Order Code RL30329
CRS Report for Congress
Received through the CRS Web
Current Economic Conditions and
Selected Forecasts
Updated September 21, 2005
Gail Makinen
Economic Policy Consultant
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 growth has been positive for 14 consecutive quarters, and the
economy is considered to be in an “expansion” phase. As of the second quarter 2005,
real or inflation-adjusted growth was some 12% above its previous high near the end
of the 1991-2001 expansion.
Real GDP grew at annualized rates of 3.8% and 3.4%, respectively, during the
first two quarters of 2005. These rates were in line with the four quarterly rates of
growth during 2004 (which were 4.5%, 3.3%, 4.0%, and 3.8%).
The rebound in payroll employment has not been strong. During August 2005,
it was about 3.1 million above the level prevailing at the end of the recession
(November 2001), but only about 1.49 million above the peak of the last expansion
(March 2001). The unemployment rate rose to a high of 6.3% in June 2003; it has
since declined and now (August 2005) stands at an expansion low of 4.9% (down
from 5.4% one year ago). The low achieved during the last expansion was 3.8%.
The other elements in the economic picture are mixed:
(1) A pick-up in output at the same time as employment is growing slowly 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.
(2) The inflation rate, measured by the CPI, rose 3.3% during 2004. This was largely
driven by rising energy prices as the inflation rate excluding food and energy rose
only 2.2%. Over the 12 months ended in August, 2005, the CPI rose3.6% and, for
the three months ended in August, it rose at an annual rate of 4.2%. Food and energy
prices have played an important role in these rates. Removing these prices from the
index, the CPI rose 2.1% for the 12 months ended in August and at an annual rate of
1.4% for the three months ended in August. Nevertheless, the inflation rate is now
generating some concern.
The consensus among economists is that GDP will grow between 3.4% and
3.8% this year. The unemployment rate will show little tendency to change.
Inflation is expected to be above the rate that prevailed in 2004. Fiscal and monetary
policies were both eased beginning in 2001. The easing continued into the first half
of 2004. This has had a positive effect on spending. However, on 11 occasions
beginning on June 30, 2004, and concluding on September 20, 2005, the Federal
Reserve has made a modest effort to tighten monetary policy by increasing the
federal funds rate by 1/4%. The cumulative increase has been 2-3/4%. Fiscal policy
also tightened modestly. The international trade deficit is large and expected to
remain so. This report will be updated monthly.

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Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Posture of Fiscal and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Economic Forecasts, 2005-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Accounting for GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Promotion of Economic Growth: The Importance of Saving . . . . . . . . . . . 13
List of Figures
Figure 1. Real Dollar Exchange Rate (Broad Dollar Index) . . . . . . . . . . . . . . . . . 7
Figure 2: Yield on Selected Securities and Federal Funds (%) . . . . . . . . . . . . . . 10
List of Tables
Table 1. The Growth Rate of Real GDP v. Final Sales, 1991-2004 . . . . . . . . . . . 3
Table 2. Civilian Unemployment Rate, 1991 - 2005 . . . . . . . . . . . . . . . . . . . . . . 4
Table 3. Rate of Change in the GDP Deflators, 1992 - 2004 . . . . . . . . . . . . . . . . 4
Table 4. Rate of Change in the Consumer Price Index (CPI), 1992 - 2004 . . . . . 5
Table 5. Rate of Change in Labor Costs, 1993 - 2005 . . . . . . . . . . . . . . . . . . . . . 5
Table 6. U.S. Foreign Trade Deficit, 1988 - 2004 . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . . 9
Table 9. Economic Forecasts 2005 - 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 10. Accounting for GDP Growth: 1995 through 2005:1H . . . . . . . . . . . 13
Table 11. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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Current Economic Conditions and
Selected Forecasts
Current Economic Conditions
Overview
U.S. economic growth has been positive during each of the past 16 quarters.
The National Bureau of Economic Research (NBER) declared that the recession that
began in March 2001 had ended in November 2001. As of the second quarter 2005,
U.S. real GDP (measured in 2000 dollars) was 12.4% above its recession low point
in the third quarter 2001, and had grown about 12% from its previous high near the
end of the 1991-2001 expansion.
According to the most recent GDP report, growth in the second quarter of 2005
was at an annual rate of 3.3% (compared with 3.8% in the first quarter), similar in
magnitude to the four quarterly rates recorded during 2004 (which were 4.5%, 3.3%,
4.0%, and 3.8%).1 Growth excluding inventories was above GDP growth in the
second quarter, increasing at an annual rate of 5.4%.2 Contributions to GDP came
mainly from consumption and investment in equipment and software.
Yet, despite the recovery in growth and other positive signs, concerns remain.
The rebound has translated into only a small rise in payroll employment above the
level attained at the end of the previous cyclical peak. Since its peak in March 2001,
payroll employment has risen by about 1.49 million. An encouraging sign is that
employment has grown by about 4.1 million over the past two years. The
unemployment rate now stands at an expansion low of 4.9%. It has varied between
4.9% and 5.7% since December 2003. These rates are still above the 3.8% low of the
1990s expansion.
1 The estimate of second quarter 2005 GDP growth is from the first (or “advance”) estimate.
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.
quarter data. A similar signal was evident in the third quarter estimate.

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CRS-2
Measured inflation appears to be rising. The broadest measure of inflation for
the economy, the GDP price index, rose 2.6% during 2004, up from 1.8% in 2003
and 2.0% in 2002. The Consumer Price Index (CPI) followed a somewhat similar
path. It rose 2.7% during 2004 vs. 2.3% in 2003 and 1.6% in 2002. For the 12-
months ended August 2005, the rate was 3.6%. The movement in both indexes,
however, has been heavily influenced by sharp movements in the price of food and
energy.

Monetary Policy
The policy of monetary easing that began in January 2001 ended in mid-2004.
During this period the Federal Open Market Committee (FOMC) of the Federal
Reserve System lowered the federal funds target rate in 13 steps by a cumulative 550
basis points (5.50 percentage points), from 6.5% to1.0% ( its lowest level since April
1961). Over the past six months, as inflationary pressures appeared to gather
momentum and the unemployment rate declined, the FOMC began to move the
federal funds target upward. On each of 10 separate occasions, June 30, August 10,
September 21, November 10 and December 14, 2004, and February 2, March 22,
May 3, June 30, August 9, and September 20, 2005, the target was advanced by
0.25%. It now stands at 3-3/4%.
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 last expansion (1995-2000). GDP growth began to slacken during the second
half of 2000 and actually contracted during 2000:3Q, 2001:1Q, and 2001:3Q. This
pattern was reversed beginning with 2001:4Q when GDP grew positively, at an
annual rate of 1.6%. During 2004, the annualized quarterly rates of growth were
4.3%, 3.6%, 4.0%, and 3.3%. During the first two quarters of 2005, GDP grew at an
annual rates of 3.8% and 3.3%, respectively.
Productivity gains have been an important part of the current expansion.3 Most
economists refer to recent trends as reflecting a “productivity-led” recovery. During
2002, 2003, and 2004, productivity rose 5.0%, 4.5%, and 4.0%, respectively. To put
these numbers into perspective, the underlying productivity trend from 1973 to 1995
was for 1.4% annual growth; and the “step-up” in productivity from 1995 to 2000
was to a 2.5% annual rate of productivity 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.

3 Productivity is measured by output per hour of all persons. 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-3
Table 1. The Growth Rate of Real GDP v. Final Sales, 1991-2004
(percent)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2004
GDP
-0.2
3.3
2.7
4.0
2.5
3.7
4.5
4.2
4.5
3.7
0.8
1.6
2.7
4.2
Year-Year
4thQ-4thQ
1.1
4.1
2.5
4.1
2.0
4.4
4.3
4.5
4.7
2.2
0.2
1.9
4.0
3.8
Final Sales Year-
-0.2
3.0
2.6
3.4
3.0
3.7
4.0
4.2
4.5
3.8
1.6
1.2
2.7
3.9
Year
4thQ-4thQ
0.2
4.2
2.6
3.2
2.9
3.9
4.0
4.7
4.2
2.9
1.5
0.8
4.0
3.6
Source: U.S. Department of Commerce.
Labor Markets. The civilian unemployment rate fell from a cyclical high of
7.8% in June 1992 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 initially by a modest recovery, the unemployment rate reversed
course and rose, reaching a high of 6.3% in June 2003. Since then it has declined,
reaching an expansion low of 4.9% in August 2005. During the past 20 months the
unemployment rate has varied between 4.9% and 5.7%.
Employment is now above its pre-recession peak. Measured from the end of the
previous peak in March 2001, payroll employment has risen by approximately 1.49
million. This is unprecedented in any postwar business cycle. Even in the previous
business cycle in the early 1990s (which was referred to initially as a “jobless”
recovery”), employment had turned substantially upward by this point. Since the
upswing began in November 2001, payroll employment has risen by 3.12 million.
Part of the reason for the low rate of job creation in the current expansion may
be that employment at the end of the last expansion was substantially above the level
many economists believed to be consistent with full employment. Thus, employment
levels were expected to adjust downward and the data may be picking up this
adjustment.
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 remains far below
prerecession levels despite the rise in GDP growth so far in this expansion and an
improvement in employment since August. 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 more than 6.2 million since the expansion
began. Does the difference between the two measures of employment reflect statistical
problems? Experts do not know. Some economists also note that self-employment
trends are more accurately captured by the household survey (the payroll survey does not
measure self-employment) and that household employment trends have often been
reliable forward indicators of coming improvement in payroll employment in the
aftermath of a recession.

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CRS-4
Table 2. Civilian Unemployment Rate, 1991 - 2005
(%, 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
5.8
5.9
5.8
6.0
6.1
6.3
6.2
6.1
6.1
6.0
5.9
5.7
2004
5.7
5.6
5.7
5.5
5.6
5.6
5.5
5.4
5.4
5.5
5.4
5.4
2005
5.2
5.4
5.2
5.2
5.1
5.0
5.0
4.9
Source: Department of Labor.
Inflation. The U.S. inflation performance has been remarkable over the past
10 years. The inflation rate decelerated throughout most of the expansion in the
1990s, as Tables 3 and 4 illustrate. Toward the end of the expansion in 2000, the
inflation rate accelerated, but the pick up was not noticeably different from earlier
years of the cycle.
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 - 2004
(%, 4Q - 4Q)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Implicit Price Deflator
2.2
2.3
2.2
2.0
1.9
1.5
1.1
1.6
2.2
2.5
1.7
2.0
2.9
Chain Type Price Index
2.2
2.3
2.2
2.0
1.9
1.5
1.1
1.6
2.2
2.5
1.7
2.0
2.9
Source: U.S. Department of Commerce.

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CRS-5
With the start of the recession in March 2001, inflation rate 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 2.2% in 2000 to 1.7% in 2002, on a fourth quarter-fourth quarter
basis. Since then it has been rising, reaching 2.9% during 2004. Over the first half
of 2005, it rose at an annual rate of 2.8%.
Table 4. Rate of Change in the Consumer Price Index (CPI),
1992 - 2004
(percent)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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
1.9
3.3
Excluding food and energy 3.3
3.3
2.6
3.0
2.6
2.2
2.4
1.9
2.6
2.7
1.9
1.1
2.2
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
2.3
2.7
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
1.4
1.7
energy
Source: Department of Labor.
The pattern can be found in the CPI. Measured on a December - December
basis, it rose by 2.4% during 2002, decelerated to 1.9% during 2003, and then
accelerated to 3.3% during 2004. For the 12-month period ended in August, it rose
3.6%, while for the three-months ended in August, it rose at an annual rate of 4.2%.
Much of the acceleration can be attributed to energy price increases.

The rate at which Unit Labor Costs have risen has accelerated from 2002
through 2004. During the first half of 2005, the rate of increase moderated
somewhat, as shown in Table 5. Employee cost trends are also measured in the
Employment Cost Index (ECI). The rate at which the ECI for private industry rose
accelerated from 1995 through most of 2001, but began to decelerate in the course
of 2002 as a result of weakened labor market pressures. The ECI began a very
modest rise beginning in 2003, somewhat in line with increases during the late 1990s.
Table 5. Rate of Change in Labor Costs, 1993 - 2005
(in percentages)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Unit Labor Costs
1.6
0.5
2.1
0.7
2.0
2.8
1.6
4.2
0.3
-0.6
0.9
3.3
2.3
Employment Cost Index
3.6
2.6
2.6
3.1
3.4
3.5
3.4
4.4
4.2
3.2
4.0
3.8
3.1
Source: U.S. Department of Labor.
Notes: Unit labor costs are for nonfarm business, 4th quarter-4th quarter. For 2005, it is the annualized rate for the first
half year. The Employment Cost Index is for private industry on a December-December basis. For 2005, it is on a June-
June basis.

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CRS-6
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
1992.4 In these years, the trade deficit declined as export growth exceeded import
growth. During 1993 the trade deficit began to grow as a fraction of GDP and is now
running at a rate in excess of its previous high in 1987. The increase in the U.S.
foreign trade deficit during 1992-2005 reminds us that the United States still receives
a substantial net inflow of capital from abroad.
Table 6. U.S. Foreign Trade Deficit, 1988 - 2004
(as a percent of GDP)
1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1.8
1.2
0.8
0.2
0.2
0.7
1.0
0.9
1.0
1.2
2.2
3.1
3.9
4.0
4.7
5.1
5.6
Source: Department of Commerce.
Note: During 2005:1H, the deficit averaged 5.7% of GDP.
The U.S. Dollar. Figure 1 records the movement in the foreign exchange value
of the dollar measured against a trade-weighted index of the currencies of many U.S.
trade partners over the past 15 years. After 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 December 2004, it depreciated by
around 17% on an inflation-adjusted basis, with some ups and downs. From
December 2004 through mid-September 2005, the dollar has fallen by less than 2%.
4 The foreign trade deficit figure analyzed above is different from the headline trade deficit
reported in the press and another trade deficit ratio often used by economists, although they
are all related and can be reconciled. In this report, the “trade deficit” refers to exports and
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, 2003, and 2004 the current account deficit was, respectively, approximately 4.1%,
4.6%, and 5.3% of nominal GDP. During 2005:1H, it reached 5.2% of nominal GDP.

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CRS-7
Figure 1. Real Dollar Exchange Rate
(Broad Dollar Index)
115
110
105
100
95
90
85
801990
1994
1998
2002
Source: Board of Governors of the Federal Reserve.
The dollar has shown more movement against the major world currencies than
the broad trade-weighted index described above suggests.5 From its high in February
2002 through April 2005, the dollar has depreciated by nearly 24% against an index
consisting of the major currencies that circulate, adjusted for inflation. However,
over the period December 2004-mid-September 2005, this index shows that the
dollar has risen in value by nearly 5.6%.
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 was expansionary between 2001 and 2003 as a full employment surplus in
2001 fell from 1.1% to a deficit of 2.7% of potential GDP in 2003. The deficit
declined to 2.4% of potential GDP in 2004. An alternative, although inferior
measure, is the ratio of the actual budget deficit to actual GDP. When examined,
fiscal policy was also expansionary since 2000 with the surplus of 2.4% in that year
giving way to a deficit of 3.6% in 2003, a net shift of 6% of GDP.
5 In Figure 1, the dollar is measured against an index of the currencies of many of the major
trade partners of the United States weighted according to the proportion of trade. This is
referred to as the “broad dollar index.” The Board of Governors also publishes the exchange
rate of the dollar with the currencies of smaller groups of countries or individual countries.

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CRS-8
In their annual joint statement, the Secretary of the Treasury and the Director of
the Office of Management and Budget announced that the total fiscal deficit for
FY2004, which ended on September 30, was $413 billion.6 This deficit is more than
twice the recorded fiscal deficit in FY2002 and approximately 3.6% of GDP.
Table 7. Alternative Measures of Fiscal Policy
($ in billions per fiscal year)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Standardized
Budget Deficit
$188
$192
$145
$145
$92
$78
$34
$+8
$+116
$+115
$-117
$303
$280
Full Employment
GDP
6,398
6,711 7,038 7,390 7,760 8,152
8,535
8,965
9,492
10,077
10,635
11,182 11,758
Ratio
0.029
0.029 0.021 0.020 0.012 0.010
0.004
0.001
+0.012 +0.011
0.011
-0.027 -0.024
Actual Budget
Deficit
$290
$255
$203
$164
$108
$22
$+69
$+126
$+236
$+128
$158
$378
$412
Actual GDP
6,241
6,578 6,964 7,325 7,697 8,187
8,626
9,127
9,708
10,060
10,384
10,842 11,553
Ratio
0.047
0.039 0.029 0.022 0.014 0.003 +0.008 +0.014 +0.024 +0.013
0.015
0.035
0.036
Source: Congressional Budget Office (January 2005).
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.7 The three
monetary aggregates, as shown in Table 8, have not responded uniformly to the
easing of monetary policy. The rate of growth of M1 in 2003 exceeded 2002. The
reverse was true for M2 and M3.
The positive growth in aggregate reserves over 2002-2004 support the Federal
Reserves view that it is providing important support to the ongoing expansion. 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). Nevertheless, the various measures of money do not
provide consistent measures of the thrust of monetary policy.
6 Secretary of the Treasury and Director of the Office of Management and Budget, Budget
Results for Fiscal Year 2004, Oct. 14, 2004. See [http://www.treas.gov/press/].
7 For a more comprehensive discussion of monetary policy, see CRS Report RL30354,
Monetary Policy: Current Policy and Conditions, by Marc Labonte and Gail Makinen.

---

CRS-9
Table 8. The Growth Rates of the Monetary Aggregates
(annualized rates of growth)
Time
Aggregate
Monetary
M1
M2
M3
Period
Reserves
Base
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 - 03:12
6.9
5.7
6.2
4.6
3.3
03:12 - 04:12
8.8
5.4
5.2
5.7
6.4
04:08 - 05:08
-0.2
3.7
1.0
3.9
6.1
Source: Board of Governors of the Federal Reserve System.
The growth in the reserves of depository institutions results to a large degree
from decisions to move the key federal funds’ interest rate (shown in Figure 2), the
principal tool of monetary policy. These moves have been motivated primarily by
a desire to bring the economy to full employment and then keep it growing at a rate
sufficient to maintain full employment. From time to time, other factors may
influence the movement of this rate. For example, the turmoil in both domestic and
international financial markets cause the rate to be reduced 1/4% on September 29,
October 15, and November 17, 1998, at which point it stood at 4.75%. In three equal
moves of 1/4% during June, August, and November 1999, the rate was returned to
its pre-crisis level of 5.5%. On both February 2 and March 21, 2000, in the face of
mounting evidence that the economy was growing at an unsustainable rate, the
federal funds rate was raised an additional 1/4%, and on May 16 it was raised1/2%,
bringing the rate to 6.5%. In six equal cuts of 1/2% (January 3 and 31, March 20,
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 September 11, 2001, 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. On 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

---

CRS-10
temporary dampening effects related to the geopolitical tensions earlier in the year.
Nevertheless, the rate was reduced to 1.0% on June 25, 2003. In the face of the
strength of the current expansion and its possible effect on inflation, the target rate
was raised in equal increments of 0.25% on 11 occasions: June 30, August 10,
September 21, November 10, and December 14, 2004, and February 2, March 22,
May 3, June 30, August 9, and September 20, 2005. It now stands at 3-3/4%.
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.
Figure 2: Yield on Selected Securities and Federal Funds (%)
Source: Board of Governors of the Federal Reserve System.
Economic Forecasts, 2005-2006
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

---

CRS-11
of the high ten among these forecasts, while BC B-10 is the average of the low 10
forecasts.
The consensus view taken by the forecasts summarized in Table 9 is that GDP
growth should be about 3.5% during 2005 and 3.3% during 2006 which is near to
what is generally considered the rate of U.S. potential growth. This rate of GDP
growth, according to the consensus, however, will be insufficient to have other than
a modest effect on the unemployment rate. The consensus anticipates that the
unemployment rate will begin to come down only gradually. The inflation rate for the
entire economy is expected to range between 2.2% and 3.0%, depending on the price
index consulted. Both short-term and long-term interest rates are expected to trend
upward, rise both in 2005 and 2006.
In its semi-annual Monetary Policy Report to the Congress, dated July 20, 2005,
The Board of Governors of the Federal Reserve presented its economic projections
for 2005 and 2006. It projected that from the fourth quarter 2004 to the fourth
quarter 2005, real GDP will grow 3.5% and that prices8 will increase from 1.75% to
2.0%. The civilian unemployment rate is projected to be average 5.0% during the
fourth quarter of the year. For 2006, real GDP, on a fourth quarter over fourth
quarter basis, is projected to grow between 3.25% and 3.5%, prices are expected to
rise between 1.75% and 2.0%, and unemployment during the fourth quarter of the
year is projected to average between 5.0%.
Table 9. Economic Forecasts 2005 - 2006
2004
2005
2004a
2005
2006
3a
4a
1a
2a
3
4
Nominal GDPb
OMB
5.3
6.1
7.0
5.8
NA
NA
6.5
6.1
5.6
CBO
5.3
6.1
7.0
5.8
NA
NA
6.5
5.7
5.3
BC T-10
5.3
6.1
7.0
5.8
7.9
6.8
6.5
6.5
6.3
BC Con.
5.3
6.1
7.0
5.8
6.1
5.4
6.5
6.2
5.6
BC B-10
5.3
6.1
7.0
5.8
4.7
4.1
6.5
6.2
4.8
Real GDPb
OMB
4.0
3.3
3.8
3.3
NA
NA
4.4
3.6
3.5
CBO
4.0
3.3
3.8
3.3
NA
NA
4.4
3.8
3.7
BC T-10
4.0
3.3
3.8
3.3
4.4
3.8
4.4
3.7
3.6
BC Con.
4.0
3.3
3.8
3.3
3.6
3.1
4.4
3.5
3.2
BC B-10
4.0
3.3
3.8
3.3
2.8
2.4
4.4
3.4
2.7
8 In its Monetary Report to Congress, the Federal Reserve features in its projections a
measure of inflation derived from the Personal Consumption Expenditure (PCE), less food
and energy, index found in the GDP accounts. This price index attempts to measure inflation
with regard to consumer spending. The PCE covers about 2/3’s of GDP.

---

CRS-12
2004
2005
2004a
2005
2006
3a
4a
1a
2a
3
4
Unemploymentc
OMB
5.4
5.4
5.3
5.1
NA
NA
5.5
5.2
5.1
CBO
5.4
5.4
5.3
5.1
NA
NA
5.5
5.2
5.2
BC T-10
5.4
5.4
5.3
5.1
5.1
5.2
5.5
5.1
5.3
BC Con.
5.4
5.4
5.3
5.1
5.0
5.0
5.5
5.1
5.0
BC B-10
5.4
5.4
5.3
5.1
4.9
4.9
5.5
5.0
4.7
GDP Price Index (chain-weighted)b
OMB
1.5
2.7
3.1
2.4
NA
NA
2.4
1.9
2.0
CBO
1.5
2.7
3.1
2.4
NA
NA
2.4
1.8
1.5
BC T-10
1.5
2.7
3.1
2.4
3.5
3.0
2.4
2.8
2.8
BC Con.
1.5
2.7
3.1
2.4
2.5
2.3
2.4
2.6
2.3
BC B-10
1.5
2.7
3.1
2.4
2.4
1.7
2.4
2.4
2.0
CPI-Ub
OMB
1.9
3.4
2.5
4.1
NA
NA
2.7
2.4
2.3
CBO
1.9
3.4
2.5
4.1
NA
NA
2.7
2.4
1.9
BC T-10
1.9
3.4
2.5
4.1
4.7
3.9
2.7
3.4
3.2
BC Con.
1.9
3.4
2.5
4.1
3.4
2.8
2.7
3.1
2.7
BC-10
1.9
3.4
2.5
4.1
2.4
1.8
2.7
2.9
2.2
T-BILL Interest Rate (3 month)c
OMB
1.5
2.0
2.5
2.9
NA
NA
1.4
3.0
3.4
CBO
1.5
2.0
2.5
2.9
NA
NA
1.4
2.8
4.0
BC T-10
1.5
2.0
2.5
2.9
3.7
4.1
1.4
3.4
4.7
BC Con.
1.5
2.0
2.5
2.9
3.5
3.8
1.4
3.2
4.2
BC B-10
1.5
2.0
2.5
2.9
3.3
3.4
1.4
3.0
3.6
10-year Treasury Notec
OMB
4.3
4.2
4.3
4.2
NA
NA
4.3
4.3
4.8
CBO
4.3
4.2
4.3
4.2
NA
NA
4.3
4.8
5.4
BC T-10
4.3
4.2
4.3
4.2
4.5
5.0
4.3
4.4
5.3
BC Con.
4.3
4.2
4.3
4.2
4.3
4.6
4.3
4.3
4.8
BC B-10
4.3
4.2
4.3
4.2
4.1
4.2
4.3
4.2
4.2
Sources: Blue Chip Economic Indicators, September , 2005. Congressional Budget Office, January,
2005; and, the Office of Management and Budget (CEA), June 8, 2005.
a. 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.
b. Quarterly rates of change are annualized.
c. Quarterly averages.

---

CRS-13
Special Topics
Accounting for GDP Growth
Table 10 records contributions to growth in GDP from 1995 to 2004. 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: 1995 through 2005:1H
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Real GDP
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Growth
Consumption
73.6
63.5
57.4
81.2
81.6
87.2
234.2
122.7
76.8
64.7
64.7
Investment
17.7
34.3
41.5
37.7
26.2
26.9
-187.8
-26.8
22.3
44.2
11.9
Govt. Purchases
4.3
5.2
7.9
8.4
16.3
10.1
80.4
51.0
19.4
9.5
11.5
Net Exports
4.3
-2.9
-6.8
-27.4
-24.1
-24.1
-26.8
-46.9
-18.6
-18.3
11.9
Source: Department of Commerce.
Note: Computed using real GDP at 2000 chained dollars on a year over year basis. Data for 2005 are from first half
year.
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.

---

CRS-14
Table 11 shows the sources of saving for the United States during the past 45
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 45-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 and 2002-2004 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 was
reversed during the period 1993-2001. The improved budget position of the federal
government during this period added to national saving.
Third, the data show that for 20 of these 45 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 began 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 had 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 would have
had to rise in order to restore balance between investment and a now smaller amount
of saving. Higher interest rates would have choked off investment and dampened
U.S. growth9.
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 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.
9 See also CRS Report RL30534, America’s Growing Current Account Deficit: Its Causes
and What It Means for the Economy, by Marc Labonte and Gail Makinen; and CRS Report
RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig Elwell.

---

CRS-15
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.
Table 11. U.S. Saving By Sector
(as percent of GDP)
Private Sector
Public Sector
Net
Netb
Year
Private/
Net of
State/
Net of
Foreign
Pers. Bus. Total
Fed.
Total
Publica
Deprec.
Local
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
3.8
12.3
16.1
6.4
-1.1
1.3
0.2
-2.0
4.5
1.3
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
5.2
11.6
16.8
7.3
-1.8
1.2
-0.6
-2.8
4.4
1.2
1991
5.4
12.0
17.4
7.6
-2.4
1.0
-1.4
-3.6
4.0
-0.2
1992
5.8
11.8
17.6
8.0
-3.5
1.1
-2.4
-4.7
3.3
0.6
1993
4.3
11.9
16.2
6.8
-2.9
1.1
-1.8
-4.1
2.8
1.1
1994
3.5
12.0
15.5
6.0
-1.9
1.3
-0.6
-2.9
3.1
1.5
1995
3.4
12.7
16.1
6.7
-1.6
1.3
-0.3
-2.5
4.1
1.2
1996 2.9
12.9
15.8
6.2
-0.8
1.4
0.6
-1.5
4.8
1.3
1997
2.6
13.1
15.7
6.1
0.3
1.6
1.9
-0.2
5.9
1.3
1998
3.2
12.0
15.2
5.5
1.4
1.7
3.1
1.0
6.5
2.1
1999
1.7
12.6
14.3
4.5
2.0
1.6
3.6
1.7
6.2
3.0
2000
1.7
11.9
13.6
3.5
2.8
1.6
4.4
2.4
5.9
4.0
2001
1.3
12.5
13.8
3.2
1.3
1.2
2.5
0.5
3.7
3.7
2002
1.5
13.3
14.8
4.4
-1.6
0.9
-0.7
-2.7
1.7
4.4
2003
1.0
13.9
14.9
4.6
-2.5
1.1
-1.4
-3.3
1.2
4.6
2004
0.9
14.9
14.9
4.9
-2.4
1.3
-1.1
-3.1
1.8
5.4
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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