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The National Bureau of Economic Research (NBER) declared on December 1, 2008, that the U.S.
economy is now in a recession that began in December 2007. During that quarter (the fourth
quarter of 2007), GDP contracted at an annual rate of 0.2%. It then grew at annual rates of 0.9%
and 2.8% during the first and second quarters of 2008. During the third quarter, GDP again
contracted at an annual rate of 0.5%.
Employment has reflected the slowdown in the economy. The unemployment rate rose to 6.5% in
October from 4.8% a year earlier and, since peaking in December 2007, payroll employment has
fallen by some 1.2 million.
Inflation is also on the rise. The headline inflation rate, measured by the CPI, rose 3.7% for the 12
months ending in October 2008. This is higher than the core inflation rate (which excludes food
and energy) of 2.2%. However, for the three months ending in October 2008, the headline CPI
fell at an annual rate of 4.4%. This was largely driven by the fall in the price of oil. Excluding
food and energy, the CPI rose at an annualized rate of 1.1%.
The consensus among economists is that GDP growth for 2008 will, over the entire year, be
positive. It is expected that fourth quarter will see a further contraction of GDP. During 2009,
GDP growth is expected to range between -1.1% and 0.3%. The unemployment rate is expected
to average between 6.4% and 6.7% during the fourth quarter of 2008, rising to between 7.1% and
8.0% during the fourth quarter of 2009. Inflation is expected to moderate over 2009.
While the international trade deficit is large, it has declined and the decline is expected to
continue. During the first three quarters of 2008, this decline and the increase in government
expenditures have been the two positive sources of support for GDP growth in the economy. They
have not, however, been sufficiently large to offset the decline in consumer and business
spending.
To contain the economic contraction and to ease the stress in national financial markets, the
Federal Reserve has eased monetary policy over the past fifteen months. Between September 18,
2007, and October 29, 2008, the target for the federal funds rate has been incrementally reduced
to 1.0% from 5.25%. This has involved an unprecedented increase in the reserves of depository
institutions. In addition, the Federal Reserve has created a number of new means for injecting
additional reserves and liquidity into the financial system including making loans to non-financial
firms.
Additional fiscal stimulus has also been forthcoming. The structural measure of the budget deficit
has increased from 1.1% of potential GDP in FY2007 to 2.4% in FY2008. New fiscal initiatives
are expected to raise the structural deficit even higher during FY2009.
This report will be updated monthly.
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Current Economic Conditions ......................................................................................................... 1
Overview ................................................................................................................................... 1
Details ....................................................................................................................................... 1
GDP .................................................................................................................................... 1
Labor Markets..................................................................................................................... 2
Inflation............................................................................................................................... 3
The U.S. Foreign Trade Deficit........................................................................................... 4
The U.S. Dollar ................................................................................................................... 5
Stance of Fiscal and Monetary Policy ............................................................................................. 6
Fiscal Policy .............................................................................................................................. 6
Monetary Policy ........................................................................................................................ 6
Economic Forecasts, 2008-2009 ..................................................................................................... 8
Special Topics................................................................................................................................ 10
Accounting for GDP Growth .................................................................................................. 10
Promotion of Economic Growth: The Importance of Saving ................................................. 10
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Figure 1. Real Dollar Exchange Rate (Broad Dollar Index) ........................................................... 5
Figure 2. Yield on Selected Securities and Federal Funds .............................................................. 7
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Table 1. The Growth Rate of Real GDP v. Final Sales, 1999-2008:3Q........................................... 2
Table 2. Civilian Unemployment Rate, 1999-2008 ......................................................................... 3
Table 3. Rate of Change in the GDP Deflators, 1999-2008:3Q....................................................... 3
Table 4. Rate of Change in the Consumer Price Index (CPI), 1999-2007....................................... 4
Table 5. Rate of Change in Labor Costs, 1999-2007....................................................................... 4
Table 6. U.S. Foreign Trade Deficit, 1995-2008:3Q ....................................................................... 5
Table 7. Alternative Measures of Fiscal Policy ............................................................................... 6
Table 8. Economic Forecasts, 2008-2009........................................................................................ 8
Table 9. Accounting for GDP Growth: 1995-2008:3Q.................................................................. 10
Table 10. U.S. Savings By Sector.................................................................................................. 12
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Author Contact Information .......................................................................................................... 13
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The National Bureau of Economic Research, the non-partisan, non-profit research institute that
dates the business cycle for the United States, declared on December 1, 2008, that the U.S.
economy has been in a recession since last December. In support of this decision, GDP growth in
the U.S. has been negative during two of the last four quarters. During the fourth quarter of 2007,
GDP contracted at an annual rate of 0.2% and during the third quarter of 2008, at an annual rate
of 0.5%. During both the first and second quarters of 2008, GDP growth was positive at annual
rates of 0.9% and 2.8%, respectively1
The rise in payroll employment peaked in December 2007. Since then, it has dropped by some
1.2 million. The unemployment rate is also on the rise and in October stood at 6.5% (compared
with 4.8% a year earlier). These rates are above the 3.8% low during the 1990s expansion.
Measured or headline inflation remains high. As measured by the Consumer Price Index (CPI) it
rose 3.7% for the 12 months ended in October 2008 compared with 4.1% during 2007 and 2.5%
in 2006. The rise in the core rate for the 12 months ending in October, which excludes food and
energy prices, was 2.2%. The broadest measure of inflation for the economy, the GDP price
index, rose at an annual rate of 2.6% over the first three quarters of 2008, compared with 2.7%
over 2007.
The Federal Reserve has responded to both the slowdown in economic activity and the financial
crisis that began during the summer of 2007 in two ways. First it reduced the target rate for
federal funds to 1.0% from 5.25%. This has involved unprecedented increases in the reserves of
depository institutions (mainly commercial banks). Second, it has exploited a little used provision
of the Federal Reserves Act to create a number of new means for expanding the reserves and
liquidity of the nation’s financial system including lending to financial firms that were not
previously eligible for such loans and making loans directly to non-financial firms. In the process,
the assets of the Federal Reserve have more than doubled over the past year from $900 billion to
$2.2 trillion (mid-November 2007 to mid-November 2008).
Fiscal policy has also shifted from contraction to expansion. As a result of such measures as tax
cuts and tax rebates, the structural measure of the budget deficit rose from 1.1% of potential GDP
in FY2007 to 2.4% in FY2008. Additional fiscal measures to stimulate the economy should
further increase the structural deficit during the current fiscal year.
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The longer run perspective on GDP growth can be gleaned from Table 1. Even during the
contraction year 2001, GDP growth, on the whole, was positive, but low. The annual data,
1 The GDP data for the third quarter of 2008 come from the second or “preliminary” estimates.
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however, fail to show that during certain quarters of 2001, GDP contracted. Similarly, GDP
growth was positive on an annual basis during 2007, the last year of the expansion that got
underway in 2002. However, during the fourth quarter of 2007, GDP contracted at an annual rate
of 0.2%. The dimensions of this slowdown were obscured to a degree as positive GDP growth
returned during the first and second quarters of 2008 and, until December 2007, the
unemployment rate showed little tendency to change.2 Final Sales, which is GDP without
accounting for changes in inventories, also declined during the third quarter of 2008, but not
during the fourth quarter of 2007.
Table 1. The Growth Rate of Real GDP v. Final Sales, 1999-2008:3Q
(percentages)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP
Year-Year
4.5
3.7
0.8
1.6
2.5
3.6
2.9
2.8
2.0
1.1
4thQ-4thQ
4.7
2.2
0.2
1.9
3.7
3.0
2.6
2.4
2.3
NA
Final Sales
Year-Year
4.5
3.8
1.6
1.2
2.5
3.3
3.3
2.8
2.4
1.5
4thQ-4thQ
4.2
2.9
1.5
0.8
3.7
2.8
2.7
2.8
2.5
NA
Source: U.S. Department of Commerce.
Productivity gains were an important part of the last expansion.3 Many economists referred to
that expansion as “productivity-led. 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 1991-2001expansion, 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.
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The economic recovery and expansion that began in 2002 was not one associated with a large
amount of job creation relative to the two expansions that preceded it. The unemployment rate
reached a low point of 4.4% compared with a low of 3.8% in April 2000 during the previous
expansion (see Table 2). At 3.8%, the unemployment rate was at a 30-year low. With the
weakening of growth that began in 2007, the unemployment rate began to rise and payroll
employment, which had reached a peak in December 2007, began to fall. Over the past 12
months, the unemployment rate has risen to 6.5% (October) from 4.8% a year earlier and payroll
employment has fallen by 1.2 million (between the peak in December 2007 and October 2008).
2 Observers have noted that the NBER has generally waited to designated the onset of a recession until the economy
experiences two consecutive quarters of negative growth. Unless data revisions show otherwise, this may be the
exception to that observation.
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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Table 2. Civilian Unemployment Rate, 1999-2008
(%, seasonally adjusted)
J F M A M J J A S O N D
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
6.5
Source: U.S. Department of Labor.
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The inflation rate over the past several years has generally been rising with the rate of increase
greatly influenced by large movements, both up and down, in energy prices (see Table 3 and
Table 4). Indeed, observers claim that the rise in the inflation rate appears to have influenced the
Federal Reserve to tighten monetary policy beginning in 2004.
Table 3. Rate of Change in the GDP Deflators, 1999-2008:3Q
(%, 4Q-4Q)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP Price Index
1.6
2.2
2.5
1.7
2.2
3.2
3.5
2.8
2.6
2.0
PCE Price Index
2.1
2.3
1.7
1.9
1.8
3.1
1.9
1.9
3.5
4.4
Source: U.S. Department of Commerce.
Because energy and food prices are largely determined on auction markets and, hence, fluctuate
frequently in response to immediate changes in supply and demand, economists seek a measure
of price inflation that reflects underlying conditions. Thus, a distinction is made between
“headline” inflation and “core” inflation with the latter being measured by a price index purged of
its energy and food component. This distinction has been especially important during 2007-2008
as energy prices first rose sharply and, then, declined noticeably.
The broadest measures of inflation in the economy, known as the GDP Price Index has not
reflected the dramatic shifts in energy prices while the price index for its major component,
consumption (the PCE Index), has. Over the first three quarters of 2008, the GDP Price Index
rose at an annual rate of 2.0% compared with 2.6% over the four quarters of 2007. The PCE
Index rose at an annual rate of 4.4% over the first three quarters of 2008 compared with 3.5%
over 2007. Energy prices have had a substantial influence on the month-to-month changes in the
Consumer Price Index. This is shown in Table 4 where both the headline and core rates are
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recorded. During the twelve months ended in October 2008, the headline rate was 3.7% while the
core rate was 2.2%. However, for the three months ended in October, the headline rate fell at an
annual rate of 4.4%, while the core rate rose at an annual rate of 1.1%.
Table 4. Rate of Change in the Consumer Price Index (CPI), 1999-2007
(in percentages)
1999 2000 2001 2002 2003 2004 2005 2006 2007
Dec. over Dec.
2.7
3.4
1.6
2.4
1.9
3.3
3.4
2.5
4.1
Excluding food and energy
1.9
2.6
2.7
1.9
1.1
2.2
2.2
2.6
2.4
Year Over Year
2.2
3.4
2.8
1.6
2.3
2.7
3.4
3.3
2.8
Excluding food and energy
2.1
2.4
2.6
2.4
1.4
1.7
2.2
2.5
2.3
Source: U.S. Department of Labor.
Since wages and salaries account for approximately two-thirds of the cost to produce GDP, some
economists think that their rate of growth provides insight into future inflation rates. Two
measures of labor cost growth are shown in Table 5. Except for 2006, the rate at which Unit
Labor Costs have grown over the past six years has been low whether measured by Unit Labor
Costs or the Employment Cost Index for private industry.
Table 5. Rate of Change in Labor Costs, 1999-2007
(in percentages)
1999 2000 2001 2002 2003 2004 2005 2006 2007
Unit Labor Costs
1.6
4.2
0.3
0.2
0.5
2.1
1.6
4.2
1.4
Employment Cost Index
3.4
4.4
4.2
3.2
4.0
3.8
3.0
2.7
3.1
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 three quarters of 2008, Unit Labor Costs in the
non-farm business sector rose at an annual rate of 1.6%.
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While the U.S. foreign trade deficit (net imports as a share of GDP), shown in Table 6, has been a
large fraction of GDP during 2002-2006, it has recently began to decline. In 2007, it declined to
4.8% of GDP whereas over the three quarters of 2008 it declined to 3.4% of GDP.4 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 capital formation in the United States depends on other than domestic saving.
4 The foreign trade deficit shown in Table 6 differs from the headline trade deficit reported in the financial press. In
Table 6, the “trade deficit” refers to exports and imports from the U.S. National Income and Product Accounts which
serve as the basis for GDP. These data are adjusted for inflation. The NIPA accounts also report exports and imports on
a non-inflation adjusted basis. When these data are compared with similar GDP numbers, the fall in the trade deficit is
not nearly so dramatic. In both 2005 and 2006, the “nominal” trade deficit was 5.7% of GDP. This declined to 5.1% in
2007 and 5.0% over the first three quarters of 2008.
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Table 6. U.S. Foreign Trade Deficit, 1995-2008:3Q
(as a percentage of GDP)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
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
3.4
Source: U.S. Department of Commerce.
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Figure 1 records the movement in the foreign exchange value of the dollar measured against a
trade-weighted and inflation adjusted 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 (or appreciated) by
more than 34% to its peak in February 2002. From then until March 2008, the dollar slowly
depreciated, ending up where it was in July 1995. Between March and November 2004, the dollar
has appreciated about 14%.5
Figure 1. Real Dollar Exchange Rate (Broad Dollar Index)
Source: Board of Governors of the Federal Reserve System.
5 In Figure 1, the dollar is measured against an index of the currencies of many of the major trading partners of the
United States weighted according to the proportion of trade account by each. 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 and individual countries. A dollar index is also computed using the major world currencies. It shows a
movement of the dollar similar to that above except that its low point occurred in November 2007. Since then, it shows
that the dollar has appreciated by some 15%.
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The stance of fiscal policy depends on how it is measured. A generally accepted method is to
compute the ratio of the structural or full employment federal budget deficit (or surplus) to full
employment GDP, also called “potential GDP.” When that is done, as shown in Table 7, fiscal
policy was contractionary between FY2003 and FY2007 as the structural budget deficit declined
to 1.1% of potential GDP from 2.6%. Fiscal counter-cyclical initiatives undertaken during
FY2008, such as the tax cuts and rebates, reversed this trend and the projected structural deficit is
expected to rise to 2.4% of potential GDP. When the actual budget deficit and actual GDP are
used, the conclusion is similar in direction to that obtained when the structural measures are used
although the magnitudes differ.
Table 7. Alternative Measures of Fiscal Policy
($ in billions per fiscal year)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Standardized Budget Deficit
10 +88 +76 -139
283
289
236
230
153
347
Full Employment GDP
8,921 9,433 10,001 10,513 11,019 11,600 12,286 13,043 13,761 14,455
Percentage
0.000 +0.9 +0.8
1.3
2.6
2.5
1.9
1.8
1.1
2.4
Actual Budget Deficit
+126 +236 +128
158
378
413
318
248
162
455
Actual GDP
9,127 9,708 10,060 10,378 10,804 11,504 12,245 13,023 13,670 14,227
Ratio
+1.4 +2.4 +1.3
1.5
3.5
3.6
2.6
1.9
1.2
3.2
Source: Congressional Budget Office (January, September, and October 2008).
¢ȱ¢ȱ
The Federal Reserve conducts monetary policy by targeting an overnight interest rate at which
depository institutions (primarily commercial banks) buy and sell reserves. To ensure that the
target prevails, the Fed must be prepared to buy and sell seasoned (or already issued) U.S.
Treasury securities. When it buys these securities in support of a lower target, it supplies reserves
to this market and when it sells these securities to support a target increase, it reduces reserves.6
As shown in Figure 2, other short-term interest rates tend to mimic the federal funds rate. This is
not usually true for longer term rates. Their changes, as well as the magnitude of their changes,
are often different, due in part to the fact that they respond to the longer term outlook for
inflation, the financing requirements of the federal budget, and the international flow of capital.
An examination of Figure 2 reveals that over the past eight years, the federal funds target has
been on a sort of roller coaster path—down, up, and down. The initial decline in the target was to
set in motion a recovery from the 2001 recession and to deal with the uncertainties from the 9/11
6 For a more comprehensive discussion of this process, see CRS Report RL30354, Monetary Policy and the Federal
Reserve: Current Policy and Conditions, by Gail E. Makinen and Marc Labonte.
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attack on the United States. The rate was then held low for nearly three years because of the
slowness of the economy to recover and expand and because of a fear that the U.S. might
experience price deflation similar to that experienced by Japan. This policy may have had serious
unintended consequences. The shift in housing finance in the U.S. from fixed rate to variable rate
mortgages meant that the housing sector was now far more vulnerable to short-term interest rates.
A number of analysts now believe that a consequence of keeping the target rate low for three
years was to set in motion a housing price “bubble.” A bubble that began to burst as the Fed
tightened monetary policy. Between June 2004 and June 2006, the target was raised incrementally
17 times to 5¼% from 1%.
During the summer of 2007, the bubble burst and the economy began to slump. As noted above,
the Fed responded with a substantial easing of monetary policy. Between October 2007 and mid-
November 2008, the reserves of depository institutions increased from $42.4 billion to $652.9
billion; an unprecedented expansion over such a short period. Still, this was not enough to deal
with the financial crisis. The Fed initiated a number of new way to supply additional reserves and
liquidity to the financial system and to some non-financial firms as well.7 The magnitude of this is
also unprecedented. During October 2007, total borrowing from the Federal Reserve was $254
million. By mid-November, 2008, it had grown to $725.2 billion.
Figure 2. Yield on Selected Securities and Federal Funds
10
9
8
7
6
5
4
3
2
1
0OO
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.
7 For a discussion of these new initiatives, see CRS Report RL34427, Financial Turmoil: Federal Reserve Policy
Responses, by Marc Labonte.
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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 from forecasts summarized in Table 9 is that GDP growth should be between
-1.1% and 0.3% during 2009. Positive growth is expected to resume during either the second or
third quarter of the year. The forecasted 2009 rate of GDP growth will be insufficient to keep the
unemployment rate from rising and it is expected to reach between 7% and 8% during the third
quarter. The headline inflation rate for the entire economy is expected to range from near zero to
about 3% (depending on the price index used). Both short-term and long-term interest rates on
Treasury securities are expected to be about comparable to the rates prevailing in 2008.
In the Minutes to the Federal Open Market Committee Meeting of October 28-29, 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 0.0% to 0.3% and
that prices8 will increase from 2.8% to 3.1%. The civilian unemployment rate is projected to
average between 6.3% and 6.5% during the remainder of the year. For 2009, real GDP, on a
fourth quarter over fourth quarter basis, is projected to grow between -0.2% and 1.1%, prices are
expected to rise between 1.3% to 2.0%, and unemployment during the fourth quarter of the year
is projected to average from 7.1% to 7.5%.
Table 8. Economic Forecasts, 2008-2009
2008 2009
2a
3a 4 1 2 3 2007a 2008 2009
Nominal GDPb (Rate of Change)
OMB
3.9
3.6
NA
NA
NA
NA
4.8
3.8
4.4
CBO
3.9
3.6
NA
NA
NA
NA
4.8
3.8
3.8
BC T-10
3.9
3.6
-2.8
2.9
1.0
5.3
4.8
4.0
2.7
BC Con.
3.9
3.6
-1.1
0.4
1.0
3.3
4.8
3.7
1.6
BC
B-10
3.9 3.6 -5.0 -.2.2 -1.0 1.1 4.8
3.5
0.2
Real GDPb (Rate of Change)
OMB
2.8
-0.5
NA
NA
NA
NA
2.0
1.6
2.2
CBO
2.8
-0.5
NA
NA
NA
NA
2.0
1.5
1.1
BC T-10
2.8
-0.5
-1.5
-0.1
1.7
2.7
2.0
1.4
0.3
BC Con.
2.8
-0.5
-2.8
-1.5
0.2
1.5
2.0
1.4
-0.4
8 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.
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2008 2009
2a
3a 4 1 2 3 2007a 2008 2009
BC B-10
2.8
-0.5
-3.9
-2.7
-1.3
0.2
2.0
1.3
-1.1
Unemploymentc
OMB
5.3
6.0
NA
NA
NA
NA
4.6
5.3
5.6
CBO
5.3
6.0
NA
NA
NA
NA
4.6
5.4
6.2
BC T-10
5.3
6.0
6.7
7.3
7.7
8.0
4.6
5.7
7.8
BC Con.
5.3
6.0
6.5
6.9
7.3
7.6
4.6
5.7
7.4
BC B-10
5.3
6.0
6.4
6.6
6.9
7.1
4.6
5.6
7.0
GDP Price Index (chain-weighted)b
OMB
1.1
4.2
NA
NA
NA
NA
2.7
2.3
2.6
CBO
1.1
4.2
NA
NA
NA
NA
2.7
2.2
2.2
BC T-10
1.1
4.2
3.3
3.0
2.7
2.6
2.7
2.7
2.6
BC Con.
1.1
4.2
1.7
1.9
1.7
1.8
2.7
2.4
2.0
BC B-10
1.1
4.2
-1.1
0.5
0.3
0.9
2.7
2.1
0.9
CPI-Ub
OMB
5.0
6.9
NA
NA
NA
NA
2.9
3.8
2.3
CBO
5.0
6.9
NA
NA
NA
NA
2.9
4.7
3.1
BC T-10
5.0
6.9
2.0
2.6
3.0
3.4
2.9
4.5
2.8
BC Con.
5.0
6.9
-2.1
0.8
1.6
2.2
2.9
4.2
1.5
BC-10
5.0
6.9
-6.0
-1.3
-0.2
1.1
2.9
3.8
0.1
T-BILL Interest Rate (three-month)c
OMB
1.7
1.5
NA
NA
NA
NA
4.4
1.9
2.8
CBO
1.7
1.5
NA
NA
NA
NA
4.4
1.9
2.7
BC T-10
1.7
1.5
1.2
1.3
1.5
1.8
4.4
1.6
1.6
BC Con.
1.7
1.5
0.8
0.8
0.9
1.1
4.4
1.5
1.0
BC B-10
1.7
1.5
0.5
0.3
0.4
0.6
4.4
1.4
0.6
10-year Treasury Notec
OMB
3.9
3.9
NA
NA
NA
NA
4.6
4.0
4.6
CBO
3.9
3.9
NA
NA
NA
NA
4.6
3.9
4.4
BC T-10
3.9
3.9
3.9
4.0
4.2
4.4
4.6
3.8
4.2
BC Con.
3.9
3.9
3.7
3.7
3.8
3.9
4.6
3.8
3.9
BC B-10
3.9
3.9
3.5
3.4
3.3
3.3
4.6
3.7
3.4
Sources: Blue Chip Economic Indicators, November 2008; Congressional Budget Office, July 2008; and the
Office of Management and Budget (CEA), September, 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.
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c. Quarterly averages.
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Table 9 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 2001-2007 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 2008:3Q
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 and especially 2008:3Q. Except
for 2008:3Q, consumption expenditures remain the largest single contributor to GDP growth.
Table 9. Accounting for GDP Growth: 1995-2008:3Q
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008:3Q
Real GDP
Growth
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%
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
-48.0
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 -102.9
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
75.1
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 27.1 175.8
Source: U.S. Department of Commerce.
Note: Computed using real GDP at 2000 chained dollars on a year-over-year basis.
ȱȱȱ DZȱȱ ȱȱȱ
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 10 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 and 2000-2007,
the gross private sector savings rate has averaged a remarkably stable 17%-19% of GDP, with
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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 beginning 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 Trade Deficit: Its Cause and What It Means for the Economy, by
Marc Labonte and Gail E. Makinen; and CRS Report RL31032, The U.S. Trade Deficit: Causes, Consequences, and
Cures, by Craig K. Elwell.
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Table 10. U.S. Savings By Sector
(as a percentage of GDP)
Private Sector
Public Sector
State/
Year Pers. Bus. Total Net of Deprec. Fed. Local Total Net of Deprec. Net Private/ Publica Net Foreignb
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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ȱȱȱȱȱȱ
ȱ
ȱȱ ȱ
Marc Labonte
Specialist in Macroeconomic Policy
mlabonte@crs.loc.gov, 7-0640
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