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The
President’s
Report to the
Board of
Directors
February 4, 2010
CURRENT ECONOMIC DEVELOPMENTS - February 4, 2010
Data since your last Directors' meeting show the economy grew in the fourth quarter
at its fastest pace in over six years, and is likely to continue to grow at a solid pace
through the first half of this year. Over half of the growth in the fourth quarter was
due to inventory investment, however, and further improvements in employment
conditions will be necessary before proclaiming an overall health in the economy.
The increase in real GDP in the fourth quarter primarily reflected positive
contributions from private inventory investment, exports, and personal consumption
expenditures. Imports, which are a subtraction in the calculation of GDP, increased.
In January, initial claims were up from December, but down a bit from their fourth
quarter average. Consumer attitudes picked up in January due to the improvement
of the overall economy, but consumers remain concerned about their personal
financial conditions.
Inflation worries remain in the background, as price increases in the fourth quarter
were relatively small. Unit labor costs fell again in the fourth quarter, and total
compensation, as measured by the ECI, held steady at a record-low pace. Oil
prices were higher on average in January than in December, despite falling $10
over the course of the month.
The acceleration in real GDP growth in the fourth quarter primarily reflected an
acceleration in private inventory investment, a deceleration in imports, and an upturn
in nonresidential fixed investment. These effects were partly offset by decelerations
in federal government spending and in personal consumption expenditures.
Annualized Percent Change
Real Gross Domestic Product
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
-6.0
-6.0
-8.0
-8.0
06:Q4
07:Q2
07:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q2
08:Q4
09:Q2
09:Q4
Income growth picked up in the fourth quarter, leading to another moderate increase
in consumption.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
15.0
12.0
Personal Income
4.0
9.0
6.0
2.0
3.0
0.0
0.0
-3.0
-6.0
Real Disposable
Income
-2.0
-9.0
-12.0
-4.0
06:Q4
07:Q4
07:Q2
08:Q4
08:Q2
09:Q4
06:Q4
07:Q4
07:Q2
09:Q2
08:Q4
08:Q2
09:Q4
09:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
Auto sales were down a bit in January from December, but almost identical to their
fourth quarter average.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
20.0
Nov
Dec
Jan
18.0
10.9
11.2
10.8
16.0
14.0
12.0
10.0
8.0
6.0
4.0
06:Q4
06:Q4
07:Q2
07:Q2
07:Q4
07:Q4
08:Q2
08:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q4
08:Q4
09:Q2
09:Q2
09:Q4
09:Q4
Jan-10
Business investment rose in the fourth quarter for the first time in a year and a half,
aided by a strong gain in equipment and software investment.
Business Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
Business
Investment
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
Equipment
and Software
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
In the fourth quarter, durable goods orders continued to show year-over-year declines,
but the data has been more upbeat in terms of quarterly changes. This is especially
true for orders of nondefense capital goods excluding aircraft, with the last two quarters
marking their highest estimates since 2006:Q1.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
15.0
15.0
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
Durable Goods,
New Orders
-15.0
-15.0
-20.0
-20.0
Percent change, previous quarter
09:Q1
09:Q2
09:Q3
09:Q4
Dur.
-11.4
1.10
3.74
0.62
Cap.
-13.88
1.76
3.36
2.93
-25.0
-30.0
-25.0
-30.0
-35.0
-35.0
06:Q4
07:Q2
07:Q4
Source: U.S. Census Bureau / Haver Analytics.
08:Q2
08:Q4
09:Q2
09:Q4
Residential investment rose again in the fourth quarter, as more buyers rushed to
close purchases before the anticipated expiration of the first-time home buyer
stimulus rebate. The program has since been extended to April 30, 2010, and
expanded to include some repeat buyers and buyers with higher incomes.
Residential Investment
Annualized Percent Change
Annualized Percent Change
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
Source: U.S. Census Bureau / Haver Analytics.
Home sales data was mixed in the fourth quarter, as existing home sales rose to
pre-recession levels, while sales of new homes slowed.
New and Existing Home Sales
Thousands of Units,
Thousands of Units,
Annualized
Annualized
1500
7500
7000
1250
Existing
Home Sales
6500
1000
6000
New Home Sales
750
5500
500
5000
250
4500
0
4000
06:Q4
07:Q2
07:Q4
Source: U.S. Census Bureau / Haver Analytics.
08:Q2
08:Q4
09:Q2
09:Q4
Government spending fell slightly in the fourth quarter, due primarily to lower
military spending and reduced spending by state and local governments.
Government Spending
Annualized Percent Change
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
Exports posted another solid gain in the fourth quarter, while import growth slowed.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
30.0
30.0
20.0
20.0
Exports
10.0
10.0
0.0
0.0
-10.0
-10.0
Imports
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
06:Q4
07:Q2
07:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q2
08:Q4
09:Q2
09:Q4
Initial claims for unemployment insurance in January were up from December, but
down slightly from their fourth quarter average. Despite falling consistently throughout
the second half of 2009, the current level of claims remain above a level more
consistent with healthy labor market conditions.
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
06:Q4
07:Q2
07:Q1
07:Q4
07:Q3
08:Q2
08:Q1
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
Jan-10
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
Consumer attitudes improved in January primarily due to a more positive outlook on
the national economy as a whole. Consumer sentiment reached a two-year high,
and consumer confidence reached a 16-month high. Still, consumers are worried
about their personal finances, and despite some improvement, the pessimists still
outnumber the optimists.
Index, 1966:Q1=100
Consumer Sentiment and Expectations
100
100
90
Sentiment
80
90
80
70
60
Index, 1966:Q1=100
70
60
Expectations
50
50
40
40
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 Jan-10
Consumer Confidence and Expectations
Index, 1985 = 100
100
Confidence
100
80
80
60
60
40
Index, 1985 = 100
120
120
Expectations
20
40
20
0
0
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 Jan-10
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
The resurgence in the ISM index continued in January, reaching its highest point
since 2004. The employment index also continued to recover, with the January
estimate representing a nearly four year high.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
60.0
60.0
55.0
55.0
ISM Index
50.0
50.0
45.0
45.0
40.0
40.0
35.0
35.0
Employment Index
30.0
30.0
25.0
25.0
06:Q4
07:Q2
07:Q1
07:Q4
07:Q3
08:Q2
08:Q1
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
Jan-10
Source: Institute for Supply Management / Haver Analytics.
Prices began to rise again in the fourth quarter, after falling thoughout the first three
quarters of the year. Inflation, however, is not a pressing concern as the growth rates
seen in the fourth quarter were relatively low by historical standards.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Consumer Price Index,
excluding food and energy
Consumer Price Index
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
09:Q2
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
09:Q4
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
8.0
12.0
Producer Price Index,
excluding food and energy
Producer Price Index
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
-8.0
-8.0
06:Q4
07:Q2
07:Q4
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q2
08:Q4
09:Q2
09:Q4
Productivity eased a bit in the fourth quarter as hours worked increased for the first
time since mid-2007. Unit labor costs fell further during the quarter, and
compensation growth slowed.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Output
Per Hour
Compensation
Per Hour
9.0
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
06:Q4
07:Q2
-6.0
07:Q4
08:Q2
08:Q4
09:Q2
-9.0
09:Q4
Source: Bureau of Labor Statistics / Haver Analytics.
In the fourth quarter, total employment costs grew at the same pace as seen in the
third quarter. Wage and salary growth also held steady, while benefit costs decelerated
slightly. The estimates for all three measures represent record lows.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
5.0
5.0
Wages and Salaries
4.0
4.0
Total
Compensation
3.0
3.0
Benefit Costs
2.0
2.0
1.0
1.0
0.0
0.0
06:Q4
07:Q2
07:Q4
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q2
08:Q4
09:Q2
09:Q4
On average, oil prices were higher in January than they were in December. But
after peaking above $83 per barrerl early in the month, prices fell steadily to end
January below $73 per barrel.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
85.0
140.0
130.0
82.5
120.0
80.0
110.0
100.0
77.5
90.0
75.0
80.0
70.0
72.5
60.0
70.0
50.0
40.0
67.5
30.0
65.0
Jan-10
20.0
06:Q4
07:Q3
08:Q2
09:Q1
09:Q4
Sep-09
Nov-09
Source: Wall Street Journal / Haver Analytics.
Overall, data since your last Directors' meeting show the economy grew in the fourth
quarter at its fastest pace in over six years, and is likely to continue to grow at a solid
pace through the first half of this year. Over half of the growth in the fourth quarter
was due to inventory investment, however, and further improvements in employment
conditions will be necessary before proclaiming an overall health in the economy.
Short-Term Interest Rates
Percent
Percent
7.0
7.0
Federal Funds Rate
(effective rate)
6.0
Discount Window Primary Credit
2.00
1.31
5.0
1.00
0.50
0.50
0.50
0.50
6.0
5.0
0.50
4.0
4.0
0.00
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4 Jan-10
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
06:Q4
07:Q2
07:Q1
07:Q4
07:Q3
08:Q2
08:Q1
Source: Federal Reserve Board of Governors / Haver Analytics.
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
Jan-10
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
February 11, 2010
Current Economic Developments - Addendum: Data released in the past week
The labor market remained generally week in January, but there was some positive
data mixed in. Payrolls shed 20,000 jobs during the month, but the unemployment
rate fell to 9.7%. An alternative measure of unemployment, that includes discouraged
workers and those forced to work part-time, fell to 16.5% in January, from 17.3% in
December. On the negative side, annual revisions to payroll data revealed that over
8.4 million jobs have been lost since the onset of the recession, up sharply from the
prior estimate of 7.2 million.
In December, wholesale inventories fell 0.8% while wholesale trade rose 0.8%. Also
in December, the U.S. trade balance widened to a one-year high of $40.2 billion, as
imports rose 4.8% and exports increased 3.3%.
Through the first week of February, Redbook sales were up 1.7% compared to
January, and up 2.0% compared to the same period last year. Oil prices decreased
slightly over the past week, averaging $73.4 per barrel as opposed to the previous
week's average of $74.4.
In January, payroll employment posted a small decrease and revisions to the prior
two months' estimates resulted in a net loss of 5,000 additional jobs. Still, the
unemployment rate fell three-tenths of a percentage point to 9.7%, a five-month low.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
300
11.0
200
100
Change from Previous Month
Nov-09
Dec-09
Jan-10
64,000
-150,000
-20,000
10.0
0
9.0
-100
8.0
-200
-300
7.0
-400
6.0
-500
-600
Nov-09
Dec-09
Jan-10
-700
10.0
10.0
9.7
5.0
4.0
-800
07:Q4 08:Q2 08:Q4 09:Q2 09:Q4
08:Q1 08:Q3 09:Q1 09:Q3 Jan-10
Source: Bureau of Labor Statistics / Haver Analytics.
07:Q4 08:Q2 08:Q4 09:Q2 09:Q4
08:Q1 08:Q3 09:Q1 09:Q3 Jan-10