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The
President’s
Report to the
Board of
Directors
March 5, 2009
Current Economic Developments - March 5, 2009
Data released since your last Directors' meeting show the economy struggled more in the
fourth quarter than originally estimated, as a sharp downward revision to real GDP resulted
in its most significant decline in over 26 years. The weakness in the economy is
widespread and likely to persist through the coming months.
In February, initial claims increased sharply again and consumer attitudes remained bleak.
Auto sales continued to fall in February, registering their second-lowest sales pace ever.
Real consumption expenditures increased in January, aided by a further increase in
incomes.
The housing market continued to struggle in January, with residential sales and
construction activity all achieving new record lows. In the manufacturing sector, the ISM
manufacturing index improved slightly in February but remains well below 50 and the
employment index dropped to its lowest point on record. In January, both industrial
production and capacity utilzation fell further. Also in January, new orders for both durable
goods and nondefense capital goods, excluding aircraft, continued to slide.
Headline inflation measures for both consumers and producers were negative in January,
and core measures slowed a bit. Oil prices held near $40 per barrel in February for the
third month in a row. Unit labor costs were revised upward in the fourth quarter, in
conjunction with a decrease in productivity, a sign that employers may continue to cut jobs
to offset the escalating costs.
Initial claims for unemployment insurance continued their upward surge in February,
resulting in their highest monthly average since October 1982.
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
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
Source: Department of Labor, Employment and Training Administration.
Consumers remained pessimistic in February, with most measures of their attitudes
at or near record low levels. The primary concern of most consumers was increasing
unemployment, and few respondents expected conditions to improve anytime soon.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
110
125
Confidence
Present
Situation
Sentiment
100
75
Current
Conditions
100
90
80
Expectations
70
Expectations
50
60
25
50
0
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Feb-07
Aug-07
Feb-08
Aug-08
40
Feb-09
Source: The University of Michigan.
Source: The Conference Board.
Total auto and light truck sales slowed further in February, falling to their lowest
annual rate since December 1981.
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
Feb-06
Aug-06
May-06
Feb-07
Nov-06
Source: Bureau of Economic Analysis.
Aug-07
May-07
Feb-08
Nov-07
6.0
Feb-09
Aug-08
May-08
Nov-08
In January, real disposable income rose for the fifth consecutive month, helping real
consumption post its largest gain since before the recession, and only its second
increase in the past eight months.
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
-4.0
-6.0
Jan-06
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
-6.0
Jan-09
Jul-08
Apr-08
Oct-08
Source: Bureau of Economic Analysis.
The housing market continued to deteriorate in January. New home sales, housing
starts, and building permits all fell to the lowest point in each series' 45+ year history.
The total existing home sales series is only 10 years old, but it also set a record low.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1500
7500
1200
New Home Sales
6500
900
5500
600
300
0
Jan-06
4500
Existing Home Sales
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
3500
Jan-09
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2500
2500
Building Permits
2000
2000
1500
1500
1000
500
0
Jan-06
1000
Housing Starts
May-06
Sep-06
500
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
0
Jan-09
Source: U.S. Census Bureau (new home sales, housing starts and building permits) and National Association of Realtors (existing sales).
The ISM manufacturing index was essentially flat in February, and the employment
index dropped to a record low.
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
Feb-06
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Feb-08
Nov-07
Aug-08
May-08
Feb-09
Nov-08
Source: Institute of Supply Management.
In January, industrial production fell for the fifth time in six months, and capacity
utilization fell to a record low.
Industrial Production and Capacity Utilization
Percent of Capacity
90.0
Percent Change, Previous Month
4.0
3.0
Industrial
Production
2.0
85.0
1.0
80.0
0.0
-1.0
75.0
-2.0
Capacity Utilization
(manufacturing)
-3.0
70.0
-4.0
-5.0
Jan-06
65.0
Jul-06
Apr-06
Jan-07
Oct-06
Source: Federal Reserve Board of Governors.
Jul-07
Apr-07
Jan-08
Oct-07
Jul-08
Apr-08
Jan-09
Oct-08
New orders for durable goods continued to shrink in January, and have now fallen
almost 25% in the past six months. Orders of nondefense capital goods excluding
aircraft have followed a similar path, falling a bit more than 20% over the same time.
New Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
25.0
25.0
20.0
20.0
Durable Goods
15.0
15.0
Capital Goods Nondefense,
Excluding Aircraft
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
Percent Change, Previous Month
-10.0
Nov-08
Dec-08
Jan-09
Durables
-3.97
-4.59
-4.54
Ex. Air.
1.07
-5.93
-5.72
-15.0
-20.0
-10.0
-15.0
-20.0
-25.0
-25.0
Jan-06
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
Jul-08
Apr-08
Jan-09
Oct-08
Source: U.S. Census Bureau.
Headline inflation measures remained negative in January, and core prices eased
slightly. Core consumer prices advanced at their slowest pace in nearly five years.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
6.0 Consumer Price Index
4.0
6.0
Consumer Price Index,
excluding food and energy
4.0
2.0
2.0
0.0
0.0
-2.0
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
-2.0
Jan-09
Producer Price Index
Percent Change, Year-Over-Year
12.0
10.0 Producer Price Index
8.0
Producer Price Index,
6.0
excluding food and energy
4.0
2.0
0.0
-2.0
-4.0
Jan-06 May-06 Sep-06
Jan-07 May-07
Source: Bureau of Labor Statistics.
Percent Change, Year-Over-Year
Sep-07
Jan-08
May-08
Sep-08
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Jan-09
Oil prices were little changed in February.
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
Feb-06
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Feb-08
Nov-07
Aug-08
May-08
Feb-09
Nov-08
Source: Wall Street Journal.
.
Productivity was revised sharply downward in the fourth quarter, showing a small
decline as opposed to the earlier reported 3.2% gain. Unit labor costs were also
revised upward, posting their largest gain in two years.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
12.0
9.0
9.0
Output
Per Hour
Compensation
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-6.0
05:Q4
-3.0
Unit
Labor Costs
06:Q2
Source: Bureau of Labor Statistics.
06:Q4
07:Q2
07:Q4
08:Q2
-6.0
08:Q4
Real GDP growth was revised downward in the fourth quarter, due to widespread
downward adjustments among its contributors. The most significant downward
revisions were made to private inventory investment, exports, and personal
consumption expenditures for nondurable goods.
Revisions to Fourth Quarter Real GDP
Description
Advanced
-3.8
-3.5
Preliminary
-6.2
-4.3
Business Investment
Equipment and Software
-19.1
-27.8
-21.1
-28.8
Residential Investment
-23.6
-22.2
Government
Exports
Imports
1.9
-19.7
-15.7
1.6
-23.6
-16.0
-5.1
-6.4
6.2
-19.9
Real GDP
Personal Consumption
Final Sales
Change in Private Inventories (Bil. 2000$)
Real GDP
8.0
4.0
0.0
-4.0
-8.0
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy struggled
more in the fourth quarter than originally estimated, as a sharp downward revision to
real GDP resulted in its msot significant decline in over 26 years. The weakness in
the economy is widespread and likely to persist through the coming months.
Percent
Short-Term Interest Rates
4.0
Federal Funds Rate
(effective rate)
3.5
3.0
Discount Window Primary Credit
2.5
1.81
1.25
0.86
2.0
1.5
0.50
0.50
Oct-08 Nov-08 Dec-08 Jan-09 Feb-09
1.0
0.5
0.0
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Source: Federal Reserve Board of Governors.
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
2.50
2.00
1.50
1.00
0.50
0.00
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
March 12, 2009
Current Economic Developments - Addendum: Data released in the past week
In February, nonfarm payrolls continued to fall sharply. Job losses over the past
three months were nearly two million, bringing the total number of jobs lost since
the start of the recession to well over four million. These accumulated losses
brought the unemployment rate to a 25-year high in February.
Wholesale inventories declined 0.7% in January, following a revised decrease of
1.5% in December. Inventories were first reported as falling 1.4% in December.
Wholesale trade fell 2.9% in January, its seventh consecutive monthly drop.
Redbook sales decreased 0.2% through the first week of March, compared to
February. Sales were 1.4% lower than during the same period last year. Oil
prices rose over the past week, averaging $45.5 per barrel, up from the previous
week's average of $42.9.
Nonfarm payrolls fell by 651,000 jobs in February, the third consecutive monthly
decline of 650,000 or more. Payrolls were also downwardly revised by 161,000 for
the previous two months, with the new December estimate being the largest singlemonth drop since October 1949. Also in February, the unemployment rose to 8.1%.
Unemployment Rate
Nonfarm Payroll Employment
Rate
Change from Previous Month
9.0
300
200
8.0
100
0
7.0
-100
-200
6.0
-300
-400
5.0
-500
-600
4.0
-700
-800
Feb-07
Oct-07
Jun-07
Jun-08
Feb-08
Source: Bureau of Labor Statistics.
Feb-09
Oct-08
Feb-07
Oct-07
Jun-07
3.0
Feb-09
Jun-08
Feb-08
Oct-08