Download President’s Report Board Directors

The
President’s
Report to the
Board of
Directors
May 3, 2007
CURRENT ECONOMIC DEVELOPMENTS - May 3, 2007
Data since your last Directors' meeting show the economy grew in the first quarter at
its slowest pace in four years. The housing market continues to be a drag on the
economy and inflation remains stubborn, but consistent employment growth has been
able to sustain incomes and consumer spending.
The increase in real GDP in the first quarter was due primarily to positive contributions
from personal consumption expenditures and state and local government spending.
Those effects were partly offset by negative contributions from residential fixed
investment, private inventory investment, and federal government spending and an
increase in imports.
In April, consumer attitudes weakened after exhibiting little change in the first quarter,
and initial claims for unemployment insurance increased a bit but remain relatively
low. Both the ISM manufacturing and employment indices increased in April
following a flat first quarter.
Inflation continued to be of some concern in the first quarter. Little change was seen
in core prices, but headline inflation accelerated. Unit labor costs slowed in the
first quarter, while total compensation costs, as measured by the ECI, accelerated
slightly. Oil prices rose steadily through the first quarter and into April, and threaten to
climb higher as demand rises entering the summer months.
The deceleration of real GDP in the first quarter primarily reflected a downturn in
exports, an upturn in imports, a deceleration in PCE for nondurable goods, and a
downturn in federal government spending which were partially offset by smaller
decreases in inventory and residential investment, an upturn in equipment and
software, and an acceleration in PCE for durable goods.
Annualized Percent Change
Real Gross Domestic Product
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
04:Q1
04:Q3
Source: Bureau of Economic Analysis.
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
In the first quarter, personal income grew at nearly twice the rate as seen in the
fourth quarter. Real disposable income eased a bit, but consumption still posted
another solid gain.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
14.0
12.0
Personal Income
10.0
8.0
4.0
6.0
4.0
2.0
2.0
0.0
-2.0
-4.0
Real Disposable Income
-6.0
0.0
04:Q1
05:Q1
04:Q3
06:Q1
05:Q3
07:Q1
06:Q3
04:Q1
05:Q1
04:Q3
06:Q1
05:Q3
07:Q1
06:Q3
Source: Bureau of Economic Analysis.
Auto sales eased in April, following a first quarter rise.
Total Auto and Light Truck Sales
Millions of Units, Annualized
19.0
18.0
17.0
16.0
15.0
14.0
13.0
04:Q1 04:Q2
04:Q3 04:Q4
05:Q1 05:Q2
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 Apr-07
Source: Bureau of Economic Analysis
Business investment rebounded in the first quarter, aided by a similar rebound in
equipment and software investment.
Business Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
Equipment and Software
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
Business Investment
-4.0
-4.0
-8.0
-8.0
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Source: Bureau of Economic Analysis.
In the first quarter, new orders for durable goods were essentially unchanged from a
year ago and orders of nondefense capital goods, excluding aircraft, fell.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
16.0
16.0
Capital Goods Nondefense,
Excluding Aircraft
12.0
12.0
8.0
8.0
4.0
4.0
Durable Goods,
New Orders
0.0
0.0
-4.0
-4.0
04:Q1
04:Q3
Source: U.S. Census Bureau.
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Residential investment continued to fall in the first quarter, albeit at a slightly less
dramatic pace.
Residential Investment
Annualized Percent Change
Annualized Percent Change
25.0
25.0
20.0
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
-15.0
-15.0
-20.0
-20.0
-25.0
-25.0
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Source: U.S. Census Bureau.
The housing market was mixed in the first quarter. Sales of existing homes sold
at a faster pace than seen the previous quarter, but new home sales slowed
significantly, to their lowest quarterly pace in nearly seven years.
New and Existing Home Sales
Thousands of Units,
Annualized
Thousands of Units,
Annualized
1400
7500
New Home Sales
1300
Existing Home Sales
7000
1200
1100
6500
1000
900
6000
800
700
5500
04:Q1
04:Q3
Source: U.S. Census Bureau.
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Government spending decelerated in the first quarter.
Government Spending
Annualized Percent Change
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Source: Bureau of Economic Analysis.
Exports fell in the first quarter for the first time in nearly four years. Imports were
on the rise again in the first quarter, after falling in the fourth quarter.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
25.0
25.0
20.0
20.0
Exports
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Imports
-5.0
-5.0
-10.0
-10.0
04:Q1
04:Q3
Source: Bureau of Economic Analysis.
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Consumer attitudes exhibited only minor changes in the first quarter, but worsened
slightly in April.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
Confidence
110
110
100
100
90
90
80
80
Expectations
70
70
60
60
04:Q1 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 Apr-07
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
110
110
100
100
Sentiment
90
90
80
80
70
70
Expectations
60
60
50
50
04:Q1 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 Apr-07
Source: The Conference Board (confidence) and University of Michigan (sentiment).
Initial claims for unemployment insurance inched up in the first quarter, and
continued to rise in April.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
400
400
375
375
350
350
325
325
300
300
275
275
04:Q1
04:Q3
04:Q2
05:Q1
04:Q4
05:Q3
05:Q2
06:Q1
05:Q4
Source: Department of Labor, Employment and Training Administration.
06:Q3
06:Q2
07:Q1
06:Q4
Apr-07
In April, both the ISM and employment indices improved, following a relatively
flat first quarter.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
65.0
65.0
ISM Index
60.0
60.0
55.0
55.0
50.0
50.0
45.0
45.0
Employment Index
40.0
40.0
35.0
35.0
30.0
30.0
04:Q1
04:Q3
04:Q2
05:Q1
04:Q4
05:Q3
05:Q2
06:Q1
05:Q4
06:Q3
06:Q2
07:Q1
06:Q4
Apr-07
Source: Institute for Supply Management.
Core inflation showed little change in the third quarter, but headline inflation
accelerated for both consumers and producers.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
5.0
5.0
4.0
Consumer Price Index,
excluding food and energy
Consumer Price Index
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
6.0
8.0
Producer Price Index,
excluding food and energy
Producer Price Index
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
04:Q1
04:Q3
Source: Bureau of Labor Statistics.
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Productivity growth eased slightly in the first quarter, but hourly compensation and
unit labor costs both slowed dramatically.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
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
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
-6.0
07:Q1
Source: Bureau of Labor Statistics.
In the first quarter, total employment costs increased a bit as an acceleration in
wages and salaries more than offset a benefit cost deceleration.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
8.0
8.0
7.0
7.0
Benefit Costs
6.0
6.0
5.0
5.0
Total
Compensation
4.0
4.0
3.0
3.0
2.0
2.0
Wages and Salaries
1.0
1.0
0.0
0.0
04:Q1
04:Q3
Source: Bureau of Labor Statistics.
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Oil prices eased overall in the first quarter due to a January fall, but rose throughout
the rest of the quarter and continued to rise in April.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
70.0
80.0
70.0
65.0
60.0
60.0
50.0
55.0
40.0
30.0
04:Q1
04:Q4
05:Q3
06:Q2
07:Q1
Dec-06
Feb-07
50.0
Apr-07
Source: Wall Street Journal (oil prices).
.
Overall, data since your last Directors' meeting show the economy grew in the first
quarter at its slowest pace in four years. The housing market continues to be a
drag on the economy and inflation remains stubborn, but consistent employment
growth has been able to sustain incomes and consumer spending.
Percent
Short-Term Interest Rates
7.0
6.0
Discount Window Primary Credit
5.0
6.25
6.25
6.25
6.25
5.90
4.0
5.43
3.0
06:Q1
7.00
6.50
6.00
Federal Funds Rate
(effective rate)
5.50
5.00
06:Q2
06:Q3
06:Q4
07:Q1 Apr-07
2.0
1.0
0.0
04:Q1 04:Q2
04:Q3 04:Q4
05:Q1 05:Q2
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
Source: Federal Reserve Board of Governors.
07:Q1 Apr-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
May 10, 2007
Current Economic Developments - Addendum: Data released in the past week
In April, nonfarm payrolls added 88,000 jobs and the unemployment rate rose a tenth of a
percentage point to 4.5%. April's increase in payrolls was the smallest since November
2004. March payrolls were revised to show an increase of 177,000 jobs, 3,000 fewer than
the original estimate, and February payrolls were also revised downward, to 90,000 from
113,000.
Wholesale inventories grew 0.3% in March, following a revised increase of 0.4% in February.
February inventories were orignally seen rising 0.5%. Wholesale sales increased 1.8 in
March, after rising 1.0% the previous month. Sales were initally reported as rising 1.2% in
February.
Redbook sales finished April down 4.1%, compared to March. Sales were 0.1% higher than
during the same period last year. Oil prices decreased during the past week, averaging 62.5
dollars per barrel, compared to last week's average of 65.4.
Payroll employment posted a modest gain in April, but revisions to the prior two
months' estimates resulted in a net loss of 26,000 jobs. The unemployment rate
held at it's first quarter average of 4.5% in April.
Nonfarm Payroll Employment
Change from Previous Quarter, Monthly Average
Unemployment Rate
Rate
5.6
400
Change from Previous Month
350
300
Feb-07
Mar-07
Apr-07
5.4
90,000
177,00
0
88,000
5.2
250
5
200
4.8
150
4.6
100
4.4
50
4.2
0
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
05:Q2
05:Q4
06:Q2
06:Q4 Apr-07
Source: Bureau of Labor Statistics.
05:Q1 05:Q3
06:Q1 06:Q3
07:Q1
05:Q2 05:Q4 06:Q2 06:Q4 Apr-07