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The
President’s
Report to the
Board of
Directors
July 1, 2010
Current Economic Developments - July 1, 2010
Data released since your last Directors' meeting show the pace of the economic recovery was slower
in the first quarter than previously thought. Data also suggest that growth improved a bit in the
second quarter. Manufacturing remained an area of strength, while labor, housing, and financial
markets continued to show weakness. As has been often repeated, further and greater increases in
employment will be key in sustaining a robust recovery.
Initial claims for unemployment insurance increased slightly in June, and remain stuck well above
their pre-recession levels. Consumer attitudes continued to be pessimistic in June, amid universal
concerns over the economy, employment conditions and personal finances. Consumption posted a
small gain in May but is unlikely to show any strong improvement before consumers can feel a direct
impact from the slowly improving economy.
Housing and construction data deteriorated in May following the expiration of the home buyers
stimulus program. New home sales fell to a record low, the pace of existing home sales slowed,
and housing starts and building permits fell to their lowest rates of the year. On the positive side,
house prices ticked up a bit in April and mortgage rates are hovering near record lows.
In the manufacturing sector, the ISM index decreased in June but remains above 50. In May, both
industrial production and capacity utilization increased again. Orders for durable goods fell slightly in
May from April, but remain up significantly from last year.
Consumer prices eased further in May, keeping inflation concerns to a minimum. Oil prices rose
slightly in June, but were down on average in the second quarter compared to the first quarter.
Initial claims for unemployment insurance increased a bit more in June, but overall
have held mostly steady through the first half of 2010.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
700
650
700
Initial Claims for Unemployment Insurance
Thousands, Quarterly Average
650
600
09:Q3
09:Q4
10:Q1
10:Q2
600
550
557
496
466
462
550
500
500
450
450
400
400
350
350
300
300
250
Jun-07
Dec-07
Sep-07
Jun-08
Mar-08
Dec-08
Sep-08
Jun-09
Mar-09
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
250
Jun-10
Dec-09
Sep-09
Mar-10
Measures of consumer attitudes were mixed in June, as confidence fell sharply and
sentiment improved. In general, consumers are concerned about the future health
of the economy and that impact on employment conditions and their personal
finances. Until job growth picks up, confidence is unlikely to improve significantly.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
100
100
Consumer
Expectations
Current
Conditions
Present
Situation
75
90
80
70
50
60
25
Consumer
Sentiment
Consumer
Confidence
0
Jun-08
Dec-08
50
Future
Expectations
Jun-09
Dec-09
Jun-10
Jun-08
Dec-08
Jun-09
Dec-09
40
Jun-10
Source: The University of Michigan / Haver Analytics.
Source: The Conference Board / Haver Analytics.
Real incomes posted another small gain in May, helping consumption rebound from
its flat reading in April. As consumers remain skeptical about potential job
opportunites and higher salaries their spending will likely remain constrained. As
such, the personal savings rate reached an eight-month high in May.
Percent Change, Previous Month
Real DPI and Consumption
Percent Change, Previous Month
6.0
6.0
5.0
5.0
Real Disposable Income
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
Real
Consumption
-2.0
-3.0
-2.0
-3.0
-4.0
May-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
Source: Bureau of Economic Analysis / Haver Analytics.
May-09
Feb-09
-4.0
May-10
Nov-09
Aug-09
Feb-10
The stimulus home-buyers tax credit expired at the end of April, leaving disappointing
sales data in its wake in May. New home sales plunged nearly 33% in May to a
record-low pace, while existing home sales fell "only" 2.2%. In order to qualify for
the credit, a sales contract needed to be signed by the end of April. As existing home
sales are not counted until closing, that data could still see some support from the
credit through June. Any new home transactions after the deadline were ineligible.
New Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1000
1000
800
800
600
600
400
400
200
200
0
0
May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10
Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
7000
7000
6500
6500
6000
6000
5500
5500
5000
5000
4500
4500
4000
4000
May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales) / Haver Analytics.
New residential construction slowed in May in the wake of the expiration of the
stimulus home-buying tax credit. Both housing starts and building permits registered
their lowest estimated rates of 2010.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
1800
1800
1600
1600
1400
1400
Building Permits
1200
1200
1000
1000
800
800
600
600
Housing Starts
400
400
200
200
0
May-07
Nov-07
Aug-07
May-08
Feb-08
Source: U.S. Census Bureau / Haver Analytics.
Nov-08
Aug-08
May-09
Feb-09
0
May-10
Nov-09
Aug-09
Feb-10
The ISM index decreased for the second consecutive month in June, but
manufacturing activity continues to expand. The employment index also eased in
June, but improved significantly in the second quarter compared to the first.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65
60.0
60
ISM Index
55.0
55
50.0
50
45.0
45
40.0
40
35.0
09:Q3
09:Q4
10:Q1
10:Q2
ISM
51.4
54.6
58.2
58.8
Emp.
46.5
50.5
54.8
58.7
30.0
25.0
35
Quarterly Averages
Employment Index
30
25
20.0
20
Jun-07
Dec-07
Sep-07
Jun-08
Mar-08
Dec-08
Sep-08
Jun-09
Mar-09
Dec-09
Sep-09
Jun-10
Mar-10
Source: Institute of Supply Management / Haver Analytics.
Industrial production increased again in May, and capacity utilization rose to its
highest level since October 2008. Despite the recent increases, industrial production
is still 8% below its peak established in September 2007.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
3.0
85.0
2.0
Industrial
Production
80.0
1.0
0.0
75.0
-1.0
70.0
-2.0
-3.0
Capacity Utilization
(manufacturing)
-4.0
-5.0
May-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
Source: Federal Reserve Board of Governors / Haver Analytics.
May-09
Feb-09
60.0
May-10
Nov-09
Aug-09
65.0
Feb-10
Durable goods orders fell in May compared to April, slowing their year-over-year
growth. Most of the May dip was due to lower orders for commercial aircraft, and
excluding transportation orders rose almost 1.0%. Orders for capital goods excluding
aircraft rose in May to nearly offset the decline seen in April, but also slowed a bit in
their annual pace.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
30.0
30.0
Durable Goods,
New Orders
20.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
10.0
10.0
0.0
0.0
-10.0
-10.0
Percent change, month-over-month
-20.0
Feb-10
Mar-10
Apr-10
May-10
Dur.
0.46
0.10
2.99
-1.12
Ex air
2.97
6.66
-2.66
2.09
-30.0
-20.0
-30.0
-40.0
-40.0
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Source: U.S. Census Bureau / Haver Analytics.
Total price indices slowed a bit further in May, as lower energy and transportation
prices more than offset rising food costs. With those items excluded core consumer
prices were steady, although core producer prices advanced at their fastest pace
since September.
Percent Change, Year-Over-Year
Consumer Price Index
Percent Change, Year-Over-Year
8.0
8.0
6.0
6.0
Consumer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
Consumer Price Index
-4.0
May-07
Sep-07
Jan-08
Percent Change, Year-Over-Year
May-08
Sep-08
Jan-09
May-09
Producer Price Index
Sep-09
Jan-10
Percent Change, Year-Over-Year
15.0
15.0
10.0
10.0
Producer Price Index,
excluding food and energy
5.0
5.0
0.0
0.0
-5.0
-10.0
May-07
-4.0
May-10
-5.0
Producer Price Index
Sep-07
Jan-08
May-08
Sep-08
Source: Bureau of Labor Statistics / Haver Analytics.
Jan-09
May-09
Sep-09
Jan-10
-10.0
May-10
Oil prices inched up slightly in June, but ended the second quarter down a bit from
the first.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
160.0
160.0
140.0
140.0
Quarterly Averages
120.0
09:Q3
09:Q4
10:Q1
10:Q2
68.1
76.0
78.8
77.9
120.0
100.0
100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
0.0
0.0
Jun-07
Dec-07
Sep-07
Jun-08
Mar-08
Dec-08
Sep-08
Jun-09
Mar-09
Dec-09
Sep-09
Jun-10
Mar-10
Source: Wall Street Journal / Haver Analytics.
The expansion in first quarter real GDP was revised smaller in the final estimate.
The lower growth rate primarily reflected an upward revision to imports and a
downward revision to personal consumption expenditures for services that were
partially offset by upward revisions to exports and to private inventory investment.
Real GDP
Annualized Percent Change
Annualized Percent Change
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
-8.0
-8.0
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
First Quarter Revisions
Description
Real GDP
Personal Consumption
Business Investment
Equipment and Software
Residential Investment
Government
Exports
Imports
Final Sales
Change in Private Inventories
Source: Bureau of Economic Analysis / Haver Analytics.
2nd Estimate
3.0
3.5
3.1
12.7
-10.7
-1.9
7.2
10.4
1.4
$53.6 (bil. 2005$)
3rd Estimate
2.7
3.0
2.2
11.4
-10.3
-1.9
11.3
14.8
0.8
$60.9 (bil. 2005$)
Overall, data released since your last Directors' meeting show the pace of the economic
recovery was slower in the first quarter than previously thought. Data also suggest that growth
improved a bit in the second quarter. Manufacturing remained an area of strength, while labor,
housing, and financial markets continued to show weakness. As has been often repeated,
further and greater increases in employment will be key in sustaining a robust recovery.
Percent
Short-Term Interest Rates
0.4
0.3
Discount Window Primary Credit
Federal Funds Rate
(effective rate)
0.59
0.75
0.75
0.75
0.75
0.2
Feb-10 Mar-10 Apr-10 May-10 Jun-10
1.25
1.00
0.75
0.50
0.25
0.1
0.0
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Source: Federal Reserve Board of Governors / Haver Analytics.
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
July 8, 2010
Current Economic Developments - Addendum: Data released in the past week
In June, nonfarm payrolls fell for the first time this year. The loss was due entirely to a
reduction in temporary workers hired by the Census, and excluding government payrolls
employment increased by 83,000 in June. Over 300,000 temporary employees are still
working on the Census, so future decreases similar to the ones in June are expected in the
coming months. The unemployment rate decreased in June, thanks to a large drop in the
labor force that more than offset a smaller fall in civilian employment.
The pace of lightweight vehicle sales slowed in June, but improved slightly overall in the
second quarter compared to the first. Also in June, the ISM nonmanufacturing index eased
a bit, but continued to signal an expanding services sector. In May, both manufacturers'
orders and shipments fell, more than offsetting gains seen in April.
Oil prices fell during the past week, averaging $73.2 per barrel compared to last week's
average of $76.9.
Nonfarm payrolls fell by 125,000 in June, due to a drop of 225,000 in temporary Census
workers. Excluding those losses, private payrolls rose for a sixth consecutive month.
The unemployment rate fell two-tenths of a percentage point in June to 9.5%, its lowest
level since July 2009.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
600
11.0
450
10.5
300
10.0
9.5
150
9.0
0
8.5
-150
8.0
-300
7.5
-450
-600
-750
-900
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Sep-08
Mar-09
Sep-09
Mar-10
Source: Bureau of Labor Statistics / Haver Analytics.
7.0
6.5
6.0
5.5
5.0
Jun-08 Dec-08 Jun-09 Dec-09 Jun-10
Sep-08 Mar-09 Sep-09 Mar-10
Total auto and light truck sales slowed in June, but improved overall in the second
quarter.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
20.0
20.0
Quarterly Sales
Millions of Units, Annualized
17.5
17.5
15.0
09:Q3
09:Q4
10:Q1
10:Q2
11.5
10.8
11.0
11.3
15.0
12.5
12.5
10.0
10.0
7.5
7.5
5.0
5.0
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Source: Bureau of Economic Analysis / Haver Analytics.