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The
President’s
Report to the
Board of
Directors
June 4, 2009
CURRENT ECONOMIC DEVEOPMENTS - June 4, 2009
Data released since your last Directors' meeting are consistent with the view that the
economy will contract in the second quarter at a much slower rate than was seen in
the previous two quarters. There are signs of demand stabilization, especially for
consumption and housing starts. However, the economy is still losing jobs at a fast pace
and slack in the labor market is now putting downward pressure on wages.
Initial claims for unemployment have eased somewhat, but remain at high levels. The same
is true for continuing claims, which suggests little hiring from the current pool of unemployed.
Consumers have become more optimistic, with the improvement in sentiment most notable
in expected future conditions. Households are now starting to receive stimulus money, and
the rate at which households will be spending their rebates will be a crucial near-term
development. In April, consumer expenditures remained flat and the noticeable increase in
disposable income was largely saved. The savings rate in April stood at 5.7, a level last
seen in 1995.
In the manufacturing sector, the ISM index continued to climb in May but still has a way
to go before signaling any economic expansion. Industrial production and capacity
utilization both fell further in April, while new orders for durable goods posted a
small increase.
Headline consumer inflation was flat in April. Core prices increased noticeably, but a large
portion of the increase was due to an increase in the tobacco excise tax. Oil prices are
now on an upward trend, having increased $10 per barrel in May and $20 overall in the
past three months.
Initial claims continued to ease in May. Still, the current level remains elevated.
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-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes continued their recent recovery in May, as confidence and
sentiment both reached their highest levels since September. Consumers are also
more optimistic about conditions improving further over the next six months, while
their feelings about present conditions have been more muted.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
110
150
Current
Conditions
Present
Situation
125
Future
Expectations
Consumer
Expectations
100
90
100
80
75
70
50
60
Consumer
Confidence
25
0
May-07
Nov-07
Consumer
Sentiment
May-08
Source: The Conference Board.
Nov-08
May-09
May-07
Nov-07
50
May-08
Nov-08
40
May-09
Source: The University of Michigan.
Total auto and light truck sales picked up a bit in May, but are still in line with the
recent historically low levels.
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-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Source: Bureau of Economic Analysis.
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
-6.0
Apr-06
Oct-06
Jul-06
-4.0
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
-6.0
Apr-09
Oct-08
Jul-08
Jan-09
Source: Bureau of Economic Analysis.
Existing home sales rose a bit in April, continuing their recent trend of alternating
gains and losses, and sales of new homes were essentially flat. Both measures
are hovering near their six-month averages, possibly signaling a leveling off of the
housing market.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
7500
New Home Sales
7000
1200
Existing
Home Sales
6500
1000
6000
800
5500
600
5000
400
4500
200
4000
Apr-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Apr-09
Jan-09
In April, housing starts and building permits both fell to once again establish new
record lows.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
2200
2000
2000
Building Permits
1800
1800
1600
1600
1400
1400
1200
1200
Housing Starts
1000
1000
800
800
600
600
400
400
200
200
Apr-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Apr-09
Jan-09
Source: U.S. Census Bureau.
The ISM manufacturing index showed further improvement in May, rising for the fifth
consecutive month, but remains below 50. The employment component of the index
was essentially unchanged in May following the strong increase seen in April.
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
May-06
Nov-06
Aug-06
May-07
Nov-07
May-08
Nov-08
May-09
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Source: Institute of Supply Management.
Industrial production fell for the sixth consecutive month in April, and capacity
utilization fell slightly to another record low.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
3.0
2.0
85.0
Capacity Utilization
(manufacturing)
80.0
1.0
0.0
75.0
-1.0
-2.0
Industrial Production
-3.0
70.0
-4.0
-5.0
Apr-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
65.0
Apr-09
Oct-08
Jul-08
Jan-09
Source: Federal Reserve Board of Governors.
Durable goods posted another significant year-over-year fall in April, but did show
some improvement from their March level. Orders of nondefense captial goods,
excluding aircraft, posted their biggest drop in seven years in April, and second
largest on record.
New Orders
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
20.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-15.0
-10.0
New Orders,
Durable Goods
Durable Goods, New Orders
Percent change, month-over-month
-15.0
-20.0
Jan-09
Feb-09
Mar-09
Apr-09
-20.0
-25.0
-7.85
1.65
-2.18
1.68
-25.0
-30.0
Apr-06
Oct-06
Jul-06
Source: U.S. Census Bureau.
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
-30.0
Apr-09
Oct-08
Jul-08
Jan-09
Headline prices fell again in April, keeping deflation concerns alive. Core prices
are less troubling, as the consumer index accelerated slightly and the producer
index has been slowly decelerating toward pre-recession levels.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
6.0
6.0
Consumer Price Index
4.0
4.0
2.0
2.0
Consumer Price Index,
excluding food and energy
0.0
-2.0
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Producer Price Index
Percent Change, Year-Over-Year
0.0
Dec-08
-2.0
Apr-09
Percent Change, Year-Over-Year
12.0
12.0
9.0
9.0
Producer Price Index
6.0
6.0
3.0
3.0
0.0
0.0
Producer Price Index,
excluding food and energy
-3.0
-6.0
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
-3.0
Dec-07
Apr-08
Aug-08
Dec-08
-6.0
Apr-09
Source: Bureau of Labor Statistics.
Oil prices continued to rise in May, reaching their highest levels since October.
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-06
Nov-06
Aug-06
Source: Wall Street Journal.
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
May-09
Feb-09
Productivity posted a revised gain in the first quarter that was about twice the rate
that was originally estimated. Compensation per hour edged slightly upward, while
unit labor costs fell.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
Compensation
Per Hour
12.0
12.0
Output
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
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
-6.0
09:Q1
08:Q3
Source: Bureau of Labor Statistics.
The drop in real GDP in the first quarter was smaller than originally thought. The
upward revision primarily reflected upward adjustments to private nonfarm business
investment and exports that were partly offset by a downward adjustment to
personal consumption expenditures for nondurable goods.
Revisions to First Quarter Real GDP
Description
Real GDP
Advanced
Preliminary
-6.1
-5.7
Personal Consumption
2.2
1.5
Nondurable Goods
1.3
-0.6
Business Investment
-37.9
-36.9
Structures
-44.2
-42.3
Equipment and Software
-33.8
-33.5
Residential Investment
-38.0
-38.7
Government
-3.9
-3.5
Exports
-30.0
-28.7
Real GDP
8.0
4.0
0.0
-4.0
-8.0
06:Q1
06:Q3
Source: Bureau of Economic Analysis.
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Data released since your last Directors' meeting are consistent with the view that the
economy will contract in the second quarter at a much slower rate than was seen in
the previous two quarters. There are signs of demand stabilization, especially for
consumption and housing starts. However, the economy is still losing jobs at a fast pace
and slack in the labor market is now putting downward pressure on wages.
Percent
Short-Term Interest Rates
3.0
Federal Funds Rate
(effective rate)
2.5
Discount Window
Primary Credit
2.0
1.00
1.5
0.50
0.50
0.50
0.50
0.50
0.50
1.0
0.00
Jan-09 Feb-09 Mar-09 Apr-09 May-09
0.5
0.0
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Source: Federal Reserve Board of Governors.
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
June 11, 2009
Current Economic Developments - Addendum: Data released in the past week
Recent news in the labor markets have been somewhat mixed. On the bright side,
nonfarm payrolls fell in May by less than what was anticipated, as the rate of job
losses eased to its slowest pace since last September. At the same time, payrolls
were revised in the previous two months to show fewer job losses than originally
thought. Still, the unemployment rate rose 1/2 percentage points to 9.4 percent,
reaching its highest level since August 1983.
The U.S. international trade deficit widened in April, as exports fell at a faster pace
than imports. April's data suggest there will be continued declines in both exports
and imports in the second quarter.
Redbook sales fell 4.3 percent through the first week of June, compared to May.
June's drop in sales was in line with its decline seen over the past year.
Oil prices continued to rise in early June, averaging $70.01 per barrel in the week
ending June 9, compared to $68.55 per barrel in the previous week.
Payroll employment fell by 345,000 jobs in May and estimates for the previous two
months were revised slightly upawrd, showing 82,000 less job losses than originally
thought. Although May's estimate was lower than anticipated and marked the
smallest number of job losses since last September, the unemployment rate rose
1/2 percentage point to 9.4 percent, its highest level since the Summer of 1983.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
300
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
May-09
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
May-07
Jan-08
Sep-07
Sep-08
May-08
Source: Bureau of Labor Statistics.
May-09
Jan-09
May-07
Jan-08
Sep-07
Sep-08
May-08
Jan-09