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The President’s Report to the Board of Directors June 3, 2014 CURRENT ECONOMIC DEVEOPMENTS - June 3, 2014 Data released since your last Directors' meeting show that the economy contracted slightly in the first quarter but suggest a rebound in growth in the second quarter. The labor market showed further signs of strengthening, consumer attitudes were mixed but remained favorable, and the housing market improved a bit but remained weak in the single family sector. Economic growth is projected to pick up to a moderate pace over the rest of the year, as the effects that contributed to the contraction in the first quarter - namely adverse weather conditions, lower inventory investment, and a decline in exports - are likely to be temporary. Initial claims for unemployment insurance ticked up in April but have fallen, as of May 24th, to their lowest four-week moving average since before the recession. Consumer attitudes were mixed in May, as indices measured by the Conference Board increased while those measured by the University of Michigan decreased. In April, real incomes inched up, but real consumption decreased for the first time since December. The housing market showed mostly positive signs in April. New and existing home sales rose in April, with sales of existing homes reaching their highest rate so far this year. Housing starts and building permits both increased in April, but the improvement occurred mainly in the multifamily sector. In the manufacturing sector, industrial production fell and capacity utilization eased in April. New orders for durable goods ticked up in April, while orders for nondefense capital goods, excluding aircraft, declined. Improvement eased on a year-over-year basis for both series. However, the ISM index improved in May to its highest level since December. Headline and core prices accelerated further in April. Oil prices rose on average in April, and were unchanged from that elevated level in May. Initial claims for unemployment insurance ticked up to 321,000 on average in April, from a six-month low in March. Weekly claims have declined in May, and the fourweek moving average fell to 311,500 in the week ending May 24. Initial Claims Thousands of Units at Annual Rates Thousands of Units at Annual Rates 500 500 450 450 400 400 350 350 300 300 250 250 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14* Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Source: Department of Labor, Employment and Training Administration / Haver Analytics. * 4-wk. ave. ending May 24 Primary measures of consumer attitudes were mixed in May. The confidence index increased, while the sentiment index declined. Consumers were more optimistic about labor market conditions and future job trends. The main concerns for respondents of the sentiment survey were personal financial prospects and income growth. Consumer Sentiment Consumer Confidence Index, 1966:Q1 = 100 Index, 1985 = 100 110 100 90 Current Conditions Consumer Expectations 100 90 80 80 70 70 Present Situation 60 Consumer Confidence 50 40 May-12 Nov-12 May-13 60 Future Expectations Nov-13 Consumer Sentiment May-14 May-12 Nov-12 May-13 Nov-13 50 40 May-14 Source: The University of Michigan / Haver Analytics. Source: The Conference Board / Haver Analytics. Real disposable incomes rose 0.2% in April, and have grown 0.3%, on average, over the past four months. Despite the increase in incomes, real consumption fell 0.3% in April, its first decline since December. Real DPI and Consumption Percent Change, Previous Month Percent Change, Previous Month 4.0 4.0 Real Consumption 2.0 2.0 0.0 0.0 -2.0 -2.0 Real Disposable Income -4.0 -4.0 -6.0 Apr-11 Oct-11 Jul-11 Apr-12 Jan-12 Oct-12 Jul-12 Source: Bureau of Economic Analysis / Haver Analytics. Apr-13 Jan-13 -6.0 Apr-14 Oct-13 Jul-13 Jan-14 Housing data in April improved a bit after easing in the first quarter. New home sales rose above expectations in April, following a decrease in March that was revised smaller. Sales of existing homes also increased in April, reaching their highest sales rate since December. New and Existing Home Sales Thousands of Units, Annualized Thousands of Units, Annualized 6000 800 700 Existing Home Sales 5500 New Home Sales 600 5000 500 4500 400 300 4000 200 3500 100 0 3000 Apr-11 Oct-11 Jul-11 Apr-12 Jan-12 Oct-12 Jul-12 Apr-13 Jan-13 Oct-13 Jul-13 Apr-14 Jan-14 Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales) / Haver Analytics. Housing starts rose in April for their third consecutive monthly increase, due mostly to a jump in multifamily starts. Building permits also increased in April, due to a rise in multifamily permits, as single-family permits decreased. Housing Starts and Building Permits Thousands of Units, Annualized Thousands of Units, Annualized 1400 1400 1200 1200 Building Permits 1000 1000 800 800 600 600 Housing Starts 400 400 200 200 0 0 Apr-11 Oct-11 Jul-11 Apr-12 Jan-12 Source: U.S. Census Bureau / Haver Analytics. Oct-12 Jul-12 Apr-13 Jan-13 Oct-13 Jul-13 Apr-14 Jan-14 Industrial production fell more than expected in April, while gains in March were revised higher. Capacity utilization eased in April, after increasing in each of the prior two months. Industrial Production and Capacity Utilization Percent Change, Previous Month Percent of Capacity 1.5 79.0 Industrial Production 78.0 Capacity Utilization (manufacturing) 1.0 77.0 0.5 76.0 75.0 0.0 74.0 -0.5 73.0 -1.0 Apr-11 Oct-11 Jul-11 Apr-12 Jan-12 Oct-12 Jul-12 Apr-13 Jan-13 72.0 Apr-14 Oct-13 Jul-13 Jan-14 Source: Federal Reserve Board of Governors / Haver Analytics. New orders for durable goods rose slightly in April, following a sizeable increase in March that was revised higher. Orders of nondefense capital goods, excluding aircraft, fell in April after rising in March. Both series showed improvement on a year-over-year basis in April, albeit at a slower pace than seen in the previous month. New Orders Percent Change, Year-Over-Year Percent Change, Year-Over-Year 30.0 30.0 Percent change, month-over-month Jan-14 Feb-14 Mar-14 Dur. -2.53 2.61 3.72 0.62 Cap. -1.89 0.10 4.68 -1.22 Durable Goods 20.0 Apr-14 20.0 10.0 10.0 0.0 0.0 Capital Goods Nondefense, Excluding Aircraft -10.0 -10.0 Apr-11 Oct-11 Jul-11 Apr-12 Jan-12 Source: U.S. Census Bureau / Haver Analytics. Oct-12 Jul-12 Apr-13 Jan-13 Oct-13 Jul-13 Apr-14 Jan-14 The ISM manufacturing index rose in May, reaching its highest level so far this year and continuing to signal expansion in the manufacturing sector. However, the employment component of the index declined in May. ISM Index Index (50+ = Economic Expansion) Index (50+ = Economic Expansion) 65.0 65.0 ISM Index 60.0 60.0 Employment Index 55.0 55.0 50.0 50.0 45.0 45.0 May-11 Nov-11 Aug-11 May-12 Feb-12 Nov-12 Aug-12 May-13 Feb-13 Nov-13 Aug-13 May-14 Feb-14 Source: Institute of Supply Management / Haver Analytics. Headline consumer prices accelerated in April, their second consecutive monthly acceleration, as the PCE index reached its highest rate since October 2012. Core prices, which exclude food and energy, also accelerated in April for the second consecutive month, and the PCE index reached its highest rate in over one year. Total Price Indices Percent Change, Year-Over-Year Percent Change, Year-Over-Year 6.0 6.0 Consumer Price Index Chained Consumer Price Index 4.0 PCE Price Index 4.0 2.0 2.0 0.0 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Core Price Indices Percent Change, Year-Over-Year Aug-13 Dec-13 0.0 Apr-14 Percent Change, Year-Over-Year 4.0 4.0 Consumer Price Index, excluding food and energy 3.0 Chained Consumer Price Index, excluding food and energy 3.0 2.0 2.0 PCE Price Index, excluding food and energy 1.0 0.0 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 1.0 Apr-13 Source: Bureau of Labor Statistics / Bureau of Economic Analysis / Haver Analytics. Aug-13 Dec-13 0.0 Apr-14 Oil prices in May, on average, were unchanged from their April level, which was the highest monthly average since September. Prices edged up towards the end of May, and started June at $102.5 per barrel as of June 2. Domestic Spot Oil Price Dollars per Barrel Dollasr per Barrel 125.0 125.0 100.0 100.0 75.0 75.0 50.0 50.0 25.0 25.0 0.0 0.0 May-11 Nov-11 Aug-11 May-12 Feb-12 Nov-12 Aug-12 May-13 Feb-13 Nov-13 Aug-13 May-14 Feb-14 Source: Wall Street Journal / Haver Analytics. First quarter GDP growth was revised down in the second estimate to -1.0% from 0.1%. The lower growth rate primarily reflected a downward revision to private inventory investment and an upward revision to imports that were partly offset by an upward revision to exports. Revisions to First Quarter Real GDP Description Real GDP Advance Estimate 2nd Estimate 0.1 -1.0 Personal Consumption (PCE) 3.0 3.1 Business Investment -2.1 -1.6 Residential Investment -5.7 -5.0 Government -0.5 -0.8 Exports -7.6 -6.0 Imports -1.4 0.7 Final Sales 0.7 0.6 Change in Nonfarm Inv. ($2005 Bil.) 65.7 30.4 Real GDP 6.0 4.0 2.0 0.0 -2.0 11:Q1 11:Q3 12:Q1 Source: Bureau of Economic Analysis / Haver Analytics. 12:Q3 13:Q1 13:Q3 14:Q1 Data released since your last Directors' meeting show that the economy contracted slightly in the first quarter but suggest a rebound in growth in the second quarter. The labor market showed further signs of strengthening, consumer attitudes were mixed but remained favorable, and the housing market improved a bit but remained weak in the single family sector. Economic growth is projected to pick up to a moderate pace over the rest of the year, as the effects that contributed to the contraction in the first quarter - namely adverse weather conditions, lower inventory investment, and a decline in exports - are likely to be temporary. Percent Short-Term Interest Rates 0.3 0.2 1.50 1.00 Discount Window Primary Credit 0.75 0.75 0.75 0.75 0.75 0.50 0.1 0.00 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 0.0 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Source: Federal Reserve Board of Governors / Haver Analytics. Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 Report compiled by Christy Marieni