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The
President’s
Report to the
Board of
Directors
May 6, 2010
CURRENT ECONOMIC DEVELOPMENTS - May 6, 2010
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. Businesses continued to invest
without adding to payrolls, and consumers continued to spend despite not being hired or
seeing their incomes rise. Those conditions are not likely sustainable, and will need to be
addressed by an improvement in employment conditions for the positive momentum in the
recovery to carry through the rest of the year.
The increase in real GDP in the first quarter primarily reflected positive contributions from
personal consumption expenditures, private inventory investment, exports, and
nonresidential investment. Those effects were partly offset by decreases in state and local
government spending and residential investment and an increase in imports.
In April consumer attitudes were mixed, persistent in their recent volatile pattern that has
left them little improved from where they stood late last summer. Initial claims for
unemployment insurance increased a bit in April but were down slightly from their first
quarter average. The ISM manufacturing and employment indices both continued to
improve in April, reaching their highest levels in six and five years, respectively.
Inflation concerns remained secondary in the first quarter. Core inflation indices for both
consumers and producers saw only minor monthly changes during the quarter, as did
headline prices for consumers. Unit labor costs fell further in the first quarter while total
compensation costs, as measured by the ECI, accelerated a bit from the record-low pace
of the previous two quarters. Oil prices did rise further in April, reaching their highest
sustained levels in over a year.
Real GDP grew in the first quarter, but at a slower rate than seen in the fourth quarter.
The slowdown in GDP's growth rate was primarily due to decelerations in private
inventory investment and exports, a downturn in residential investment and a larger
decrease in state and local government spending that were partly offset by an
acceleration in personal consumption expenditures and a slowdown in imports.
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
07:Q1
07:Q3
08:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q3
09:Q1
09:Q3
10:Q1
Consumption posted its biggest gain in three years in the first quarter, despite no
change in real income. The recent increases in consumption have played a key
role in the recovery of GDP, contributing more than 2.5% to growth in the first quarter.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
12.0
5.0
Real Disposable
Income
9.0
4.0
6.0
3.0
3.0
2.0
1.0
0.0
0.0
-3.0
-1.0
-6.0
-2.0
-3.0
Personal
Income
-9.0
-4.0
-12.0
-5.0
07:Q1
08:Q1
07:Q3
09:Q1
08:Q3
10:Q1
09:Q3
07:Q1
08:Q1
07:Q3
09:Q1
08:Q3
10:Q1
09:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
Lightweight vehicle sales were up slightly in April from their first quarter average, but
down a bit from the March sales pace. Sales in both March and April were up over
20% from their year-ago levels.
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
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
08:Q3 08:Q4
09:Q1 09:Q2
09:Q3 09:Q4
10:Q1Apr-10
Source: Bureau of Economic Analysis / Haver Analytics.
Business investment increased again in the first quarter, led by another solid, yet
albeit smaller, increase in equipment and software investment.
Business Investment
Annualized Percent Change
Annualized Percent Change
40.0
40.0
30.0
30.0
20.0
Business
Investment
Equipment
and Software
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
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
On a year-over-year basis, new orders for durable goods posted their first increase in
two years in the first quarter, and their biggest one since the fourth quarter of 2005.
Orders for nondefense capital goods, excluding aircraft, also rose for the first time in
over a 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
Durable Goods,
New Orders
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
07:Q1
07:Q3
08:Q1
Source: U.S. Census Bureau / Haver Analytics.
08:Q3
09:Q1
09:Q3
10:Q1
Residential investment fell in the first quarter, following two quarters of growth which
was likely due to the stimulus home-buying rebate program.
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
-50.0
-50.0
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
Source: U.S. Census Bureau / Haver Analytics.
With the extended rebate plan set to expire in April, home sales posted strong gains
in March. Those sales weren't enough to offset the weak sales in January and
February, resulting in sales being down overall for the quarter.
New and Existing Home Sales
Thousands of Units,
Annualized
Thousands of Units,
Annualized
1000
7000
6500
800
New
Home Sales
Existing
Home Sales
600
6000
5500
400
5000
200
4500
0
4000
07:Q1
07:Q3
08:Q1
Source: U.S. Census Bureau / Haver Analytics.
08:Q3
09:Q1
09:Q3
10:Q1
Government spending decreased again in the first quarter, due entirely to cut-backs
in state and local government spending. Federal spending increased slightly in the
first quarter, after holding steady in the fourth quarter.
Government Spending
Annualized Percent Change
Annualized Percent Change
15.0
15.0
Total
Federal
10.0
10.0
5.0
5.0
0.0
0.0
State
and Local
-5.0
-5.0
-10.0
-10.0
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
Exports and imports both continued to rise in the first quarter, further evidence of
increasing global and domestic demand.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
40.0
40.0
30.0
30.0
20.0
20.0
Exports
10.0
10.0
0.0
0.0
-10.0
-10.0
Imports
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
07:Q1
07:Q3
08:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q3
09:Q1
09:Q3
10:Q1
Consumer attitudes were mixed in April. Consumer confidence rose sharply for the
second consecutive month, yet sentiment eased slightly following no change in
March. Overall consumers felt better about the economy as a whole in April, but
were mixed about the recovery retaining its momentum in the coming months.
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
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 Apr-10
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
100
100
90
90
Sentiment
80
80
70
70
60
60
50
50
40
40
Expectations
30
30
20
20
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 Apr-10
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
Initial claims for unemployment insurance declined through the first quarter, but picked
up a bit in April, and remain above levels more consistent with healthy labor conditions.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
700
700
650
600
650
Monthly Levels
Jan-10
Feb-10
Mar-10
Apr-10
480
468
450
459
550
600
550
500
500
450
450
400
400
350
350
300
300
250
250
200
200
07:Q1
07:Q3
07:Q2
08:Q1
07:Q4
08:Q3
08:Q2
09:Q1
08:Q4
09:Q3
09:Q2
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
10:Q1
09:Q4
Apr-10
The ISM index improved further in the first quarter, and kept rising in April. The April
estimate showed a greater than 85% improvement over the record low recorded in
December 2008. The employment index hit a five-year high in April.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
60.0
60.0
ISM Index
55.0
55.0
50.0
50.0
45.0
45.0
40.0
40.0
Employment Index
35.0
35.0
30.0
30.0
25.0
25.0
20.0
20.0
07:Q1
07:Q3
07:Q2
08:Q1
07:Q4
08:Q3
08:Q2
09:Q1
08:Q4
09:Q3
09:Q2
10:Q1
09:Q4
Apr-10
Source: Institute for Supply Management / Haver Analytics.
Total consumer prices rose moderately in the first quarter compared to the previous
year, but that was due more to how low prices were last year than to recent price
increases. Monthly changes to CPI during the first quarter were quite small. That
data, along with only slight changes to the core indices in the first quarter, has kept
inflation concerns muted for now.
Percent Change, Year-Over-Year
Consumer Price Index
Percent Change, Year-Over-Year
6.0
6.0
Consumer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
Consumer Price Index
-2.0
-2.0
07:Q1
07:Q3
Percent Change, Year-Over-Year
08:Q1
08:Q3
09:Q1
Producer Price Index
09:Q3
10:Q1
Percent Change, Year-Over-Year
12.0
12.0
9.0
9.0
Producer Price Index,
excluding food and energy
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Producer Price Index
-6.0
-6.0
07:Q1
07:Q3
08:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q3
09:Q1
09:Q3
10:Q1
Productivity growth slowed in the first quarter but still posted a solid gain. Growth in
hourly compensation accelerated but unit labor costs continued to fall.
Productivity and Costs
Percent Change, Previous Quarter (annualized)
Percent Change, Previous Quarter (annualized)
12.0
12.0
9.0
9.0
Compensation
Per Hour
Output
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
-9.0
07:Q1
07:Q3
08:Q1
08:Q3
-6.0
09:Q1
09:Q3
-9.0
10:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
In the first quarter, total compensation accelerated for the first time since 2007:Q1 on
a year-over-year basis. The faster growth rate was due primarily to a pick up in benefit
costs, as wages and salaries grew at the same pace as they had in the previous two
quarters.
Employment Cost Index
Percent Change year-over-year
Percent Change year-over-year
5.0
5.0
4.0
4.0
Total
Compensation
3.0
3.0
2.0
2.0
Benefit Costs
1.0
1.0
Wages and Salaries
0.0
0.0
07:Q1
07:Q3
08:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q3
09:Q1
09:Q3
10:Q1
Oil prices rose a bit during the first quarter, and continued to rise in April, posting
their highest monthly average since September 2008. However, prices have fallen
over $6 per barrel during the first few days of May.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
90.0
130.0
120.0
87.5
110.0
85.0
100.0
82.5
90.0
80.0
80.0
70.0
77.5
60.0
75.0
50.0
72.5
40.0
70.0
Apr-10
30.0
07:Q1
07:Q4
08:Q3
09:Q2
10:Q1
Dec-09
Feb-10
Source: Wall Street Journal / Haver Analytics.
Overall, 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. Businesses continued to invest
without adding to payrolls, and consumers continued to spend despite not being hired or
seeing their incomes rise. Those conditions are not likely sustainable, and will need to be
addressed by an improvement in employment conditions for the positive momentum in the
recovery to carry through the rest of the year.
Percent
Short-Term Interest Rates
8.0
6.0
Federal Funds Rate
(effective rate)
1.50
4.0
1.00
0.50
2.0
Discount Window Primary Credit
0.50
0.50
0.50
0.50
0.61
0.75
0.00
09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 Apr-10
0.0
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
08:Q3 08:Q4
09:Q1 09:Q2
09:Q3 09:Q4
Source: Federal Reserve Board of Governors / Haver Analytics.
10:Q1 Apr-10
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
May 13, 2010
Current Economic Developments - Addendum: Data released in the past week
Nonfarm payrolls surged in April, posting their largest single-month gain since March 2006.
Part of the increase was due to temporary workers hired as part of the 2010 Census, however,
even with those hires removed employment still had its biggest gain in over two years.
Despite recent increases in employment, the unemployment rate rose to 9.9%, the highest
estimate this year. Much of that increase, however, can be explained by people returning to
the labor force and actively seeking employment.
The U.S. trade deficit widened to $40.4 billion in March, as exports rose 3.2% and imports
increased 3.1%. The deficit in March was the biggest since December 2008. Also in March,
wholesale inventories rose 0.4% and sales increased 2.4%.
Last week concern spread over the debt crisis in Greece. The joint bailouts approved by the
IMF and the EU early this week have so far calmed many of those fears, but it is much too
early to draw any conclusions about the long-term effectiveness of the plans. The short-term
package provides an immediate €110 billion to Greece to shore up its economy and provide
market confidence. The long-term plan will make nearly €1 trillion available for loans to other
troubled European nations, such as Portugal and Spain, should conditions deteriorate.
In April nonfarm payrolls added 290,000 jobs, and revisions to the previous two
months' estimates resulted in 121,000 additional jobs being created. Despite those
gains, the unemployment rate rose two-tenths of a percentage point in April to 9.9%.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
400
12.0
Change from Previous Month
200
Feb-10
Mar-10
Apr-10
39,000
230,000
290,000
11.0
10.0
9.0
0
8.0
-200
7.0
6.0
-400
5.0
-600
4.0
3.0
-800
08:Q1 08:Q3
09:Q1 09:Q3
10:Q1
08:Q2
08:Q4
09:Q2
09:Q4 Apr-10
Source: Bureau of Labor Statistics.
08:Q1 08:Q3 09:Q1 09:Q3 10:Q1
08:Q2 08:Q4 09:Q2 09:Q4 Apr-10
Global stock markets fell sharply through the last week of April and first week of
May, but have recouped some of those losses this week in response to the bailout
of Greece.
Stock Price Index Changes
Index (Jan 4, 2010 = 100)
Index (Jan 4, 2010 = 100)
120.0
115.0
110.0
120.0
NASDAQ Composite
115.0
Wilshire 5000
S&P 500
Financial Times Euro 300 (FTSE)
110.0
105.0
105.0
100.0
100.0
95.0
95.0
90.0
90.0
85.0
85.0
80.0
80.0
75.0
1/4/10
75.0
1/22/10
2/11/10
3/3/10
3/23/10
4/12/10
4/30/10
1/13/10
2/2/10
2/22/10
3/12/10
4/1/10
4/21/10
5/11/10
Sources: Wall Street Journal (NASDAQ), Dow Jones (Wilshire), New York Times (S&P), Financial Times (FTSE) / Haver Analytics.
If it is contained, the affect of the Greek crisis on the U.S. will likely be relatively small.
Should the crisis spread to other European nations, the affects could be greater. One
potential risk to the U.S. recovery is a widening trade balance, which would negatively
impact GDP, due to the stronger dollar relative to the Euro. The stronger dollar may
also apply further downward pressure to U.S. prices.
Exchange Rates
Index (Jan 4, 2010 = 100)
Index (Jan 4, 2010 = 100)
120.0
120.0
115.0
115.0
110.0
Euro/US$
110.0
105.0
105.0
100.0
100.0
95.0
Nominal Major Currency
Trade-Weighted Exchange Value of US$
(through May 7)
90.0
1/4/10
95.0
90.0
1/22/10
2/11/10
3/3/10
3/23/10
4/12/10
4/30/10
1/13/10
2/2/10
2/22/10
3/12/10
4/1/10
4/21/10
5/11/10
Sources: Wall Street Journal (Euro), Federal Reserve Board (Trade-weighted dollar) / Haver Analytics.