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The
President’s
Report to the
Board of
Directors
November 3, 2011
CURRENT ECONOMIC DEVELOPMENTS - November 3, 2011
Data since your last Directors' meeting show the economy grew at its fastest pace of the
year in the third quarter. Despite the pick up, third quarter growth was not robust enough to
significantly reduce unemployment and the same areas of weakness and downside risks
remain as threats to higher growth in the near term. Confidence is low, the housing market
is still depressed, and the European debt situation remains in flux. Resilient consumers and
businesses continue to support the economy, but they will need to be joined by other
sectors for the recovery to strengthen.
The growth in real GDP in the third quarter primarily reflected positive contributions from
personal consumption expenditures, nonresidential fixed investment, exports and federal
government spending. Those effects were partly offset by negative contributions from private
inventory investment, state and local government spending 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 decreased in October, but remain well above their pre-recession
levels. The ISM index declined slightly in October, but continued to signal a small expansion
in the manufacturing sector.
Total consumer inflation accelerated further in the third quarter, as did the core index. Unit
labor costs fell in the third quarter and total compensation costs, as measured by the ECI,
slowed. Oil prices rose steadily through October, but their average for the month was
in line with those of the previous two months.
Real GDP growth acccelerated in the third quarter to its fastest growth pace in one
year. The higher rate was due primarily to accelerations in personal consumption
expenditures and nonresidential fixed investment and a smaller decrease in state
and local government spending, the effects of which were partly offset by a larger
decrease in private inventory investment.
Annualized Percent Change
Real Gross Domestic Product
Annualized Percent Change
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
-10.0
-10.0
08:Q3
09:Q1
09:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
10:Q1
10:Q3
11:Q1
11:Q3
Real consumption grew at its fastest pace of the year in the third quarter, and was
the primary contributor to the increase in third quarter GDP. The strong consumption
occured despite a decrease in real incomes and only a small increase in nominal
incomes.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
12.0
Personal
Income
9.0
4.0
6.0
2.0
3.0
0.0
0.0
-3.0
-2.0
-6.0
Real Disposable
Income
-9.0
-4.0
-12.0
-15.0
-6.0
08:Q3
09:Q3
09:Q1
10:Q3
10:Q1
11:Q3
08:Q3
11:Q1
09:Q3
09:Q1
10:Q3
10:Q1
11:Q3
11:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
Total lightweight vehicle sales rose again in October, easily eclipsing their third quarter
average and nearly equaling the most recent high established in February. Sales for
domestic manufacturers were especially strong - the best in over three years. Sales
have likely been helped by the increasing need for consumers to replace older cars.
The average age of vehicles nationwide has risen to 10.7 years, from 9.8 in 2007.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
16.0
12.0
8.0
4.0
0.0
08:Q3 08:Q4
09:Q1 09:Q2
09:Q3 09:Q4
10:Q1 10:Q2
10:Q3 10:Q4
11:Q1 11:Q2
11:Q3 Oct-11
Source: Bureau of Economic Analysis / Haver Analytics / Edmunds.com / N.Y
Times.
Business investment accelerated in the third quarter, due to double-digit gains in
both equipment and software and nonresidential structures.
Business Investment
Annualized Percent Change
Annualized Percent Change
40.0
40.0
Equipment
and Software
30.0
30.0
20.0
20.0
Business
Investment
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
Structures
-40.0
-40.0
-50.0
-50.0
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
New orders for durable goods continued to improve in the third quarter, and at a
higher pace than seen in the second quarter. Orders of nondefense capital goods,
excluding aircraft, slowed a bit in the third quarter but remained solid.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
30.0
30.0
20.0
20.0
10.0
Capital Goods Nondefense,
Excluding Aircraft
10.0
Durable Goods,
New Orders
0.0
0.0
-10.0
-10.0
Percent change, previous quarter
-20.0
-30.0
2010:Q4
2011:Q1
2011:Q2
2011:Q3
Dur.
-0.56
4.48
1.00
3.92
Cap.
2.37
0.22
4.68
2.47
-20.0
-30.0
-40.0
-40.0
08:Q3
09:Q1
09:Q3
Source: U.S. Census Bureau / Haver Analytics.
10:Q1
10:Q3
11:Q1
11:Q3
Residential investment posted another small increase in the third quarter, marking the
first consecutive quarterly gains since the second half of 2005. Despite the recent
gains, the current level of residential investment is still below the initial trough
following 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
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
Source: U.S. Census Bureau / Haver Analytics.
The housing market remained depressed in the third quarter. New home sales eased
a bit and were little changed from the levels seen over the previous four quarters.
Existing home sales were flat in the third quarter, and despite some volatility over the
past two years, were similar to the sales paces seen during the recession.
New and Existing Home Sales
Thousands of Units,
Annualized
Thousands of Units,
Annualized
700
600
7000
6500
Existing
Home Sales
6000
500
5500
400
5000
300
4500
200
4000
New Home Sales
100
3500
0
3000
08:Q3
09:Q1
09:Q3
Source: U.S. Census Bureau / Haver Analytics.
10:Q1
10:Q3
11:Q1
11:Q3
Government spending was unchanged in the third quarter, following three straight
quarterly declines. The improvement is likely temporary, however, as spending is
expected to fall further in the coming years as fiscal policy continues to tighten.
Government Spending
Annualized Percent Change
Annualized Percent Change
8.0
8.0
Contribution to % Change in Real GDP
6.0
2010:Q4
2011:Q1
2011:Q2
2011:Q3
-0.58
-1.23
-0.18
0.00
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
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
Growth in both imports and exports was little changed in the third quarter. The two
series have moved in tandem throughout 2011, resulting in a mostly steady level of
net exports.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
50.0
50.0
40.0
40.0
Exports
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
Imports
-20.0
-20.0
Net Exports: Bil. Chn. 2005$
-30.0
-40.0
2010:Q4
2011:Q1
2011:Q2
2011:Q3
-414.2
-424.4
-416.4
-409.4
-30.0
-40.0
-50.0
-50.0
08:Q3
09:Q1
09:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
10:Q1
10:Q3
11:Q1
11:Q3
Measures of consumer attitudes were mixed in October, and despite some
improvement in sentiment, estimates are at or near their lowest levels since the
recession. The pessimism is widespread, with respondants concerned about job
prospects, personal finances, business conditions and the ability of elected officials
to address any ofthose issues.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
100
100
Confidence
80
80
60
60
40
40
Expectations
20
20
0
0
08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 Oct-11
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
100
100
Sentiment
80
80
60
60
40
40
Expectations
20
20
08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 Oct-11
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
Initial claims for unemployment insurance came down some in the third quarter and
eased a bit more in October. But overall, claims have been little changed this year and
seem to be stuck around the 400,000 level. 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
700
700
650
650
600
600
550
550
500
500
450
450
400
400
350
350
300
300
250
250
08:Q3
09:Q1
08:Q4
09:Q3
09:Q2
10:Q1
09:Q4
10:Q3
10:Q2
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
11:Q1
10:Q4
11:Q3
11:Q2
Oct-11*
*Four-week moving average, ending October 29.
The ISM manufacturing index eased a bit in October, but matched its third quarter
average. While the index still signals slight expansion of the sector, growth has
slowed considerably from earlier in the year. The employment index also declined
in October, but improved somewhat from the third 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
40.0
40.0
35.0
35.0
Employment Index
30.0
30.0
25.0
25.0
20.0
20.0
08:Q3
09:Q1
08:Q4
09:Q3
09:Q2
10:Q1
09:Q4
10:Q3
10:Q2
11:Q1
10:Q4
11:Q3
11:Q2
Oct-11
Source: Institute for Supply Management / Haver Analytics.
During the third quarter, price measures continued to creep upward. Consumer prices
have risen steadily thoughout the year, and third quarter growth was the fastest since
the second half of 2008. Producer price indices also rose further in the third quarter,
advancing at their fastest paces since the end of the recession.
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
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11: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
08:Q3
09:Q1
09:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
10:Q1
10:Q3
11:Q1
11:Q3
Productivity grew during the third quarter at its fastest pace since the first quarter of
2010, easily offsetting the small declines seen in the first and second quarters of this
year. Total compensation slowed in the third quarter, while unit labor costs fell.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
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
-6.0
-9.0
08:Q3
-6.0
Unit Labor Costs
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
-9.0
11:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
Employment costs eased in the third quarter on a year-over-year basis, as benefit
costs decelerated and wage and salary growth continued to hold steady. On a quarterly
basis the ECI grew 0.3% in the third quarter, matching the record lows seen in the first
and third quarters of 2009.
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
1.0
2.0
1.0
Wages and Salaries
0.0
0.0
08:Q3
09:Q1
09:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
10:Q1
10:Q3
11:Q1
11:Q3
On average, oil prices in October were similar to the levels seen in August and
September. But the daily closing prices actually rose consistently during the month,
from near $75 per barrel in early October to the low $90s 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
Oct-11
20.0
08:Q3
09:Q2
10:Q1
10:Q4
11:Q3
Jun-11
Aug-11
Source: Wall Street Journal / Haver Analytics.
Overall, data since your last Directors' meeting show the economy grew at its fastest pace of the
year in the third quarter. Despite the pick up, growth was not robust enough to significantly reduce
unemployment and the same areas of weakness and downside risks remain as threats to higher
growth in the near term. Confidence is low, the housing market is still depressed, and the
European debt situation remains in flux. Resilient consumers and businesses continue to support
the economy, but they will need to be joined by other sectors for the recovery to strengthen.
Percent
Short-Term Interest Rates
2.0
1.5
Federal Funds Rate
(effective rate)
1.0
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
0.75
1.50
1.00
0.50
0.5
10:Q3 10:Q4
11:Q1 11:Q2 11:Q3 Oct-11
0.00
0.0
08:Q3 08:Q4
09:Q1 09:Q2
09:Q3 09:Q4
10:Q1 10:Q2
10:Q3 10:Q4
11:Q1 11:Q2
Source: Federal Reserve Board of Governors / Haver Analytics.
11:Q3 Oct-11
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
November 10, 2011
Current Economic Developments - Addendum: Data released in the past week
Last Friday's employment report showed continued, modest improvement in the labor
market. Nonfarm payrolls added 80,000 jobs in October and payroll estimates for the
previous two months were revised substantially upward. While government payrolls continue
to shrink, private payrolls have increased by more than 150,000 per month this year on
average. The unemployment rate fell one-tenth of a percentage point to 9.0% in October as
a sizable increase in civilian employment outpaced a smaller increase in the labor force.
Average hourly earnings posted a small increase in October, while average hours worked
held steady. The higher earnings, combined with the larger payrolls, could translate to
higher incomes in the fourth quarter.
Wholesale inventories declined 0.1% in September, their first decrease in two years. Sales
at the wholesale level increased 0.5% in September, their fourth consecutive monthly gain.
Redbook sales rose 1.4% in the first week of November, compared to October, and were
up 3.1% versus the same period last year. Oil prices rose during the past week, and have
averaged $94.2 per barrel so far in November after averaging $86.4 per barrel in October.
Nonfarm payrolls added 80,000 jobs in October, and job gains for the previous two
months were revised upward by a total of 102,000 jobs. The increases helped the
unemployment rate fall one-tenth of a percentage point to 9.0%. Total civilian
employment posted another large gain in October, and has increased by an average
335,000 over the past three months, reaching its highest level since April 2009.
Unemployment Rate
Nonfarm Payroll Employment
Change from Previous Quarter
Rate
300
12.0
150
11.0
0
10.0
-150
9.0
-300
8.0
-450
7.0
-600
6.0
-750
5.0
4.0
-900
08:Q3
09:Q3
09:Q1
10:Q3
10:Q1
11:Q3
11:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q3
09:Q3
09:Q1
10:Q3
10:Q1
11:Q3
11:Q1