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The
President’s
Report to the
Board of
Directors
September 2, 2014
CURRENT ECONOMIC DEVELOPMENTS - September 2, 2014
Data released since your last Directors' meeting show the economy grew at a faster pace in
the second quarter than originally thought. Growth is expected to slow in the third quarter
but remain above trend throughout the second half of the year. Recent data has been mixed,
with support from manufacturing and improvement in the labor market partially offset by
weakness in consumer spending. However, consumer attitudes have improved and housing
data have been more positive. Economic and political tensions abroad pose areas of concern.
In August, initial claims increased slightly but remained near the eight-year low seen in July.
Consumer attitudes improved, as consumers felt more strongly about current conditions. In
July, consumption posted its biggest decline since January, despite a small increase in
disposable incomes.
The housing market showed mostly positive signs in July. Existing home sales, housing starts
and building permits all increased, while new home sales declined. In the manufacturing
sector, the ISM index improved to a three-year high in August and continued to signal
expansion. Industrial production and capacity utilization both rose in July, with utilization
reaching a six-year high. Also in July, orders for both durable goods and nondefense capital
goods, excluding aircraft, continued to post strong year-over-year gains.
Both total and core price indices continued to decelerate in July. Oil prices fell in August,
leading to their lowest monthly average since January.
Initial claims for unemployment insurance ticked up a bit in August, but remained
below 300,000 on average. Weekly claims in July had registered their lowest monthly
average since February 2006.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
500
500
450
450
400
400
350
350
300
300
250
250
200
Aug-11
Feb-12
Nov-11
Aug-12
May-12
Feb-13
Nov-12
Aug-13
May-13
200
Aug-14*
Feb-14
Nov-13
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
May-14
* 4-wk. ave. ending Aug 23
Consumer attitudes improved in August due to better feelings towards current
conditions, offsetting declines in future expecations. The Conference Board's
confidence index increased to its highest level since October 2007. Consumer
attitudes were more positive towards business conditions and the labor market, while
expectations for personal finances and negative perceptions about government
economic policies remain areas of concern.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
110
110
Current
Conditions
Consumer
Expectations
100
100
90
90
80
80
Present
Situation
70
Future
Expectations
60
60
Consumer
Sentiment
50
40
Aug-12
Feb-13
70
Consumer
Confidence
Aug-13
Feb-14
Aug-14
Aug-12
Feb-13
Aug-13
50
Feb-14
40
Aug-14
Source: The University of Michigan (left panel) and The Conference Board (right panel) / Haver Analytics.
In July, real incomes increased for the seventh consecutive month, albeit at their
lowest rate so far this year. The higher incomes failed to boost spending, however, as
consumption decreased in July. The decline in consumption in July was partly due to a
decrease in vehicle sales and lower spending on electricity as a result of unseasonably
mild weather.
Percent Change, Previous Month
Real DPI and Consumption
Percent Change, Previous Month
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
Real
Consumption
-2.0
-2.0
Real Disposable Income
-3.0
-3.0
-4.0
-4.0
-5.0
-5.0
-6.0
-6.0
-7.0
-7.0
Jul-11
Jan-12
Oct-11
Jul-12
Apr-12
Jan-13
Oct-12
Source: Bureau of Economic Analysis / Haver Analytics.
Jul-13
Apr-13
Jan-14
Oct-13
Jul-14
Apr-14
Home sales data was mixed in July. Existing home sales rose for the fourth
consecutive month, reaching their highest sales pace since September. Meanwhile,
new home sales fell in July for the second month in a row.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
7000
800
6500
700
Existing Home Sales
6000
600
5500
New Home Sales
500
5000
4500
400
4000
300
3500
200
3000
100
2500
0
2000
Jul-11
Jan-12
Oct-11
Jul-12
Apr-12
Jan-13
Oct-12
Jul-13
Apr-13
Jan-14
Oct-13
Jul-14
Apr-14
Source: U.S. Census Bureau (new home sales) and National Association of Realtors (existing sales) / Haver Analytics.
New construction picked up in July, as housing starts and building permits both
increased, and housing starts reached their highest rate since November. Starts and
permits had both declined in each of the prior two months.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
1400
1200
1200
Building Permits
1000
1000
800
800
600
600
Housing Starts
400
400
200
200
0
0
Jul-11
Jan-12
Oct-11
Jul-12
Apr-12
Source: U.S. Census Bureau / Haver Analytics.
Jan-13
Oct-12
Jul-13
Apr-13
Jan-14
Oct-13
Jul-14
Apr-14
The ISM manufacturing index rose in August, reaching its highest level in over three
years and continuing to signal expansion in the manufacturing sector. The
employment index held relatively steady in August, easing just one-tenth of a percent
from the three-year high seen in July.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
ISM Index
60.0
60.0
55.0
55.0
50.0
50.0
Employment Index
45.0
45.0
40.0
40.0
Aug-11
Feb-12
Nov-11
Aug-12
May-12
Feb-13
Nov-12
Aug-13
May-13
Feb-14
Nov-13
Aug-14
May-14
Source: Institute for Supply Management / Haver Analytics.
Industrial production posted an increase in July equal to its upwardly revised increase
in June. Industrial production has risen in each of the past six months. Capacity
utilization also rose in July, reaching its highest level in over six years.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
2.0
79.0
1.5
Capacity Utilization
(manufacturing)
Industrial Production
78.0
1.0
77.0
0.5
76.0
0.0
75.0
-0.5
74.0
-1.0
73.0
Jul-11
Jan-12
Oct-11
Jul-12
Apr-12
Jan-13
Oct-12
Source: Federal Reserve Board of Governors / Haver Analytics.
Jul-13
Apr-13
Jan-14
Oct-13
Jul-14
Apr-14
Durable goods orders surged on both a year-over-year and a monthly basis in July,
driven by a large increase in orders for civilian aircraft. When excluding transportation,
orders of durable goods eased slightly from June to July. Orders for nondefense
capital goods, excluding aircraft, accelerated in July on a year-over-year basis,
despite a small drop from their June level.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
40.0
40.0
Percent Change, Previous Month
May-14
Jun-14
Jul-14
Durables
-0.89
2.73
22.58
Ex. Air.
-1.40
5.41
-0.48
30.0
Nondefense Capital Goods,
Excluding Aircraft
20.0
30.0
20.0
10.0
10.0
0.0
0.0
Durable Goods,
New Orders
-10.0
-10.0
-20.0
-20.0
Jul-11
Jan-12
Oct-11
Jul-12
Apr-12
Jan-13
Oct-12
Jul-13
Apr-13
Jan-14
Oct-13
Jul-14
Apr-14
Source: U.S. Census Bureau / Haver Analytics.
Headline consumer prices continued to decelerate in July. Core prices, which
exclude food and energy, also eased in July for the second consecutive month.
Total Price Indices
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
6.0
6.0
Consumer Price Index
Chained Consumer Price
Index
4.0
PCE Price Index
4.0
2.0
2.0
0.0
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Core Price Indices
Percent Change, Year-Over-Year
Nov-13
Mar-14
0.0
Jul-14
Percent Change, Year-Over-Year
4.0
4.0
Consumer Price Index,
excluding food and energy
3.0
Chained Consumer Price Index,
excluding food and energy
2.0
3.0
2.0
PCE Price Index, excluding food
and energy
1.0
0.0
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
1.0
Mar-13
Jul-13
Source: Bureau of Labor Statistics / Bureau of Economic Analysis / Haver Analytics.
Nov-13
Mar-14
0.0
Jul-14
Oil prices fell in August and their monthly average was the lowest since January. Prices
reached $96.0 per barrel as of August 29.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
150.0
150.0
125.0
125.0
100.0
100.0
75.0
75.0
50.0
50.0
25.0
25.0
0.0
0.0
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Source: Wall Street Journal / Haver Analytics.
Second quarter real GDP growth was revised higher in the second estimate. The upward
revision to second quarter GDP growth primarily reflected an upward revision to
nonresidential fixed investment and a downward revision to imports that were partly
offset by a downward revision to private inventory investment.
Revisions to Second Quarter Real GDP
Description
Advanced
2nd Estimate
4.0
4.2
Personal Consumption
2.5
2.5
Business Investment
5.5
8.4
7.0
10.7
Government
1.6
1.4
Residential
7.5
7.2
Exports
9.5
10.1
Imports
11.7
11.0
Final Sales
2.3
2.8
Real GDP
Equipment and Software
Real GDP
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
11:Q2
11:Q4
12:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
12:Q4
13:Q2
13:Q4
14:Q2
Data released since your last Directors' meeting show the economy grew at a faster pace in
the second quarter than originally thought. Growth is expected to slow in the third quarter
but remain above trend throughout the second half of the year. Recent data has been mixed,
with support from manufacturing and improvement in the labor market partially offset by
weakness in consumer spending. However, consumer attitudes have improved and housing
data have been more positive. Economic and political tensions abroad pose areas of concern.
Percent
Short-Term Interest Rates
0.3
Federal Funds Rate
(effective rate)
0.2
1.50
1.00
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
0.50
0.1
0.00
Mar-14 Apr-14 May-14 Jun-14 Jul-14
0.0
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Source: Federal Reserve Board of Governors / Haver Analytics.
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Report compiled by Christy Marieni