Download President’s Report Board Directors

The
President’s
Report to the
Board of
Directors
November 4, 2010
CURRENT ECONOMIC DEVELOPMENTS - November 4, 2010
Data since your last Directors' meeting show the economy continued to recover at a slow
pace in the third quarter, as expected. While consumers have proven resilient and
businesses continue to invest, growth is unlikely to improve much through the end of the
year. The prolonged weakness of the labor and housing markets are also potential
downside risks that could undermine the recovery.
The growth in real GDP in the third quarter primarily reflected positive contributions from
personal consumption expenditures, private inventory investment, nonresidential fixed
investment, federal government spending, and exports. Those effects were partly
offset by a negative contribution from residential investment and an increase in imports.
In October, consumer attitudes remained subdued amid ongoing concerns about job
conditions, personal finances and the overall health of the economy. Initial claims for
unemployment insurance were also little changed in October, and remain elevated well
above comfortable levels. The ISM index rose to a five-month high in October, signifying
further recovery in the manufacturing sector.
Total consumer inflation continued to slow in the third quarter, and core prices advanced
at a near record-low pace. Unit labor costs were flat in the third quarter while total
compensation costs, as measured by the ECI, picked up a bit. Oil prices rose in October
to their highest levels since the spring, after holding mostly steady through the third
quarter.
Real GDP growth picked up a bit in the third quarter from the second quarter, due
primarily to a sharp deceleration in imports and accelerations in inventory investment
and consumption. Partially offsetting those improvements were a downturn in
residential investment and slowdowns in business investment and exports.
Real Gross Domestic Product
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
-6.0
-6.0
-8.0
-8.0
07:Q3
08:Q1
08:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q1
09:Q3
10:Q1
10:Q3
Real consumption grew at its fastest pace in nearly four years in the third quarter,
and was the primary contributor to the increase in third quarter GDP. The strong
consumption occured despite only a marginal increase in real incomes and a
significant slowdown in nominal incomes.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
15.0
12.0
Real Disposable
Income
4.0
9.0
2.0
6.0
3.0
0.0
0.0
-2.0
-3.0
-6.0
-4.0
Personal
Income
-9.0
-12.0
-6.0
07:Q3
08:Q3
08:Q1
09:Q3
09:Q1
10:Q3
10:Q1
07:Q3
08:Q3
08:Q1
09:Q3
09:Q1
10:Q3
10:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
Total lightweight vehicle sales rose in October to their highest sales pace of the year.
Excluding August of 2009, when sales surged due to stimulus rebates, the October
sales rate was the highest since September 2008.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
16.0
12.0
8.0
4.0
0.0
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 Oct-10
Source: Bureau of Economic Analysis / Haver Analytics.
Business investment posted another solid increase in the third quarter, again due
primarily to strong investment in equipment and software. Investment in structures
also rose in the third quarter, following two years of reductions.
Business Investment
Annualized Percent Change
Annualized Percent Change
30.0
30.0
Equipment
and Software
20.0
20.0
10.0
10.0
0.0
0.0
Business
Investment
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
Structures
-40.0
-40.0
-50.0
-50.0
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
New orders for durable goods continued to improve in the third quarter, but at a
slower pace than seen in the second quarter. Orders of nondefense capital goods,
excluding aircraft, followed a similar pattern.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
30.0
30.0
Percent change, previous quarter
2009:Q4
2010:Q1
2010:Q2
2010:Q3
Dur.
1.37
5.85
2.59
1.55
Cap.
3.15
3.58
6.95
1.74
20.0
10.0
20.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
Durable Goods,
New Orders
Capital Goods Nondefense,
Excluding Aircraft
-30.0
-20.0
-30.0
-40.0
-40.0
07:Q3
08:Q1
08:Q3
Source: U.S. Census Bureau / Haver Analytics.
09:Q1
09:Q3
10:Q1
10:Q3
Residential investment fell sharply in the third quarter, more than offsetting the
substantial stimulus-driven increase seen in the second quarter. The drop also
brought the level of residential investment to its lowest point in 27 years.
Residential Investment
Annualized Percent Change
Annualized Percent Change
40.0
40.0
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
Source: U.S. Census Bureau / Haver Analytics.
The housing market continued to struggle in the third quarter, as both new and
existing home sales fell to new record lows. Despite historically low mortgage rates,
potential buyers are not as motivated as they were when the stimulus rebates were
in effect from mid-2009 through mid-2010.
New and Existing Home Sales
Thousands of Units,
Annualized
1000
Thousands of Units,
Annualized
Existing
Home Sales
800
7000
6500
6000
New Home Sales
5500
600
5000
400
4500
4000
200
3500
0
3000
07:Q3
08:Q1
08:Q3
Source: U.S. Census Bureau / Haver Analytics.
09:Q1
09:Q3
10:Q1
10:Q3
Government spending posted another solid gain in the third 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
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
Import growth slowed dramatically in the third quarter, but not enough to prevent
net exports from again subtracting significantly from GDP. Moving forward, a weaker
dollar may help close the net export gap.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
50.0
50.0
Net Exports
Contribution to % Change in Real GDP
40.0
Imports
40.0
30.0
2009:Q4
2010:Q1
2010:Q2
2010:Q3
30.0
20.0
1.90
-0.31
-3.50
-2.01
20.0
10.0
10.0
0.0
0.0
-10.0
Exports
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
07:Q3
08:Q1
08:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q1
09:Q3
10:Q1
10:Q3
After falling in the third quarter, measures of consumer attitudes were mostly steady
in October. Consumers continue to be concerned about labor market conditions and
the short-term outlook for the economy. The total indices are unlikely to increase
much without a substantial improvement in one, if not both, of these areas.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
100
100
Confidence
80
80
60
60
40
40
20
Expectations
20
0
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 Oct-10
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
100
100
Sentiment
80
80
60
40
60
40
Expectations
20
20
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 Oct-10
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
Initial claims for unemployment insurance rose slightly in the third quarter and eased
back in October. Overall, claims have been little changed this year and remain well
above a level considered to be more indicative of a healthy labor market.
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
07:Q3
08:Q1
07:Q4
08:Q3
08:Q2
09:Q1
08:Q4
09:Q3
09:Q2
10:Q1
09:Q4
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
10:Q3
10:Q2
Oct-10
The manufacturing sector continued to expand in October, as the ISM index rose
to its highest level since May. The employment index eased a bit in October from
its third quarter average, but also remained well above 50, suggesting further
increases in manufacturing payrolls.
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
45.0
45.0
40.0
40.0
35.0
35.0
30.0
30.0
Employment Index
25.0
25.0
20.0
20.0
07:Q3
08:Q1
07:Q4
08:Q3
08:Q2
09:Q1
08:Q4
09:Q3
09:Q2
10:Q1
09:Q4
10:Q3
10:Q2
Oct-10
Source: Institute for Supply Management / Haver Analytics.
During the third quarter, total consumer prices slowed further and core prices moved
slightly closer to their record low set in 1961. Total producer prices also slowed in the
third quarter, but the core index accelerated a bit.
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
Consumer Price Index
-2.0
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
-2.0
10:Q3
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
12.0
9.0
9.0
Producer Price Index,
excluding food and energy
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Producer Price Index
-6.0
-6.0
07:Q3
08:Q1
08:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
09:Q1
09:Q3
10:Q1
10:Q3
Productivity grew during the third quarter, offsetting the decline seen in the second
quarter. Total compensation increased for the first time this year, while unit labor costs
were essentially unchanged.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
9.0
12.0
Compensation
Per Hour
9.0
Output
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
-9.0
07:Q3
-6.0
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
-9.0
10:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
Employment costs picked up a bit in the third quarter on a year-over-year basis, as
an acceleration in benefit costs more than offset a slowdown in wages and salaries.
On a quarterly basis the ECI grew 0.4% in the third quarter, matching the record low
seen in the final three quarters of 2009.
Employment Cost Index
Percent Change, year-over-year
Percent Change, year-over-year
5.0
5.0
4.0
4.0
Total
Compensation
3.0
3.0
2.0
2.0
Benefit Costs
1.0
1.0
Wages and Salaries
0.0
0.0
07:Q3
08:Q1
08:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
09:Q1
09:Q3
10:Q1
10:Q3
On average oil prices held mostly steady through the first three quarters of 2010,
before rising in October to their highest sustained levels since the spring.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
140.0
85.0
120.0
82.5
100.0
80.0
80.0
77.5
60.0
75.0
40.0
72.5
70.0
20.0
07:Q3
08:Q2
09:Q1
09:Q4
Jun-10
10:Q3
Aug-10
Oct-10
Source: Wall Street Journal / Haver Analytics.
Overall, data since your last Directors' meeting show the economy continued to recover
at a slow pace in the third quarter. While consumers have proven resilient and
businesses continue to invest, growth is unlikely to improve much through the end of the
year. The prolonged weakness of the labor and housing markets are also potential
downside risks that could undermine the recovery.
Percent
6.0
Short-Term Interest Rates
5.0
4.0
Federal Funds Rate
(effective rate)
Discount Window Primary Credit
3.0
0.50
0.50
0.61
0.75
0.75
0.75
1.00
0.50
2.0
09:Q3 09:Q4
1.50
10:Q1 10:Q2 10:Q3 Oct-10
1.0
0.0
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 Oct-10
Source: Federal Reserve Board of Governors / Haver Analytics.
0.00
On September 10th, the Business Cycle Dating Committee of the National Bureau of
Economic Research (NBER) announced that a trough in economic activity occurred in
June 2009. The trough marked the end of the recession that began in December 2007
and spanned 18 months, making it the longest recession since World War II.
Given the end date of June 2009, the economy had been expanding for 15 months at the
end of September. The following charts compare the current recovery to the average
recovery following the seven recessions that took place between 1960 and 2001.
The charts focus on the paths of economic growth, unemployment, and prices during the
first five quarters of the recoveries.
The current recovery has been weaker compared to the average of the past seven
recoveries. Real GDP growth was slower when first emerging from the trough, and
has not managed to sustain strong growth deeper into the recovery.
Real GDP Growth
Annualized Percent Change
Annualized Percent Change
7.0
7.0
Average of Seven Recessions
between 1960 and 2001
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
Recession ended
June 2009
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
trough
1Q
Source: Bureau of Economic Analysis / Haver Analytics.
2Q
3Q
4Q
5Q
Unemployment was two percentage points higher at the trough in 2009 than it was on
average at the end of the prior recessions. The rate also continued to rise during
the early parts of this recovery and is three-tenths of a percentage point higher five
quarters into this recovery, compared to a drop of four-tenths on average after the
same amount of time for the previous recoveries.
Unemployment Rate
Percent
Percent
12.0
12.0
Recession ended
June 2009
11.0
11.0
10.0
10.0
9.0
9.0
8.0
8.0
7.0
7.0
6.0
6.0
Average of Seven Recessions
between 1960 and 2001
5.0
5.0
4.0
4.0
3.0
3.0
trough
1Q
2Q
3Q
4Q
5Q
Source: Bureau of Labor Statistics / Haver Analytics.
Core inflation averaged about 1.0% in the five quarters following previous troughs, but
has averaged only 0.3% following the 'Great Recession'.
Consumer Price Index
Percent change, previous period
Percent change, previous period
2.0
2.0
Average of Seven Recessions
between 1960 and 2001
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
_____ Total
-0.5
-0.5
Recession ended
June 2009
- - - - - Core
-1.0
-1.0
trough
1Q
Source: Bureau of Labor Statistics / Haver Analytics.
2Q
3Q
4Q
5Q
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
November 10, 2010
Current Economic Developments - Addendum: Data released in the past week
Last Friday's employment report showed robust improvement in the labor market.
Nonfarm payrolls added 151,000 jobs - well above expectations - and payroll estimates
for the previous two months were revised substantially upward. On average, private
payrolls have increased by more than 110,000 per month this year, and by more than
135,000 over the past three months.
Despite the recent gains in payroll employment, the unemployment rate held steady at
9.6% in October for the third consecutive month. The October rate reflected sizable
declines in both civilian employment and the civilian labor force.
Wholesale inventories rose 1.5% in September, continuing a trend that has seen
inventories rise in each month this year. Sales at the wholesale level increased 0.4% in
September, their third consecutive monthly gain.
Oil prices rose during the past week, and have averaged $85.2 per barrel so far in
November after averaging $81.9 per barrel in October.
Nonfarm payrolls added 151,000 jobs in October, the largest monthly increase since
May. Payroll reductions over the previous two months were also revised smaller
by 110,000 jobs. Still, the unemployment rate was unchanged at 9.6%. However,
the U-6 unemployment rate, which includes marginally attached workers and those
forced to work part-time, fell one-tenth of a percentage point to 17.0%.
Unemployment Rate
Nonfarm Payroll Employment
Change from Previous Month
Rate
400
12.0
200
10.0
0
8.0
-200
6.0
-400
4.0
-600
2.0
-800
07:Q3
09:Q1
08:Q2
10:Q3
09:Q4
Source: Bureau of Labor Statistics / Haver Analytics.
07:Q3
09:Q1
08:Q2
10:Q3
09:Q4