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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