Economic Overview
In 2004, U.S. economic performance was
solid, creating a generally healthy environment for banking, while global
growth exceeded expectations. In the U.S.,
real Gross Domestic Product (GDP) grew rapidly, as the negative impact of
higher oil prices was more than offset by sound fundamentals and the FRB's accommodative monetary policy.
Consumer spending continued to rise, while consumer credit quality
remained healthy. Sustained gains in
productivity contributed to rising corporate profits and cash flows. Businesses rebuilt inventories and increased
capital spending, particularly for information processing equipment and
software. Although overall corporate loan demand remained soft, corporate
credit quality improved as the economy strengthened in the second half of the
year. Employment grew and the unemployment rate receded, although the pace of
job creation was soft relative to GDP growth, reflecting business efforts to
constrain operating costs. Housing activity rose to historic levels. Inflation
rose modestly but stayed low relative to historic standards. The FRB raised the federal funds rate target from one percent at mid-year to
2.25 percent, but the increases were widely anticipated and bond yields
remained low, generating a flatter yield curve.
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