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The
President’s
Report to the
Board of
Directors
August 4, 2011
CURRENT ECONOMIC DEVELOPMENTS - August 4, 2011
Data released since your last Directors' meeting show the economy grew at a slow pace in
the second quarter, and that economic activity during both the recession and subsequent
recovery was weaker than previously estimated. The weakness in the economy through the
first half of the year was broad, with only business investment and inventory growth providing
consistent support. More robust job creation in the coming months will be imperative to
support a stronger recovery.
The increase in real GDP in the second quarter primarily reflected positive contributions from
exports, nonresidential fixed investment, inventory investment and federal government
spending. Those effects were partly offset by negative contributions from state and local
government spending and imports. First quarter growth was revised sharply downward due
mostly to downward adjustments to gross domestic private investment and net exports.
Initial claims for unemployment insurance eased a bit in July, but were little changed from
their average over the first six months of the year. Consumer attitudes were mixes in July
due to disparate short-term outlooks, but concerns about current job and income conditions
were evident in both surveys. Data from the manufacturing sector continue to support growth
in investment, although on a smaller scale. The ISM index fell further in July, but held above
50, and industrial production posted a small increase in the second quarter.
Headline inflation measures accelerated further in the second quarter, as did core indices.
Compensation costs, as measured by the ECI, also picked up due to higher benefit costs. Oil
prices were little changed in July after falling steadily in the latter part of the second quarter.
Real GDP growth accelerated in the second quarter, but only because first quarter
growth was revised sharply lower. Growth through the first half of the year has
averaged only 0.9%, and only 1.6% over the past four quarters. Revisions also
showed that the recession was more severe than previously thought.
Real Gross Domestic Product
Annualized Percent Change
Annualized Percent Change
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
-6.0
-6.0
-9.0
-9.0
-12.0
-12.0
08:Q2
08:Q4
09:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q4
10:Q2
10:Q4
11:Q2
While nominal incomes continued to rise steadily in the second quarter, real
disposable income managed only another small gain. The lack of income growth
has taken a toll on consumption, which was essentially flat in the second quarter.
Without more growth in either jobs or income, consumption is unlikely to improve
much in the near term.
Real Consumption
Personal Income
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
-6.0
-12.0
08:Q2
09:Q2
08:Q4
10:Q2
09:Q4
11:Q2
10:Q4
08:Q2
09:Q2
08:Q4
10:Q2
09:Q4
11:Q2
10:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
Lightweight vehicle sales rose in July from June, essentially matching their second
quarter average. The industry continued to be restricted by shortages of Japanese
models, as both Toyota and Honda saw more than a 20% drop in sales compared to
July 2010. Other manufacturers cited the ongoing job and income concerns of
potential customers as significant hurdles to a robust recovery in sales going forward.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
08:Q2 08:Q3
08:Q4 09:Q1
09:Q2
09:Q3 09:Q4
10:Q1 10:Q2
10:Q3 10:Q4
11:Q1 11:Q2
Jul-11
Source: Bureau of Economic Analysis / Haver Analytics.
Business investment accelerated in the second quarter, due largely to a rebound in
investment in structures. Investment in equipment and software eased further in
the second quarter, growing at its slowest pace since the recession.
Business Investment
Annualized Percent Change
Annualized Percent Change
30.0
30.0
Equipment and Software
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
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
10:Q4
11:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
Durable goods orders posted another solid year-over-year gain in the second
quarter, as did orders for nondefense capital goods, excluding aircraft. However,
those increases have been steadily declining over the past year.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
30.0
30.0
20.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
Durable Goods,
New Orders
-30.0
-30.0
-40.0
-40.0
08:Q2
08:Q4
09:Q2
Source: U.S. Census Bureau / Haver Analytics.
09:Q4
10:Q2
10:Q4
11:Q2
Residential investment posted a small increase in the second quarter, and overall
has been little changed over the past three quarters. On a more positive note,
residential investment is no longer a drag on GDP. From 2006 through the end of
the recession, residential investment restricted GDP by an average of 1.0% per
quarter. During the recovery, on average it has had no impact.
Annualized Percent Change
Residential Investment
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
Contribution to percent change in GDP
-40.0
10:Q4
11:Q1
11:Q2
0.06
-0.06
0.08
-40.0
-50.0
-50.0
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
10:Q4
11:Q2
Source: U.S. Census Bureau / Haver Analytics.
Housing sales remained weak in the second quarter, culminating with lower-thanexpected sales in June. New home sales were up overall in the second quarter, but
remain close to the record lows seen over the previous three quarters. Sales of
existing homes fell in the second quarter, erasing more than half of the previous
quarter's gain.
New and Existing Home Sales
Thousands of Units,
Annualized
Thousands of Units,
Annualized
750
625
6500
6000
New Home Sales
Existing
Home Sales
500
5500
375
5000
250
4500
125
4000
0
3500
08:Q2
08:Q4
09:Q2
Source: U.S. Census Bureau / Haver Analytics.
09:Q4
10:Q2
10:Q4
11:Q2
Government spending fell further in the second quarter, as state and local
governments continued to restrict their expenditures. Federal spending picked up
a bit in the second quarter, due primarily to a rebound in defense spending.
Government Spending
Annualized Percent Change
Annualized Percent Change
20.0
20.0
15.0
15.0
Federal
Total
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
State & Local
-10.0
-10.0
-15.0
-15.0
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
10:Q4
11:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
Import growth slowed significantly in the second quarter, more than offsetting a
smaller decline in export growth, allowing net exports to provide a small boost to real
GDP.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
30.0
30.0
Imports
20.0
20.0
10.0
10.0
Exports
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
08:Q2
08:Q4
09:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q4
10:Q2
10:Q4
11:Q2
Initial claims for unemployment insurance fell a bit in July, but remain elevated well
above pre-recession levels.
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:Q2
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
10:Q2
10:Q1
10:Q4
10:Q3
11:Q2
11:Q1
Jul-11
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
Measures of consumer attitudes were mixes in July, as confidence improved while
sentiment worsened. The difference was based in expectations, as respondents to
both surveys felt worse about current economic conditions. Some improvement
could be expected following the debt limit resolution, but concerns about the job
market and stagnant incomes will likely persist into the coming months.
Consumer Confidence and Expectations
Index, 1985 = 100
80
Index, 1985 = 100
100
100
80
Confidence
60
60
40
40
20
Expectations
20
0
0
08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 Jul-11
Index, 1966:Q1=100
Consumer Sentiment and Expectations
100
80
100
80
Sentiment
60
60
40
20
Index, 1966:Q1=100
40
Expectations
20
0
0
08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 Jul-11
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
The ISM manufacturing index continued to fall dramatically in July, reaching its
lowest level in two years. The index held above 50, however, a signal that the
manufacturing sector is still slowly expanding. The employment index also fell
sharply in July, displaying the largest single-month drop since late 2008.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
May
June
July
ISM
53.5
55.3
50.9
Emp.
58.2
59.9
53.5
65.0
60.0
65.0
ISM Index
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
08:Q2
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
10:Q2
10:Q1
10:Q4
10:Q3
11:Q2
11:Q1
Jul-11
Source: Institute for Supply Management / Haver Analytics.
Growth in industrial production slowed in the second quarter, due primarily to
decreases in the production of consumer goods and untilities. Capacity utilization
declined slightly in the second quarter, the first decline since the end of the recession.
Industrial Production and Capacity Utilization
Percent of Capacity
Annualized Percent Change
20.0
85.0
Industrial Production
10.0
80.0
0.0
75.0
-10.0
70.0
Capacity Utilization
(manufacturing)
-20.0
65.0
-30.0
60.0
08:Q2
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
Source: Federal Reserve Board of Governors / Haver Analytics.
10:Q2
10:Q1
10:Q4
10:Q3
11:Q2
11:Q1
Total consumer prices continued to accelerate in the second quarter, growing at their
fastest pace in nearly three years. The recent gains were due primarily to higher food
and energy prices, although the core index also continued to rise due to higher apparel
and vehicle prices. Both total and core measures for producers also picked up in the
second quarter.
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Consumer Price Index
Percent Change, Year-Over-Year
Consumer Price Index,
excluding food and energy
08:Q2
08:Q4
Percent Change, Year-Over-Year
09:Q2
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Consumer Price Index
09:Q4
10:Q2
10:Q4
Producer Price Index
11:Q2
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
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
10:Q4
11:Q2
Source: Bureau of Labor Statistics / Haver Analytics.
Growth in wages and salaries has held mostly steady over the past two years, but total
compensation costs have continued to rise as benefit costs have taken off. The
increase in benefit costs in the second quarter was the biggest in almost five years.
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
08:Q2
08:Q4
09:Q2
Source: Bureau of Labor Statistics / Haver Analytics.
09:Q4
10:Q2
10:Q4
11:Q2
After hitting their most recent peak in April, oil prices fell steadily through the
remainder of the second quarter. Prices held mostly steady in the mid-$90's during
July, before approaching $100 again late in the month.
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
08:Q2
09:Q1
09:Q4
10:Q3
11:Q2
Mar-11
May-11
Jul-11
Source: Wall Street Journal / Haver Analytics.
Overall, data since your last Directors' meeting show the economy grew at a slow pace in the
second quarter, and that economic activity during both the recession and subsequent recovery
was weaker than previously estimated. The weakness in the economy through the first half of
the year was broad, with only business investment and inventory growth providing consistent
support. More robust job creation in the coming months will be imperative to support a
stronger recovery.
Percent
2.5
Short-Term Interest Rates
2.0
1.5
1.0
Federal Funds Rate
(effective rate)
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
0.75
1.50
1.00
0.50
0.5
0.00
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
Jul-11
0.0
08:Q2 08:Q3
08:Q4 09:Q1
09:Q2 09:Q3
09:Q4 10:Q1
10:Q2 10:Q3
10:Q4 11:Q1
11:Q2 Jul-11
Source: Federal Reserve Board of Governors / Haver Analytics.
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
August 11, 2011
Current Economic Developments - Addendum: Data released in the past week
The employment situation report for July was better than anticipated. More jobs were
added than expected, and gains for the previous two months were revised higher. The
unemployment rate also dipped slightly in July, though that was due primarily to a
sizable decrease in the labor force. Also of positive note in the report were increases in
average hourly earnings and hours worked. Despite the employment report being better
than expected, the data did little to ease concerns about the economic outlook.
Productivity fell 0.3% in the second quarter, its second consecutive decline. Unit labor
costs and compensation per hour both slowed significantly in the second quarter,
growing at less than half the pace seen in the first quarter.
Through the first week of August, Redbook sales were up 0.7% compared to July, and
up 4.8% compared to the same period last year. Oil prices fell dramatically over the past
week, averaging $85.2 per barrel as opposed to the previous week's average of $95.8.
There are many data releases due out Thursday and Friday, and the data is expected
to come in mostly on the positive side. Improvements are expected in retail sales,
business inventories and foreign trade, but consumer sentiment is expected to fall
further.
Nonfarm payrolls added 117,000 jobs in July, and job gains for the previous two
months were revised larger by 56,000. Private employment increased by 154,000
jobs in July, and has increased by an average 164,000 per month so far this year.
The unemployment rate was unchanged in July from the second quarter average,
but down one-tenth from its June level.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
400
11.0
200
10.0
0
9.0
-200
-400
-600
Change from Previous Month
May-11
Jun-11
Jul-11
53,000
46,000
117,000
8.0
7.0
-800
09:Q2 09:Q4 10:Q2 10:Q4 11:Q2
09:Q3 10:Q1 10:Q3 11:Q1 Jul-11
Source: Bureau of Labor Statistics / Haver Analytcis.
09:Q2 09:Q4 10:Q2 10:Q4 11:Q2
09:Q3 10:Q1 10:Q3 11:Q1 Jul-11
Productivity decreased again in the second quarter, the result of hours worked
increasing faster than output. Growth in unit labor costs and hourly compensation
both slowed during the quarter. In the first quarter, productivity was revised sharply
downward, from the previously estimated 1.8% increase to a 0.6% decline. The change
was due almost entirely to lower output, as hours worked were mostly unrevised.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Output
Per Hour
9.0
9.0
Compensation
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
-6.0
-9.0
08:Q2
-6.0
Unit Labor Costs
08:Q4
09:Q2
Source: Bureau of Labor Statistics / Haver Analytics.
09:Q4
10:Q2
10:Q4
-9.0
11:Q2