Thank you, Mr. Chairman. I will be referring to the package of charts labeled “Nonfinancial Developments.” Since last week, when Dave Stockton summarized the nonfinancial outlook for you, three major releases have been published—industrial production, the consumer price index, and housing starts. As shown on line 1 of our first chart, total IP currently is estimated to have declined ½ percent in March. In part this reflected a sharp decline in the output of utilities (line 8) owing to warmer-than-normal weather. But even leaving that aside, manufacturing output (line 3) declined 0.2 percent. Moreover, previous estimates for December and February were revised down noticeably, as newly available and revised source data were brought on board. As shown on line 5, high-tech output moved up in March, but elsewhere in manufacturing the situation remains discouraging. As shown in the middle right panel, manufacturing output excluding the motor vehicle and high-tech industries has been flat over the last three months. Unfortunately, none of the available indicators—including the orders data from the Census Bureau and the various purchasing manager series—gives us reason to think that the next three months will be any better. Overall, the picture in the industrial sector looks somewhat softer in the recent past than we had previously estimated and somewhat softer in the next few months as well.
As indicated in line 1 of your next chart, the consumer price index increased 0.3 percent in March, pushed up by another sizable increase in energy prices (line 2). As shown on line 4, the CPI excluding food and energy was unchanged in March, reflecting another small decline in core commodity prices and a second consecutive low reading on inflation in non-energy services prices. The middle panel depicts two workhorse measures of core consumer inflation, which continued to edge down. Over the past twelve months, the core CPI has decelerated 0.7 percentage point. Core PCE price inflation, shown as the red line, appears to have decelerated only 0.1 percentage point through March, based on our translation of the CPI data released this morning. But the market-based subset of this index has decelerated an estimated 0.5 percentage point, more in line with the contour of the core CPI. The bottom left panel displays this morning’s data on housing starts and permits. As shown in line 2, single-family starts rebounded in March, and preliminary inspection of the data suggests that the bounceback was of about the magnitude we had been expecting on the basis of the adverse weather conditions in February. However, the permits number came in softer than we had been anticipating, and mortgage rates have edged up since the time of the March Greenbook. So we will likely be trimming our forecast a bit for housing construction in the upcoming Greenbook projection.
As shown in the top left panel of your next chart, the four-week moving average of initial claims for unemployment insurance has remained in the neighborhood of 420,000, consistent with a further decline in payroll employment in the labor market report for April. In the motor vehicle sector, the subject of your middle two panels, the key factor is that inventories have remained on the high side. In response, General Motors is now offering zero percent financing on sixty-month loans, and the PIN data show a sizable step-up in incentives at the beginning of April on an industry average basis. As can be seen in the middle left panel, our contacts on the whole seem extraordinarily uncertain about how much of an effect the higher incentives will have, but they are reasonably optimistic overall. As shown in the middle right panel, the motor vehicle manufacturers also have responded by scheduling production at a distinctly lower level in the second quarter than in the first. We currently are guessing that motor vehicle production will take about ¾ percentage point off the growth of real GDP in the second quarter. The bottom left panel shows that sales at chain stores improved in the most recent week, but sales are still essentially trendless since the beginning of the year. As shown to the right, consumer sentiment, as measured in the University of Michigan’s index, inched up a bit further in early April from its late March reading.
On balance, the information we’ve received since the March Greenbook points to slightly weaker activity in the second quarter than we had expected. Our current estimate of GDP growth in the second quarter is down only a hair but the composition is now noticeably different, with defense spending providing a good deal more thrust than we had earlier anticipated and private domestic final sales looking a bit more anemic. Our projection for the growth of manufacturing IP in the second quarter has been revised down about 2½ percentage points at an annual rate. And the labor market looks a little more sluggish than was implicit in our March outlook, with claims hanging up higher and longer than we had been anticipating and with surveys of both business and household sentiment remaining very soft.
Looking to the second half, as Dave Stockton indicated last week, we will be inclined to tamp down our projection for growth, partly reflecting our somewhat more subdued assessment of the labor markets and also the absence thus far of any reassuring harbingers of increased vigor on the investment front. Another factor reflects simply the arithmetic of defense spending having built a higher base in the second quarter and, therefore, given what we know about appropriations, having less room to contribute to growth in the second half. That said, the stock market is up, as others have noted, in the neighborhood of 10 percent relative to our expectation in the March Greenbook, and oil prices have fallen faster than we had assumed. So we wouldn’t want to mark down our projection very far. In the end, I suspect that we’ll be left with an economy displaying roughly the same gap in resource utilization by the end of 2004 as in the previous forecast and an inflation rate that may be just a shade lower than in the March Greenbook. That concludes my remarks.