Order Code RL30329
Current Economic Conditions and
Selected Forecasts
Updated October 21, 2008
Gail E. Makinen
Economic Policy Consultant
Government and Finance Division

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Current Economic Conditions and Selected Forecasts
Summary
For the first time in the current economic expansion, recent revisions to the data
show that the U.S. experienced a quarter in which real GDP growth was negative (the
fourth quarter of 2007). Positive GDP growth returned during the first two quarters
of 2008. As of the second quarter of 2008, real GDP was about 20% larger than it
was at its previous high near the end of the 1991-2001 expansion.
During the first two quarters of 2008, real GDP grew at an annual rate of 0.9%
and 2.8%, respectively. Annualized quarterly rates of growth over the four quarters
of 2007 were 0.1%, 4.8%, 4.8%, and - 0.2%.
While the present expansion has been characterized by a modest growth in
payroll employment compared with past expansions, a rising unemployment rate and
job losses have characterized the first seven months of 2008. The unemployment rate
rose to 6.1% in August (where it remained in September) from an expansion low of
4.4% (October 2006) and payroll employment has declined by more than 700,000
since December 2007.
Inflation is also on the rise. The headline inflation rate, measured by the CPI,
rose 4.9% for the 12 months ending in September 2008. This is higher than the core
inflation rate (which excludes food and energy) of 2.5%. For the three months
ending in September 2008, the headline CPI rose at an annual rate of 2.6%.
Excluding food and energy, it rose at an annualized rate of 2.7%.
The consensus among economists is that GDP will grow will average between
1.3% and 1.7% in 2008 and -0.2% and 1.3% in 2009. The unemployment rate is
expected to rise and average between 5.6% and 5.7%. The inflation rate is expected
to be higher than the rate that prevailed in 2007. And, although the international
trade deficit is still large, it has declined and the decline is expected to continue.
To forestall an economic downturn and to ease the stress in national financial
markets, the Federal Reserve has eased monetary policy over the past eight months.
Between September 18, 2007, and October 8, 2008, the target for the federal funds
rate was incrementally reduced to 1.5% from 5.25%.
The foreign trade deficit has continued to fall as a percentage of GDP. During
the first half of 2008, it was the major contributor to GDP growth.
This report will be updated monthly.

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Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The U.S. Foreign Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The U.S. Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Posture of Fiscal and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Economic Forecasts, 2008-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Accounting for GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Promotion of Economic Growth: The Importance of Saving . . . . . . . . . . . 12
List of Figures
Figure 1. Real Dollar Exchange Rate (Broad Dollar Index) . . . . . . . . . . . . . . . . . 6
Figure 2. Yield on Selected Securities and Federal Funds . . . . . . . . . . . . . . . . . . 9
List of Tables
Table 1. The Growth Rate of Real GDP v. Final Sales, 1992-2007 . . . . . . . . . . . 3
Table 2. Civilian Unemployment Rate, 1991-2008 . . . . . . . . . . . . . . . . . . . . . . . 3
Table 3. Rate of Change in the GDP Deflators, 1993-2007 . . . . . . . . . . . . . . . . . 4
Table 4. Rate of Change in the Consumer Price Index (CPI), 1993-2007 . . . . . . 4
Table 5. Rate of Change in Labor Costs, 1993-2007 . . . . . . . . . . . . . . . . . . . . . . 5
Table 6. U.S. Foreign Trade Deficit, 1989-2007 . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . . 8
Table 9. Economic Forecasts 2008-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 10. Accounting for GDP Growth: 1995-2008:1H . . . . . . . . . . . . . . . . . . . 12
Table 11. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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Current Economic Conditions and
Selected Forecasts
Current Economic Conditions
Overview
U.S. economic growth has been positive during 25 of the past 26 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 of 2008,
U.S. real GDP (measured in 2000 dollars) was about 18% above its recession low
point in the third quarter 2001, and had grown about 20% 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 2008
was at an annual rate of 2.8% up from 0.9% in the first quarter. During the four
quarters of 2007, the annualized quarterly rates were 0.1%, 4.8%, 4.8%, and -0.2%.
During the four quarters of 2006, the quarterly rates were 4.8%, 2.4%, 1.1%, and
2.1%. Growth excluding inventories during the first half of 2008 was positive at an
annual rate of 2.8.1
The rise in payroll employment peaked in December 2007. Since then, it was
dropped by more than 700,000. The unemployment rate is also on the rise and in
August stood at 6.1% (where it remained in September), up from an expansion low
of 4.4% first reached in October 2006 and 4.5% in May 2007. Over the past 18
months, the unemployment rate has varied between 4.4% and 6.1%. These rates are
still above the 3.8% low of the 1990s expansion.
Measured or headline inflation has accelerated. As measured by the Consumer
Price Index (CPI) it rose 4.7% for the 12 months ended in September 2008 compared
with 2.5% during 2006 and 3.4% in 2005. The rise in the core rate for the 12 months
ending in September, which excludes food and energy prices, was 2.5%. The
broadest measure of inflation for the economy, the GDP price index, rose at an
annual rate of 1.9% over the first half of 2008, compared with 2.7% over 2007.
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
1 The GDP data for the second quarter 2008 come from the first or “advance” estimates.

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CRS-2
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 an increase in
inflationary pressures rose, 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% until it stood at
5.25%. The target was changed on September 18, 2007, when, in a series of 7 moves,
the rate was reduced to1.5% on October 8, 2008. These changes were designed to
forestall a recession and deal with the stresses in the nation’s financial markets.
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 1992 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 3.0%, 2.6%, 3.8%, and 1.3%, respectively. During the four quarters
of 2006, the annualized rates were 4.8%, 2.7%, 0.8%, and 1.5%. During the
comparable quarters of 2007, GDP grew at an annual rate of 0.1%, 4.8%, 4.8%,and
-0.2%. During the first two quarters of 2008, it grew at annualized rates of 0.9% and
2.8%, respectively.
Productivity gains have been an important part of the current expansion.2 Most
economists refer to recent trends as reflecting a “productivity-led” recovery.
Between 2002 and 2007, productivity growth was from 0.8% to 4.5% (on a 4/Q over
4/Q basis). 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 gains were not part of the initial recovery phase after March 1991
and did not show up in the aggregate data until 1995.
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. It then declined reaching an
expansion low of 4.4% in October 2006. It has recently risen, however, and in
August stood at 6.1% (where it remained in September). And, payroll employment
between December 2007 and September 2008 fell by more than 700,000, in response
to the decline in the rate of growth of GDP during two of the last three quarters.
2 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, 1992-2007
(percentages)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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 2.9
2.8
2.0
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
3.0
2.6
2.4
2.3
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
2.8
2.4
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
2.7
2.8
2.5
Source: U.S. Department of Commerce.
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
5.1 million since the peak of the last expansion in March 2001 (and 6.7 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 8.0 million since the peak of the last expansion (and
9.6 million 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, 1991-2008
(%, 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
4.6
4.7
4.7
4.7
4.8
4.7
5.0
2008
4.9
4.8
5.1
5.0
5.5
5.5
5.7
6.1
6.1
Source: U.S. Department of Labor.

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CRS-4
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.
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, 1993-2007
(%, 4Q-4Q)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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 3.5
2.8
2.6
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 3.5
2.8
2.6
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% and in 2007 to 2.6%.
During the first half of 2008, it rose at an annual rate of 1.9%.
Table 4. Rate of Change in the Consumer Price Index (CPI),
1993-2007
(in percentages)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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
4.1
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
2.4
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
2.8
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
2.3
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% only to rise to 4.1% in 2007. Much of this

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CRS-5
acceleration can be attributed to energy price increases for when food and energy are
excluded the increase was reduced to 2.4%. This also characterizes 2008. During
the three months ended in September, the annualized rate of rise of the CPI was
2.6%. Excluding food and energy it was 2.7%.

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
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, 1993-2007
(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
4.2
0.3
0.2
0.5
2.1
1.6
4.2
1.4
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. During the first quarter of 2008,
Unit labor costs rose at an annual rate of 2.3%.
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 1992.3 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, declining to
4.8% in 2007 and 3.6% during the first half of 2008. Since the net inflow of capital
from abroad comes to the United States in the form of a trade deficit, it serves as a
reminder that the rate of capital formation in the United States depends on other than
domestic sources of saving.
3 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
years 2002 through 2007, the current account deficit was, respectively, approximately 4.1%,
4.6%, 5.3%, 5.7%, 5.7% and 5.1%of nominal GDP. During the first half of 2008, it averaged
5.0% of nominal GDP.

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CRS-6
Table 6. U.S. Foreign Trade Deficit, 1989-2007
(as a percentage of GDP)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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
4.8
Source: U.S. Department of Commerce.
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 April 2008, the dollar has depreciated about 10.0%.
Figure 1. Real Dollar Exchange Rate (Broad Dollar Index)
120
110
x
e
d 100
In
90
80
1995
1997
1999
2001
2003
2005
2007
Source: Board of Governors of the Federal Reserve System.
The dollar has shown less movement against the major world currencies than
the broad trade-weighted index described above suggests.4 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 February 2008, this index shows that the
dollar fell in value about 6.5%.
4 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-7
Posture of 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
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. Subsequent tightening is reflected in the decline in the deficit from
2.5% of potential GDP in 2004 to 1.2% in 2007. An alternative, although inferior
measure, is the ratio of the actual budget deficit to actual GDP. Using this measure,
fiscal policy was also expansionary between 2000 and 2004 during which a surplus
of 2.5%shifted to a deficit of 3.5%, a net shift of 6% of GDP. Between 2005 and
2007, the deficit fell from 2.6% of GDP to 2.1% indicating a 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
2007
Standardized
192
144
146
93
81
38
+2
+105
+102
-131
288
294
239
229
167
Budget Deficit
Full
Employment
6,711 7,039 7,389 7,753 8,139 8,514 8,935 9,450 10,019 10,536 11,039 11,623 12,316 13,073 13,796
GDP
Ratio
0.029 0.020 0.020 0.012 0.010 0.004 0.000 +0.011 +0.010 0.012 0.026 0.024 0.019
0.018 0.012
Actual Budget
255
203
164
107
22
+69
+126
+236
+128
158
378
413
318
248
163
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 11,504 12,245 13,023 13,670
Ratio
0.039 0.029 0.022 0.014 0.003 +0.08 +0.014 +0.024 +0.013 0.015 0.035 0.036 0.026
0.019 0.0129
Source: Congressional Budget Office (January 2008).
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.5 The monetary
aggregates M1 and M2, as shown in Table 8, have not responded uniformly to the
easing of monetary policy.6 The rate of growth of M1 since the end of 2004 has been
5 For a more comprehensive discussion of monetary policy, see CRS Report RL30354,
Monetary Policy: Current Policy and Conditions, by Marc Labonte and Gail Makinen.
6 M1 consists primarily of currency held by the public and demand deposits of businesses
(continued...)

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CRS-8
either zero or negative, whereas that for M2 has accelerated. The pattern in
Aggregate Reserves over 2005-2008 is consistent with the Federal Reserve’s
movement in the target for federal funds, the principal tool of monetary policy (see
Figure 2). The continued 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
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
06:12 - 07:12
-1.7
1.4
0.0
5.9
NA
07:08 - 08:08
-1.0
2.1
1.6
5.4
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 (and
an additional three times between then and December 11, 2001).
6 (...continued)
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
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 beginning on September 18, 2007and concluding on
October 8, 2008, during which the target was reduced to 1.5% from 5.25% to provide
liquidity to ease unsettled conditions related to the subprime mortgage market and
to provide a boost in aggregate demand to a sagging economy.
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
10
9
8
7
6
5
4
3
2
1
091 92 93 94 95 96 97 98 99 OO O1 O2 O3 O4 05 06 07 08
Three Month
Federal Funds
Five Year
Long Term
Source: Board of Governors of the Federal Reserve System.
Economic Forecasts, 2008-2009
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 10 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 1.3% and 1.7% during 2008. This is lower than the
growth rates achieved in 2005, 2006, and 2007. The forecasted 2008 rate of GDP

---

CRS-10
growth, according to the consensus, will be insufficient to keep the unemployment
rate from rising. The headline inflation rate for the entire economy is expected to
range from 2.1% to 4.6% (depending on the price index used). Both short-term and
long-term interest rates are expected to be below comparable Treasury rates
prevailing in 2007.
In the Monetary Policy Report submitted to Congress on July 15, 2008, the
Federal Reserve presented new economic projections for 2008 and 2009. It projected
that from the fourth quarter 2007 to the fourth quarter 2008, real GDP will grow from
1.0% to 1.6% and that prices7 will increase from about 3.8% to 4.2%. The civilian
unemployment rate is projected to average between 5.5% and 5.7% during the
remainder of the year. For 2009, real GDP, on a fourth quarter over fourth quarter
basis, is projected to grow between 2.0% and 2.8%, prices are expected to rise
between 2.0% and 2.3%, and unemployment during the fourth quarter of the year is
projected to average from 5.3% to 5.8%.
7 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-11
Table 9. Economic Forecasts 2008-2009
2007
2008
3a
4a
1a
2a
3 4
2007a
2008
2009
Nominal GDPb (Rate of Change)
OMB
6.4
2.3
3.5
3.9
NA
NA
4.8
3.8
4.4
CBO
6.4
2.3
3.5
3.9
NA
NA
4.8
3.8
3.8
BC T-10
6.4
2.3
3.5
3.9
5.8
4.0
4.8
4.2
3.7
BC Con.
6.4
2.3
3.5
3.9
3.3
1.0
4.8
3.8
2.8
BC B-10
6.4
2.3
3.5
3.9
0.7
-2.1
4.8
3.5
1.7
Real GDPb (Rate of Change)
OMB
4.8
-0.2
0.9
2.8
NA
NA
2.0
1.6
2.2
CBO
4.8
-0.2
0.9
2.8
NA
NA
2.0
1.5
1.1
BC T-10
4.8
-0.2
0.9
2.8
0.6
1.5
2.0
1.7
1.3
BC Con.
4.8
-0.2
0.9
2.8
-0.3
0.2
2.0
1.5
0.5
BC B-10
4.8
-0.2
0.9
2.8
-1.3
-1.3
2.0
1.3
-0.2
Unemploymentc
OMB
4.6
4.8
4.9
5.3
NA
NA
4.6
5.3
5.6
CBO
4.6
4.8
4.9
5.3
NA
NA
4.6
5.4
6.2
BC T-10
4.6
4.8
4.9
5.3
6.0
6.2
4.6
5.7
7.3
BC Con.
4.6
4.8
4.9
5.3
6.0
6.0
4.6
5.7
6.9
BC B-10
4.6
4.8
4.9
5.3
5.9
5.8
4.6
5.6
6.5
GDP Price Index (chain-weighted)b
OMB
1.5
2.8
2.6
1.1
NA
NA
2.7
2.3
2.6
CBO
1.5
2.8
2.6
1.1
NA
NA
2.7
2.2
2.2
BC T-10
1.5
2.8
2.6
1.1
5.2
3.6
2.7
2.6
2.7
BC Con.
1.5
2.8
2.6
1.1
3.6
2.6
2.7
2.3
2.2
BC B-10
1.5
2.8
2.6
1.1
2.0
1.6
2.7
2.1
1.7
CPI-Ub
OMB
2.7
5.1
4.2
5.0
NA
NA
2.9
3.8
2.3
CBO
2.7
5.1
4.2
5.0
NA
NA
2.9
4.7
3.1
BC T-10
2.7
5.1
4.2
5.0
7.1
4.1
2.9
4.6
3.4
BC Con.
2.7
5.1
4.2
5.0
6.5
2.2
2.9
4.4
2.5
BC-10
2.7
5.1
4.2
5.0
5.0
0.2
2.9
4.2
1.7
T-BILL Interest Rate (three-month)c
OMB
4.3
3.6
2.1
1.7
NA
NA
4.4
1.9
2.8
CBO
4.3
3.6
2.1
1.7
NA
NA
4.4
1.9
2.7
BC T-10
4.3
3.6
2.1
1.7
1.7
2.1
4.4
1.8
2.3
BC Con.
4.3
3.6
2.1
1.7
1.5
1.9
4.4
1.6
1.7
BC B-10
4.3
3.6
2.1
1.7
1.2
1.6
4.4
1.4
1.1
10-year Treasury Notec
OMB
4.7
4.2
3.7
3.9
NA
NA
4.6
4.0
4.6
CBO
4.7
4.2
3.7
3.9
NA
NA
4.6
3.9
4.4
BC T-10
4.7
4.2
3.7
3.9
3.9
4.2
4.6
3.9
4.4
BC Con.
4.7
4.2
3.7
3.9
3.9
4.0
4.6
3.8
3.9
BC B-10
4.7
4.2
3.7
3.9
3.7
3.7
4.6
3.7
3.4
Sources: Blue Chip Economic Indicators, October 2008; Congressional Budget Office, January 2008; and the
Office of Management and Budget (CEA), July, 2008.
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-12
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, and 2007,
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, and 2007, purchases by all levels of
government have played only a small role in both expansions. Net export growth
was an important component of growth in 2007. Consumption expenditures remain
the largest single contributor to GDP growth.
Table 10. Accounting for GDP Growth: 1995-2008:1H
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007 2008:1H
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% 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
71.6
44.7
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
-16.2
-82.2
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
17.7
30.6
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
27.1
106.9
Source: U.S. Department of Commerce.
Note: 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

---

CRS-13
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 2002-2005 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.8
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.
8 See also CRS Report RL30534, America’s Growing Trade Deficit: Its Cause 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-14
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
3.7
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
4.6
-2.6
1.0
-1.6
-3.6
1.1
4.7
2004
1.6 13.6
15.2
4.8
-2.4
1.2
-1.2
-3.2
1.6
5.3
2005
0.4 14.0
14.3
3.4
-1.8
1.4
-0.4
-2.4
1.0
5.9
2006
0.3 13.3
13.5
3.3
-0.9
1.4
0.5
-1.5
1.9
6.0
2007
0.3 12.5
12.8
2.7 -0.8
1.2
0.4
-1.7
1.2
5.1
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.

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