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The
President’s
Report to the
Board of
Directors
March 1, 2012
Current Economic Developments - March 1, 2012
Data released since your last Directors' meeting show the economy was stronger in the fourth
quarter than originally estimated, but recent data suggest growth will slow in the first quarter.
General economic conditions have shifted a bit recently, as labor markets and consumer
attitudes have improved while manufacturing has eased. The latest Greek bailout plan has
relieved some of the European tension, but escalating oil prices provide a new concern. Still,
the economy remains on track to grow at a moderate pace in the first half of the year.
In February, initial claims continued to fall and consumer attitudes improved to their best levels
in one year. Real consumption expenditures were unchanged again in January, as incomes fell
for the second time in three months.
Housing market data was mostly positive in January, and while the sector as a whole remains
weak, there have been signs of improvement. Existing home sales have increased in three
of the past four months, and sales of new homes were also trending upward before easing slightly
in January. New residential construction data was also up in January, and over the past three
months have been at their highest levels since the end of the recession.
Recent manufacturing data has been less favorable than that seen over the past several months.
The ISM index fell in February and industrial production was flat in January. New orders for
durable goods fell sharply in January, as did orders for nondefense capital goods excluding
aircraft, suggesting business investment may continue to weaken.
Inflation remained subdued in January, and although core measures have continued to trend
mostly upward, they are expected to ease in the coming months. Inflation may be pushed up
temporarily due to higher oil prices, which rose persistently throughout February due to political
concerns in the Middle East.
Initial claims for unemployment insurance resumed their downward trend in February,
falling to their lowest level in four years. Claims are now only slightly above the level
seen at the onset of the recession.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
700
700
650
650
600
600
550
550
500
500
450
450
400
400
350
350
300
300
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12*
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
* - 4-wk. ave. ending Feb. 25
Consumer attitudes improved in February, as both confidence and sentiment reached
their highest levels in twelve months. Consumers continue to be more optimistic
about business and labor market conditions, and are more confident in the economy's
ability to overcome minor setbacks. Respondents to the Conference Board survey
also reported some improvement in their personal financial situations.
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
100
100
Current
Conditions
90
80
90
80
70
70
60
60
50
Sentiment
50
Expectations
40
40
Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
100
100
Expectations
80
80
60
60
40
40
20
0
Feb-09
Aug-09
May-09
Feb-10
Nov-09
Confidence
Aug-10
May-10
Feb-11
Nov-10
Present
Situation
20
0
Feb-12
Aug-11
May-11
Nov-11
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
Real disposable incomes fell slightly in January, and over the past year have seen a
monthly average increase of only one-half of a percentage point. The slow growth
in incomes has restrained consumption, which has been largely unchanged over the
past three months.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
2.0
2.0
1.5
1.5
Real Consumption
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
Real Disposable Income
-1.5
-1.5
-2.0
-2.0
-2.5
Jan-09
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Source: Bureau of Economic Analysis / Haver Analytics.
Jan-11
Oct-10
-2.5
Jan-11
Jul-11
Apr-11
Oct-11
Housing market data was mostly positive in January. Existing home sales improved
significantly over December's downwardly revised estimate, marking the third increase
in the last four months. New home sales decreased slightly in January, but from a
December number that was revised higher, leaving the current sales pace above
expectations.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
700
7000
600
6000
New Home Sales
500
5000
400
4000
300
3000
200
2000
Existing Home Sales
100
0
Jan-09
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Jan-11
Oct-10
0
Jan-12
Jul-11
Apr-11
1000
Oct-11
Sources: U.S. Census Bureau (new home sales) and National Association of Realtors (existing sales) / Haver Analytics.
Housing starts increased in January, from a level in December that was revised
significantly higher. Starts have averaged nearly 700,000 over the past three months,
the highest three-month average since late 2008. Building permits also increasd
January. The recent strength in new construction data is likely due in part to
unseasonable mild weather being enjoyed in many parts of the country.
Thousands of Units, Annualized
Housing Starts and Building Permits
Thousands of Units, Annualized
1000
1000
Building Permits
800
800
600
600
400
400
200
200
Housing Starts
0
0
Jan-09
Jul-09
Apr-09
Jan-10
Oct-09
Sources: U.S. Census Bureau / Haver Analytics.
Jul-10
Apr-10
Jan-11
Oct-10
Jul-11
Apr-11
Jan-12
Oct-11
The ISM manufacturing index fell in February, offsetting much of the improvement
seen over the previous three months. The index signals that the manufacturing sector
is still expanding, only at a slower rate. The employment component of the index
declined further in February, falling to a three-month low.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
40.0
40.0
Employment Index
30.0
30.0
20.0
20.0
Feb-09
Aug-09
May-09
Feb-10
Nov-09
Aug-10
May-10
Feb-11
Nov-10
Aug-11
May-11
Feb-12
Nov-11
Source: Institute of Supply Management / Haver Analytics.
Industrial production was unchanged in January, following a strong increase in
December. The recent warm weather was a detriment to production, as lower
demand for home heating fuels reduced utilities output. Capacity utilization rose again
in January, reaching its highest level since April 2008.
Industrial Production and Capacity Utilization
Percent of
Capacity
Percent Change, Previous Month
3.0
85.0
Industrial
Production
2.0
80.0
1.0
75.0
0.0
70.0
-1.0
65.0
Capacity
Utilization
(manufacturing)
-2.0
-3.0
Jan-09
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Jan-11
Oct-10
60.0
Jan-12
Jul-11
Apr-11
Oct-11
In January, new orders for durable goods posted their first monthly decrease since
September but continued to increase on a year-over-year basis, albeit at a lower
rate than the previous three months. Orders of nondefense capital goods excluding
aircraft also fell sharply in January but still increased from the previous year. The
January drop in core orders was worse than anticipated, and may signal weaker
manufacturing output in the first quarter than previously expected.
New Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
30.0
30.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
20.0
10.0
10.0
0.0
0.0
Durable Goods
-10.0
-10.0
-20.0
Percent Change, Previous
Month
Nov-11
Dec-11
-30.0
-20.0
Jan-12
Durables
4.20
3.20
-4.00
Ex. Air.
-1.50
3.43
-4.48
-30.0
-40.0
-40.0
Jan-09
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Jan-11
Oct-10
Jul-11
Apr-11
Jan-12
Oct-11
Source: U.S. Census Bureau / Haver Analytics.
Total consumer prices increased in January from the previous month, after holding
steady in December. Core CPI also increased in January, due in part to an increase
in apparel prices, and the 12-month change reached 2.3%, its highest level since
September 2008. Total producer prices increased slightly in January, despite falling
food and energy prices, while the core index rose more significantly. On an annual
basis, total producer prices eased further while the core index held steady.
Consumer Price Index
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Jan-09
May-09
Sep-09
Jan-10
Percent Change, Year-Over-Year
8.0
6.0
Consumer Price Index
4.0
2.0
0.0
Consumer Price Index,
-2.0
excluding food and energy
-4.0
May-10 Sep-10
Jan-11 May-11 Sep-11 Jan-12
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
12.0
8.0
8.0
Producer Price Index
4.0
4.0
0.0
0.0
Producer Price Index,
excluding food and energy
-4.0
-8.0
Jan-09
May-09
Sep-09
Jan-10
Source: Bureau of Labor Statistics / Haver Analytics.
May-10
Sep-10
Jan-11
May-11
Sep-11
-4.0
-8.0
Jan-12
On average oil prices posted another small gain in February, however daily closing
prices rose sharply throughout the month due to increased concern over nuclear issues
in Iran. Prices peaked at nearly $110 per barrel on February 24th, their highest level
since early May. The higher prices have already impacted retail gas prices, which
reached their highest level in over five months.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars 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
Feb-09
Aug-09
May-09
Feb-10
Nov-09
0.0
Aug-10
Feb-11
Aug-11
Feb-12
May-10
Nov-10
May-11
Nov-11
Source: Wall Street Journal / Haver Analytics.
Real GDP growth was revised upward in the fourth quarter. The higher growth rate
primarily reflected upward revisions to nonresidential fixed investment and personal
consumption expenditures and a downward revision to imports.
Revisions to Fourth Quarter Real GDP
Description
Advance
2nd Estimate
2.8
3.0
Personal Consumption
2.0
2.1
Business Investment
1.7
2.8
Real GDP
Equipment and Software
5.2
4.8
Residential Investment
10.9
11.5
Government
-4.6
-4.4
Exports
4.7
4.3
Imports
4.4
3.8
Final Sales
0.8
1.1
Real GDP
8.0
4.0
0.0
-4.0
-8.0
-12.0
08:Q4
09:Q2
09:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
10:Q2
10:Q4
11:Q2
11:Q4
Overall, data released since your last Directors' meeting show the economy was stronger in the
fourth quarter than originally estimated, but recent data suggest growth will slow in the first
quarter. General economic conditions have shifted a bit recently, as labor markets and consumer
attitudes have improved while manufacturing has eased. The latest Greek bailout plan has
relieved some of the European tension, but escalating oil prices provide a new concern. Still,
the economy remains on track to grow at a moderate pace in the first half of the year.
Percent
Short-Term Interest Rates
0.3
0.2
Federal Funds Rate
(effective rate)
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
1.50
1.00
0.50
0.00
0.1
Oct-11 Nov-11 Dec-11 Jan-12 Feb-12
0.0
Feb-11 Mar-11
Apr-11 May-11
Jun-11 Jul-11
Aug-11 Sep-11
Oct-11 Nov-11
Dec-11 Jan-12
Feb-12
Source: Federal Reserve Board of Governors / Haver Analytics.
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
March 7, 2012
Current Economic Developments - Addendum: Data released in the past week
Lightweight vehicle sales rose again in February, selling at their fastest annual pace
since February 2008. The increase was led by passenger car sales, not surprising
given the rising gas prices.
Productivity growth was revised up slightly in the fouth quarter, as output was higher
than originally thought and hours worked increased by less than previously estimated.
More importantly, annual revisions resulted in much faster growth in labor costs over
the second half of last year.
In February, the ISM nonmanufacturing index improved to 57.3, its highest level in
one year. The employment index eased to 55.7 in February, but remained well above
50 signaling manufacturing employment is still increasing, only at a slower pace. In
January, manufacturers' orders fell 1.0% while shipments rose 0.9%, but shipments
of nondefense capital goods excluding aircraft fell 3.0%.
Employment data from the Bureau of Labor Statistics is due out Friday morning.
Market expectations are for payrolls to post their third consecutive monthly gain of
more than 200,000, and the unemployment rate is expected to hold steady at 8.3%.
Total auto and light truck sales increased above expectations in February, despite
rising gas prices, to the highest level in four years. Dealers attributed the stronger
sales to more fuel-efficient vehicles and more favorable economic conditions for the
consumer.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
20.0
20.0
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
0.0
Feb-09
Aug-09
May-09
Feb-10
Nov-09
Aug-10
May-10
Source: Bureau of Economic Analysis / Haver Analytics.
Feb-11
Nov-10
0.0
Feb-12
Aug-11
May-11
Nov-11
Productivity was revised up slightly in the fourth quarter, reflecting moderate gains in
both output and hours worked. Annual revisions revealed sharp increases for both
compensation and unit labor costs over the second half of 2011. In the third quarter,
compensation increased 5.7% and labor costs rose 3.9%, up from the previously
estimated declines of 0.3% and 2.1%, respectively. In the fourth quarter, previously
reported gains of 1.9% and 1.2% were revised up to 3.7% and 2.8%.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Compensation
Per Hour
Output
Per Hour
9.0
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit
Labor Costs
-6.0
-9.0
08:Q4
09:Q2
09:Q4
Source: Bureau of Labor Statistics / Haver Analytics.
10:Q2
-6.0
10:Q4
11:Q2
-9.0
11:Q4