or by movements in interest rates.17 The three
monetary aggregates have all responded positively to the easing of monetary policy.
Their annualized rates of growth over the first seven months of 2003 are substantially
higher than during 2002.
Table 8. Alternative Measures of Fiscal Policy
($ 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
10,42
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
8
+0.01 +0.00
Ratio
0.021 0.024 0.029 0.028 0.021 0.020 0.013 0.009 0.004 0.000
1
8
0.015
Actual Budget
Deficit
$221
$269
$290
$255
$203
$164
$107
$22
$+69 $+126 $+236 $+127 $158
10,03 10,33
Actual GDP
5,738 5,928 6,222 6,561 6,949 7,323 7,700 8,194 8,655 9,141 9,715
2
7
+0.00 +0.01 +0.02 +0.01
Ratio
0.039 0.045 0.047 0.039 0.029 0.022 0.014 0.003
8
4
4
3
0.015
Source: Congressional Budget Office (January 2003).
16 CBO, Monthly Budget Review, Oct. 9, 2003, available at [http://www.cbo.gov].
17 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-13
The positive growth in aggregate reserves over 2001-2003 to-date is also 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, four of the quantity measures of monetary policy have recorded a
rising rate of growth.
Table 9. 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
6.4
6.5
02:12-03:09
16.0
5.8
8.2
7.4
6.4
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

---

CRS-14
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.
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
Long-Term
Source: Board of Governors of the Federal Reserve System.
On June 25, 2003, the target federal funds rate was lowered to 1% in order to
provide further support to the economy. Disinflation had also become a concern —
although minor. The FOMC did not alter its stance at its next meetings, on August
12 and September 16.

---

CRS-15
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 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 pace in the second half of 2003 is
expected to be over twice that in the first half. Growth is forecast to approach or
exceed 4% over the next few quarters.18 Growth in 2004 is anticipated to be around
what is generally considered the rate of U.S. potential growth. The rate of GDP
growth, according to the consensus forecast, however, will be insufficient to have
much of an effect on the unemployment rate. The consensus forecast anticipates that
the unemployment rate will begin to come down gradually starting early next year.
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 below their 2002 levels on average this year, and to
increase only slightly next year, despite strong growth.
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 prices19 will increase about 1.25% to 1.50%.
The civilian
18 At the high end of the range, the forecasting firm Macroeconomic Advisers is expecting
real GDP to be 6.9% in the third quarter and 4.3% in the fourth quarter. Its forecasts are
based on data as of October 17, which is more current than the forecasts contained in the
Blue Chip survey of two weeks earlier.
19 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
(continued...)

---

CRS-16
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%.
Table 10. Economic Forecasts 2003 - 2004
2003
2004
2002* 2003*
2004
1*
2*
3
4
1
2
Nominal GDPa
OMB
3.8
4.3
NA
NA
NA
NA
3.6
4.0
5.0
CBO
3.8
4.3
NA
NA
NA
NA
3.6
3.7
5.3
BC T-10
3.8
4.3
8.0
6.9
7.0
6.7
3.6
4.4
6.1
BC Con.
3.8
4.3
6.3
5.0
5.3
5.0
3.6
4.2
5.3
BC B-10
3.8
4.3
4.5
3.1
3.6
3.4
3.6
4.0
4.5
Real GDPa
OMB
1.4
3.3
NA
NA
NA
NA
2.4
2.3
3.7
CBO
1.4
3.3
NA
NA
NA
NA
2.4
2.5
3.6
BC T-10
1.4
3.3
6.0
4.9
4.8
4.6
2.4
2.8
4.5
BC Con.
1.4
3.3
4.9
3.7
3.8
3.7
2.4
2.7
3.9
BC B-10
1.4
3.3
3.7
2.5
2.8
2.8
2.4
2.5
3.3
Unemploymentb
OMB
5.8
6.2
NA
NA
NA
NA
5.8
5.9
5.6
CBO
5.8
6.2
NA
NA
NA
NA
5.8
6.2
6.2
BC T-10
5.8
6.2
6.2
6.3
6.3
6.3
5.8
6.1
6.2
BC Con.
5.8
6.2
6.2
6.2
6.1
6.0
5.8
6.1
5.9
BC B-10
5.8
6.2
6.2
6.0
5.8
5.7
5.8
6.0
5.6
GDP Price Index (chain-weighted)a
OMB
2.4
1.0
NA
NA
NA
NA
1.1
1.6
1.2
CBO
2.4
1.0
NA
NA
NA
NA
1.1
1.5
1.4
BC T-10
2.4
1.0
2.0
2.0
2.2
2.1
1.1
1.7
2.0
BC Con.
2.4
1.0
1.4
1.3
1.5
1.3
1.1
1.6
1.4
BC B-10
2.4
1.0
0.8
0.6
0.8
0.6
1.1
1.4
0.8
19 (...continued)
Expenditure (PCE) chain-type price index. This price index attempts to measure inflation
with regard to consumer spending.

---

CRS-17
2003
2004
2002* 2003*
2004
1*
2*
3
4
1
2
CPI-Ua
OMB
3.8
0.7
NA
NA
NA
NA
1.6
2.3
1.7
CBO
3.8
0.7
NA
NA
NA
NA
1.6
2.3
1.9
BC T-10
3.8
07
2.5
2.5
2.7
2.5
1.6
2.4
2.4
BC Con.
3.8
0.7
2.0
1.7
1.8
1.8
1.6
2.3
1.8
BC-10
3.8
0.7
1.2
0.6
1.o
1.1
1.6
2.2
1.2
T-BILL Interest Rate (3 month)b
OMB
1.2
1.0
NA
NA
NA
NA
1.6
1.2
2.0
CBO
1.2
1.0
NA
NA
NA
NA
1.6
1.0
1.7
BC T-10
1.2
1.0
1.0
1.1
1.3
1.6
1.6
1.1
1.9
BC Con.
1.2
1.0
1.0
1.0
1.1
1.2
1.6
1.0
1.4
BC B-10
1.2
1.0
1.0
0.9
0.9
1.0
1.6
1.0
1.0
10-year Treasury Noteb
OMB
3.9
3.6
NA
NA
NA
NA
4.6
3.7
4.1
CBO
3.9
3.6
NA
NA
NA
NA
4.6
4.0
4.6
BC T-10
3.9
3.6
4.3
4.7
4.9
5.1
4.6
4.1
5.2
BC Con.
3.9
3.6
4.3
4.7
4.5
4.7
4.6
4.0
4.8
BC B-10
3.9
3.6
4.3
4.1
4.1
4.2
4.6
3.9
4.3
Sources: Blue Chip Economic Indicators, October 10, 2003. Congressional Budget Office, August,
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.
a. Quarterly rates of change are annualized.
b. Quarterly averages.
Special Topics
Accounting for GDP Growth
Table 11 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

---

CRS-18
significantly during this period, although it continued to be the largest single
contributor to GDP growth.
Table 11. 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
90.9
Investment
46.7
1.2
42.4
45.5
44.4
30.3
21.6
50.4
-13.3
Govt.
0.8
-6.8
12.0
10.2
10.1
16.3
7.3
23.6
35.6
Purchases
Net Exports
-6.9
19.4
-5.9
-19.0
-25.6
-26.4
-34.0
-39.1
-13.2
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
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 12 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

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CRS-19
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. growth20.
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.
20 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-20
Table 12. U.S. Saving By Sector
(as percent of GDP)
Private Sector
Public Sector
Net Private
Netb
Year
State
& Pub.a
Foreign
Net of
&
Net of
Pers. Bus. Total Deprec. Fed. Local Total Deprec.
1960-9
5.7
11.4 17.1
9.6
2.2
1.7
4.0
1.3
10.9
-0.6
1970-9
6.8
11.6 18.4
9.8
-0.5
1.8
1.3
-1.2
8.6
-0.2
1980-9
6.7
12.6 19.2
9.0
-2.2
1.4
-0.8
-3.0
6.0
1.5
1990-9
4.3
12.5 16.9
6.8
-1.0
1.3
-0.3
-2.0
4.8
1.4
1984
7.8
13.2 21.0
11.0
-3.1
1.7
-1.4
-3.7
7.3
2.2
1985
6.7
13.1 19.8
9.8
-3.0
1.6
-1.4
-3.7
6.1
2.6
1986
6.0
12.1 18.1
8.0
-3.1
1.5
-1.6
-3.8
4.2
3.2
1987
5.3
12.3 17.7
7.6
-1.9
1.3
-0.6
-2.9
4.7
3.2
1988
5.7
12.7 18.5
8.4
-1.5
1.4
-0.1
-2.4
6.0
2.2
1989
5.5
11.9 17.4
7.3
-1.2
1.4
0.2
-2.0
5.3
1.6
1990
5.8
11.8 17.5
7.5
-1.8
1.1
-0.7
-2.9
4.6
1.2
1991
6.2
12.1 18.4
8.2
-2.4
1.0
-1.4
-3.7
4.5
-0.2
1992
6.5
12.1 18.4
8.3
-3.5
1.0
-2.5
-4.8
3.5
0.6
1993
5.3
12.1 17.5
7.5
-2.9
1.1
-1.8
-4.1
3.4
1.1
1994
4.5
12.3 17.0
6.9
-1.9
1.2
-0.6
-2.9
4.0
1.5
1995
4.1
12.8 17.1
7.1
-1.5
1.3
-0.1
-2.4
4.7
1.3
1996
3.5
13.0 16.5
6.5
-0.7
1.4
0.8
-1.5
5.0
1.4
1997
3.0
13.1 16.2
6.1
0.4
1.5
1.9
-0.3
5.8
1.5
1998
3.4
12.2 15.6
5.6
1.5
1.6
3.1
1.0
6.6
2.3
1999
1.9
12.7 14.6
4.4
2.2
1.6
3.8
1.6
6.0
3.4
2000
1.8
11.9 13.7
3.6
3.1
1.4
4.5
2.3
5.9
4.4
2001
1.7
12.2 13.9
2.9
1.7
0.9
2.6
0.4
3.3
3.8
2002
2.7
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.

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