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The
President’s
Report to the
Board of
Directors
July 7, 2011
Current Economic Developments - July 7, 2011
Data released since your last Directors' meeting show the economy grew at a slightly faster pace in
the first quarter than previously thought, but also suggest that growth is unlikely to improve much in
the second quarter. The domestic economic picture has not changed much recently, as housing and
labor markets remain areas of concern while manufacturing continues to provide support. Despite
the relatively stagnant course of the economy at the moment, growth is expected to pick up in the
second half of the year.
Initial claims for unemployment insurance were little changed in June, and remain stuck well above
their pre-recession levels. Consumer attitudes worsened in June, and continue to hover close to
the levels seen over the past two years. Also in June, vehicle sales slowed further due to a variety
of reasons, including ongoing supply issues for Japanese manufacturers. Consumption posted its
biggest decline in nearly two years in May, as stagnant incomes continue to force consumers to
think carefully about all their spending decisions.
The housing market continues to represent a downside risk to the outlook, and both new and
exisiting home sales declined in May. On the positive side, however, housing starts and building
permits both increased in May and housing prices improved in April.
The manufacturing sector remains a key contributor to the recovery, as most recent data has come
in on the positive side. The ISM index unexpectedly rose in June, and industrial production, capacity
utilization and durable goods orders all rose in May.
Primary inflation measures rose further in May, but most of the upward pressure on prices is still
expected to be temporary. If the acceleration in prices were to continue, inflation could become more
of a concern. Oil prices eased in June, but were up on average in the second quarter compared to
the first quarter.
Initial claims for unemployment insurance were essentially unchanged in June, but
were up overall in the second quarter, erasing most of the improvement seen in the
first quarter.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
700
700
Initial Claims for Unemployment Insurance
Thousands, Quarterly Average
650
650
600
10:Q3
10:Q4
11:Q1
11:Q2
600
550
462
434
405
428
550
500
500
450
450
400
400
350
350
300
300
250
Jun-08
Dec-08
Sep-08
Jun-09
Mar-09
Dec-09
Sep-09
Jun-10
Mar-10
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
250
Jun-11
Dec-10
Sep-10
Mar-11
Measures of consumer attitudes fell in June, due mostly to renewed concerns about
the general economic outlook. While inflation worries eased during the month,
income worries increased. Personal financial concerns, combined with the more
pessimistic economic outlook, are likely to restrain spending in the near term.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
100
125
Current
Conditions
Consumer
Expectations
100
90
80
75
70
50
60
Future
Expectations
25
Present
Situation
0
Jun-09
Dec-09
Jun-10
Dec-10
50
Consumer
Sentiment
Consumer
Confidence
Jun-11
Jun-09
Dec-09
Jun-10
Dec-10
40
Jun-11
Source: The University of Michigan / Haver Analytics.
Source: The Conference Board / Haver Analytics.
Total lightweight vehicle sales slowed a bit further in June, falling to their lowest level
since the previous June. Multiple of factors contributed to the declining sales including
lesser incentives, less confident consumers, and continued supply shortages for some
Japanese automakers. Despite the weakness in recent data, sales are expected to
pick-up in the coming months, due mostly to the end of the supply disruptions.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
20.0
20.0
Quarterly Sales
Millions of Units, Annualized
18.0
18.0
16.0
10:Q3
10:Q4
11:Q1
11:Q2
16.0
14.0
11.6
12.3
13.0
12.1
14.0
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
Jun-08
Dec-08
Sep-08
Jun-09
Mar-09
Source: Bureau of Economic Analysis / Haver Analytics.
Dec-09
Sep-09
Jun-10
Mar-10
0.0
Jun-11
Dec-10
Sep-10
Mar-11
Real incomes held mostly steady again in May, and the continued lack of growth has
hampered spending. Consumption posted its biggest decline in May since September
2009, and the previously estimated increase in April was revised to show a small decline.
Given the weakness in consumption in April and May, overall second quarter growth in
spending is likely to be below its first quarter rate.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
5.0
5.0
4.0
4.0
Real Disposable Income
3.0
3.0
Real
Consumption
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
-3.0
-3.0
-4.0
May-08
Nov-08
Aug-08
May-09
Feb-09
Nov-09
Aug-09
May-10
Feb-10
-4.0
May-11
Nov-10
Aug-10
Feb-11
Source: Bureau of Economic Analysis / Haver Analytics.
The housing market continued to struggle in May, much as it has over the past three
years when not propped up by stimulus initiatives. New home sales were only slightly
above their 12-month average, while sales of existing homes declined for the second
straight month and are down over 10% since January.
New Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
800
800
600
600
400
400
200
200
0
May-08
Sep-08
Jan-09
Thousands of Units, Annualized
May-09
Sep-09
Jan-10
May-10
Existing Home Sales
Sep-10
Jan-11
0
May-11
Thousands of Units, Annualized
7000
7000
6000
6000
5000
5000
4000
4000
3000
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
3000
May-11
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales) / Haver Analytics.
New residential construction picked up a bit in May, but overall the data remains
mostly in line with the low levels established in the winter of 2008/2009 during the
worst of the housing crash.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
1400
1200
1200
1000
1000
Building Permits
800
800
600
600
400
400
200
200
Housing Starts
0
May-08
Nov-08
Aug-08
May-09
Feb-09
Nov-09
Aug-09
May-10
Feb-10
0
May-11
Nov-10
Aug-10
Feb-11
Source: U.S. Census Bureau / Haver Analytics.
The total ISM index and its employment component both increased in June,
recouping some of the losses seen in May. The prices index fell sharply again in
June as oil and commodity prices continued to ease, providing some evidence that
part of the recent upward pressure on prices was temporary as expected.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
100.0
100.0
90.0
90.0
Prices Index
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
ISM Index
40.0
Quarterly Averages
Employment
Index
30.0
20.0
40.0
10:Q3
10:Q4
11:Q1
11:Q2
ISM
55.2
57.9
61.1
56.4
Emp.
57.6
58.6
63.1
60.3
Prcs.
63.2
71.0
82.8
76.7
30.0
20.0
10.0
10.0
Jun-08
Dec-08
Sep-08
Jun-09
Mar-09
Dec-09
Sep-09
Source: Institute of Supply Management / Haver Analytics.
Jun-10
Mar-10
Dec-10
Sep-10
Jun-11
Mar-11
In May, idustrial production posted a small increase after being unchanged in April,
and capacity utilization rose to erase most of the decline seen the previous month.
After improving consistently from mid-2009 through the end of last year, production
and capacity data has held mostly steady so far in 2011.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
3.0
80.0
Industrial
Production
2.0
75.0
1.0
0.0
70.0
-1.0
-2.0
65.0
-3.0
Capacity Utilization
(manufacturing)
-4.0
-5.0
May-08
Nov-08
Aug-08
May-09
Feb-09
Nov-09
Aug-09
May-10
Feb-10
60.0
May-11
Nov-10
Aug-10
Feb-11
Source: Federal Reserve Board of Governors / Haver Analytics.
Durable goods orders rose in May compared to April, and their year-over-year
growth rate accelerated. Orders for nondefense capital goods excluding aircraft also
rose in May, but their annual pace slowed a bit.
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, month-over-month
-20.0
-30.0
Feb-11
Mar-11
Apr-11
May-11
Dur.
-1.06
4.58
-2.52
2.06
Ex air
-0.13
5.41
-0.38
1.56
-20.0
-30.0
-40.0
-40.0
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Source: U.S. Census Bureau / Haver Analytics.
Total price indices continued to accelerate in May, as headline prices for both
consumers and producers advanced at their fastest rates since the fall of 2008.
Core consumer prices also rose further in May to a 16-month high, but core producer
prices eased slightly during the month.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
6.0
Consumer Price Index,
excluding food and energy
4.0
6.0
Consumer Price Index
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Producer Price Index
Percent Change, Year-Over-Year
Jan-11
-4.0
May-11
Percent Change, Year-Over-Year
15.0
15.0
Producer Price Index,
excluding food and energy
10.0
10.0
Producer Price Index
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
-10.0
May-11
Source: Bureau of Labor Statistics / Haver Analytics.
Oil prices eased a bit more in June, but average prices overall in the second quarter
were the highest in almost three years. Oil prices are expected to decline further in
the coming months due to lower global demand and the administration's decision to
release 30 million barrels of oil from the U.S. Strategic Petroleum Reserve.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars per Barrel
160.0
160.0
Quarterly Averages
140.0
120.0
140.0
10:Q3
10:Q4
11:Q1
11:Q2
76.2
85.0
94.0
102.6
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-08
Dec-08
Sep-08
Jun-09
Mar-09
Source: Wall Street Journal / Haver Analytics.
Dec-09
Sep-09
Jun-10
Mar-10
Dec-10
Sep-10
Jun-11
Mar-11
Real GDP growth in the first quarter was revised slightly higher in the final estimate. The
higher growth rate primarily reflected a downward revision to imports and an upward
revision to private inventory investment that were largely offset by downward revisions
to exports, nonresidential fixed investment, and state and local government spending.
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
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
First Quarter Revisions
Description
Real GDP
Personal Consumption
Business Investment
Equipment and Software
Residential Investment
Government
Exports
Imports
Change in Private Inventories
2nd Estimate
1.8
2.2
3.4
11.6
-3.3
-5.1
9.2
7.5
$36.0 (bil. 2005$)
3rd Estimate
1.9
2.2
2.0
8.8
-2.0
-5.8
7.6
5.1
$39.5 (bil. 2005$)
Source: Bureau of Economic Analysis / Haver Analytics.
Overall, data released since your last Directors' meeting show the economy grew at a slightly faster
pace in the first quarter than previously thought, but also suggest that growth is unlikely to improve
much in the second quarter. The domestic economic picture has not changed much recently, as
housing and labor markets remain areas of concern while manufacturing continues to provide
support. Despite the relatively stagnant course of the economy at the moment, growth is expected
to pick up in the second half of the year.
Percent
Short-Term Interest Rates
0.4
0.3
Federal Funds Rate
(effective rate)
Discount Window Primary Credit
2.00
1.50
1.00
0.50
0.00
0.2
0.75
0.75
0.75
0.75
0.75
Feb-11 Mar-11 Apr-11 May-11 Jun-11
0.1
0.0
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
July 14, 2011
Current Economic Developments - Addendum: Data released in the past week
In June, nonfarm payrolls posted another small increase and the unemployment rate rose to
its highest point this year. Recent increases in private employment have been a bit more
positive than the headline figures suggest, but were largely offset by continued reducitons in
government payrolls. The details of the employment report offered further troubling news,
as average hours worked declined and earnings were mostly flat. The increase in the
unemployment rate was due to a huge decrease in household employment outpacing a
smaller, yet still sizable, drop in the labor force.
The U.S. foreign trade deficit widened sharply in May, due primarily to a surge in imports of
pertroleum products and the higher cost of those goods at the time. Although energy prices
have fallen since then, the impact on net exports from the higher prices in May will likely cause
second quarter GDP growth to be slower than previously expected. Import prices fell 0.5% in
June, while export prices inched up 0.1%.
In the first week of July, redbook sales were up 0.6% compared to June, and up 5.4% from
the same week last year. Oil prices rose over the past week, averaging $96.8 per barrel
compared to the previous week's average of $95.5.
Nonfarm payrolls rose by only 18,000 in June, far fewer than expected, and job gains
over the prior two months were also revised lower by 44,000. The unemployment rate
increased one-tenth of a percentage point in June to 9.2%, its highest level since
December.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
600
11.0
450
10.5
300
150
0
-150
10.0
9.5
9.0
-300
-450
-600
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Sep-09
Mar-10
Sep-10
Mar-11
Source: Bureau of Labor Statistics / Haver Analytics.
8.5
8.0
Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
Sep-09 Mar-10 Sep-10 Mar-11