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The
President’s
Report to the
Board of
Directors
December 2, 2010
CURRENT ECONOMIC DEVELOPMENTS - December 2, 2010
Data released since your last Directors' meeting show the economy grew in the third quarter
at a higher rate than first estimated and also suggest fourth quarter growth is likely to be in
line with the growth seen over the previous six months. General areas of strength and
weakness remain mostly the same as over the past few months. More positive data has
come from initial claims for unemployment insurance and consumer attitudes, while house
prices have started to fall again and business investment has slowed a bit. Overall, the
recovery is continuing at the expected, slow pace.
In November, initial claims fell to their lowest level in over two years and consumer attitudes
improved. Vehicle sales held steady in November, as the industry continues to show
significant gains over last year. In October, real consumption rose again while incomes
rebounded from the small drop seen in September.
The real estate market continued to struggle in October, as sales of both new and existing
homes slowed. New construction also remains historically low, having shown little change
since early 2009. In the manufacturing sector, the ISM index eased in November but held
above 50. Industrial production was flat in October and capacity utilization posted a small
gain. Orders for both durable goods and nondefense capital goods, excluding aircraft, fell
in October but were well above their year-ago levels.
Low inflation levels remained a concern in October, as the total CPI was flat and the core
index slowed to a record low. Oil prices rose slightly in November, and unit labor costs were
unchanged in the third quarter, following an upwardly revised second quarter estimate.
In November, initial claims for unemployment insurance fell to their lowest monthly
average since July 2008. Despite the drop, claims are still above a level more
consistent with a healthy economy.
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
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
Consumer attitudes improved in November, as both confidence and sentiment
reached their highest levels since the second quarter. While consumers feel the
recovery has gained some traction, the majority expect further improvements to be
too small to impact their personal financial situations.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
100
100
Consumer
Expectations
Current
Conditions
90
80
80
60
70
40
60
Future
Expectations
20
Present
Situation
0
Nov-08
May-09
Nov-09
May-10
Nov-10
Nov-08
May-09
50
Consumer
Sentiment
Consumer
Confidence
Nov-09
May-10
40
Nov-10
Source: The University of Michigan / Haver Analytics.
Source: The Conference Board / Haver Analytics.
Total auto and light truck sales held steady in November. Manufacturers are on
track to sell roughly 11.5 million vehicles in 2010, a marked improvement from the
2009 total of 10.3 million. The auto industry is still far from recovered, however, as
sales averaged over 15 million per year during the 20 years preceding the recession.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
25.0
25.0
20.0
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
Nov-07
May-08
Feb-08
Nov-08
Aug-08
May-09
Feb-09
Source: Bureau of Economic Analysis / Haver Analytics.
Nov-09
Aug-09
0.0
Nov-10
May-10
Feb-10
Aug-10
Consumption posted another moderate increase in October, aided by a rebound in
personal incomes.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
2.0
6.0
Real Disposable Income
4.0
1.0
2.0
0.0
0.0
-2.0
-1.0
Real Consumption
-4.0
-2.0
Oct-07
Apr-08
Oct-08
Jan-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
-6.0
Oct-10
Apr-10
Jan-10
Jul-10
Source: Bureau of Economic Analysis / Haver Analytics.
The housing market remained subdued in October. New home sales gave back
most of the gain seen in September and were virtually unchanged from the sales
pace seen back in the spring. Existing home sales also eased, and while safely
above the record-low pace of July, remain historically low.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1000
7000
Existing
Home Sales
800
New
Home Sales
6500
6000
5500
600
5000
400
4500
4000
200
3500
0
Oct-07
Apr-08
Jan-08
Oct-08
Jul-08
Source: U.S. Census Bureau / Haver Analytics.
Apr-09
Jan-09
Oct-09
Jul-09
3000
Oct-10
Apr-10
Jan-10
Jul-10
New residential construction data was disappointing in October, as both measures
came in below expectations. What little momentum there was earlier in the year has
been lost, with starts down nearly 25% since April and permits down almost 20%
since March.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
1500
1500
1250
1250
1000
1000
Building Permits
750
750
500
500
Housing Starts
250
250
0
0
Oct-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
Oct-10
Jul-10
Source: U.S. Census Bureau / Haver Analytics.
Both the ISM manufacturing and employment indices were little changed in
November, holding well above 50 and signaling further expansion in the
manufacturing sector.
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
Nov-07
May-08
Feb-08
Nov-08
Aug-08
May-09
Feb-09
Source: Institute for Supply Management / Haver Analytics.
Nov-09
Aug-09
May-10
Feb-10
Nov-10
Aug-10
Industrial production was flat in October, following a small decline in September.
Capacity utilization rose further in October, reaching a 26-month high.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
3.0
85.0
Industrial Production
2.0
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
Oct-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
60.0
Oct-10
Apr-10
Jan-10
Jul-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Orders for both durable goods and nondefense capital goods excluding aircraft fell
in October, offsetting much of the growth seen over the previous two months. But
despite the declines, both series managed to post double-digit year-over-year
increases.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
30.0
30.0
Percent change, previous month
20.0
Dur.
Cap.
10.0
Jun-10
-0.15
3.58
Jul-10
1.23
-5.26
Aug-10
-0.77
5.10
Sep-10
4.99
1.87
Oct-10
-3.35
-4.47
20.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
Durable Goods,
New Orders
Capital Goods Nondefense,
Excluding Aircraft
-30.0
-30.0
-40.0
-40.0
Oct-07
Apr-08
Jan-08
Oct-08
Jul-08
Source: U.S. Census Bureau / Haver Analytics.
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
Oct-10
Jul-10
In October, total consumer prices held mostly steady for a fourth consecutive month,
but core prices slowed to their lowest year-over-year growth rate ever. Total producer
prices accelerated in October while the core index was mostly flat.
Consumer Price Index
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Oct-07
Percent Change, Year-Over-Year
Consumer Price Index,
excluding food and energy
Consumer Price Index
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Oct-10
Producer Price Index
Percent Change, Year-Over-Year
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
Oct-07
Percent Change, Year-Over-Year
Producer Price Index,
excluding food and energy
Producer Price Index
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
Oct-10
Source: Bureau of Labor Statistics / Haver Analytics.
Oil prices increased slightly in November, to their highest monthly average since
April. Prices peaked close to $88 per barrel in the middle of the month before falling
back to the low- to mid-$80s by the end of the month.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars per Barrel
160.0
160.0
140.0
140.0
120.0
120.0
100.0
100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
Nov-07
May-08
Feb-08
Nov-08
Aug-08
Source: Wall Street Journal / Haver Analytics.
May-09
Feb-09
Nov-09
Aug-09
May-10
Feb-10
Nov-10
Aug-10
Productivity was revised a bit higher in the third quarter, more than offsetting the
decrease seen in the second quarter. Significant upward revisions were made to
costs in the second quarter, with compensation per hour having risen 2.9%
(up from a 0.6% decline) and unit labor costs having risen 4.9% (up from 1.3%).
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Compensation
Per Hour
9.0
Output
Per Hour
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
-6.0
-6.0
Unit Labor Costs
-9.0
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
-9.0
10:Q3
10:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
Real GDP growth in the third quarter was stronger than originally thought. The
upward adjustment primarily reflected an upward revision to personal consumption
expenditures, exports and state and local government spending. These effects were
partly offset by a downward revision to private inventory investment.
Revisions to Third Quarter Real GDP
Description
Real GDP
Advance
Preliminary
2.0
2.5
Personal Consumption
2.6
2.8
Business Investment
9.7
10.3
Equipment and Software
12.0
16.8
-29.1
-27.5
Government
3.4
4.0
Exports
5.0
6.3
Imports
17.4
16.8
Final Sales
0.6
1.2
Residential Investment
Real GDP
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
Overall, data released since your last Directors' meeting show the economy grew in the third quarter
at a higher rate than first estimated and also suggest fourth quarter growth is likely to be in line with
the growth seen over the previous six months. General areas of strength and weakness remain
mostly the same as over the past few months. More positive data has come from initial claims for
unemployment insurance and consumer attitudes, while house prices have started to fall again and
business investment has slowed a bit. Overall, the recovery is continuing at the expected, slow pace.
Percent
Short-Term Interest Rates
0.4
Discount Window Primary Credit
0.3
0.75
0.75
0.75
0.75
1.50
1.00
0.75
0.50
Federal Funds Rate
(effective rate)
0.00
0.2
Jul-10
Aug-10 Sep-10 Oct-10 Nov-10
0.1
0.0
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
December 9, 2010
Current Economic Developments - Addendum: Data released in the past week
Payroll employment rose by only 39,000 in November, far below expectations. The
unemployment rate also rose two-tenths of a percentage point to 9.8%, its highest level
since April. The higher unemployment rate primarily reflected a 173,000 decrease in
civilian employment, which outpaced a 103,000 increase in the labor force.
In October, manufacturers' orders fell 0.9% while total shipments rose 0.3%. However,
shipments of nondefense capital goods excluding aircraft fell 1.3%, their first decrease
since January. In November, the ISM nonmanufacturing index improved to 55.0 and the
employment index rose to 52.7, a three year high.
Redbook sales rose 0.6% through the first week of December, compared to November.
Sales in the week ending December 4th were 3.8% higher than during the same period
last year. Oil prices rose during the past week, averaging $88.4 per barrel compared to
the previous week's average of $83.7, and threatened to rise above $90.0 per barrel for
the first time since October 2008.
In November, nonfarm payrolls added 39,000 jobs but the unemployment rate rose to
9.8%. Over the previous two month, payrolls were revised higher by 38,000 jobs, due
almost entirely to revisions to government payrolls. Earlier estimates saw these payrolls
down by 156,000 jobs in October and September, while updated data show a drop of
124,000. Private payrolls were revised up by 6,000 over the same period.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
600
12.0
11.0
300
10.0
0
-300
9.0
8.0
7.0
-600
6.0
-900
Nov-08
May-09
Nov-09
May-10
Nov-10
Feb-09
Aug-09
Feb-10
Aug-10
Source: Bureau of Labor Statistics.
5.0
Nov-08
May-09
Nov-09
May-10
Nov-10
Feb-09
Aug-09
Feb-10
Aug-10