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The
President’s
Report to the
Board of
Directors
September 2, 2010
CURRENT ECONOMIC DEVELOPMENTS - September 2, 2010
Data released since your last Directors' meeting show the economy grew at a slower pace in
the second quarter than originally thought, and third quarter growth is unlikely to be much
stronger. As has been the case for the past few months, poor labor market conditions,
restrained consumer confidence, and waning stimulus effects are contributing to uncertainty
about the strength of the recovery, if not its sustainability.
In August, initial claims increased after showing little change through the first half of the year.
Consumer attitudes improved a bit, but are unlikely to make any significant gains without
substantial improvements in employment conditions and signs of improvement in the economy
moving forward. Vehicle sales were down a bit from the previous month, but remain on pace
to sell about one million more units this year than seen in 2009. Consumption posted its third
consecutive increase in July, despite a small decrease in incomes.
The housing market has showed further signs of weakness in the wake of the stimulus rebate.
Sales of both new and existing homes have fallen steadily since the rebate expired, resulting
in record-low sales paces for both in July.
In the manufacturing sector, industrial production and capacity utilization both rose in July.
Durable goods orders continued to show strong year-over-year gains in July, but orders for
nondefense capital goods excluding aircraft fell sharply from their June level. In August, the
ISM index rose to offset a small July decline.
Price concerns continue to lean more toward the downside, with core inflation indices holding
steady at low levels. Energy prices have also shown little change.
After holding mostly steady the previous four months, initial claims for unemployment
insurance rose in August to their highest level of the year.
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
250
250
Aug-07
Feb-08
Nov-07
Aug-08
May-08
Feb-09
Nov-08
Aug-09
May-09
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
Feb-10
Nov-09
Aug-10
May-10
Consumer attitudes generally improved slightly in August, but remain well below the
recent peak seen in June. As has been the case for several months, repondents
continue to be concerned about job conditions, personal finances, and the overall
health of the economy both today and in the months ahead.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
100
100
Future
Expectations
90
Current
Conditions
Consumer
Expectations
Present
Situation
75
80
70
50
60
50
25
40
Consumer
Sentiment
30
Aug-08
Feb-09
Consumer
Confidence
Aug-09
Feb-10
Aug-10
Aug-08
Feb-09
Aug-09
Feb-10
0
Aug-10
Source: The University of Michigan (left panel) and The Conference Board (right panel) / Haver Analytics.
Vehicle sales fell slightly in August from their July level. As auto sales are often
compared to their year ago levels, a significant drop in August sales was widely
reported in the media. However, sales last August were greatly inflated by the 'Cash
for Clunkers' program, which skews any comparisons to last year.
Total Lightweight Vehicle Sales
Millions of Units, Annualized
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
AugAug-07Dec-07
Dec-07Apr-08
Apr-08Aug-08
Aug-08Dec-08
Dec-08 Apr-09
Apr-09 Aug-09
Aug-09Dec-09
Dec-09 Apr-10
Apr-10 Aug-10
Aug-10
Source: Bureau of Economic Analysis / Haver Analytics.
Consumption posted a small increase in July, even as incomes fell slightly. While
consumption hasn't been particularly strong during the recovery it has shown
consistent improvement, increasing in eight of the past ten months.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
2.0
6.0
Real Disposable
Personal Income
4.0
1.0
2.0
0.0
0.0
-2.0
-1.0
-4.0
Real Consumption
-2.0
-6.0
Jul-07
Jan-08
Oct-07
Jul-08
Apr-08
Jan-09
Oct-08
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Source: Bureau of Economic Analysis / Haver Analytics.
The expiration of the home-buying tax credit and increased uncertainty about the
recovery have taken a dramatic toll on the real estate market. Both new and existing
home sales fell to all-time-lows in July, highlighted by a record 27.2% drop in existing
sales.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
7500
1000
7000
Existing Home Sales
800
6500
New Home Sales
6000
5500
600
5000
4500
400
4000
3500
200
3000
0
2500
Jul-07
Jan-08
Oct-07
Jul-08
Apr-08
Jan-09
Oct-08
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Source: U.S. Census Bureau (new home sales) and National Association of Realtors (existing sales) / Haver Analytics.
Building activity has held mostly steady for the past year and a half, with July data
for starts and permits little changed from their levels at the end of 2008. Given the
low level of home sales and a large inventory of unsold homes still on the market,
new construction data is unlikely to improve much in the coming months.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
1500
1500
1250
1250
Building Permits
1000
1000
750
750
500
500
Housing Starts
250
250
0
0
Jul-07
Jan-08
Oct-07
Jul-08
Apr-08
Jan-09
Oct-08
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Source: U.S. Census Bureau / Haver Analytics.
The ISM manufacturing index rose slightly in August, offsetting the small decrease
seen in July. The employment index also improved in August, reaching its highest
level in over 25 years.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
65.0
65.0
60.0
60.0
ISM Index
55.0
55.0
50.0
50.0
45.0
45.0
40.0
40.0
35.0
35.0
Employment Index
30.0
30.0
25.0
25.0
20.0
20.0
Aug-07
Feb-08
Nov-07
Aug-08
May-08
Feb-09
Nov-08
Source: Institute for Supply Management / Haver Analytics.
Aug-09
May-09
Feb-10
Nov-09
Aug-10
May-10
Both industrial production and capacity utilization increased in July, more than
offsetting the small decreases seen in June. Production data has been one of the
few consistent sources of positive news during the recovery.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
3.0
85.0
2.0
Industrial Production
80.0
1.0
0.0
75.0
-1.0
70.0
-2.0
-3.0
65.0
Capacity Utilization
(manufacturing)
-4.0
-5.0
60.0
Jul-07
Jan-08
Oct-07
Jul-08
Apr-08
Jan-09
Jul-09
Oct-08
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Durable goods orders posted a solid year-over-year gain in July, but it was the
smallest such improvement since December. Orders picked up a bit on a monthly
basis, but not enough to offset the declines of the prior two months. Orders for
nondefense capital goods excluding aircraft fell sharply in July, a potentially troubling
sign for future investment data.
Percent Change, Year-over-year
Durable Goods Orders
Percent Change, Year-over-year
30.0
30.0
Percent Change, Previous Month
20.0
10.0
May-10
Jun-10
Durables
-0.72
-0.15
0.36
Ex. Air.
4.74
3.58
-7.18
20.0
Jul-10
10.0
0.0
0.0
-10.0
-10.0
Durable Goods,
New Orders
-20.0
-20.0
Nondefense Capital Goods,
Excluding Aircraft
-30.0
-30.0
-40.0
-40.0
Jul-07
Jan-08
Oct-07
Jul-08
Apr-08
Source: U.S. Census Bureau / Haver Analytics.
Jan-09
Oct-08
Jul-09
Apr-09
Jan-10
Oct-09
Jul-10
Apr-10
Total consumer inflation picked up slightly in July, but the core index held steady at
the 47-year low established in April. With little recent change in inflation rates, the
threat of deflation remains.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
6.0
6.0
Consumer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
Consumer Price Index
-4.0
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
-4.0
Jul-10
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
15.0
15.0
Producer Price Index,
excluding food and energy
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-10.0
Jul-07
-5.0
Producer Price Index
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
-10.0
Jul-10
Source: Bureau of Labor Statistics / Haver Analytics.
Oil prices inched up a bit further in August, and were virtually identical to their 12-month
average.
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
0.0
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Source: Wall Street Journal / Haver Analytics.
The decrease in second quarter productivity was revised higher in the second
estimate, as output did not increase by as much as originally thought while hours
worked remained the same. The lower output also resulted in an upward revision to
unit labor costs, which advanced at their highest rate since late 2008.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
10.0
Output
Per Hour
Compensation
Per Hour
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
Unit Labor Costs
-10.0
-10.0
07:Q2
07:Q4
07:Q3
08:Q2
08:Q1
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
10:Q2
10:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
Second quarter real GDP growth was revised lower in the second estimate, but by a
smaller amount than expected. The slower growth rate was due primarily to an
upward revision to imports and downward revisions to private inventory investment
and exports. Those effects were partly offset by an upward adjustment to PCE.
Revisions to Second Quarter Real GDP
Description
Real GDP
Advanced
2nd Estimate
2.4
1.6
Personal Consumption
1.6
2.0
Business Investment
17.0
17.6
21.9
24.9
Equipment and Software
Government
4.4
4.3
Residential
27.9
27.2
Exports
10.3
9.1
Imports
28.8
32.4
Final Sales
1.3
1.0
Real GDP
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
07:Q2
07:Q4
08:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q4
09:Q2
09:Q4
10:Q2
Overall, data released since your last Directors' meeting show the economy grew at a
slower pace in the second quarter than originally thought, and third quarter growth is
unlikely to be much stronger. As has been the case for the past few months, poor labor
market conditions, restrained consumer confidence, and waning stimulus effects are
contributing to uncertainty about the strength of the recovery, if not its sustainability.
Percent
Short-Term Interest Rates
0.5
0.4
1.25
1.00
0.3
0.75
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
0.50
Federal Funds Rate
(effective rate)
0.25
0.2
Apr-10 May-10 Jun-10 Jul-10 Aug-10
0.1
0.0
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
September 8, 2010
Current Economic Developments - Addendum: Data released in the past week
In August, total nonfarm payrolls fell less than expected and private payrolls posted
another modest increase. Further evidence that the labor market is slowly improving
were revisions to June and July data, where estimated job losses were cut by one-third.
Most of the decreases in payroll employment in recent months have been due to the
elimination of temporary Census 2010 workers, but only 80,000 such employees remain,
likely limiting their negative impact on future payroll reports.
The weakness in the labor market has been a trademark of the recession, and the time it
takes to refill those jobs will be a key factor in the strength of the economic recovery.
Included in this report is a look at some broader measures of employment conditions that
shows the depth of the damage done to the labor market over the past few years.
Due to the Labor Day holiday, very little data besides the employment situation was
released over the past few days. The ISM nonmanufacturing index fell in August but
remained above 50, suggesting the services sector is still expanding, albeit at a
slower pace.
Payroll employment fell by 54,000 in August, due primarily to the completion of
114,000 temporary Census jobs. Private payrolls increased by 67,000 in August and
have risen every month this year. The unemployment rate rose one-tenth of a
percentage point in August to 9.6%.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
600
11.0
300
10.0
9.0
0
8.0
-300
7.0
-600
-900
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Nov-08
May-09
Nov-09
May-10
Source: Bureau of Labor Statistics / Haver Analytics.
6.0
5.0
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Nov-08
May-09
Nov-09
May-10
While the traditional civilian unemployment rate has hovered around 10% over the past year,
an alternative measure that captures people forced to work part time and those only marginally
attached to the labor force has been closer to 17%. In the ten years prior to this recession,
the difference between the series' averaged 3.6%. Over the past year, this difference has
been nearly twice that. While both series have declined a bit at times recently, that was more
the result of people leaving the labor force than it was the creation of new jobs.
Unemployment Measures
Percent
20.0
Percent
20.0
15.0
15.0
Alternative Measure
10.0
10.0
5.0
5.0
Civilian Unemployment Rate
0.0
0.0
Feb-94
Dec-95
Oct-97
Aug-99
Jun-01
Apr-03
Feb-05
Dec-06
Oct-08
Aug-10
Jan-95
Nov-96 Sep-98
Jul-00
May-02 Mar-04
Jan-06
Nov-07 Sep-09
Source: The Bureau of Labor Statistics / Haver Analytics.
The poor labor market has forced many people who want and are available to work
full-time to accept part-time postitions. The number of these type of employees more
than doubled during the recession.
Working Part-time due to Economic Conditions
Millions
Millions
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
Feb-94
Dec-95
Oct-97
Aug-99
Jun-01
Apr-03
Feb-05
Dec-06
Oct-08
Aug-10
Jan-95
Nov-96 Sep-98
Jul-00
May-02 Mar-04
Jan-06
Nov-07 Sep-09
Source: The Bureau of Labor Statistics / Haver Analytics.
The ratio of total people employed to the population gives a quick snapshot of general
employment conditions. Currently the ratio stands at 58.5%, down from 62.8% before
the crisis and from a peak of 64.6% in 2000:Q1. For men of prime working age, nearly
one in five does not currently hold any kind of job. This ratio was close to 90% ten
years ago and regularly approached 95% through the '50s and '60s.
Percent
Employment/Population Ratios
66.0
Percent
98.0
Total
64.0
96.0
94.0
92.0
62.0
90.0
60.0
88.0
86.0
Men: 25-54
58.0
84.0
82.0
56.0
80.0
54.0
78.0
60:Q3
65:Q3
70:Q3
75:Q3
80:Q3
85:Q3
90:Q3
95:Q3
00:Q3
05:Q3 10:Q3*
63:Q1
68:Q1
73:Q1
78:Q1
83:Q1
88:Q1
93:Q1
98:Q1
03:Q1
08:Q1
Source: The Bureau of Labor Statistics / Haver Analytics / Dow Jones.
* 2010:Q3 data is July/August average
Another characteristic of the labor market during this recession is the long duration
people have remained unemployed after losing their jobs. Over the past year a record
5.8% of the labor force has not only been unemployed, but has been so 15 weeks or
more. The previous record was 4.2%, set in 1983. In August, roughly 3 in 5
unemployed persons had been without work for more than three months.
Percent
Percent Unemployed 15+ Weeks
Percent
7.0
7.0
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
60:Q3
65:Q3
70:Q3
75:Q3
80:Q3
85:Q3
90:Q3
95:Q3
00:Q3
05:Q3 10:Q3*
63:Q1
68:Q1
73:Q1
78:Q1
83:Q1
88:Q1
93:Q1
98:Q1
03:Q1
08:Q1
Source: The Bureau of Labor Statistics / Haver Analytics.
* 2010:Q3 data is July/August average