Current Economic Conditions and Selected Forecasts
96-963 E
CRS Report for Congress
Received through the CRS Web
Current Economic Conditions
and Selected Forecasts
Updated June 5, 1998
Gail Makinen
Specialist in Economic Policy
Economics Division
Congressional Research Service ˜ The Library of Congress
ABSTRACT
This report begins with a comprehensive presentation of current economic conditions
focusing on income growth, unemployment, and inflation. The posture of monetary and
fiscal policy is surveyed as are the forecasts of economic activity. It concludes with data on
the factors important for economic growth. This report is updated periodically.
Current Economic Conditions and Selected Forecasts
Summary
According to the National Bureau of Economic Research, the arbitrator of the
U.S. business cycle, the U.S. economy is in an expansion that is soon be 7 years old,
having gotten underway in March of 1991.
Gross Domestic Product (GDP), our basic measure of economic activity, grew
at an annual rate of 4.8% during 1998:1 compared with 3.8% during 1997, 2.8%
during 1996, 2.0% during 1995, 3.5% during 1994 and 2.3% during 1993. Over the
past five quarters there has been some net increase in inventories as the growth rate
of final sales has been closer to 3%.
The unemployment rate has continued to fall during 1997 and 1998, reaching
an expansion low of 4.3% in April 1998. The monthly unemployment rates recorded
during most of the past 2 years have been below the rates thought by many
economists to characterize full employment. If these economists are correct, excess
demand currently characterizes the economy. Excess demand leads to a rise in the
inflation rate. This has yet to materialize, however. During the past 12 months,
approximately 2.9 million jobs have been created, which means an average rate of
job creation per month of 243,500. During the expansion, over 14 million jobs have
been added to the economy.
The inflation rate has, on average, been low over most of the expansion. Except
for 1996, the rate of inflation measured by the Consumer Price Index has declined in
each year of the expansion. For the 12 months ending in April 1998, the CPI rose
1.4%, the lowest rate of increase since 1986. For the 3-months ending in April, it
rose at an annual rate of 1.2%. A similar pattern shows up in the two GDP price
indexes. Both indexes rose 1.8% during 1997 an at a rate of 1.4% for the 12 months
ended in March. Labor costs, a possible indicator of future inflation, have shown
some tendency to accelerate as labor markets have tightened.
Fiscal policy continued to tighten during 1996 and 1997. Monetary policy
appears to be geared to promoting a real GDP growth rate of about 2.0% to 2.75%
per year, a rate thought compatible with a stable rate of inflation.
Recent forecasts by private sector individuals and firms expect GDP to grow
about 3.1% during 1998 and in the 1.7% to 2.3% range during 1999. Unemployment
is expected to average about 4.7% this year and 5.0% for 1999 and inflation is
expected to average in the 1.4% to 2.8% range for both years.
Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Macroeconomic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Posture of Monetary and Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Summary of Current Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Sources of GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Economic Forecasts, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Promotion of Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. The Growth Rate of Real GDP vs. Final Sales . . . . . . . . . . . . . . . . . . 2
Table 2. Civilian Unemployment Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 3. Rate of Change in the Consumer Price Index . . . . . . . . . . . . . . . . . . . . 4
Table 4. Rate of Change in the GDP Deflators . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 5. Rate of Change in Labor Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 6. U.S. Foreign Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . 7
Table 9. Sources of GDP Growth: 1990 through 1998:1 . . . . . . . . . . . . . . . . . 9
Table 10. Economic Forecasts, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 11. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Figures
Figure 1. U.S. Dollar Exchange Rate, 1987-1998 . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2. Yield on Selected U.S. Treasury Securities and Federal Funds . . . . . . 8
Current Economic Conditions and
Selected Forecasts
Current Economic Conditions
In March 1998, the American economy completed its 84th month of expansion
according to the National Bureau of Economic Research, the nonprofit, nonpartisan
organization that dates the phases of the business cycle for the United States. The
length of the current expansion is above average. The nine completed expansions
since the end of World War II have averaged 50 months. This average is dominated
by two long expansions: one ran for 106 months and dominated the decade of the
1960s; the other dominated the decade of the 1980s and ran for 92 months. GDP
growth during the early part of the current expansion was insufficient to keep the
unemployment rate from rising. Substantial growth began in 1992. The higher rate
1
of growth reversed the rise in the unemployment rate which had reached 7.7% in
June 1992. The fall in the unemployment rate was accomplished in an environment
of low inflation.
Thus far, the rate of increase of most broad-based price and wage indexes have
remained fairly low even as the economy moves toward over-full employment.
Given the expected growth rates in the labor force and productivity, the determinants
of a sustainable rate of growth, growth of GDP in the 2.0%!2.5% range would be
compatible with a continued low rate of inflation. This is, no doubt, why the Federal
Reserve hiked interest rates seven times beginning in February 1994 in an effort to
reduce GDP growth to a more sustainable rate. During 1995, GDP growth was 2.0%,
most of which took place in the third quarter. During 1996, however, GDP growth
accelerated to 2.8% (with growth at a 4.3% annual rate during the fourth quarter).
This prompted the Federal Reserve to raise interest rates on March 25, 1997. During
1997 GDP grew 3.8%. For the first quarter of 1998, GDP grew at an annual rate of
4.8%.
1 Gross Domestic Product rather than Gross National Product is now used as the
principal measure of economic activity for the United States. The two measures differ in
their treatment of foreign-owned productive resources in the United States and similar U.S.-
owned resources abroad.
CRS-2
Recent Macroeconomic Developments
The growth rate of GDP both before and after the 1990!1991 recession is
shown in Table 1.2 The relatively shallow recession was followed by a
recovery/expansion of modest proportions. Only in 1992 did GDP growth become
relatively rapid. This continued into 1994. As the economy approached full
employment, the Federal Reserve began to tighten monetary policy to sustain the
expansion. As this happened, inventories began to accumulate during 1994. During
1995 and the first quarter of 1996, inventories were reduced to bring them into line
with the slower rate of growth of sales. This slowed GDP growth during 1995. For
1996 as a whole, however, inventories did not increase as Final Sales rose 2.8%.
This was not the case during 1997 and the first quarter of 1998 as GDP growth
substantially outstripped the growth rate of final sales indicating the buildup of
inventories.
Table 1. The Growth Rate of Real GDP vs. Final Sales
(in percentages)
1990
1991
1992
1993
1994
1995
1996
1997 1998*
GDP
Year Over Year
1.2
-0.9
2.7
2.3
3.5
2.0
2.8
3.8
4.8
4thQ Over 4thQ
-0.2
0.4
3.7
2.2
3.3
1.6
3.3
3.7
3.7
Final Sales
Year Over Year
1.6
-0.7
2.5
2.1
2.9
2.5
2.8
3.1
3.4
4thQ Over 4thQ
0.6
!0.4
3.9
2.1
2.6
2.2
3.1
3.1
3.2
*Annualized rate for the first quarter.
Source: U.S. Department of Commerce.
The unemployment rate, a near constant 5.3% for 2 years, began rising in July
1990. It rose sharply over the ensuing 10 months, reaching 6.7% in March 1991, the
official trough of the recession. However, initially, even as the economy recovered,
the unemployment rate continued to rise, reaching a high of 7.7% in June 1992.
Since that time, the rate has fallen slowly, reaching an expansion low of 4.3% in
April 1998, a rate not seen since the 1960s. Since August 1994, the rate has
fluctuated within a range of from 4.3% to 6.0%. This range is thought by many
economists to be consistent with full employment. However, a rate of 4.3% is below
all estimates of the lower bound of the range. Since the expansion began in March
1991, civilian employment has risen by about 14.0 million.
2The annual rate of growth of GDP and other economic variables can be computed in
two ways. One is to take the annual average of GDP for 1996, for example, and compare
it to the annual average for 1995. When this method is used, the calculated growth rate is
actually GDP’s growth from the mid point of 1995 to the mid point of 1996. An alternative
method is to compute its growth from the fourth quarter of 1995 to the fourth quarter of
1996 (or where monthly data are available, from December to December). This method has
the advantage of computing growth over the past 12 months in question. The GDP growth
rates used in the text of this report are those on a year over year basis.
CRS-3
The unemployment data recorded since January 1994 are computed on the basis
of substantial changes in the questionnaire used in the survey of households from
which the labor market data are obtained, and thus, are not comparable with the
pre-1994 data shown on Table 2.
Table 2. Civilian Unemployment Rate
(in percentages)
J
F
M
A
M
J
J
A
S
O
N
D
1992
7.1
7.3
7.3
7.3
7.4
7.7
7.6
7.6
7.5
7.4
7.3
7.3
1993
7.1
7.0
7.0
7.0
6.9
6.9
6.8
6.7
6.7
6.7
6.5
6.4
1994
6.7
6.6
6.5
6.4
6.1
6.1
6.1
6.0
5.8
5.7
5.6
5.4
1995
5.7
5.4
5.5
5.8
5.7
5.6
5.7
5.6
5.6
5.5
5.6
5.6
1996
5.7
5.5
5.5
5.5
5.6
5.3
5.4
5.2
5.2
5.2
5.3
5.3
1997
5.3
5.3
5.2
5.0
4.8
5.0
4.9
4.9
4.9
4.8
4.6
4.7
1998
4.7
4.6
4.7
4.3
4.3
Source: U.S. Department of Labor.
As the economic expansion has taken hold and the unemployment rate has
fallen, fears of a renewed burst of inflation have arisen. Thus far, there is little
evidence in the broad based price and wage indexes that inflationary pressures are
building.3
As shown in Table 3, the CPI rose 1.7% during 1997. For the 12 months ended
in April 1998, it rose 1.4% and for the 3 month period ending in April, the CPI rose
at an annual rate of 1.2%. The rate of inflation shown by the two price indexes
derived from the GDPs accounts recorded in Table 4, has shown a continued
tendency to fall. During 1994, both the implicit price deflator and the chain weight
deflator rose 2.5%. During 1995, they both rose 2.4%. During 1996, the chain
weighted index rose 2.3% while the implicit deflator rose 2.2%.4 Both indexes rose
1.4% for the four quarters ended in March 1998.
Labor costs, regarded by some as an indication of future inflation, as shown in
Table 5, have turned in an encouraging performance. Per unit labor costs, which are
heavily influenced by productivity, rose slowly during the recovery because recorded
productivity was high. This is characteristic of the initial stages of an economi
5
c
upturn. The rise in the Employment Cost Index for private industry has shown some
tendency to accelerate since its 1995 low. This may be the early sign of future price
rises.
3 For a more extensive discussion of inflation and other alternative measures of the
inflation rate, see Library of Congress. Congressional Research Service. Inflation: Causes,
Costs and Current Status. CRS Report 96-914 E, by Gail Makinen.
4On a year over year basis, the rise in the Implicit Price Deflator between 1990 and
1996 was respectively, 4.3% 4.0%, 2.8%, 2.6%, 2.4%, 2.5%, and 2.3%. The corresponding
rise in the chain type deflator was identical.
5On a year over year basis, the rise in per unit labor costs for 1990 through 1996 was
respectively, 5.0%, 4.2%, 1.9%, 2.1%, 1.6%, 2.2%, and 1.8%.
CRS-4
Table 3. Rate of Change in the Consumer Price Index
(in percentages)
1990
1991
1992
1993
1994
1995
1996
1997
1998*
Dec. Over Dec.
6.1
3.1
2.9
2.7
2.7
2.5
3.3
1.7
1.4
Year Over Year
5.4
4.2
3.0
3.0
2.6
2.8
2.9
2.3
0.5
*Based on first quarter data.
Source: U.S. Department of Labor.
Table 4. Rate of Change in the GDP Deflators
(in percentages)
1990
1991
1992
1993
1994
1995
1996
1997 1998*
Implicit Price Deflator
4.6
3.4
2.6
2.5
2.5
2.4
2.2
1.8
1.4
Chain Type Deflator
4.6
3.4
2.6
2.5
2.5
2.4
2.3
1.8
1.4
*Based on first quarter data.
Source: U.S. Department of Commerce.
Table 5. Rate of Change in Labor Costs
(in percentages)
1990 1991 1992 1993 1994 1995 1996 1997 1998*
Unit Labor Costs
6.4
2.5
1.0
2.2
2.1
2.3
2.2
1.9
2.2
Employment Cost Index
4.6
4.4
3.5
3.6
3.1
2.6
3.1
3.5
3.6
* The employment cost index is for private industry and for the 12 months ending in December
except for 1998, which is the 12 months ending in March. Unit labor costs are from 1997:1 to
1998:1.
Source: U.S. Department of Labor.
Table 6. U.S. Foreign Trade Deficit
(as a percent of GDP)
1987
1988 1989 1990 1991
1992 1993 1994 1995
1996 1997 1998*
Trade
Deficit
2.8
2.0
1.4
1.0
0.4
0.5
1.1
1.6
1.5
1.7
2.0
2.9
*Based on first quarter data.
Source: U.S. Department of Commerce.
The U.S. foreign trade deficit (net imports), as shown in Table 6, recorded a
continued and dramatic fall from 1986 through 1991. In each of these years the trade
deficit declined as export growth exceeded import growth. During 1992 the trade
deficit began to grow as a fraction of GDP and is now running at a rate comparable
to 1987.
The increase in the U.S. foreign trade deficit during 1992!1996 reminds us that
the United States still receives a substantial inflow of capital from abroad.
CRS-5
Figure 1 records the movement in the foreign exchange value of the dollar.
Since early 1994 the dollar has been under heavy selling pressure. It probably would
have continued to fall in price (depreciate) during 1995, 1996, and 1997 had it not
been for substantial foreign central bank intervention. Net official inflows of capital,
a measure of central bank intervention, accounted for about 75% of the net capital
inflow in 1995, about 60% during 1996, and about 50% during the first quarter of
1997.
Figure 1. U.S. Dollar Exchange Rate, 1987-1998
Source: Board of Governors of the Federal Reserve System.
Posture of Monetary and Fiscal Policy
The course of GNP growth can respond significantly to changes in fiscal and
monetary policy. The posture of fiscal policy depends on how it is measured. A
generally accepted method is to examine the ratio of the structural or full employment
budget deficit to full employment GDP. When that is done, as shown in Table 7, fiscal
policy during 1997 was contractionary as the full employment deficit fell from 1.6%
to 1.0% of potential GNP. An alternative, although inferior measure, is the ratio of the
actual budget deficit to actual GDP. When this ratio is examined, fiscal policy in 1997
was also contractionary as the actual deficit fell from 1.4% to 0.3% of actual GDP.
CRS-6
Table 7. Alternative Measures of Fiscal Policy
($ in billions)
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Standardized
Budget Deficit
$138
$151
$154
$182
$203
$235
$240
$194
$190
$123
$80
Full
Employment
4,642
4,935
5,280
5,635
6,005
6,300
6,588
6,877
7,203
7,534
7,872
GDP
Ratio
0.029
0.031
0.029
0.032
0.034
0.037
0.036
0.028
0.026
0.016
0.010
Actual Budget
$150
$155
$152
$221
$269
$290
$255
$203
$164
$107
$22
Deficit
Actual GDP
4,609
4,957
5,356
5,683
5,862
6,149
6,478
6,849
7,194
7,533
7,972
Ratio
0.033
0.031
0.028
0.039
0.046
0.047
0.039
0.030
0.023
0.014
0.003
Source: Congressional Budget Office (January 1998).
Traditionally, the posture of monetary policy has been judged either by the growth
of the monetary aggregates or by movements in interest rates. In fact, neither is a
6
n
unambiguous indicator. The monetary aggregates, for example, give a confused picture.
Although M1 can explain how the economic expansion got underway, it cannot explain
the expansions continuation. The opposite is true for both M2 and M3.
Although the contraction of reserves could indicate monetary tightening, it is, in
fact, compatible with monetary expansion. This occurs because over much of this
expansion, demand deposits have been declining and it is against these deposits that
banks are legally obligated to hold reserves. Each dollar of decline frees up about 10
cents in reserves that banks can lend. Thus, even though reserves have fallen, they have
declined by less than the reserves set free by the contraction of demand deposits. This
has increased the net lending powers of banks.
Some of the dollars that were in checking accounts have found their way into
passbook savings and CDs. These shifts can explain why M1 falls without a
commensurate fall in M2 and M3. For the latter to grow, however, funds must be added
to passbook savings and CDs that were not originally in checking accounts.
For a more
6
comprehensive discussion of monetary policy, see U.S. Library of
Congress. Congressional Research Service. Monetary Policy: Current Policy of Conditions.
CRS Report 96-983 E, by Gail Makinen.
CRS-7
Table 8. The Growth Rates of the Monetary Aggregates
(annualized rates of change)
Time
Aggregate
Monetary
Period
Reserves
Base
M1
M2
M3
88:12!89:12
0.3%
4.1%
0.9%
5.1%
3.7%
89:12!90:12
2.9
9.3
4.0
3.5
1.4
90:12!91:12
9.5
5.8
8.6
3.1
1.3
91:12!92:12
19.5
10.6
14.2
1.7
0.1
92:12!93:12
11.4
10.0
10.1
1.5
0.9
93:12!94:12
-2.1
8.4
1.7
0.9
1.4
94:12!95:12
-5.1
3.9
-2.2
4.6
6.1
95:12!96:12
-11.0
4.2
-4.3
4.9
7.4
96:12!97:12
-5.7
6.3
-1.2
5.2
8.4
97:10!98:04
-0.2
6.4
3.3
8.5
12.0
98:01-98:04
-5.0
3.4
2.2
9.5
11.6
Source: Board of Governors of the Federal Reserve System.
The growth in the reserves of depository institutions results to a large degree from
decisions to move the key federal funds’ interest rate (shown in figure 2). The rate was
forced down beginning in October 1990. From April through July 1991, the rate was
held at a fairly steady 5.75%. In August it was moved toward 5.50%, in September to
5.25%, in November to 4.75%, in January 1992 to about 4.0%, in April toward 3.75%,
in July toward 3.25%, and in September toward 3.0%, where it was maintained for nearly
16 months. Beginning in February 1994, the Board of Governors, in a series of seven
steps culminating in February 1995, raised the federal funds rate to 6.0%. (The increase
in the federal funds rate was achieved by reducing the level of aggregate reserves
available to depository institutions.) Early in July, as a pronounced slowdown in
economic activity became apparent, the federal funds rate was reduced to 5.75%. In mid-
December it was reduced to 5.5% and on January 31, 1996, it was reduced to 5.25%.
However, as GDP growth rose in 1996 to a rate believed to be unsustainable, the Federal
Reserve reversed course and hiked the rate to 5.5% on March 25, 1997.
As shown in figure 2, movements in short term interest rates mimic closely
movements in the federal funds rate. This is not as true for longer term rates. Their rise
and fall as well as the magnitude of their shifts is often different from the timing and
magnitude of shifts in the federal funds rate. This is due in part to the fact that they
respond to the longer run outlook for inflation and the financing requirements
necessitated by the budget deficit, both current and prospective.
CRS-8
Figure 2. Yield on Selected U.S. Treasury Securities and Federal Funds
Source: Board of Governors of the Federal Reserve System.
Summary of Current Developments
The NBER decided that the U.S. recession that began in July 1990 ended in March
1991. By 1992:1 GDP recovered the ground lost in the three quarters during which
output contracted. The growth rate of GDP during the recovery was, however, low when
compared with the average of past expansions. The unemployment rate began to rise in
July 1990. It rose rapidly, reaching 6.8% in May 1991. For the first 6 months of 1992
it slowly crept upward, reaching a high of 7.7% in June. Since then it has fallen. Over
the past 24 months, it has ranged between 4.3 and 5.6%, a range consistent with most
measures of full employment, if not overfull employment. During the expansion more
than 14.0 million jobs have been added to the U.S. economy. All three price indexes
show that the inflation rate during the expansion has remained low. Monetary policy,
responsible for the recovery, was adjusted to slow the growth of aggregate demand. This
has involved seven upward adjustments to the federal funds rates between February 1994
and February 1995. The rate was adjusted downward by 0.25% in early July and mid-
December of 1995, and on January 31, 1996. Although this led to a rise in the growth
rate of GDP, the rate achieved was thought to be too high. Consequently, on March 25,
1997, the Federal Reserve hiked the rate by 0.25%.
CRS-9
Sources of GDP Growth
Table 9 records the sources of growth in GDP over the current expansion. These
data record two interesting developments. First, investment spending has played an
important role in this expansion. And among the categories of investment, outlays for
personal computers have been important. This bodes well for the longer run growth in
productivity. Second, except for 1996, purchases by all levels of government have
played virtually no role in the expansion.
Table 9. Sources of GDP Growth: 1990 through 1998:1
1990
1991
1992
1993
1994
1995
1996
1997
1998:1
Real GDP Growth*
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Consumption
84.2
-44.9
69.0
86.0
59.8
79.3
68.6
65.0
91.0
Investment
-55.5
-135.4
31.9
46.6
55.7
22.0
28.6
50.7
90.1
Govt. Purchases
45.5
12.9
3.5
-2.0
0.0
0.0
6.4
4.8
-12.0
Federal
(13.0)
(4.3)
(-6.9)
(-13.5)
(-8.7)
(-12.8)
(-3.2)
(-1.3)
(-14.4)
State & Local
(32.4)
(-17.2)
(10.3)
(11.5)
(8.7)
(12.8)
(9.5)
(6.1)
(2.4)
Net Exports
25.9
67.3
-4.4
-30.5
-15.1
-1.4
-3.6
-20.5
-68.9
* Computed using real GDP at 1992 chained dollars.
Source: Department of Commerce.
Economic Forecasts, 1998
All of the forecasts summarized in Table 10 expect the expansion now in progress
to continue through 1998. If these forecasts come to pass, the economy is expected to
maintain a soft landing in the sense that GDP growth at about 2.0% to 2.5% will be
sufficient to keep the unemployment rate about 5.0%. The inflation rate is expected to
remain in the 2.0% to 3.0% range. Similarly, the modest nature of the expansion is
expected to keep both short-term and long-term interest rates from rising much above
their 1997 levels.
The Wall Street Journal published the results of its survey of 55 economic
forecasters in its January 2, 1998 edition. These forecasters, on average, expect real GDP
to grow at an annual rate of 2.6% during the first half 1998 and at an annual rate of 2.1%
during the second half of the year and the CPI is expected to rise 2.3% for the year ended
in December. The 3-month Treasury bill rate and 30-year bond rate are expected to be
5.18% and 6.02% on June 30 and 5.15% and 6.60% on December 31, 1998.
The Chairman of the Board of Governors of the Federal Reserve presented the
economic projections of the Federal Reserve for 1998 in testimony before the
Subcommittee on Domestic and International Monetary Policy of the House Banking
Committee on February 24, 1998. The Federal Reserve projects that over the four
quarters of 1998 real GDP will grow between 2.0% and 2.75% and that the CPI will
increase from 1.75% to 2.25%. The civilian unemployment rate is projected to average
about 4.75% during the fourth quarter of the year.
CRS-10
Table 10. Economic Forecasts, 1998
1997
1998
1997* 1998 1999
1*
2*
3*
4*
1*
2
3
4
Nominal GDPa
OMB
7.4 5.2
4.6
5.2
5.8 NA NA NA
5.8
4.3
4.1
CBO
7.4 5.2
4.6
5.2
5.8 NA NA NA
5.8
4.7
4.2
DRI
7.4 5.2
4.6
5.2
5.8 3.8 4.1 3.3
5.8
4.6
3.9
WEFA
7.4 5.2
4.6
5.2
5.8 3.7 4.7 4.8
5.8
4.7
5.3
BC
7.4 5.2
4.6
5.2
5.8 4.0 4.2 4.3
5.8
4.7
4.4
Real GDPa
OMB
4.9 3.3
3.1
3.7
4.8 NA NA NA
3.8
2.4
2.0
CBO
4.9 3.3
3.1
3.7
4.8 NA NA NA
3.8
2.7
2.0
DRI
4.9 3.3
3.1
3.7
4.8 2.0 2.1 1.4
3.8
3.1
1.8
WEFA
4.9 3.3
3.1
3.7
4.8 2.3 1.9 2.2
3.8
3.1
2.7
BC
4.9 3.3
3.1
3.7
4.8 2.4 2.3 2.3
3.8
3.1
2.3
Unemploymentb
OMB
5.3 4.9
4.9
4.7
4.7 NA NA NA
4.9
4.9
5.1
CBO
5.3 4.9
4.9
4.7
4.7 NA NA NA
4.9
4.8
5.1
DRI
5.3 4.9
4.9
4.7
4.7 4.6 4.6 4.7
4.9
4.7
5.0
WEFA
5.3 4.9
4.9
4.7
4.7 4.5 4.6 4.7
4.9
4.6
5.0
BC
5.3 4.9
4.9
4.7
4.7 4.7 4.7 4.7
4.9
4.7
4.9
GDP Deflator (chain weights)
a
OMB
2.4 1.8
1.4
1.4
1.0 NA NA NA
2.0
1.9
2.0
CBO
2.4 1.8
1.4
1.4
1.0 NA NA NA
2.0
2.2
2.3
DRI
2.4 1.8
1.4
1.4
1.0 1.7 1.9 2.8
2.0
1.4
2.0
WEFA
2.4 1.8
1.4
1.4
1.0 1.4 2.7 2.6
2.0
1.6
2.5
BC
2.4 1.8
1.4
1.4
1.0 1.6 1.9 2.0
2.0
1.6
2.1
CPI-Ua
OMB
2.3 1.0
2.0
2.1
0.5 NA NA NA
2.3
2.1
2.2
CBO
2.3 1.0
2.0
2.1
0.5 NA NA NA
2.3
2.2
2.5
DRI
2.3 1.0
2.0
2.1
0.5 2.0 2.6 2.7
2.3
1.7
2.6
WEFA
2.3 1.0
2.0
2.1
0.5 1.7 2.6 2.9
2.3
1.7
2.8
BC
2.3 1.0
2.0
2.1
0.5 1.8 2.2 2.3
2.3
1.7
2.4
T-BILL Rateb
OMB
5.1 5.1
5.1
5.1
5.1 NA NA NA
5.1
5.0
4.9
CBO
5.1 5.1
5.1
5.1
5.1 NA NA NA
5.1
5.3
5.2
DRI
5.1 5.1
5.1 5.1
5.1 5.0 5.0 5.0
5.1
5.0
4.6
WEFA
5.1 5.1
5.1
5.1
5.1 5.1 5.1 5.1
5.1
5.1
5.5
BC
5.1 5.1
5.1
5.1
5.1 5.1 5.1 5.1
5.1
5.1
5.2
10-Year Rateb
OMB
6.6 6.7
6.3
5.9
5.7 NA NA NA
6.4
5.9
5.8
CBO
6.6 6.7
6.3
5.9
5.7 NA NA NA
6.4
6.0
6.1
DRI
6.6 6.7
6.3
5.9
5.7 5.8 5.7 5.7
6.4
5.7
5.5
WEFA
6.6 6.7
6.3
5.9
5.7 5.7 5.8 5.9
6.4
5.7
6.1
BC
6.6 6.7
6.3
5.9
5.7 5.7 5.7 5.8
6.4
5.7
5.9
CRS-11
Sources: Data Resources, Inc., U.S. Forecast Summary, May 1998; Wharton Econometric Forecasting
Associates Group. U.S. Economic Outlook, May 1998; Blue Chip Economic Indicators, May 10, 1998.
Congressional Budget Office, January 7 1998; and, the Office of Management and Budget, February 1998.
* Actual data, subject to revisions. The annual data for nominal GDP, real GDP, the GDP deflator and
the CPI are on a year over year basis; and the unemployment and interest rate data are either quarterly or
annual averages.
a. Annualized quarterly rates of change.
b. Quarterly averages.
Promotion of Economic Growth
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.
In Table 11 the sources of saving for the United States during the past 35 years are
shown. There are several things to note about these data. First, the gross private sector
savings rate has averaged a remarkably stable 16%-17% of GDP, with most of the saving
being done by businesses. More significantly, however, the private sector saving rate net
of depreciation, representing saving available for additions to capital, declined
considerably in the 1980s. Thus, even without a federal budget deficit, the United States
would have had a “saving problem.”
Second, over this 35-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 reflects the widely publicized budget deficit. Even though state and local
governments have been running sizable budget surpluses, they have not been large
enough to offset the federal deficits.
Third, the data show that for 20 of these 35 years, the United States exported a small
fraction of its savings to the rest of the world (i.e., was a net exporter of capital). This
changed during the 1980s when the United States started to import the savings of the rest
of the world.
Should efforts to correct the international trade deficit prove fruitful, the net inflow
of foreign saving will cease. Should this occur without a significant improvement in
either the private sector saving rate or the negative saving rate of the public sector, the
CRS-12
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.
Table 11. U.S. Saving By Sector
(as a percent of GDP)
Private Sector
Public Sector
Net of
State &
Net of
Net Private
Netb
Year
Pers.
Bus.
Total
Deprec.
Fed.
Local
Total
Deprec.
& Pub.a
Foreign
1960-9
5.2
11.2
16.4
8.8
2.1
2.8
5.0
2.4
11.2
-0.6
1970-9
5.8
11.3
17.2
8.7
-0.5
3.1
2.6
0.2
8.8
-0.2
1980-9
5.2
11.9
17.1
7.3
-2.0
2.9
0.8
-1.3
6.0
1.6
1990-7
3.6
11.4
15.0
5.9
-1.6
2.4
0.8
-1.3
4.6
1.3
1984
6.3
12.6
18.9
9.2
-2.9
3.2
0.3
-1.8
7.4
2.3
1985
5.2
12.3
17.5
7.9
-2.8
3.2
0.4
-1.7
6.2
2.8
1986
4.7
11.3
16.0
6.4
-2.9
3.1
0.2
-1.9
4.5
3.2
1987
3.8
11.7
15.5
5.9
-1.6
2.8
1.2
-1.0
4.9
3.3
1988
4.0
12.0
16.0
6.5
-1.3
2.7
1.4
-0.7
5.8
2.3
1989
3.7
11.3
15.0
5.5
-1.0
2.7
1.7
-0.3
5.2
1.7
1990
3.9
11.1
15.0
5.7
-1.6
2.4
1.2
-1.3
4.4
1.4
1991
4.4
11.3
15.7
6.3
-2.2
2.3
0.1
-2.0
4.3
-0.1
1992
4.6
10.9
15.5
6.4
-3.4
2.4
-1.0
-3.1
3.3
0.8
1993
3.8
11.1
14.9
5.8
-2.8
2.5
-0.3
-2.5
3.3
1.3
1994
3.0
11.8
14.8
5.4
-1.7
2.4
0.7
-1.3
4.1
2.0
1995
3.5
11.5
15.0
5.9
-1.4
2.4
1.0
-1.0
4.9
1.6
1996
3.1
11.6
14.7
5.8
-0.5
2.4
1.9
-0.1
5.7
1.7
1997
2.8
11.6
14.4
5.5
0.5
2.3
2.8
1.0
6.5
2.0
Source: U.S. Department of Commerce.
a. Equal to the sum of private sector saving net of depreciation and total public sector saving net of depreciation.
b. Negative sign indicates the export of saving from the United States. Positive sign indicates the import of saving
from abroad.
A sudden increase in the national saving rate is, however, not without some possible
adverse consequences. In the short run, a sudden increase in the saving rate means
decreased consumption and/or lower public sector net spending. In either case, the
demand for some types of output would fall to be replaced by an increased demand for
other types of output. As a result, some industries and firms would have to contract
while others expand. Resources would have to transit from declining to growing
industries. These short-run dislocations should be borne in mind if a higher national
saving rate becomes the object of public policy.
CRS Report for Congress
Received through the CRS Web
Current Economic Conditions
and Selected Forecasts
Updated June 5, 1998
Gail Makinen
Specialist in Economic Policy
Economics Division
Congressional Research Service ˜ The Library of Congress
ABSTRACT
This report begins with a comprehensive presentation of current economic conditions
focusing on income growth, unemployment, and inflation. The posture of monetary and
fiscal policy is surveyed as are the forecasts of economic activity. It concludes with data on
the factors important for economic growth. This report is updated periodically.
Current Economic Conditions and Selected Forecasts
Summary
According to the National Bureau of Economic Research, the arbitrator of the
U.S. business cycle, the U.S. economy is in an expansion that is soon be 7 years old,
having gotten underway in March of 1991.
Gross Domestic Product (GDP), our basic measure of economic activity, grew
at an annual rate of 4.8% during 1998:1 compared with 3.8% during 1997, 2.8%
during 1996, 2.0% during 1995, 3.5% during 1994 and 2.3% during 1993. Over the
past five quarters there has been some net increase in inventories as the growth rate
of final sales has been closer to 3%.
The unemployment rate has continued to fall during 1997 and 1998, reaching
an expansion low of 4.3% in April 1998. The monthly unemployment rates recorded
during most of the past 2 years have been below the rates thought by many
economists to characterize full employment. If these economists are correct, excess
demand currently characterizes the economy. Excess demand leads to a rise in the
inflation rate. This has yet to materialize, however. During the past 12 months,
approximately 2.9 million jobs have been created, which means an average rate of
job creation per month of 243,500. During the expansion, over 14 million jobs have
been added to the economy.
The inflation rate has, on average, been low over most of the expansion. Except
for 1996, the rate of inflation measured by the Consumer Price Index has declined in
each year of the expansion. For the 12 months ending in April 1998, the CPI rose
1.4%, the lowest rate of increase since 1986. For the 3-months ending in April, it
rose at an annual rate of 1.2%. A similar pattern shows up in the two GDP price
indexes. Both indexes rose 1.8% during 1997 an at a rate of 1.4% for the 12 months
ended in March. Labor costs, a possible indicator of future inflation, have shown
some tendency to accelerate as labor markets have tightened.
Fiscal policy continued to tighten during 1996 and 1997. Monetary policy
appears to be geared to promoting a real GDP growth rate of about 2.0% to 2.75%
per year, a rate thought compatible with a stable rate of inflation.
Recent forecasts by private sector individuals and firms expect GDP to grow
about 3.1% during 1998 and in the 1.7% to 2.3% range during 1999. Unemployment
is expected to average about 4.7% this year and 5.0% for 1999 and inflation is
expected to average in the 1.4% to 2.8% range for both years.
Contents
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Macroeconomic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Posture of Monetary and Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Summary of Current Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Sources of GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Economic Forecasts, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Promotion of Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. The Growth Rate of Real GDP vs. Final Sales . . . . . . . . . . . . . . . . . . 2
Table 2. Civilian Unemployment Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 3. Rate of Change in the Consumer Price Index . . . . . . . . . . . . . . . . . . . . 4
Table 4. Rate of Change in the GDP Deflators . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 5. Rate of Change in Labor Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 6. U.S. Foreign Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 7. Alternative Measures of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 8. The Growth Rates of the Monetary Aggregates . . . . . . . . . . . . . . . . . . 7
Table 9. Sources of GDP Growth: 1990 through 1998:1 . . . . . . . . . . . . . . . . . 9
Table 10. Economic Forecasts, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 11. U.S. Saving By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Figures
Figure 1. U.S. Dollar Exchange Rate, 1987-1998 . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2. Yield on Selected U.S. Treasury Securities and Federal Funds . . . . . . 8
Current Economic Conditions and
Selected Forecasts
Current Economic Conditions
In March 1998, the American economy completed its 84th month of expansion
according to the National Bureau of Economic Research, the nonprofit, nonpartisan
organization that dates the phases of the business cycle for the United States. The
length of the current expansion is above average. The nine completed expansions
since the end of World War II have averaged 50 months. This average is dominated
by two long expansions: one ran for 106 months and dominated the decade of the
1960s; the other dominated the decade of the 1980s and ran for 92 months. GDP
growth during the early part of the current expansion was insufficient to keep the
unemployment rate from rising. Substantial growth began in 1992. The higher rate
1
of growth reversed the rise in the unemployment rate which had reached 7.7% in
June 1992. The fall in the unemployment rate was accomplished in an environment
of low inflation.
Thus far, the rate of increase of most broad-based price and wage indexes have
remained fairly low even as the economy moves toward over-full employment.
Given the expected growth rates in the labor force and productivity, the determinants
of a sustainable rate of growth, growth of GDP in the 2.0%!2.5% range would be
compatible with a continued low rate of inflation. This is, no doubt, why the Federal
Reserve hiked interest rates seven times beginning in February 1994 in an effort to
reduce GDP growth to a more sustainable rate. During 1995, GDP growth was 2.0%,
most of which took place in the third quarter. During 1996, however, GDP growth
accelerated to 2.8% (with growth at a 4.3% annual rate during the fourth quarter).
This prompted the Federal Reserve to raise interest rates on March 25, 1997. During
1997 GDP grew 3.8%. For the first quarter of 1998, GDP grew at an annual rate of
4.8%.
1 Gross Domestic Product rather than Gross National Product is now used as the
principal measure of economic activity for the United States. The two measures differ in
their treatment of foreign-owned productive resources in the United States and similar U.S.-
owned resources abroad.
CRS-2
Recent Macroeconomic Developments
The growth rate of GDP both before and after the 1990!1991 recession is
shown in Table 1.2 The relatively shallow recession was followed by a
recovery/expansion of modest proportions. Only in 1992 did GDP growth become
relatively rapid. This continued into 1994. As the economy approached full
employment, the Federal Reserve began to tighten monetary policy to sustain the
expansion. As this happened, inventories began to accumulate during 1994. During
1995 and the first quarter of 1996, inventories were reduced to bring them into line
with the slower rate of growth of sales. This slowed GDP growth during 1995. For
1996 as a whole, however, inventories did not increase as Final Sales rose 2.8%.
This was not the case during 1997 and the first quarter of 1998 as GDP growth
substantially outstripped the growth rate of final sales indicating the buildup of
inventories.
Table 1. The Growth Rate of Real GDP vs. Final Sales
(in percentages)
1990
1991
1992
1993
1994
1995
1996
1997 1998*
GDP
Year Over Year
1.2
-0.9
2.7
2.3
3.5
2.0
2.8
3.8
4.8
4thQ Over 4thQ
-0.2
0.4
3.7
2.2
3.3
1.6
3.3
3.7
3.7
Final Sales
Year Over Year
1.6
-0.7
2.5
2.1
2.9
2.5
2.8
3.1
3.4
4thQ Over 4thQ
0.6
!0.4
3.9
2.1
2.6
2.2
3.1
3.1
3.2
*Annualized rate for the first quarter.
Source: U.S. Department of Commerce.
The unemployment rate, a near constant 5.3% for 2 years, began rising in July
1990. It rose sharply over the ensuing 10 months, reaching 6.7% in March 1991, the
official trough of the recession. However, initially, even as the economy recovered,
the unemployment rate continued to rise, reaching a high of 7.7% in June 1992.
Since that time, the rate has fallen slowly, reaching an expansion low of 4.3% in
April 1998, a rate not seen since the 1960s. Since August 1994, the rate has
fluctuated within a range of from 4.3% to 6.0%. This range is thought by many
economists to be consistent with full employment. However, a rate of 4.3% is below
all estimates of the lower bound of the range. Since the expansion began in March
1991, civilian employment has risen by about 14.0 million.
2The annual rate of growth of GDP and other economic variables can be computed in
two ways. One is to take the annual average of GDP for 1996, for example, and compare
it to the annual average for 1995. When this method is used, the calculated growth rate is
actually GDP’s growth from the mid point of 1995 to the mid point of 1996. An alternative
method is to compute its growth from the fourth quarter of 1995 to the fourth quarter of
1996 (or where monthly data are available, from December to December). This method has
the advantage of computing growth over the past 12 months in question. The GDP growth
rates used in the text of this report are those on a year over year basis.
CRS-3
The unemployment data recorded since January 1994 are computed on the basis
of substantial changes in the questionnaire used in the survey of households from
which the labor market data are obtained, and thus, are not comparable with the
pre-1994 data shown on Table 2.
Table 2. Civilian Unemployment Rate
(in percentages)
J
F
M
A
M
J
J
A
S
O
N
D
1992
7.1
7.3
7.3
7.3
7.4
7.7
7.6
7.6
7.5
7.4
7.3
7.3
1993
7.1
7.0
7.0
7.0
6.9
6.9
6.8
6.7
6.7
6.7
6.5
6.4
1994
6.7
6.6
6.5
6.4
6.1
6.1
6.1
6.0
5.8
5.7
5.6
5.4
1995
5.7
5.4
5.5
5.8
5.7
5.6
5.7
5.6
5.6
5.5
5.6
5.6
1996
5.7
5.5
5.5
5.5
5.6
5.3
5.4
5.2
5.2
5.2
5.3
5.3
1997
5.3
5.3
5.2
5.0
4.8
5.0
4.9
4.9
4.9
4.8
4.6
4.7
1998
4.7
4.6
4.7
4.3
4.3
Source: U.S. Department of Labor.
As the economic expansion has taken hold and the unemployment rate has
fallen, fears of a renewed burst of inflation have arisen. Thus far, there is little
evidence in the broad based price and wage indexes that inflationary pressures are
building.3
As shown in Table 3, the CPI rose 1.7% during 1997. For the 12 months ended
in April 1998, it rose 1.4% and for the 3 month period ending in April, the CPI rose
at an annual rate of 1.2%. The rate of inflation shown by the two price indexes
derived from the GDPs accounts recorded in Table 4, has shown a continued
tendency to fall. During 1994, both the implicit price deflator and the chain weight
deflator rose 2.5%. During 1995, they both rose 2.4%. During 1996, the chain
weighted index rose 2.3% while the implicit deflator rose 2.2%.4 Both indexes rose
1.4% for the four quarters ended in March 1998.
Labor costs, regarded by some as an indication of future inflation, as shown in
Table 5, have turned in an encouraging performance. Per unit labor costs, which are
heavily influenced by productivity, rose slowly during the recovery because recorded
productivity was high. This is characteristic of the initial stages of an economi
5
c
upturn. The rise in the Employment Cost Index for private industry has shown some
tendency to accelerate since its 1995 low. This may be the early sign of future price
rises.
3 For a more extensive discussion of inflation and other alternative measures of the
inflation rate, see Library of Congress. Congressional Research Service. Inflation: Causes,
Costs and Current Status. CRS Report 96-914 E, by Gail Makinen.
4On a year over year basis, the rise in the Implicit Price Deflator between 1990 and
1996 was respectively, 4.3% 4.0%, 2.8%, 2.6%, 2.4%, 2.5%, and 2.3%. The corresponding
rise in the chain type deflator was identical.
5On a year over year basis, the rise in per unit labor costs for 1990 through 1996 was
respectively, 5.0%, 4.2%, 1.9%, 2.1%, 1.6%, 2.2%, and 1.8%.
CRS-4
Table 3. Rate of Change in the Consumer Price Index
(in percentages)
1990
1991
1992
1993
1994
1995
1996
1997
1998*
Dec. Over Dec.
6.1
3.1
2.9
2.7
2.7
2.5
3.3
1.7
1.4
Year Over Year
5.4
4.2
3.0
3.0
2.6
2.8
2.9
2.3
0.5
*Based on first quarter data.
Source: U.S. Department of Labor.
Table 4. Rate of Change in the GDP Deflators
(in percentages)
1990
1991
1992
1993
1994
1995
1996
1997 1998*
Implicit Price Deflator
4.6
3.4
2.6
2.5
2.5
2.4
2.2
1.8
1.4
Chain Type Deflator
4.6
3.4
2.6
2.5
2.5
2.4
2.3
1.8
1.4
*Based on first quarter data.
Source: U.S. Department of Commerce.
Table 5. Rate of Change in Labor Costs
(in percentages)
1990 1991 1992 1993 1994 1995 1996 1997 1998*
Unit Labor Costs
6.4
2.5
1.0
2.2
2.1
2.3
2.2
1.9
2.2
Employment Cost Index
4.6
4.4
3.5
3.6
3.1
2.6
3.1
3.5
3.6
* The employment cost index is for private industry and for the 12 months ending in December
except for 1998, which is the 12 months ending in March. Unit labor costs are from 1997:1 to
1998:1.
Source: U.S. Department of Labor.
Table 6. U.S. Foreign Trade Deficit
(as a percent of GDP)
1987
1988 1989 1990 1991
1992 1993 1994 1995
1996 1997 1998*
Trade
Deficit
2.8
2.0
1.4
1.0
0.4
0.5
1.1
1.6
1.5
1.7
2.0
2.9
*Based on first quarter data.
Source: U.S. Department of Commerce.
The U.S. foreign trade deficit (net imports), as shown in Table 6, recorded a
continued and dramatic fall from 1986 through 1991. In each of these years the trade
deficit declined as export growth exceeded import growth. During 1992 the trade
deficit began to grow as a fraction of GDP and is now running at a rate comparable
to 1987.
The increase in the U.S. foreign trade deficit during 1992!1996 reminds us that
the United States still receives a substantial inflow of capital from abroad.
CRS-5
Figure 1 records the movement in the foreign exchange value of the dollar.
Since early 1994 the dollar has been under heavy selling pressure. It probably would
have continued to fall in price (depreciate) during 1995, 1996, and 1997 had it not
been for substantial foreign central bank intervention. Net official inflows of capital,
a measure of central bank intervention, accounted for about 75% of the net capital
inflow in 1995, about 60% during 1996, and about 50% during the first quarter of
1997.
Figure 1. U.S. Dollar Exchange Rate, 1987-1998
Source: Board of Governors of the Federal Reserve System.
Posture of Monetary and Fiscal Policy
The course of GNP growth can respond significantly to changes in fiscal and
monetary policy. The posture of fiscal policy depends on how it is measured. A
generally accepted method is to examine the ratio of the structural or full employment
budget deficit to full employment GDP. When that is done, as shown in Table 7, fiscal
policy during 1997 was contractionary as the full employment deficit fell from 1.6%
to 1.0% of potential GNP. An alternative, although inferior measure, is the ratio of the
actual budget deficit to actual GDP. When this ratio is examined, fiscal policy in 1997
was also contractionary as the actual deficit fell from 1.4% to 0.3% of actual GDP.
CRS-6
Table 7. Alternative Measures of Fiscal Policy
($ in billions)
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Standardized
Budget Deficit
$138
$151
$154
$182
$203
$235
$240
$194
$190
$123
$80
Full
Employment
4,642
4,935
5,280
5,635
6,005
6,300
6,588
6,877
7,203
7,534
7,872
GDP
Ratio
0.029
0.031
0.029
0.032
0.034
0.037
0.036
0.028
0.026
0.016
0.010
Actual Budget
$150
$155
$152
$221
$269
$290
$255
$203
$164
$107
$22
Deficit
Actual GDP
4,609
4,957
5,356
5,683
5,862
6,149
6,478
6,849
7,194
7,533
7,972
Ratio
0.033
0.031
0.028
0.039
0.046
0.047
0.039
0.030
0.023
0.014
0.003
Source: Congressional Budget Office (January 1998).
Traditionally, the posture of monetary policy has been judged either by the growth
of the monetary aggregates or by movements in interest rates. In fact, neither is a
6
n
unambiguous indicator. The monetary aggregates, for example, give a confused picture.
Although M1 can explain how the economic expansion got underway, it cannot explain
the expansions continuation. The opposite is true for both M2 and M3.
Although the contraction of reserves could indicate monetary tightening, it is, in
fact, compatible with monetary expansion. This occurs because over much of this
expansion, demand deposits have been declining and it is against these deposits that
banks are legally obligated to hold reserves. Each dollar of decline frees up about 10
cents in reserves that banks can lend. Thus, even though reserves have fallen, they have
declined by less than the reserves set free by the contraction of demand deposits. This
has increased the net lending powers of banks.
Some of the dollars that were in checking accounts have found their way into
passbook savings and CDs. These shifts can explain why M1 falls without a
commensurate fall in M2 and M3. For the latter to grow, however, funds must be added
to passbook savings and CDs that were not originally in checking accounts.
For a more
6
comprehensive discussion of monetary policy, see U.S. Library of
Congress. Congressional Research Service. Monetary Policy: Current Policy of Conditions.
CRS Report 96-983 E, by Gail Makinen.
CRS-7
Table 8. The Growth Rates of the Monetary Aggregates
(annualized rates of change)
Time
Aggregate
Monetary
Period
Reserves
Base
M1
M2
M3
88:12!89:12
0.3%
4.1%
0.9%
5.1%
3.7%
89:12!90:12
2.9
9.3
4.0
3.5
1.4
90:12!91:12
9.5
5.8
8.6
3.1
1.3
91:12!92:12
19.5
10.6
14.2
1.7
0.1
92:12!93:12
11.4
10.0
10.1
1.5
0.9
93:12!94:12
-2.1
8.4
1.7
0.9
1.4
94:12!95:12
-5.1
3.9
-2.2
4.6
6.1
95:12!96:12
-11.0
4.2
-4.3
4.9
7.4
96:12!97:12
-5.7
6.3
-1.2
5.2
8.4
97:10!98:04
-0.2
6.4
3.3
8.5
12.0
98:01-98:04
-5.0
3.4
2.2
9.5
11.6
Source: Board of Governors of the Federal Reserve System.
The growth in the reserves of depository institutions results to a large degree from
decisions to move the key federal funds’ interest rate (shown in figure 2). The rate was
forced down beginning in October 1990. From April through July 1991, the rate was
held at a fairly steady 5.75%. In August it was moved toward 5.50%, in September to
5.25%, in November to 4.75%, in January 1992 to about 4.0%, in April toward 3.75%,
in July toward 3.25%, and in September toward 3.0%, where it was maintained for nearly
16 months. Beginning in February 1994, the Board of Governors, in a series of seven
steps culminating in February 1995, raised the federal funds rate to 6.0%. (The increase
in the federal funds rate was achieved by reducing the level of aggregate reserves
available to depository institutions.) Early in July, as a pronounced slowdown in
economic activity became apparent, the federal funds rate was reduced to 5.75%. In mid-
December it was reduced to 5.5% and on January 31, 1996, it was reduced to 5.25%.
However, as GDP growth rose in 1996 to a rate believed to be unsustainable, the Federal
Reserve reversed course and hiked the rate to 5.5% on March 25, 1997.
As shown in figure 2, movements in short term interest rates mimic closely
movements in the federal funds rate. This is not as true for longer term rates. Their rise
and fall as well as the magnitude of their shifts is often different from the timing and
magnitude of shifts in the federal funds rate. This is due in part to the fact that they
respond to the longer run outlook for inflation and the financing requirements
necessitated by the budget deficit, both current and prospective.
CRS-8
Figure 2. Yield on Selected U.S. Treasury Securities and Federal Funds
Source: Board of Governors of the Federal Reserve System.
Summary of Current Developments
The NBER decided that the U.S. recession that began in July 1990 ended in March
1991. By 1992:1 GDP recovered the ground lost in the three quarters during which
output contracted. The growth rate of GDP during the recovery was, however, low when
compared with the average of past expansions. The unemployment rate began to rise in
July 1990. It rose rapidly, reaching 6.8% in May 1991. For the first 6 months of 1992
it slowly crept upward, reaching a high of 7.7% in June. Since then it has fallen. Over
the past 24 months, it has ranged between 4.3 and 5.6%, a range consistent with most
measures of full employment, if not overfull employment. During the expansion more
than 14.0 million jobs have been added to the U.S. economy. All three price indexes
show that the inflation rate during the expansion has remained low. Monetary policy,
responsible for the recovery, was adjusted to slow the growth of aggregate demand. This
has involved seven upward adjustments to the federal funds rates between February 1994
and February 1995. The rate was adjusted downward by 0.25% in early July and mid-
December of 1995, and on January 31, 1996. Although this led to a rise in the growth
rate of GDP, the rate achieved was thought to be too high. Consequently, on March 25,
1997, the Federal Reserve hiked the rate by 0.25%.
CRS-9
Sources of GDP Growth
Table 9 records the sources of growth in GDP over the current expansion. These
data record two interesting developments. First, investment spending has played an
important role in this expansion. And among the categories of investment, outlays for
personal computers have been important. This bodes well for the longer run growth in
productivity. Second, except for 1996, purchases by all levels of government have
played virtually no role in the expansion.
Table 9. Sources of GDP Growth: 1990 through 1998:1
1990
1991
1992
1993
1994
1995
1996
1997
1998:1
Real GDP Growth*
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Consumption
84.2
-44.9
69.0
86.0
59.8
79.3
68.6
65.0
91.0
Investment
-55.5
-135.4
31.9
46.6
55.7
22.0
28.6
50.7
90.1
Govt. Purchases
45.5
12.9
3.5
-2.0
0.0
0.0
6.4
4.8
-12.0
Federal
(13.0)
(4.3)
(-6.9)
(-13.5)
(-8.7)
(-12.8)
(-3.2)
(-1.3)
(-14.4)
State & Local
(32.4)
(-17.2)
(10.3)
(11.5)
(8.7)
(12.8)
(9.5)
(6.1)
(2.4)
Net Exports
25.9
67.3
-4.4
-30.5
-15.1
-1.4
-3.6
-20.5
-68.9
* Computed using real GDP at 1992 chained dollars.
Source: Department of Commerce.
Economic Forecasts, 1998
All of the forecasts summarized in Table 10 expect the expansion now in progress
to continue through 1998. If these forecasts come to pass, the economy is expected to
maintain a soft landing in the sense that GDP growth at about 2.0% to 2.5% will be
sufficient to keep the unemployment rate about 5.0%. The inflation rate is expected to
remain in the 2.0% to 3.0% range. Similarly, the modest nature of the expansion is
expected to keep both short-term and long-term interest rates from rising much above
their 1997 levels.
The Wall Street Journal published the results of its survey of 55 economic
forecasters in its January 2, 1998 edition. These forecasters, on average, expect real GDP
to grow at an annual rate of 2.6% during the first half 1998 and at an annual rate of 2.1%
during the second half of the year and the CPI is expected to rise 2.3% for the year ended
in December. The 3-month Treasury bill rate and 30-year bond rate are expected to be
5.18% and 6.02% on June 30 and 5.15% and 6.60% on December 31, 1998.
The Chairman of the Board of Governors of the Federal Reserve presented the
economic projections of the Federal Reserve for 1998 in testimony before the
Subcommittee on Domestic and International Monetary Policy of the House Banking
Committee on February 24, 1998. The Federal Reserve projects that over the four
quarters of 1998 real GDP will grow between 2.0% and 2.75% and that the CPI will
increase from 1.75% to 2.25%. The civilian unemployment rate is projected to average
about 4.75% during the fourth quarter of the year.
CRS-10
Table 10. Economic Forecasts, 1998
1997
1998
1997* 1998 1999
1*
2*
3*
4*
1*
2
3
4
Nominal GDPa
OMB
7.4 5.2
4.6
5.2
5.8 NA NA NA
5.8
4.3
4.1
CBO
7.4 5.2
4.6
5.2
5.8 NA NA NA
5.8
4.7
4.2
DRI
7.4 5.2
4.6
5.2
5.8 3.8 4.1 3.3
5.8
4.6
3.9
WEFA
7.4 5.2
4.6
5.2
5.8 3.7 4.7 4.8
5.8
4.7
5.3
BC
7.4 5.2
4.6
5.2
5.8 4.0 4.2 4.3
5.8
4.7
4.4
Real GDPa
OMB
4.9 3.3
3.1
3.7
4.8 NA NA NA
3.8
2.4
2.0
CBO
4.9 3.3
3.1
3.7
4.8 NA NA NA
3.8
2.7
2.0
DRI
4.9 3.3
3.1
3.7
4.8 2.0 2.1 1.4
3.8
3.1
1.8
WEFA
4.9 3.3
3.1
3.7
4.8 2.3 1.9 2.2
3.8
3.1
2.7
BC
4.9 3.3
3.1
3.7
4.8 2.4 2.3 2.3
3.8
3.1
2.3
Unemploymentb
OMB
5.3 4.9
4.9
4.7
4.7 NA NA NA
4.9
4.9
5.1
CBO
5.3 4.9
4.9
4.7
4.7 NA NA NA
4.9
4.8
5.1
DRI
5.3 4.9
4.9
4.7
4.7 4.6 4.6 4.7
4.9
4.7
5.0
WEFA
5.3 4.9
4.9
4.7
4.7 4.5 4.6 4.7
4.9
4.6
5.0
BC
5.3 4.9
4.9
4.7
4.7 4.7 4.7 4.7
4.9
4.7
4.9
GDP Deflator (chain weights)
a
OMB
2.4 1.8
1.4
1.4
1.0 NA NA NA
2.0
1.9
2.0
CBO
2.4 1.8
1.4
1.4
1.0 NA NA NA
2.0
2.2
2.3
DRI
2.4 1.8
1.4
1.4
1.0 1.7 1.9 2.8
2.0
1.4
2.0
WEFA
2.4 1.8
1.4
1.4
1.0 1.4 2.7 2.6
2.0
1.6
2.5
BC
2.4 1.8
1.4
1.4
1.0 1.6 1.9 2.0
2.0
1.6
2.1
CPI-Ua
OMB
2.3 1.0
2.0
2.1
0.5 NA NA NA
2.3
2.1
2.2
CBO
2.3 1.0
2.0
2.1
0.5 NA NA NA
2.3
2.2
2.5
DRI
2.3 1.0
2.0
2.1
0.5 2.0 2.6 2.7
2.3
1.7
2.6
WEFA
2.3 1.0
2.0
2.1
0.5 1.7 2.6 2.9
2.3
1.7
2.8
BC
2.3 1.0
2.0
2.1
0.5 1.8 2.2 2.3
2.3
1.7
2.4
T-BILL Rateb
OMB
5.1 5.1
5.1
5.1
5.1 NA NA NA
5.1
5.0
4.9
CBO
5.1 5.1
5.1
5.1
5.1 NA NA NA
5.1
5.3
5.2
DRI
5.1 5.1
5.1 5.1
5.1 5.0 5.0 5.0
5.1
5.0
4.6
WEFA
5.1 5.1
5.1
5.1
5.1 5.1 5.1 5.1
5.1
5.1
5.5
BC
5.1 5.1
5.1
5.1
5.1 5.1 5.1 5.1
5.1
5.1
5.2
10-Year Rateb
OMB
6.6 6.7
6.3
5.9
5.7 NA NA NA
6.4
5.9
5.8
CBO
6.6 6.7
6.3
5.9
5.7 NA NA NA
6.4
6.0
6.1
DRI
6.6 6.7
6.3
5.9
5.7 5.8 5.7 5.7
6.4
5.7
5.5
WEFA
6.6 6.7
6.3
5.9
5.7 5.7 5.8 5.9
6.4
5.7
6.1
BC
6.6 6.7
6.3
5.9
5.7 5.7 5.7 5.8
6.4
5.7
5.9
CRS-11
Sources: Data Resources, Inc., U.S. Forecast Summary, May 1998; Wharton Econometric Forecasting
Associates Group. U.S. Economic Outlook, May 1998; Blue Chip Economic Indicators, May 10, 1998.
Congressional Budget Office, January 7 1998; and, the Office of Management and Budget, February 1998.
* Actual data, subject to revisions. The annual data for nominal GDP, real GDP, the GDP deflator and
the CPI are on a year over year basis; and the unemployment and interest rate data are either quarterly or
annual averages.
a. Annualized quarterly rates of change.
b. Quarterly averages.
Promotion of Economic Growth
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.
In Table 11 the sources of saving for the United States during the past 35 years are
shown. There are several things to note about these data. First, the gross private sector
savings rate has averaged a remarkably stable 16%-17% of GDP, with most of the saving
being done by businesses. More significantly, however, the private sector saving rate net
of depreciation, representing saving available for additions to capital, declined
considerably in the 1980s. Thus, even without a federal budget deficit, the United States
would have had a “saving problem.”
Second, over this 35-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 reflects the widely publicized budget deficit. Even though state and local
governments have been running sizable budget surpluses, they have not been large
enough to offset the federal deficits.
Third, the data show that for 20 of these 35 years, the United States exported a small
fraction of its savings to the rest of the world (i.e., was a net exporter of capital). This
changed during the 1980s when the United States started to import the savings of the rest
of the world.
Should efforts to correct the international trade deficit prove fruitful, the net inflow
of foreign saving will cease. Should this occur without a significant improvement in
either the private sector saving rate or the negative saving rate of the public sector, the
CRS-12
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.
Table 11. U.S. Saving By Sector
(as a percent of GDP)
Private Sector
Public Sector
Net of
State &
Net of
Net Private
Netb
Year
Pers.
Bus.
Total
Deprec.
Fed.
Local
Total
Deprec.
& Pub.a
Foreign
1960-9
5.2
11.2
16.4
8.8
2.1
2.8
5.0
2.4
11.2
-0.6
1970-9
5.8
11.3
17.2
8.7
-0.5
3.1
2.6
0.2
8.8
-0.2
1980-9
5.2
11.9
17.1
7.3
-2.0
2.9
0.8
-1.3
6.0
1.6
1990-7
3.6
11.4
15.0
5.9
-1.6
2.4
0.8
-1.3
4.6
1.3
1984
6.3
12.6
18.9
9.2
-2.9
3.2
0.3
-1.8
7.4
2.3
1985
5.2
12.3
17.5
7.9
-2.8
3.2
0.4
-1.7
6.2
2.8
1986
4.7
11.3
16.0
6.4
-2.9
3.1
0.2
-1.9
4.5
3.2
1987
3.8
11.7
15.5
5.9
-1.6
2.8
1.2
-1.0
4.9
3.3
1988
4.0
12.0
16.0
6.5
-1.3
2.7
1.4
-0.7
5.8
2.3
1989
3.7
11.3
15.0
5.5
-1.0
2.7
1.7
-0.3
5.2
1.7
1990
3.9
11.1
15.0
5.7
-1.6
2.4
1.2
-1.3
4.4
1.4
1991
4.4
11.3
15.7
6.3
-2.2
2.3
0.1
-2.0
4.3
-0.1
1992
4.6
10.9
15.5
6.4
-3.4
2.4
-1.0
-3.1
3.3
0.8
1993
3.8
11.1
14.9
5.8
-2.8
2.5
-0.3
-2.5
3.3
1.3
1994
3.0
11.8
14.8
5.4
-1.7
2.4
0.7
-1.3
4.1
2.0
1995
3.5
11.5
15.0
5.9
-1.4
2.4
1.0
-1.0
4.9
1.6
1996
3.1
11.6
14.7
5.8
-0.5
2.4
1.9
-0.1
5.7
1.7
1997
2.8
11.6
14.4
5.5
0.5
2.3
2.8
1.0
6.5
2.0
Source: U.S. Department of Commerce.
a. Equal to the sum of private sector saving net of depreciation and total public sector saving net of depreciation.
b. Negative sign indicates the export of saving from the United States. Positive sign indicates the import of saving
from abroad.
A sudden increase in the national saving rate is, however, not without some possible
adverse consequences. In the short run, a sudden increase in the saving rate means
decreased consumption and/or lower public sector net spending. In either case, the
demand for some types of output would fall to be replaced by an increased demand for
other types of output. As a result, some industries and firms would have to contract
while others expand. Resources would have to transit from declining to growing
industries. These short-run dislocations should be borne in mind if a higher national
saving rate becomes the object of public policy.