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The
President’s
Report to the
Board of
Directors
December 3, 2009
CURRENT ECONOMIC DEVELOPMENTS - December 3, 2009
Data released since your last Directors' meeting show the economy grew in the third
quarter at a slower rate than first estimated. Recent data also suggests growth is likely
to remain at or below the third quarter pace in the coming months. Until firms start to
hire again, and consumers become more comfortable with their current finances and
future income potential, the recovery will be slow and precarious.
In November, initial claims for unemployment insurance fell further while consumer
attitudes were mixed. Auto sales increased slightly in November, building on the
rebound seen the previous month. In October, real consumption rose while incomes
continued to hold mostly steady.
The real estate market continued to improve in October, as sales of both new and
existing homes increased. The better sales have yet to translate to new construction,
as housing starts and building permits have been little changed. In the manufacturing
sector, the ISM index eased in November but held above 50. Industrial production posted
only a small gain in October and capacity utilization was flat. Orders for durable goods
fell again in October, as did orders for nondefense capital goods, excluding aircraft.
Inflation remains a very small concern, as total prices for both consumers and producers
slowed further in October. Oil prices rose slightly in November, and unit labor costs fell
in the third quarter, although revised figures showed not by as much as first reported.
Initial claims for unemployment insurance continued to fall in November, averaging
less than 500,000 per week for the first time in over a year. However, claims are
still well above a level consistent with a healthy economy.
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
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
Changes in consumer attitudes were mixed in November, as confidence improved
slightly and sentiment fell. Both surveys found consumers worried about their current
finances and income expectations, which may lead to increased savings and more
tentative spending plans.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
100
140
Current
Conditions
Present
Situation
120
Future
Expectations
90
100
80
Consumer
Expectations
80
70
60
60
40
50
20
Consumer
Confidence
0
Nov-07
May-08
Consumer
Sentiment
Nov-08
May-09
Nov-09
Nov-07
May-08
Nov-08
May-09
40
Nov-09
Source: The University of Michigan / Haver Analytics.
Source: The Conference Board / Haver Analytics.
Total auto and light truck sales rose a bit in November, evidence of a slow recovery
taking shape for the auto industry. Historically speaking the sales pace is still quite
slow, but excluding the two 'CARS' influenced months of July and August, November
sales were the strongest in over a year.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
25.0
25.0
20.0
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
Nov-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Source: Bureau of Economic Analysis / Haver Analytics.
Nov-08
Aug-08
0.0
Nov-09
May-09
Feb-09
Aug-09
Consumption rebounded in October to post its fourth increase in five months, even
as incomes have seen little change recently.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
2.0
6.0
1.5
4.0
Real Consumption
1.0
2.0
0.5
0.0
0.0
-0.5
-2.0
-1.0
Real Disposable Income
-4.0
-1.5
-2.0
Oct-06
Apr-07
Oct-07
Jan-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
-6.0
Oct-09
Apr-09
Jan-09
Jul-09
Source: Bureau of Economic Analysis / Haver Analytics.
The housing market showed further improvement in October. Existing home sales
surged to their highest level since February 2007, and sales of new homes rose to
a one-year high.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
7000
1100
1000
6500
New
Home Sales
900
800
Existing
Home Sales
700
6000
5500
600
500
5000
400
4500
300
200
Oct-06
Apr-07
Jan-07
Oct-07
Jul-07
Source: U.S. Census Bureau / Haver Analytics.
Apr-08
Jan-08
Oct-08
Jul-08
4000
Oct-09
Apr-09
Jan-09
Jul-09
New residential construction data was disappointing in October, as both measures
came in below expectations. The series' have been relatively steady recently even
as sales have increased, with excess supply offsetting the need for new construction.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
1750
1750
1500
1500
Building Permits
1250
1000
1250
1000
Housing Starts
750
750
500
500
250
250
Oct-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Source: U.S. Census Bureau / Haver Analytics.
Both the ISM diffusion and employment indices retreated in November, but held
above 50 to signal further economic expansion.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
40.0
40.0
Employment Index
30.0
30.0
20.0
20.0
Nov-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Source: Institute for Supply Management / Haver Analytics.
Nov-08
Aug-08
May-09
Feb-09
Nov-09
Aug-09
Industrial production posted its fourth consecutive monthly gain in October, albeit a
very small one. Capacity utilization held steady at the nine-month high established
in September.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
85.0
2.0
Industrial Production
1.0
80.0
0.0
75.0
-1.0
-2.0
70.0
-3.0
-4.0
Capacity Utilization
(manufacturing)
-5.0
Oct-06
Apr-07
Jan-07
65.0
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
60.0
Oct-09
Apr-09
Jan-09
Jul-09
Source: Federal Reserve Board of Governors / Haver Analytics.
Durable goods orders continued in fall October, but the severity of the declines
continued to lessen. The monthly data has been quite volatile, with gains and losses
alternating for both series.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
15.0
15.0
Durable Goods,
New Orders
10.0
10.0
Capital Goods Nondefense,
Excluding Aircraft
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
-15.0
-20.0
-25.0
-15.0
Percent change, previous month
Dur.
Cap.
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
-20.0
-1.14
3.80
4.78
-1.28
-2.70
-0.96
1.98
2.62
-0.62
-2.89
-25.0
-30.0
-30.0
Oct-06
Apr-07
Jan-07
Oct-07
Jul-07
Source: U.S. Census Bureau / Haver Analytics.
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Consumer prices continued to fall in October, but at a much slower rate than seen in
recent months. Core prices accelerated during the month to grow at their fastest
pace since June. The decreases in producer prices also slowed in October, but
core prices advanced at their slowest rate in six years.
Consumer Price Index
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Oct-06
Percent Change, Year-Over-Year
Consumer Price Index
Consumer Price Index,
excluding food and energy
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Oct-09
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
9.0
Producer Price Index
6.0
3.0
0.0
-3.0
Producer Price Index,
excluding food and energy
-6.0
-9.0
Oct-06
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
Oct-09
Source: Bureau of Labor Statistics / Haver Analytics.
Oil prices increased slightly in November, reaching their highest point since
September 2008.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars 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
Nov-06
May-07
Feb-07
Nov-07
Aug-07
Source: Wall Street Journal / Haver Analytics.
May-08
Feb-08
Nov-08
Aug-08
May-09
Feb-09
Nov-09
Aug-09
Productivity was revised lower in the third quarter, but still registered a six-year high.
Significant upward revisions were made to compensation, resulting in similar upward
revisions to unit labor costs. This was especially true for the second quarter, where
the previous estimate of a 6.1% drop in labor costs was revised to show no change.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Compensation
Per Hour
9.0
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
-6.0
-9.0
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
-9.0
09:Q3
09:Q1
Source: Bureau of Labor Statistics / Haver Analytics.
Real GDP growth in the third quarter was lower than originally thought. The
downward adjustment primarily reflected a downward revision to personal
consumption expenditures and upward revisions to imports and nonresidential fixed
investment. These effects were partly offset by an upward revision to exports.
Revisions to Third Quarter Real GDP
Description
Real GDP
Advance
Preliminary
3.5
2.8
Personal Consumption
3.4
2.9
Business Investment
-2.5
-4.1
Equipment and Software
Residential Investment
1.1
2.3
23.4
19.5
Government
2.3
3.1
Exports
14.7
17.0
Imports
16.4
20.8
Final Sales
2.5
1.9
Real GDP
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
Overall, data released since your last Directors' meeting show the economy grew in the
third quarter at a slower rate than first estimated. Recent data also suggests growth is
likely to remain at or below the third quarter pace in the coming months. Until firms start
to hire again, and consumers become more comfortable with their current finances and
future income potential, the recovery will be slow and precarious.
Percent
Short-Term Interest Rates
0.5
0.4
Federal Funds Rate
(effective rate)
1.00
0.3
0.50
Discount Window Primary Credit
0.50
0.50
0.50
0.50
0.50
0.00
0.2
Jul-09
Aug-09 Sep-09 Oct-09 Nov-09
0.1
0.0
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Source: Federal Reserve Board of Governors / Haver Analytics.
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
December 10, 2009
Current Economic Developments - Addendum: Data released in the past week
Payroll employment fell by only 11,000 in November, the smallest monthly drop since
the onset of the recession. Payroll reductions for the previous two months were also
revised smaller by 159,000 jobs, helping the unemployment rate fall by two-tenths of a
percentage point in November to 10.0%. The November employment report was
stronger than expected, showing an earlier improvement in labor market conditions than
previously anticipated.
In October, manufacturers' orders rose 0.6% and shipments rose 0.8% as both series
built on the gains seen in September. Wholesale inventories rose 0.3% in October,
their first increase in over a year. Wholesale trade rose 1.2% in October, building on
the 1.3% increase of the previous month.
Redbook sales fell 5.2% through the first week of December, compared to November.
Sales in the week ending December 5th, however, were 1.2% higher than during the
same period last year. Oil prices fell a bit during the past week, averaging $75.0 per
barrel compared to the previous week's average of $77.5.
In November, nonfarm payrolls shed 11,000 jobs and the unemployment rate fell to
10.0%. Job losses in October were revised smaller by 79,000 to show a decrease of
111,000 jobs, and the September reduction was revised smaller by 80,000, showing a
decrease of 139,000 jobs versus the previously estimated decrease of 219,000 jobs.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
300
12.0
200
11.0
100
10.0
0
-100
9.0
-200
8.0
-300
7.0
-400
-500
-600
-700
-800
Nov-07
May-08
Nov-08
May-09
Nov-09
Feb-08
Aug-08
Feb-09
Aug-09
Source: Bureau of Labor Statistics.
6.0
5.0
4.0
3.0
Nov-07
May-08
Nov-08
May-09
Nov-09
Feb-08
Aug-08
Feb-09
Aug-09