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The
President’s
Report to the
Board of
Directors
November 2, 2012
CURRENT ECONOMIC DEVELOPMENTS - November 2, 2012
Data released since your last Directors' meeting show that the economy accelerated in the third
quarter, but likely not by enough to significantly reduce unemployment or stem the threats posed
by the ongoing fiscal and financial concerns both here and in Europe. Resilient consumers and
the burgeoning recovery in the housing market have brightened the outlook, but support from
manufacturing and business investment has declined. In all, growth is unlikely to improve much
further over the rest of the year.
In October, nonfarm payrolls posted another solid increase and job gains for the previous two
months were revised higher. However, the unemployment rate ticked up one-tenth of a
percentage point from the three-year low seen in September. Initial claims for unemployment
insurance eased a bit in October, but remain above their pre-recession levels.
The growth in real GDP in the third quarter primarily reflected positive contributions from
personal consumption expenditures, federal government spending, and residential fixed
investment. Those effects were partly offset by negative contributions from exports,
nonresidential fixed investment, and private inventory investment.
Also in October, consumer attitudes improved towards both current economic conditions and the
short-term outlook. The ISM index increased slightly in October, but continued to signal only a
small expansion in the manufacturing sector.
Total consumer inflation decelerated further in the third quarter, as did the core index. Unit labor
costs also fell in the third quarter and total compensation costs, as measured by the ECI, slowed.
Oil prices fell steadily through October, and their average for the month dropped from those of
the previous two months.
Nonfarm payrolls added 171,000 jobs in October, and job gains for the previous two
months were revised upward by a total of 84,000 jobs. Despite the better-thanexpected payroll gains, the unemployment rate rose one-tenth of a percentage point
to 7.9% in October. The uptick in the unemployment rate was due primarily to a
moderate increase in the size of the labor force, which outpaced a smaller gain in
civilian employment.
Nonfarm Payroll Employment
Unemployment Rate
12.0
300
11.0
200
10.0
100
9.0
0
8.0
-100
7.0
-200
6.0
-300
5.0
-400
4.0
Source: Bureau of Labor Statistics / Haver Analytics.
09
:Q
09 3
:Q
10 4
:
10 Q1
:Q
10 2
:Q
10 3
:Q
11 4
:
11 Q1
:Q
11 2
:Q
11 3
:Q
12 4
:
12 Q1
:Q
12 2
:
O Q3
ct
-1
2
Rate
09
:Q
09 3
:Q
10 4
:Q
10 1
:Q
10 2
:Q
10 3
:Q
11 4
:
11 Q1
:Q
11 2
:Q
11 3
:Q
12 4
:Q
12 1
:Q
12 2
:
O Q3
ct
-1
2
Change from Previous Quarter, Monthly Average
400
Initial claims for unemployment insurance came down some in the third quarter and
eased a bit more in October, but overall remain at a level consistent with little
improvement in unemployment. Weekly claims averaged roughly 315,000 in the two
years preceding the recession.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
600
600
550
550
500
500
450
450
400
400
350
350
300
300
250
250
09:Q3
10:Q1
09:Q4
10:Q3
10:Q2
11:Q1
10:Q4
11:Q3
11:Q2
12:Q1
11:Q4
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
12:Q3
12:Q2
Oct-12*
*Four-week moving average, ending October 27.
Real GDP growth acccelerated in the third quarter. The higher rate was due primarily
to an upturn in federal government spending, a downturn in imports, an acceleration
in PCE, a smaller decrease in private inventory investment, an acceleration in
residential fixed investment, and a smaller decrease in state and local government
spending that were partly offset by downturns in exports and in nonresidential
fixed investment.
Annualized Percent Change
Real Gross Domestic Product
Annualized Percent Change
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
09:Q3
10:Q1
10:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
11:Q1
11:Q3
12:Q1
12:Q3
Real consumption accelerated in the third quarter, and was a primary contributor to
the increase in third quarter GDP. The strong consumption occured despite only a
small increase in real incomes, which was well below the growth rates seen in the
first two quarters of the year. Growth in nominal incomes also decelerated in the third
quarter.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
5.0
15.0
Personal
Income
12.0
4.0
9.0
6.0
3.0
3.0
2.0
0.0
-3.0
Real Disposable
Income
1.0
-6.0
-9.0
0.0
09:Q3
10:Q3
10:Q1
11:Q3
11:Q1
12:Q3
12:Q1
09:Q3
10:Q3
10:Q1
11:Q3
11:Q1
12:Q3
12:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
Total lightweight vehicle sales fell in October to below their third quarter average. The
lower-than-expected sales were primarily due to weaker domestic vehicle sales, as
Hurricane Sandly likely accounted for a portion of the decrease. Additionally, the drop
in truck sales outpaced the decrease in auto sales.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
16.0
12.0
8.0
4.0
0.0
09:Q3 09:Q4
10:Q1 10:Q2
10:Q3 10:Q4
11:Q1 11:Q2
11:Q3 11:Q4
12:Q1 12:Q2
12:Q3 Oct-12
Source: Bureau of Economic Analysis / Haver Analytics / Edmunds.com / N.Y Times.
Business investment fell in the third quarter for the first time since 2011:Q1, as
nonresidential structures decreased and equipment and software was unchanged.
Business Investment
Annualized Percent Change
Annualized Percent Change
40.0
40.0
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
Structures
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
On a year-over-year basis, new orders for durable goods fell slightly in the third
quarter, their first decline in nearly three years. Orders of nondefense capital goods,
excluding aircraft, also decreased in the third quarter, suggesting future business
investment will continue to slow.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
40.0
40.0
30.0
30.0
Durable Goods,
New Orders
20.0
20.0
10.0
10.0
Capital Goods Nondefense,
Excluding Aircraft
0.0
0.0
-10.0
-10.0
Percent change, previous quarter
2011:Q4
2012:Q1
2012:Q2
2012:Q3
Dur.
2.48
-0.57
-0.62
-1.28
Cap.
1.36
0.09
-1.51
-6.38
-20.0
-30.0
-20.0
-30.0
-40.0
-40.0
09:Q3
10:Q1
10:Q3
Source: U.S. Census Bureau / Haver Analytics.
11:Q1
11:Q3
12:Q1
12:Q3
Residential investment posted another solid gain in the third quarter and has now
increased in each of the last six quarters.
Residential Investment
Annualized Percent Change
Annualized Percent Change
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
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
Source: U.S. Census Bureau / Haver Analytics.
The housing market continuted to improve in the third quarter. New home sales rose
for the fourth consecutive quarter to reach their highest level in three years. Existing
home sales also increased in the third quarter, more than offsetting the small dip
seen in the second quarter.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
600
6000
500
5500
Existing
Home Sales
400
5000
300
4500
200
4000
New Home Sales
100
3500
0
3000
09:Q3
10:Q1
10:Q3
Source: U.S. Census Bureau / Haver Analytics.
11:Q1
11:Q3
12:Q1
12:Q3
Government spending jumped in the third quarter, following two straight years of
quarterly declines. The improvement was due to an unexpected increase in federal
defense spending, which is likely to be temporary.
Government Spending
Annualized Percent Change
Annualized Percent Change
6.0
6.0
Contribution to % Change in Real GDP
4.0
2011:Q4
2012:Q1
2012:Q2
2012:Q3
-0.43
-0.60
-0.14
0.71
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
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
Exports fell in the third quarter, more than offsetting a smaller decrease in import
growth, which resulted in a slight drag on GDP from net exports.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
30.0
30.0
Imports
20.0
20.0
Exports
10.0
10.0
0.0
0.0
Net Exports Contribution to Percent Change in GDP
-10.0
2011:Q4
2012:Q1
2012:Q2
2012:Q3
-0.64
0.06
0.23
-0.18
-10.0
-20.0
-20.0
09:Q3
10:Q1
10:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
11:Q1
11:Q3
12:Q1
12:Q3
Measures of consumer attitudes improved in October, after falling slightly in the third
quarter, and are now at their highest levels since the recession. The optimism
was widespread, with respondants expressing more favorable views on job prospects,
personal finances, business conditions and overall economic expectations.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
100
100
80
80
60
60
Confidence
40
40
Expectations
20
20
0
0
09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 Oct-12
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
100
100
Sentiment
80
80
60
60
40
40
Expectations
20
20
09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 Oct-12
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
The ISM manufacturing index improved a bit in October, after easing on average in
the third quarter. While the index still signals slight expansion of the sector, growth
has slowed somewhat since the beggining of the year. The employment index
declined in October, falling slightly below its third quarter average.
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
Employment Index
40.0
40.0
35.0
35.0
09:Q3
10:Q1
09:Q4
10:Q3
10:Q2
11:Q1
10:Q4
Source: Institute for Supply Management / Haver Analytics.
11:Q3
11:Q2
12:Q1
11:Q4
12:Q3
12:Q2
Oct-12
Total consumer prices continued to decelerate in the third quarter, as they had in
each of the past three quarters, and core prices grew at their slowest rate in a year.
Meanwhile, total producer prices accelerated in the third quarter for the first time since
2011:Q3, due mostly to rising fuel costs, as the core index continued to slow.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Consumer Price Index,
excluding food and energy
Consumer Price Index
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
12.0
Producer Price Index,
excluding food and energy
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
Producer Price Index
-8.0
-8.0
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
Productivity growth held steady during the third quarter, as increased output again
outpaced a smaller gain in total hours. Total compensation growth slowed in the third
quarter, while unit labor costs fell for the first time this year.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
9.0
12.0
9.0
Output
Per Hour
Compensation
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
09:Q3
10:Q1
10:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
11:Q1
11:Q3
12:Q1
-6.0
12:Q3
Employment costs accelerated in the third quarter on a year-over-year basis, due to an
acceleration in benefit costs, while wage and salary growth continued to
hold steady.
Employment Cost Index
Percent Change, year-over-year
Percent Change, year-over-year
5.0
5.0
4.0
4.0
Benefit Costs
3.0
3.0
Total Compensation
2.0
2.0
1.0
1.0
Wages and Salaries
0.0
0.0
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
On average, oil prices in October dropped from the levels seen in August and
September. The daily closing prices fell consistently during the month, from around
$92 per barrel in early October to near $86 by the end of the month.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
100.0
140.0
120.0
95.0
100.0
90.0
80.0
60.0
85.0
40.0
80.0
20.0
09:Q3
10:Q2
11:Q1
Source: Wall Street Journal / Haver Analytics.
11:Q4
12:Q3
Jun-12
Aug-12
Oct-12
Data released since your last Directors' meeting show that the economy accelerated in the third
quarter, but likely not by enough to significantly reduce unemployment or stem the threats posed
by the ongoing fiscal and financial concerns both here and in Europe. Resilient consumers and
the burgeoning recovery in the housing market have brightened the outlook, but support from
manufacturing and business investment has declined. In all, growth is unlikely to improve much
further over the rest of the year.
Percent
Short-Term Interest Rates
0.5
0.4
Federal Funds Rate
(effective rate)
0.3
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
0.75
1.50
1.00
0.50
0.2
11:Q3 11:Q4
12:Q1 12:Q2 12:Q3 Oct-12
0.00
0.1
0.0
09:Q3 09:Q4
10:Q1 10:Q2
10:Q3 10:Q4
11:Q1
11:Q2 11:Q3
11:Q4 12:Q1
12:Q2 12:Q3
Source: Federal Reserve Board of Governors / Haver Analytics.
Oct-12