Order Code RL30329
Current Economic Conditions and
Selected Forecasts
Updated October 19, 2007
Gail E. Makinen
Economic Policy Consultant
Government and Finance Division

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Current Economic Conditions and Selected Forecasts
Summary
U.S. real GDP growth has been positive for 23 consecutive quarters, and the
economy is considered to be in an “expansion” phase. As of the second quarter 2007,
real or inflation-adjusted growth was some 16% above its previous high near the end
of the 1991-2001 expansion.
Real GDP grew at annualized quarterly rates of 0.6% in the first quarter and
3.8% in the second quarter of 2007. This compares with 4.8%, 2.4%, 1.1%, and
2.1% over the four quarters of 2006, and 3.1%, 2.8%, 4.5%, and 1.2% over the four
quarters of 2005.
The rebound in payroll employment has been modest compared with past
expansions. During September 2007, it was about 7.4 million above the level
prevailing at the end of the recession (November 2001), but only about 5.8 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 (September 2007) stands
at 4.7%, up from a 4.4% low first reached in October 2006. The low achieved during
the last expansion was 3.8%.
The other elements in the economic picture are promising:
(1) A pickup in output at the same time as employment is growing slowly means that
productivity (or output per worker) is increasing. As seen in the 1990s, productivity
growth is the key to raising the standard of living and is not necessarily associated
with weak labor markets over time. In that period, the United States eventually
experienced both rapid productivity and strong employment growth as the recovery
broadened and deepened throughout the decade.
(2) The headline inflation rate, measured by the CPI, rose 2.8% for the 12 months
ending in September 2007. This is slightly higher than the core inflation rate (which
excludes food and energy) of 2.1%. For the three months ending in September 2007,
the headline CPI rose at an annual rate of only 1.0%. Excluding food and energy, it
rose at an annualized rate of only 2.5%. Thus, it can be argued, the underlying or
core rate of inflation appears to be restrained.
The consensus among economists is that GDP will grow between 1.9% and
2.1% in 2007. The unemployment rate is expected to remain within the rates
achieved over the past year. The inflation rate is expected to be lower than the rate
that prevailed in 2006. Between June 30, 2004, and June 29, 2006, the Federal
Reserve increased the federal funds rate target to 5¼% from 1%. This policy was
reversed on September 18 when the target was reduced to 4.75% in the face of
unsettled financial markets. Fiscal policy tightened during FY2005 and FY2006.
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, 2007-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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, 1992-2006 . . . . . . . . . . . 3
Table 2. Civilian Unemployment Rate, 1991-2007 . . . . . . . . . . . . . . . . . . . . . . . 4
Table 3. Rate of Change in the GDP Deflators, 1993-2006 . . . . . . . . . . . . . . . . . 5
Table 4. Rate of Change in the Consumer Price Index (CPI), 1993-2006 . . . . . . 5
Table 5. Rate of Change in Labor Costs, 1993-2006 . . . . . . . . . . . . . . . . . . . . . . 6
Table 6. U.S. Foreign Trade Deficit, 1989-2006 . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . . 9
Table 9. Economic Forecasts 2007-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 10. Accounting for GDP Growth: 1995-2007:1H . . . . . . . . . . . . . . . . . . 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 23 quarters.
The National Bureau of Economic Research (NBER) declared that the recession that
began in March 2001 ended in November 2001. As of the second quarter 2007, U.S.
real GDP (measured in 2000 dollars) was about 17% above its recession low point
in the third quarter 2001, and had grown about 16% 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 2007
was at an annual rate of 3.8% compared with 0.6% in the first quarter. During the
four quarters of 2006, the quarterly rates were 4.8%, 2.4%, 1.1%, and 2.1%.
Comparable rates during 2005 were 3.1%, 2.8%, 4.5%, and 1.2%.1 Growth
excluding inventories during the second quarter of 2007 was 3.2%.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.
While the rebound has translated into a rise in payroll employment above the level
attained at the end of the previous cyclical peak, it is modest compared with a
number of previous expansions. Since its peak in March 2001, payroll employment
has risen by about 5.8 million. An encouraging sign is that employment has grown
by more than 8.0 million since September 2002. The unemployment rate now stands
at 4.7%, up from an expansion low of 4.4% first recorded in October 2006. Over the
past 12 months, it has varied between 4.4% and 4.7%. These rates are still above the
3.8% low of the 1990s expansion.
1 The GDP data for the second quarter 2007 come from the third or “final” estimate.
2 The accounting framework that governs the calculation of GDP is not 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 pickup is anticipated would be at least technical: with demand on the rise, inventories
are not sufficient after a while and new production will eventually be required to keep up
with demand. New production, however, increases GDP, according to the accounting
framework.

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CRS-2
Measured or headline inflation during 2007:1H was close to the core rate (or the
headline rate less food and energy). The broadest measure of inflation for the
economy, the GDP price index, rose at an annual rate of 3.4% over the first half of
2007, compared with 2.7% in 2006 and 3.4% in 2005. The Consumer Price Index
(CPI) for the 12 months ended in September 2007 rose 2.8% compared with 2.5%
during 2006 and 3.4% in 2005. The core rate for the 12 months ending in September
was 2.1%.
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% to 1.0% (its lowest level since April
1961). As the expansion gathered momentum and the possibility of inflationary
pressures rising, the FOMC began to move the federal funds target upward. At each
of 17 consecutive meetings, beginning on June 30, 2004, and ending on June 29,
2006, the FOMC advanced the target by 0.25%. It then stood at 5.25%. No
additional changes were made until September 18, 2007, when the target was reduced
to 4.75% in response to unsettled conditions in national financial markets, especially
the subprime mortgage market.
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
3.0%, 3.5%, 3.6%, and 2.5%. During the four quarters of 2005, GDP grew at an
annual rates of 3.1%, 2.8%, 4.5%, and 1.2%, respectively. During the four quarters
of 2006, the annualized rates were 4.8%, 2.4%, 1.1%, and 2.1%. During the first two
quarters of 2007, GDP grew at an annual rate of 0.6% and 3.8%.
Productivity gains have been an important part of the current expansion.3 Most
economists refer to recent trends as reflecting a “productivity-led” recovery.
Between 2002 and 2006, productivity growth was from 2.1% to 4.1%. To put this
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
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
gains were not part of the initial recovery phase after March 1991 and did not show
up in the aggregate data until 1995.
Table 1. The Growth Rate of Real GDP v. Final Sales, 1992-2006
(percentages)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
GDP
3.3
2.7
4.0
2.5
3.7
4.5
4.2
4.5
3.7
0.8
1.6
2.5 3.6 3.1
2.9
Year-Year
4thQ-4thQ
4.1
2.5
4.1
2.0
4.4
4.3
4.5
4.7
2.2
0.2
1.9
3.7
3.1
2.9
2.6
Final Sales
3.0
2.6
3.4
3.0
3.7
4.0
4.2
4.5
3.8
1.6
1.2
2.5
3.3
3.3
2.6
Year-Year
4thQ-4thQ
4.2
2.6
3.2
2.9
3.9
4.0
4.7
4.2
2.9
1.5
0.8
3.7
2.8
2.9
3.0
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 and
is now (September 2007) 4.7%, above the expansion low of 4.4% first reached in
October 2006. During the year, the rate has varied between 4.4% and 4.7%.
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 5.8
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 some 8.0 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.

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CRS-4
Divergence in payroll and household surveys? An interesting and perhaps important
feature of the present economic expansion is the divergence between the two main
measures of employment. The payroll survey shows that employment has increased by
5.8 million since the peak of the last expansion in March 2001 (and 7.4 million since the
trough in November 2001). 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 about 8.5 million since the peak of the last expansion (and
10.0million since the trough). 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.
Table 2. Civilian Unemployment Rate, 1991-2007
(%, 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
4.0
4.0
4.0
4.1
3.9
3.9
3.9
3.9
2001
4.2
4.2
4.3
4.4
4.3
4.55
4.6
4.9
5.0
5.3
5.5
5.7
2002
5.7
5.7
5.7
5.9
5.8
5.8
5.8
5.7
5.7
5.7
5.9
6.0
2003
5.8
5.9
5.9
6.0
6.1
6.3
6.2
6.1
6.1
6.0
5.8
5.7
2004
5.7
5.6
5.8
5.6
5.6
5.6
5.5
5.4
5.4
5.4
5.4
5.4
2005
5.2
5.4
5.2
5.1
5.1
5.0
5.0
4.9
5.1
5.0
5.0
4.9
2006
4.7
4.8
4.7
4.7
4.6
4.6
4.8
4.7
4.6
4.4
4.5
4.5
2007
4.6
4.5
4.4
4.5
4.5
4.5
4.6
4.6
4.7
Source: U.S. Department of Labor.
Inflation. The U.S. inflation performance has been remarkable over the past
10 years. The inflation rate decelerated throughout most of the expansion in the
1990s, (see Tables 3 and 4). While the inflation rate accelerated in 2000 as the
expansion ended, the pickup was not too different from the 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.

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CRS-5
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
post-World War II experience, this combination 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, 1993-2006
(%, 4Q-4Q)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Implicit Price Deflator
2.3
2.2
2.0
1.9
1.5
1.1
1.6
2.2
2.5
1.7
2.2
3.2
3.4
2.7
Chain Type Price Index 2.3
2.2
2.0
1.9
1.5
1.1
1.6
2.2
2.5
1.7
2.2
3.2
3.4
2.7
Source: U.S. Department of Commerce.
With the start of the recession in March 2001, the inflation rate decelerated. The
increase in consumer prices (the Consumer Price Index or CPI) slowed on a year-year
basis from 2.8% in 2001 to 1.6% in 2002. The rate of increase in the GDP deflator,
the broadest measures of inflation in the economy, decelerated from 2.2% in 2000 to
1.7% in 2002, on a fourth quarter-fourth quarter basis. It then rose to 3.2% during
2004 and 3.4% during 2005. During 2006 it declined to 2.7%. During the first half
of 2007, it rose at an annual rate of 3.4%.
Table 4. Rate of Change in the Consumer Price Index (CPI),
1993-2006
(percentages)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Dec. over Dec.
2.7
2.7
2.5
3.3
1.7
1.6
2.7
3.4
1.6
2.4
1.9
3.3
3.4
2.5
Excluding food and energy
3.3
2.6
3.0
2.6
2.2
2.4
1.9
2.6
2.7
1.9
1.1
2.2
2.2
2.6
Year Over Year
3.0
2.6
2.8
3.0
2.3
1.6
2.2
3.4
2.8
1.6
2.3
2.7
3.4
3.3
Excluding food and energy
3.3
2.8
3.0
2.7
2.4
2.3
2.1
2.4
2.6
2.4
1.4
1.7
2.2
2.5
Source: U.S. Department of Labor.
This pattern can be found in the CPI. Measured on a December-December
basis, it rose by 1.9% during 2003, accelerated to 3.3% during 2004 and 3.4% during
2005. During 2006 it declined to 2.5%. Much of the acceleration can be attributed
to energy price increases. For the 12 months ended in September 2007, it rose 2.8%.
Excluding food and energy, the increase was 2.1%.

Except for 2006, the rate at which Unit Labor Costs has been low over the past
six years, as shown in Table 5. Labor cost trends are also measured by 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

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CRS-6
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, 1993-2006
(in percentages)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Unit Labor Costs
1.6
0.5
2.1
0.7
2.0
2.7
1.6
4.3
0.4
0.2
0.5
2.1
1.6
4.1
3.3
Employment Cost
3.6
2.6
2.6
3.1
3.4
3.5
3.4
4.4
4.2
3.2
4.0 3.8
3.0
2.7
3.1
Index
Source: U.S. Department of Labor.
Notes: Unit labor costs are for the nonfarm business sector, 4th quarter-4th quarter. The Employment
Cost Index is for private industry on a December-December basis. For 2007, ULC are annualized for
the first half year while the ECI is for the year June 2006 to June 2007.
The U.S. Foreign Trade Deficit. The U.S. foreign trade deficit (net imports
as a share of GDP), as shown in Table 6, recorded a continued and dramatic fall from
1988 through 1992.4 This was reversed beginning in 1993 as the trade deficit began
to grow as a fraction of GDP. During 2006, it averaged 5.4% of GDP. Since the net
inflow of capital from abroad comes to the United States in the form of a trade
deficit, its increase during 1992-2006 is a reminder that the rate of capital formation
in the United States depends on other than domestic sources of saving. During the
first half of 2007 the trade deficit averaged 5.2% of GDP.
Table 6. U.S. Foreign Trade Deficit, 1989-2006
(as a percentage of GDP)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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
5.0
5.6
5.6
5.5
Source: U.S. Department of Commerce.
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, 2004, and 2005, the current account deficit was, respectively, approximately
4.1%, 4.6%, 5.3%, and 5.7% of nominal GDP. During 2006, it averaged 5.6% of Nominal
GDP, and during the first half of 2007, it averaged 5.3% of Nominal GDP.

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CRS-7
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 more than
34% to its peak in February 2002. From then until December 2004, it depreciated by
about 16% on an inflation-adjusted basis, with some ups and downs. From
December 2004 through July 2007, the dollar has depreciated about 2.5%.
Figure 1. Real Dollar Exchange Rate (Broad Dollar Index)
120
110
x
100
Inde
90
80
1995
1997
1999
2001
2003
2005
2007
Source: 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.5 From its high in February
2002 through December 2004, the dollar depreciated some 7% against an index
consisting of the major currencies that circulate, adjusted for inflation. However,
over the period December 2004 through July 2007, this index shows that the dollar
rose in value about 1.8%.
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 federal
budget deficit to full employment GDP, also called “potential GDP.” When that is
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
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 2.5% of potential
GDP in 2003. The deficit declined to 2.4% of potential GDP in 2004, and 1.9% in
2005 and 1.8% in 2006. An alternative, although inferior measure, is the ratio of the
actual budget deficit to actual GDP. When examined, fiscal policy was also
expansionary between 2000, with the surplus of 2.5%, to a deficit of 3.5% in 2004,
a net shift of 6% of GDP. In 2005, the deficit fell to 2.6% of GDP and to 1.9% in
2006, both shifts toward fiscal tightness.
Table 7. Alternative Measures of Fiscal Policy
($ in billions per fiscal year)
1993 1994 1995 1996 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Standardized
$193 $145 $146
$96
$80
$38
$+1
$+105 $+105 $-120
$276
$286
$237
$242
Budget Deficit
Full
Employment
6,706 7,034 7,386 7,753 8,139 8,514 8,937 9,454 10,033 10,567 11,091 11,691 12,375 13,106
GDP
Ratio
0.029 0.021 0.020 0.012 0.010 0.004 0.000 +0.011 +0.010 0.012
0.025
0.024
0.019 0.018
Actual Budget
$255 $203 $164 $107
$22
$+69 $+126 $+236 $+128 $158
$378
$413
$318
$248
Deficit
Actual GDP
6,578 6,964 7,325 7,697 8,187 8,626 9,127 9,708 10,060 10,378 10,804 11,525 12,266 13,065
Ratio
0.039 0.029 0.022 0.014 0.003 +0.08 +0.014 +0.024 +0.013 0.015
0.035
0.035
0.026 0.019
Source: Congressional Budget Office (January 2007).
Monetary Policy
Traditionally, the posture of monetary policy has been judged either by the
growth of the monetary aggregates or by movements in interest rates.6 The monetary
aggregates M1 and M2, 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 M2.7 In 2005 through the first half of 2007, M1 growth has
fallen while M2 growth has been both consistently positive and rising.
6 For a more comprehensive discussion of monetary policy, see CRS Report RL30354,
Monetary Policy: Current Policy and Conditions, by Marc Labonte and Gail Makinen.
7 M1 consists primarily of currency held by the public and demand deposits of businesses
and accounts held by households against which checks can be written. M2 consists of M1
plus saving and time deposits under $100,000, individual holdings of money market mutual
funds and money market deposit accounts. M3, data on which is no longer recorded,
consists of M2 plus time deposits at commercial banks in amounts of $100,000 or more,
time repurchase agreements, institution-only money market funds, overnight repurchase
agreements, and several types of Eurodollar deposits held by U.S. residents.

---

CRS-9
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.
Table 8. The Growth Rates of the Monetary Aggregates
(annualized rates of growth)
Aggregate
Monetary
Time Period
Reserves
Base
M1
M2
M3a
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
04:12 - 05:12
-4.3
3.6
0.0
4.1
7.8
05:12 - 06:12
-4-4
3.1
-0.5
5.3
NA
06:08 - 07:08
-1.4
2.1
0.3
6.7
NA
Source: Board of Governors of the Federal Reserve System.
a. Data on M3 ceased to be published after March 2006.
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 during 1998 caused the rate to be reduced ¼% on
September 29, October 15, and November 17 of that year. And in response to the
September 11, 2001, terrorist attacks, the rate was reduced ½% on September 17.

---

CRS-10
During the period 2004-2006, the target rate was increased. In 17 steps, each
¼% in magnitude, it was raised to 5¼% on June 29, 2006, from 1% on June 30,
2004. This was reversed on September 18, 2007, when the target was reduced to
4.75% to provide liquidity to ease unsettled conditions in national financial markets.
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
changes as well as the magnitude of their changes are often different from the timing
and magnitude of shifts in the federal funds target. 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, 2007-2008
The forecasts in Table 9 come from three sources. OMB and CBO are well
known. BC stands for the Blue Chip Economic Indicators, a firm that collects the
forecasts from about 50 forecasters in finance, business, and universities. BC Con
represents the consensus or average forecasts of this group. BC T-10 is the average
of the high ten among these forecasts, while BC B-10 is the average of the low 10
forecasts.
The consensus view taken by the forecasts summarized in Table 9 is that GDP
growth should be between 1.9% and 2.1% during 2007. This is lower than the
growth rates achieved in 2005 and 2006. The forecasted 2007 rate of GDP growth,
according to the consensus, will be sufficient to keep the unemployment rate
unchanged. The inflation rate for the entire economy is expected to range from 2.5%

---

CRS-11
to 2.9%. Both short-term and long-term interest rates are expected to remain close
to those prevailing in 2006.
In its semiannual Monetary Policy Report to the Congress, dated July 18, 2007,
the Board of Governors of the Federal Reserve presented its economic projections
for 2007 and 2008. It projected that from the fourth quarter 2006 to the fourth
quarter 2007, real GDP will grow from 2.25% to 2.5% and that prices8 will increase
from about 2.0% to 2.25%. The civilian unemployment rate is projected to average
between 4.5% and 4.75% during the remainder of the year. For 2008, real GDP, on
a fourth quarter over fourth quarter basis, is projected to grow between 2.5% and
2.75%, prices are expected to rise between 1.75% and 2.0%, and unemployment
during the year is projected to be about 4.75%.
Table 9. Economic Forecasts 2007-2008
2006
2007
3a
4a
1a
2a
3 4
2006a
2007
2008
Nominal GDPb (Rate of Change)
OMB
3.9
4.2
4.9
6.6
NA
NA
6.1
5.3
5.5
CBO
3.9
4.2
4.9
6.6
NA
NA
6.1
4.3
4.8
BC T-10
3.9
4.2
4.9
6.6
5.9
5.3
6.1
5.0
5.5
BC Con.
3.9
4.2
4.9
6.6
4.3
3.7
6.1
4.7
4.6
BC B-10
3.9
4.2
4.9
6.6
2.5
2.2
6.1
4.4
3.7
Real GDPb (Rate of Change)
OMB
1.1
2.1
0.6
3.8
NA
NA
2.9
2.7
3.0
CBO
1.1
2.1
0.6
3.8
NA
NA
2.9
2.3
3.0
BC T-10
1.1
2.1
0.6
3.8
3.1
2.6
2.9
2.1
2.9
BC Con.
1.1
2.1
0.6
3.8
2.6
1.8
2.9
2.0
2.4
BC B-10
1.1
2.1
0.6
3.8
1.9
1.2
2.9
1.9
1.8
Unemploymentc
OMB
4.7
4.5
4.5
4.5
4.6
NA
4.6
4.6
4.8
CBO
4.7
4.5
4.5
4.5
4.6
NA
4.6
4.7
4.9
BC T-10
4.7
4.5
4.5
4.5
4.6
4.9
4.6
4.7
5.2
BC Con.
4.7
4.5
4.5
4.5
4.6
4.8
4.6
4.6
4.9
BC B-10
4.7
4.5
4.5
4.5
4.6
4.6
4.6
4.5
4.7
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 two-thirds of GDP.

---

CRS-12
2006
2007
3a
4a
1a
2a
3 4
2006a
2007
2008
GDP Price Index (chain-weighted)b
OMB
2.4
1.7
4.2
2.6
NA
NA
2.9
2.5
2.4
CBO
2.4
1.7
4.2
2.6
NA
NA
2.9
1.9
1.8
BC T-10
2.4
1.7
4.2
2.6
2.8
2.7
2.9
2.9
2.7
BC Con.
2.4
1.7
4.2
2.6
1.7
1.9
2.9
2.7
2.1
BC B-10
2.4
1.7
4.2
2.6
0.6
1.0
2.9
2.5
1.6
CPI-Ub
OMB
3.0
-2.0
3.8
6.0
1.0
NA
3.3
2.1
2.6
CBO
3.0
-2.0
3.8
6.0
1.0
NA
3.3
1.9
2.3
BC T-10
3.0
-2.0
3.8
6.0
1.0
3.0
3.3
2.9
3.0
BC Con.
3.0
-2.0
3.8
6.0
1.0
2.0
3.3
2.7
2.4
BC-10
3.0
-2.0
3.8
6.0
1.0
0.9
3.3
2.6
1.8
T-BILL Interest Rate (three-month)c
OMB
4.9
4.9
5.0
4.7
4.3
NA
4.7
4.7
4.6
CBO
4.9
4.9
5.0
4.7
4.3
NA
4.7
4.8
4.5
BC T-10
4.9
4.9
5.0
4.7
4.3
4.5
4.7
4.8
4.7
BC Con.
4.9
4.9
5.0
4.7
4.3
4.1
4.7
4.6
4.2
BC B-10
4.9
4.9
5.0
4.7
4.3
3.7
4.7
4.3
3.7
10-year Treasury Notec
OMB
4.9
4.6
4.7
4.9
4.7
NA
4.8
5.0
5.1
CBO
4.9
4.6
4.7
4.9
4.7
NA
4.8
4.8
5.0
BC T-10
4.9
4.6
4.7
4.9
4.7
4.8
4.8
4.8
5.2
BC Con.
4.9
4.6
4.7
4.9
4.7
4.6
4.8
4.7
4.8
BC B-10
4.9
4.6
4.7
4.9
4.7
4.4
4.8
4.6
4.5
Sources: Blue Chip Economic Indicators, October 2007; Congressional Budget Office, January 2007;
and the Office of Management and Budget (CEA), February, 2007.
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 2006. These
data record two interesting developments. First, except for 2001-2002, investment
spending has played an important role in both the 1991-2001 and current expansions.
Among the categories of investment spending, outlays for personal computers were
important. This bodes well for the longer run growth in productivity. Second, with
the exception of 2001-2002, purchases by all levels of government have played only
a small role in both expansions. Consumption expenditures have continued to be the
largest single contributor to GDP growth.
Table 10. Accounting for GDP Growth: 1995-2007:1H
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Real GDP
100.0% 100.0% 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
78.3
69.9
75.6
67.6
82.2
Investment
17.7
34.3
41.5
37.7
26.2
26.9
-187.8
-26.8
22.4
39.1
27.4
21.3
-15.0
Govt. Purchases
4.3
5.2
7.9
8.4
16.3
10.1
80.4
51.0
18.3
8.9
5.0
10.9
18.7
Net Exports
4.3
-2.9
-6.8
-27.4
-24.1
-24.1
-26.8
-46.9
-19.0
-17.9
-8.1
0.1
14.0
Source: U.S. Department of Commerce.
Notes: Computed using real GDP at 2000 chained dollars on a year over year basis.
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 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

---

CRS-14
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 2002-2005 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 savings, the United States would have
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. growth.9
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 decline 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.
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
Table 11. U.S. Saving By Sector
(as a percentage of GDP)
Private Sector
Public Sector
Net
Net of
State/
Net of
Private/
Netb
Year
Pers. Bus. Total Deprec. Fed.
Local
Total Deprec.
Publica
Foreign
1960-69
5.7 11.4
17.1
9.6
2.2
1.7
4.0
1.3
10.9
-0.6
1970-79
6.8 11.6
18.4
9.8
-0.5
1.8
1.3
-1.2
8.6
-0.2
1980-89
6.7 12.6
19.2
9.0
-2.2
1.4
-0.8
-3.0
6.0
1.5
1990-99
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
1.8 13.1
14.9
4.6
-1.5
0.8
-0.7
-2.7
1.9
4.4
2003
1.6 13.2
14.8
4.8
-2.6
1.0
-1.6
-3.6
1.1
4.7
2004
1.3 13.2
14.7
4.4
-2.5
1.1
-1.4
-3.4
0.9
5.5
2005
-0.3 13.7
13.4
2.6
-1.8
1.2
-0.5
-2.5
0.1
6.2
2006
-0.8 13.7
12.9
3.0 -0.4
1.2
0.9
-1.1
1.9
6.1
crsphpgw
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 indicates the export of saving from the United States. Positive indicates the import of
saving from abroad.

---