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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