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The
President’s
Report to the
Board of
Directors
May 4, 2012
CURRENT ECONOMIC DEVELOPMENTS - May 4, 2012
Data since your last Directors' meeting show the economy continued to grow in the first
quarter, but at a slower pace than in the fourth quarter. Contributing to the slowdown were
effects that are expected to be temporary - namely higher oil prices and another sizeable
drop in military spending - and growth is expected to pick up a bit over the rest of the year.
While the recovery remains on course, persistant downside risks stemming from domestic
fiscal issues and the European debt crisis continue to shed some uncertainty on the outlook.
In April, nonfarm payrolls posted a weaker-than-expected gain, but the unemployment rate
fell one-tenth of a percentage point as the size of the labor force shrunk further. Initial
claims for unemployment insurance increased in April, and were well above their first
quarter average.
The increase in real GDP in the first quarter primarily reflected positive contributions from
personal consumption expenditures, private inventory investment, exports, and residential
investment that were partly offset by negative contributions from government spending and
nonresidential investment, as well as an increase in imports.
In April, consumer attitudes were mixed but remained well above their late summer/early
fall levels. The ISM manufacturing index improved in April, suggesting a possible
improvement in manufacturing following the disappointing durable goods data for March.
Inflation concerns remain minimal as headline measures slowed in the first quarter, and
core indices remained at moderate levels. Unit labor costs eased in the first quarter, as did
total compensation costs, as measured by the ECI. Oil prices fell in April but still averaged
over $103 per barrel for the month.
In April, nonfarm payrolls added 115,000 jobs, and revisions to the previous two
months' estimates resulted in 53,000 additional jobs being created. Payroll gains
were lower than anticipated and well below the first quarter monthly average of
233,000. The unemployment rate fell one-tenth of a percentage point in April to 8.1%,
as a decrease in civilian employment was outpaced by a larger drop in the labor force.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
400
10.0
200
9.5
0
9.0
-200
8.5
-400
Change from Previous Month
-600
Feb-12
Mar-12
Apr-12
259,000
154,000
115,000
8.0
7.5
-800
10:Q1 10:Q3
11:Q1 11:Q3
12:Q1
10:Q2
10:Q4
11:Q2
11:Q4 Apr-12
Source: Bureau of Labor Statistics / Haver Analytics.
10:Q1 10:Q3 11:Q1 11:Q3 12:Q1
10:Q2 10:Q4 11:Q2 11:Q4 Apr-12
Initial claims for unemployment insurance rose on average in April, reaching their
highest level since November, despite a decrease in the last week of the month.
Increases in first three weeks of the month marked a shift away from the downward
trend seen since the middle of last year.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
700
700
Monthly Levels
650
650
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12*
391
378
376
367
364
384
600
600
550
550
500
500
450
450
400
400
350
350
300
300
250
250
200
200
09:Q1
09:Q3
09:Q2
10:Q1
09:Q4
10:Q3
10:Q2
11:Q1
10:Q4
11:Q3
11:Q2
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
12:Q1
11:Q4
Apr-12*
* 4-wk. ave. ending April 28
The deceleration in real GDP in the first quarter primarily reflected a deceleration in
private inventory investment and a downturn in nonresidential fixed investment that
were partly offset by accelerations in personal consumption expenditures and in
exports.
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
-4.0
-4.0
-6.0
-6.0
-8.0
-8.0
09:Q1
09:Q3
10:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
10:Q3
11:Q1
11:Q3
12:Q1
In the first quarter, personal income posted its largest quarterly gain in one year,
but real incomes slowed following two quarters of accelerated growth. Consumption
accelerated for the third straight quarter, despite the lower real income, and continued
to be a primary contributor to GDP growth.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
5.0
12.0
4.0
Personal
Income
9.0
3.0
6.0
2.0
3.0
1.0
0.0
0.0
Real Disposable
Income
-3.0
-1.0
-2.0
-6.0
-3.0
-9.0
-4.0
-12.0
-5.0
09:Q1
10:Q1
09:Q3
11:Q1
10:Q3
12:Q1
11:Q3
09:Q1
10:Q1
09:Q3
11:Q1
10:Q3
12:Q1
11:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
Lightweight vehicle sales inched up in April, slightly above their March level, but not
quite reaching their first quarter average. Sales in April were largely supported by
increased demand for smaller, more fuel-efficient vehicles as consumers looked to
combat elevated gas prices.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
16.0
12.0
8.0
4.0
0.0
09:Q1 09:Q2
09:Q3 09:Q4
10:Q1 10:Q2
10:Q3 10:Q4
11:Q1 11:Q2
11:Q3 11:Q4
12:Q1Apr-12
Source: Bureau of Economic Analysis / Haver Analytics.
Business investment decreased in the first quarter for the first time in over two years,
and equipment and software investment slowed for the second consecutive quarter.
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
-10.0
-10.0
Business
Investment
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
In the first quarter, durable goods orders decreased slightly for the first time in over
one year, and orders of nondefense capital goods, excluding aircraft, slowed to nearly
flat. On a year-over-year basis, durable goods orders posted a weaker gain
compared to the sharp upturn in the fourth quarter of 2011, and growth of core orders
continued to decelerate.
Percent Change, Previous Quarter
Durable Goods Orders
Percent Change, Previous Quarter
15.0
15.0
Capital Goods Nondefense,
Excluding Aircraft
10.0
10.0
5.0
5.0
0.0
0.0
Durable Goods,
New Orders
-5.0
-5.0
Percent Change, year-over-year
-10.0
-15.0
11:Q2
11:Q3
11:Q4
12:Q1
Durables
8.2
8.8
12.8
7.8
Cap. Ex. Air
10.6
9.5
7.4
7.3
-10.0
-15.0
-20.0
-20.0
09:Q1
09:Q3
10:Q1
Source: U.S. Census Bureau / Haver Analytics.
10:Q3
11:Q1
11:Q3
12:Q1
Residential investment increased in the first quarter at its fastest pace in nearly two
years. This marks the fourth consecutive quarterly increase, following a period of
volatility directly after the recession.
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
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
Source: U.S. Census Bureau / Haver Analytics.
New home sales ticked upward in the first quarter, following a solid increase in the
previous quarter. Existing home sales posted another strong gain in the first quarter
and have erased the majority of the losses seen in the first three quarters of 2010.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
700
6500
600
6000
New
Home Sales
500
5500
Existing
Home Sales
400
5000
300
4500
200
4000
100
3500
0
3000
09:Q1
09:Q3
10:Q1
Source: U.S. Census Bureau / Haver Analytics.
10:Q3
11:Q1
11:Q3
12:Q1
Government spending declined again in the first quarter, although not as much as in
the previous quarter, subtracting over half of a percentage point from GDP growth.
State and local government cutbacks, as well as another decrease in federal defense
spending, contributed to the decline in overall government expenditures.
Government Spending
Annualized Percent Change
Annualized Percent Change
25.0
25.0
20.0
20.0
15.0
15.0
Federal
10.0
10.0
Total
5.0
5.0
0.0
0.0
-5.0
-5.0
State
and Local
-10.0
-10.0
-15.0
-15.0
-20.0
-20.0
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
Imports continued to accelerate in the first quarter, led by large increases in
industrial supplies and auto imports, while exports grew at a slightly faster rate.
Overall net exports had a nearly neutral effect on GDP in the first quarter, after
providing a slight drag in the fourth quarter.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
50.0
50.0
40.0
40.0
30.0
30.0
Imports
20.0
20.0
10.0
10.0
0.0
0.0
Exports
-10.0
-10.0
-20.0
-20.0
Contribution to % Change in GDP: Net Exports
-30.0
-40.0
2011:Q2
2011:Q3
2011:Q4
2012:Q1
0.24
0.43
-0.26
-0.01
-30.0
-40.0
-50.0
-50.0
09:Q1
09:Q3
10:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
10:Q3
11:Q1
11:Q3
12:Q1
Consumer confidence fell unexpectedly in April, but was still higher than its first
quarter average. Sentiment increased again in April, reaching its highest level
since February 2011. In general, consumers are slightly less upbeat towards
employment conditions and reported weaker personal financial situations.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
100
100
Expectations
80
80
60
60
40
40
Confidence
20
20
0
0
09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 Apr-12
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
100
100
80
80
Sentiment
60
60
Expectations
40
40
20
20
09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 Apr-12
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
Both the ISM index and the employment index improved in April to their highest
levels since June 2011, indicating the continued expansion of the manufacturing
sector that began after the end of the recession.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
60.0
Employment Index
ISM Index
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
09:Q1
09:Q3
09:Q2
10:Q1
09:Q4
10:Q3
10:Q2
Source: Institute for Supply Management / Haver Analytics.
11:Q1
10:Q4
11:Q3
11:Q2
12:Q1
11:Q4
Apr-12
Headline consumer inflation eased further in the first quarter, due primarily to
decelerating food and energy prices. The core index continued to pick up in the first
quarter, but appears to be leveling off from the steady increases of last year. The
headline producer price index exhibited similar behavior in the first quarter, while the
core index eased slightly.
Percent Change, Year-Over-Year
Consumer Price Index
Percent Change, Year-Over-Year
6.0
6.0
Consumer Price Index
Consumer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
12.0
9.0
Producer Price Index,
excluding food and energy
6.0
9.0
Producer Price Index
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
-6.0
-6.0
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
Oil prices continued to rise sharply during the first quarter, averaging over $102 per
barrel and erasing the decline seen in the third quarter of last year. However, prices
fell in April from March, the first monthly decline since September 2011.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
120.0
130.0
120.0
110.0
110.0
100.0
90.0
100.0
80.0
70.0
60.0
90.0
50.0
40.0
80.0
30.0
09:Q1
09:Q4
10:Q3
Source: Wall Street Journal / Haver Analytics.
11:Q2
12:Q1
Dec-11
Feb-12
Apr-12
Productivity fell in the first quarter, as hours worked increased faster than output.
Compensation per hour and unit labor costs both slowed for the second straight
quarter.
Productivity and Costs
Annualized Percent Change
Annualized Percent Change
12.0
12.0
9.0
Output
Per Hour
9.0
Compensation
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
-6.0
-9.0
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
-9.0
12:Q1
11:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
In the first quarter, total compensation growth eased as slowing benefit costs offset
faster wage and salary growth. Growth in benefit costs has slowed substantially since
mid-2011 and has been the driving force behind the downward trend in total
compensation seen over that time.
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
Wages and Salaries
1.0
0.0
1.0
0.0
09:Q1
09:Q3
10:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
10:Q3
11:Q1
11:Q3
12:Q1
Data since your last Directors' meeting show the economy continued to grow in the first
quarter, but at a slower pace than in the fourth quarter. Contributing to the slowdown were
effects that are expected to be temporary - namely higher oil prices and another sizeable
drop in military spending - and growth is expected to pick up a bit over the rest of the year.
While the recovery remains on course, persistant downside risks stemming from domestic
fiscal issues and the European debt crisis continue to shed some uncertainty on the outlook.
Percent
Short-Term Interest Rates
0.8
0.6
Federal Funds Rate
(effective rate)
1.50
0.4
1.00
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
0.75
0.50
0.2
0.00
11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 Apr-12
0.0
09:Q1 09:Q2
09:Q3 09:Q4
10:Q1
10:Q2 10:Q3
10:Q4 11:Q1
11:Q2 11:Q3
11:Q4 12:Q1
Source: Federal Reserve Board of Governors / Haver Analytics.
Apr-12