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The
President’s
Report to the
Board of
Directors
June 3, 2010
CURRENT ECONOMIC DEVEOPMENTS - June 3, 2010
Data released since your last Directors' meeting are consistent with an economy that is slowly
recovering. Manufacturing output and investment continued to improve while the stimulus
rebate boosted home sales. Downside risks remain though as job opportunities remain
scarce, especially when compared to the number of people laid off during the recession.
In addition, the housing market must now stand on its own and jitters over the European debt
crisis continue to effect domestic and global financial markets.
Initial claims for unemployment insurance were unchanged in May, and remain elevated.
Consumers have become a bit more optimistic, but overall attitudes have showed little change
since their initial recovery last spring. The increased optimism in future business conditions
and job opportunites has helped prop up consumption, despite only small rises in incomes.
Consumption expenditures were flat in April, however, following a strong first quarter.
The housing market surged in April, boosted by the expiring home buyer stimulus rebate.
Existing home sales posted another solid increase and new home sales registered a two-year
high. Housing starts also rose in April, but building permits fell back to a six-month low,
suggesting new construction activity may slow in the coming months. In the manufacturing
sector, the ISM index remained high in May and the employment index continued to improve.
Industrial production and capacity utilization both rose again in April, while new orders for
durable goods also continued to recover.
Deflation concerns still outweighed inflation concerns in April, as headline price indices eased
and core consumer prices slowed to their slowest annual growth rate in nearly 50 years. Oil
prices fell for most of May before rebounding a bit at the end of the month.
After falling steadily through most of 2009, initial claims were flat in May, and overall
have been little changed through the first half of 2010.
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
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: Department of Labor, Employment and Training Administration / Haver Analytics.
Consumer confidence rose again in May, posting its third consecutive monthly gain.
Consumer sentiment also improved, but stands at the same level seen in February.
Job market and general business conditions continue to be the primary concerns, but
there have been signs of increased optimism in those areas. Income expectations,
however, remain downbeat.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
90
100
Consumer
Expectations
Future
Expectations
Present
Situation
75
Current
Conditions
80
70
50
60
25
Consumer
Sentiment
Consumer
Confidence
0
May-08
Nov-08
May-09
Nov-09
Source: The Conference Board / Haver Analytics.
May-10
May-08
Nov-08
May-09
Nov-09
50
40
May-10
Source: The University of Michigan / Haver Analytics.
Total lightweight vehicle sales picked up a bit in May, offsetting the dip seen in April.
Sales continue to be much stronger than during the same periods last year, with an
average selling rate of 11.1 million compared to the 2009 rate of 10.3 million. Industry
experts expect final 2010 sales to approach 12 million units.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
20.0
20.0
18.0
18.0
16.0
16.0
14.0
14.0
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
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: Bureau of Economic Analysis / Haver Analytics.
Real disposable income posted a modest increase in April, but the higher incomes
didn't carry-over to higher consumption, which was essentially unchanged.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
6.0
6.0
4.0
4.0
Real
Consumption
2.0
2.0
0.0
0.0
-2.0
-2.0
Real Disposable Income
-4.0
Apr-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
-4.0
Apr-10
Oct-09
Jul-09
Jan-10
Source: Bureau of Economic Analysis / Haver Analytics.
Home sales surged in April as consumers rushed to complete purchases before the
expiration of the stimulus tax credit, much like they did in the fall before the plan was
originally schedule to end. Unlike in the fall, however, the credit also boosted sales of
new homes, which reached a two-year high. Of interest going forward is how the market
will respond in the absence of any government incentive for the first time since April 2008.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1200
7000
6500
Existing
Home Sales
1000
6000
New
Home Sales
800
5500
600
5000
400
4500
200
4000
0
3500
Apr-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales) / Haver Analytics.
In April, housing starts continued the slight upward trend seen since October, leading
to an 18-month high. Building permit data was disappointing, however, nearly
erasing the gains seen over the past six months.
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
400
400
Housing Starts
200
200
0
0
Apr-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
Source: U.S. Census Bureau / Haver Analytics.
The ISM manufacturing index eased a bit in May, but remains well above 50 signalling
continued economic expansion. The employment component of the index rose further
in May to reach its highest level in six years.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
60.0
60.0
ISM Index
50.0
50.0
40.0
40.0
30.0
Employment Index
30.0
20.0
20.0
May-07
Nov-07
Aug-07
May-08
Nov-08
May-09
Nov-09
May-10
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Source: Institute of Supply Management / Haver Analytics.
Industrial production rose again in April, its ninth gain in the past ten months.
Capacity utilization also continued to improve.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
3.0
85.0
Industrial Production
2.0
80.0
1.0
0.0
75.0
-1.0
70.0
-2.0
-3.0
Capacity Utilization
(manufacturing)
-4.0
-5.0
Apr-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
60.0
Apr-10
Oct-09
Jul-09
65.0
Jan-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Durable goods posted another significant year-over-year gain in April, and also
posted a healthy increase from their March level. Despite a drop from the previous
month, orders of nondefense captial goods, excluding aircraft, exhibited the biggest
year-over-year improvement in the series' 18 year history.
New Orders
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
30.0
30.0
Durable Goods
20.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
10.0
10.0
0.0
0.0
-10.0
-20.0
-30.0
-10.0
Percent change, month-over-month
Feb-10
Mar-10
Dur.
0.46
0.10
2.78
Cap.
2.97
6.66
-2.65
-40.0
Apr-07
Oct-07
Jul-07
Apr-08
Jan-08
Source: U.S. Census Bureau / Haver Analytics.
-20.0
Apr-10
-30.0
Oct-08
Jul-08
Apr-09
Jan-09
-40.0
Apr-10
Oct-09
Jul-09
Jan-10
Headline consumer prices slowed in April, offsetting most of the increase seen in
March. Core prices also slowed further, resulting in the index's slowest year-overyear growth in 47 years. Total prices also slowed for producers, but core prices rose
slightly.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
6.0
Consumer Price Index
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
-4.0
Apr-07
Aug-07
Dec-07
Apr-08
Dec-08
Apr-09
Aug-09
Producer Price Index
Percent Change, Year-Over-Year
12.0
9.0 Producer Price Index
6.0
3.0
0.0
-3.0
-6.0
-9.0
Apr-07 Aug-07 Dec-07
Aug-08
Dec-09
Percent Change, Year-Over-Year
Producer Price Index,
excluding food and energy
Apr-08
Aug-08
Dec-08
-4.0
Apr-10
Apr-09
Aug-09
Dec-09
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
Apr-10
Source: Bureau of Labor Statistics / Haver Analytics.
Oil prices underwent a sustained and dramatic fall throughout most of May. After
starting the month at over $80 per barrel, prices fell consistently to an eight month
low of $66.9 on May 24th. Prices did rebound, however, into the mid-$70s in the last
few days of the month
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
160.0
160.0
140.0
140.0
120.0
120.0
100.0
100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
May-07
Nov-07
Aug-07
May-08
Feb-08
Source: Wall Street Journal / Haver Analytics.
Nov-08
Aug-08
May-09
Feb-09
Nov-09
Aug-09
May-10
Feb-10
Productivity growth was revised lower in the first quarter, reflecting lower output and
greater hours than previously estimated. Most notable in the revisions was a 1.9%
decrease in compensation during the fourth quarter, previously reported as a 0.4%
gain. The result was a record drop in unit labor costs in the fourth quarter.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
9.0
12.0
Compensation
Per Hour
Output
Per Hour
9.0
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
-6.0
08:Q3
09:Q1
-9.0
10:Q1
09:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
First quarter GDP growth was revised down slightly in the second estimate. The
slower rate primarily reflected a downward adjustment to consumption and an
upward adjustment to exports. Those effects were partially offset by an unpward
revision to imports. Business investment was also revised lower, but its contribution
to GDP was essentially unchanged.
Revisions to First Quarter Real GDP
Description
Advance Estimate
2nd Estimate
3.2
3.0
Personal Consumption
3.6
3.5
Business Investment
4.1
3.1
13.4
12.7
Residential Investment
-10.9
-10.7
Government
-1.8
-1.9
Exports
5.8
7.2
Imports
8.9
10.4
Final Sales
1.6
1.4
Real GDP
Equipment and Software
Real GDP
8.0
4.0
0.0
-4.0
-8.0
07:Q1
07:Q3
08:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q3
09:Q1
09:Q3
10:Q1
Data released since your last Directors' meeting are consistent with an economy that is slowly
recovering. Manufacturing output and investment continued to improve while the stimulus rebate
boosted home sales. Downside risks remaing though as job opportunities are scarce, especially
when compared to the number of people laid off during the recession. In addition, the housing
market must now stand on its own, and jitters over the European debt crisis continue to effect
domestic and global financial markets.
Percent
Short-Term Interest Rates
0.4
0.3
Federal Funds Rate
(effective rate)
Discount Window
Primary Credit
1.50
1.00
0.2
0.50
0.50
0.59
0.75
0.75
0.75
0.00
Jan-10 Feb-10 Mar-10 Apr-10 May-10
0.1
0.0
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Source: Federal Reserve Board of Governors / Haver Analytics.
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
June 10, 2010
Current Economic Developments - Addendum: Data released in the past week
Nonfarm payrolls posted their largest single-month gain in ten years in May, but the increase
was due almost entirely to the hiring of temporary Census 2010 workers. Over the past three
months, however, private employment has increased by an average of nearly 139,000 per
month. The unemployment rate fell two-tenths of a percentage point in May to 9.7%, mainly
reflecting a decline in labor force participation.
The debt crisis in Europe continues to present a downside risk to the U.S. economy. The
three primary affects the crisis could have are direct losses on the balance sheets of U.S.
banks, an atmosphere of uncertainty and risk aversion leading to tighter lending, and a
reduction in trade. Should the crisis remain contained in peripheral European nations Greece, Portugal, Spain, Ireland and Italy - the above risks are much smaller than if it were
to spread more broadly.
Redbook sales inched up 0.1% through the first week of June, compared to May, and were
up 3.6% from the same period last year. Oil prices eased a bit further in early June, averaging
$72.5 per barrel in the week ending June 8th, compared to $73.2 per barrel in the previous
week.
Payroll employment rose by 431,000 jobs in May, but most of the increase was due
to the hiring of temporary workers for the Census as only 41,000 jobs were added in
the private sector. Both average hours worked and average hourly earnings rose,
however, providing an income boost to those who have jobs. Also in May, the
unemployment rate fell two-tenths of a percentage point to 9.7 percent.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
500
11.0
250
10.0
9.0
0
8.0
-250
7.0
-500
6.0
-750
5.0
-1000
May-08
Jan-09
Sep-08
Sep-09
May-09
Source: Bureau of Labor Statistics.
May-10
Jan-10
4.0
May-08
Jan-09
Sep-09
May-10
Sep-08
May-09
Jan-10
Global stock market jitters were initially alleviated by the bailout plan announcement,
but index values have since fallen back to (and in many cases below) where they
stood beforehand.
Stock Price Index Changes
Index (Jan 4, 2010 = 100)
Index (Jan 4, 2010 = 100)
120.0
115.0
110.0
120.0
NASDAQ Composite
Wilshire 5000
S&P 500
Financial Times Euro 300 (FTSE)
115.0
110.0
105.0
105.0
100.0
100.0
95.0
95.0
90.0
90.0
85.0
85.0
May 10, 2010:
First day markets open following
EU/IMF bailout announcement
80.0
75.0
1/4/10
80.0
75.0
2/1/10
1/18/10
3/1/10
2/15/10
3/29/10
3/15/10
4/26/10
4/12/10
5/24/10
5/10/10
6/7/10
Sources: Wall Street Journal (NASDAQ), Dow Jones (Wilshire), New York Times (S&P), Financial Times (FTSE) / Haver Analytics.
The dollar also continues to strengthen against the Euro amid the crisis, leading to a
four-year high in the exchange rate on June 7th. The dollar has been more steady
since the bailout announcement when weighed against all major currencies, with its
weekly average up less than 1.5%. Going back to mid-April however, the index is up
over 5.5%.
Exchange Rates
Index (Jan 4, 2010 = 100)
Index (Jan 4, 2010 = 100)
130.0
130.0
125.0
125.0
120.0
120.0
115.0
115.0
Euro/US$
110.0
110.0
105.0
105.0
100.0
100.0
Nominal Major Currency
Trade-Weighted Exchange Value of US$
(through June 4)
95.0
90.0
1/4/10
95.0
90.0
2/1/10
1/18/10
3/1/10
2/15/10
3/29/10
3/15/10
4/26/10
4/12/10
5/24/10
5/10/10
Sources: Wall Street Journal (Euro), Federal Reserve Board (Trade-weighted dollar) / Haver Analytics.
6/7/10