Download President’s Report Board Directors

The
President’s
Report to the
Board of
Directors
February 5, 2009
CURRENT ECONOMIC DEVELOPMENTS - February 5, 2009
Data since your last Directors' meeting show the economy posted its biggest
contraction in over 25 years in the fourth quarter, and the weakness in the economy
is likely to persist through the first half of this year.
The decrease in real GDP in the fourth quarter primarily reflected negative
contributions from exports, personal consumption expenditures, equipment and
software, and residential investment that were partly offset by positive contributions
from inventory investment, government spending, and a decrease in imports.
In January, initial claims continued to rise amid further weakening of the labor
market. Consumer attitudes were mixed in January, and most measures remain
at or near record low levels.
Inflation worries are for now a thing of the past, as headline prices for both
consumers and producers grew at their slowest paces in years in the fourth quarter.
The concern now is that prices may hold at levels less than ideal for economic
growth. Unit labor costs slowed a bit during the fourth quarter, while total
compensation, as measured by the ECI, grew at its slowest pace ever. Oil prices
stabilized in January, following a steep decline seen over the past five months.
Most of the major components contributed to the much larger decrease in real
GDP in the fourth quarter than in the third. The largest contributors were a downturn
in exports and a much larger decrease in equipment and software. The most
notable offset was a much larger decrease in imports. The decrease in real GDP
would have been larger if not for an accumulation of inventories.
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
05:Q4
06:Q2
Source: Bureau of Economic Analysis.
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Despite an increase in real incomes in the fourth quarter, consumers continued
to curtail their spending.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
15.0
Personal Income
12.0
4.0
9.0
2.0
6.0
3.0
0.0
0.0
-2.0
-3.0
-6.0
Real Disposable
Income
-4.0
-9.0
-12.0
-6.0
05:Q4
06:Q4
06:Q2
07:Q4
07:Q2
08:Q4
05:Q4
06:Q4
06:Q2
08:Q2
07:Q4
07:Q2
08:Q4
08:Q2
Source: Bureau of Economic Analysis.
Auto sales fell throughout 2008 and continued to slow in January. Last month's
sales pace was the slowest since July 1982.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
20.0
Nov
Dec
Jan
18.0
10.1
10.3
9.5
16.0
14.0
12.0
10.0
8.0
6.0
4.0
05:Q4
05:Q4
06:Q2
06:Q2
06:Q4
06:Q4
Source: Bureau of Economic Analysis.
07:Q2
07:Q2
07:Q4
07:Q4
08:Q2
08:Q2
08:Q4
08:Q4
Jan-09
Business investment fell sharply in the fourth quarter, aided by the largest drop in
equipment and software investment since 1958.
Business Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
15.0
15.0
Business
Investment
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
Equipment
and Software
-15.0
-15.0
-20.0
-20.0
-25.0
-25.0
-30.0
-30.0
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Source: Bureau of Economic Analysis.
In the fourth quarter, new orders for durable goods fell at their fastest pace on record.
Orders for nondefense capital goods, excluding aircraft, also fell, following three
consecutive quarters of growth.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
20.0
20.0
16.0
16.0
Capital Goods Nondefense,
Excluding Aircraft
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
Durable Goods,
New Orders
-8.0
-8.0
-12.0
-12.0
-16.0
-16.0
-20.0
-20.0
05:Q4
06:Q2
Source: U.S. Census Bureau.
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Residential investment posted another significant decline in the fourth quarter.
Since its peak in the fourth quarter of 2005, investment has fallen in every quarter
for three full years.
Residential Investment
Annualized Percent Change
Annualized Percent Change
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Source: U.S. Census Bureau.
The pace of new home sales in the fourth quarter was the slowest since 1982:Q2,
aided by an all-time-low rate in December. Since their peaks in 2005:Q3, the sales
pace of new homes has fallen over 70% and of existing homes over 35%.
New and Existing Home Sales
Thousands of Units,
Thousands of Units,
Annualized
Annualized
1500
7500
New Home Sales
7000
Existing
Home Sales
1250
6500
1000
6000
750
5500
500
5000
250
4500
0
4000
05:Q4
06:Q2
Source: U.S. Census Bureau.
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Growth in government spending eased in the fourth quarter.
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
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Source: Bureau of Economic Analysis.
Exports and imports both posted stiff declines in the fourth quarter. With the
global economy slowing down, the support to real GDP from nex exports has
evaporated.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
30.0
30.0
Exports
20.0
20.0
10.0
10.0
0.0
0.0
Imports
-10.0
-10.0
Net Exports: Contribution to % change in Real GDP
-20.0
08:Q1
08:Q2
08:Q3
08:Q4
0.77
2.93
1.05
0.09
-20.0
-30.0
-30.0
05:Q4
06:Q2
Source: Bureau of Economic Analysis.
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Initial claims for unemployment insurance continued to escalate through the fourth
quarter and into January as employment conditions deteriorated further. January's
estimate was the highest since November 1982.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
600
600
550
550
500
500
450
450
400
400
350
350
300
300
250
250
05:Q4
06:Q2
06:Q1
06:Q4
06:Q3
07:Q2
07:Q1
07:Q4
07:Q3
08:Q2
08:Q1
08:Q4
08:Q3
Jan-09
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes were mixed in January after deteriorating in the fourth quarter.
Sentiment improved in January to a four-month high, but confidence fell to establish
a new record low.
Consumer Sentiment and Expectations
Index, 1966:Q1=100
100
90
Index, 1966:Q1=100
100
Sentiment
90
80
80
70
70
60
Expectations
50
60
50
40
40
05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 Jan-09
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
100
100
Confidence
80
80
60
60
40
Expectations
40
20
20
05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 Jan-09
Source: The Conference Board (confidence) and University of Michigan (sentiment).
The ISM index fell sharply in the fourth quarter, and held close to that level in
January. The employment index, while down from its fourth quarter average,
was unchanged in January from its December estimate.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
60.0
60.0
ISM Index
55.0
55.0
50.0
50.0
45.0
45.0
40.0
40.0
Employment Index
35.0
35.0
30.0
30.0
25.0
25.0
05:Q4
06:Q2
06:Q1
06:Q4
06:Q3
07:Q2
07:Q1
07:Q4
07:Q3
08:Q2
08:Q1
08:Q4
08:Q3
Jan-09
Source: Institute for Supply Management.
Headline inflation slowed considerably in the fourth quarter, for both consumers and
producers. Core consumer prices slowed to their lowest rate in over four years, but
producer prices accelerated for the fourth consecutive quarter. Going forward, inflation
is likely to remain subdued and may hold at less than ideal levels for some time.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
6.0
6.0
Consumer Price Index
Consumer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
10.0
8.0
10.0
8.0
Producer Price Index
Producer Price Index,
excluding food and energy
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
05:Q4
06:Q2
Source: Bureau of Labor Statistics.
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
Productivity accelerated in the fourth quarter as a decline in output was more than
offset by a greater drop in hours worked. Unit labor costs slowed during the period,
but compensation picked up a bit.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
Compensation
Per Hour
12.0
12.0
9.0
9.0
Output
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit
Labor Costs
-6.0
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
-6.0
08:Q4
Source: Bureau of Labor Statistics.
In the fourth quarter, total employment costs grew at their slowest pace on record,
as wages and salaries and benefit costs decelerated.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
6.0
6.0
Total
Compensation
Benefit Costs
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
Wages and Salaries
1.0
1.0
05:Q4
06:Q2
Source: Bureau of Labor Statistics.
06:Q4
07:Q2
07:Q4
08:Q2
08:Q4
After a dropoff in oil prices seen over the past several months, prices stabilized in
January.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
130.0
110.0
120.0
100.0
110.0
90.0
100.0
80.0
90.0
70.0
80.0
60.0
70.0
50.0
60.0
40.0
50.0
40.0
05:Q4
06:Q3
07:Q2
08:Q1
08:Q4
Sep-08
Nov-08
30.0
Jan-09
Source: Wall Street Journal (oil prices).
Overall, data since your last Directors' meeting show the economy posted its
biggest contraction in over 25 years in the fourth quarter, and the weakness in the
economy is likely to persist through the first half of this year.
Short-Term Interest Rates
Percent
Percent
10.0
10.0
Discount Window Primary Credit
9.0
5.02
3.67
8.0
2.33
2.25
7.0
1.31
0.50
6.0
07:Q4
08:Q1
08:Q2
08:Q3
6.00
5.00
4.00
3.00
2.00
1.00
0.00
9.0
8.0
7.0
6.0
08:Q4 Jan-09
Federal Funds Rate
(effective rate)
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
05:Q4
06:Q2
06:Q1
06:Q4
06:Q3
Source: Federal Reserve Board of Governors.
07:Q2
07:Q1
07:Q4
07:Q3
08:Q2
08:Q1
08:Q4
08:Q3
Jan-09
PRESDIENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
February 12, 2009
Current Economic Developments - Addendum: Data released in the past week
The labor market deteriorated further in January, as nonfarm payrolls posted their
most significant loss in 34 years and unemployment reached a 16-year high. Job
losses for the previous two months were also revised higher.
In December, wholesale inventories fell 1.4% and wholesale trade fell 3.6%. Also in
December, the U.S. trade balance narrowed to a six-year low of $39.9 billion, as
weakening global demand for U.S.-produced goods more than offset a decrease in
our demand for imports.
Through the first week of February, Redbook sales were up 0.7% compared to
January, but down 1.7% compared to the same period last year. Oil prices decreased
slightly over the past week, averaging $39.8 per barrel as opposed to the previous
week's average of $41.2.
In January, payroll employment posted its biggest monthly decrease since December
1974. Since the start of the recession payrolls have been reduced by more than
3.5 million jobs, half of those losses coming in the past three months.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
8.0
300
200
100
Nov-08
Dec-08
Jan-09
6.8
7.2
7.6
7.5
7.0
0
6.5
-100
6.0
-200
-300
5.5
-400
Change from Previous Month
-500
Nov-08
Dec-08
Jan-09
-600
-597,000
-577,000
-598,000
5.0
4.5
4.0
-700
06:Q4 07:Q2 07:Q4 08:Q2 08:Q4
07:Q1 07:Q3 08:Q1 08:Q3 Jan-09
Source: Bureau of Labor Statistics.
06:Q4 07:Q2 07:Q4 08:Q2 08:Q4
07:Q1 07:Q3 08:Q1 08:Q3 Jan-09