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The
President’s
Report to the
Board of
Directors
June 2, 2011
CURRENT ECONOMIC DEVELOPMENTS - June 2, 2011
Data released since your last Directors' meeting has come in mostly below expectations but
show that the economy continues to recover, albeit at a slow pace. The housing market
remains weak, contributions from manufacturing have slowed, and downside risks remain in
foreign debt issues, domestic budget constraints, and the effects of the recent spate of natural
disasters. Despite the recent downturn in data, economic growth is expected to pick up a bit in
the coming months.
Initial claims for unemployment insurance eased a bit in May, but remain uncomfortably high.
Consumer attitudes were mixed in May as measures of future expectations moved in opposite
directions, but feelings towards current conditions were little changed. Auto sales fell in May to
their lowest level in eight months, due primarily to higher prices. Incomes were flat in April and
have shown little growth over the past year, and along with higher energy prices have
restrained consumption, which managed only another very small gain in April.
The housing market remained subdued in April. New home sales increased but remain near
historical lows, while sales of existing homes eased a bit. Housing starts and building permits
also declined in April and are little changed from where they stood two years ago. In the
manufacturing sector, the ISM index fell sharply in May but did continue to signal expansion
in the economy. In April, industrial production was flat while new orders for durable goods fell.
Price indices continued to accelerate in April, due to higher energy and commodity prices.
While core price measures have also been rising, those increases are expected to be
transitory. Oil prices fell sharply in the first few days of May and then held mostly steady
through the rest of the month.
Initial claims for unemployment insurance fell slightly in May, following the sharp
increase seen in April. After dropping to a three-year low of 375,000 at the end of
February, claims have been above 400,000 for eight consecutive weeks, a level well
above what would be considered indicative of a healthy labor market.
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-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
Measures of consumer attitudes were mixed in May, as sentiment improved but
confidence fell, due primarily to disparate views on near-term future conditions. The
Conference Board survey found respondents to be much more apprehensive about
future business and labor market conditions, while the Michgan survey was boosted
by increasing reports of job gains and easing inflation concerns.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
100
100
Consumer
Expectations
Current
Conditions
90
75
80
70
50
Present
Situation
60
Future
Expectations
25
50
Consumer
Sentiment
Consumer
Confidence
0
May-09
Nov-09
May-10
Nov-10
Source: The Conference Board / Haver Analytics.
May-11
May-09
Nov-09
May-10
Nov-10
40
May-11
Source: The University of Michigan / Haver Analytics.
Total lightweight vehicle sales fell in May to their lowest level in eight months, due to a
variety of factors including higher prices, tsunami-related supply shortages from Japan,
and general concerns among consumers about the state of the economy. Even as oil
prices fell during the month, consumers continued to gravitate towards smaller, more
fuel-efficient vehicles.
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
2.0
2.0
0.0
0.0
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Source: Bureau of Economic Analysis / Haver Analytics.
Real disposable incomes were unchanged again in April, and have grown by only 0.3%
over the past six months. The stagnant incomes are restricting consumption, which
edged up only 0.1% in April. Equally small increases were also seen in three of the
previous four 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
Apr-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
-4.0
Apr-11
Oct-10
Jul-10
Jan-11
Source: Bureau of Economic Analysis / Haver Analytics.
Housing data was mixed in April and remain historically weak, despite improving a bit
from the record lows established in the last few months. New home sales unexpectedly
rose in April and are up 16.2% over the past two months, while sales of existing homes
eased slightly in April and matched their six-month average.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
800
7000
700
6500
Existing
Home Sales
New
Home Sales
600
6000
500
5500
400
5000
300
4500
200
4000
100
3500
0
3000
Apr-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
Oct-10
Jul-10
Apr-11
Jan-11
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales) / Haver Analytics.
Housing starts fell in April, erasing most of the gain seen in March. Building permits
also fell slightly during the month and are little changed from where they stood two
years ago.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
1400
1200
1200
1000
1000
Building Permits
800
800
600
600
400
400
Housing Starts
200
200
0
0
Apr-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
Oct-10
Jul-10
Apr-11
Jan-11
Source: U.S. Census Bureau / Haver Analytics.
The ISM manufacturing index fell sharply in May, dropping to its lowest level since
September 2009. The index was still above 50, though, signalling continued economic
expansion. The employment component of the index also fell in May but remains
quite high compared to its recent history.
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-08
Nov-08
Aug-08
May-09
Nov-09
May-10
Nov-10
May-11
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Source: Institute of Supply Management / Haver Analytics.
Industrial production was flat in April, following a solid gain seen in the previous
month. Capacity utilization eased a bit in April, the first decline in the series in nearly
two years.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
3.0
80.0
Industrial Production
2.0
75.0
1.0
0.0
70.0
-1.0
-2.0
-3.0
65.0
Capacity Utilization
(manufacturing)
-4.0
-5.0
Apr-08
Oct-08
Jul-08
Apr-09
Jan-09
Oct-09
Jul-09
Apr-10
Jan-10
60.0
Apr-11
Oct-10
Jul-10
Jan-11
Source: Federal Reserve Board of Governors / Haver Analytics.
New orders for durable goods fell in April and posted the smallest year-over-year
gain since late 2009. Orders of nondefense capital goods, excluding aircraft, also
declined in April, the third decrease in four months. Year-over-year increases in
that series have also been steadily declining over the past eight months.
New Orders
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
30.0
30.0
Percent change, month-over-month
Jan-11
Feb-11
Mar-11
Apr-11
Dur.
4.01
-1.06
4.58
-3.59
Cap.
-4.81
-0.13
5.41
-2.31
20.0
10.0
20.0
10.0
0.0
0.0
Capital Goods Nondefense,
Excluding Aircraft
-10.0
-20.0
-10.0
-20.0
-30.0
-30.0
Durable Goods
-40.0
Apr-08
Oct-08
Jul-08
Apr-09
Jan-09
Source: U.S. Census Bureau / Haver Analytics.
Oct-09
Jul-09
Apr-10
Jan-10
-40.0
Apr-11
Oct-10
Jul-10
Jan-11
Headline consumer prices continued to accelerate in April, growing at their fastest
pace since October 2008. The core index also picked up to reach a 14-month high.
Producer price measures told a similar story, with the total index growing at its
fastest rate since September 2008 and the core index reaching a 21-month high.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
6.0
6.0
Consumer Price Index,
excluding food and energy
4.0
Consumer Price Index
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
Apr-08
Aug-08
Dec-08
Apr-09
Dec-09
Apr-10
Aug-10
Producer Price Index
Percent Change, Year-Over-Year
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
Apr-08
Aug-09
Dec-08
Apr-09
Producer Price Index
Aug-09
Dec-09
-4.0
Apr-11
Percent Change, Year-Over-Year
Producer Price Index,
excluding food and energy
Aug-08
Dec-10
Apr-10
Aug-10
Dec-10
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
Apr-11
Source: Bureau of Labor Statistics / Haver Analytics.
Oil prices fell sharply in the first few days of May, and then spent the rest of the
month hovering around $100 per barrel. The lower prices helped reduce the cost of
gas by about $0.25 per gallon, welcome news to consumers with the summer driving
season now underway.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
150.0
150.0
125.0
125.0
100.0
100.0
75.0
75.0
50.0
50.0
25.0
25.0
0.0
0.0
May-08
Nov-08
Aug-08
May-09
Feb-09
Source: Wall Street Journal / Haver Analytics.
Nov-09
Aug-09
May-10
Feb-10
Nov-10
Aug-10
May-11
Feb-11
Productivity growth was revised slightly higher in the first quarter, reflecting stronger
output than previously estimated but no change in hours worked. Most notable in the
revisions was a 0.1% increase in compensation during the fourth quarter, previously
reported as a 1.9% gain. Unit labor costs were also revised downward in the fourth
quarter, to a drop of 2.8% from the previous estimate of a 1.0% decline.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Compensation
Per Hour
9.0
Output
Per Hour
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
-6.0
-6.0
Unit Labor Costs
-9.0
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
-9.0
11:Q1
10:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
First quarter GDP growth was unrevised in the second estimate, as upward
adjustments to nonresidential fixed investment, inventory investment and exports
were offset by a downward revision to consumption and an upward revision to
imports. GDP growth was expected to undergo a small upward revision, but fell
short due mostly to the larger-then-expected downward adjustment to PCE.
Revisions to First Quarter Real GDP
Description
Advance Estimate
2nd Estimate
1.8
1.8
Personal Consumption (PCE)
2.7
2.2
Business Investment
1.8
3.4
Residential Investment
-4.1
-3.3
Government
-5.2
-5.1
Exports
4.9
9.2
Imports
4.4
7.5
Final Sales
0.8
0.6
Change in Nonfarm Inv. ($2005 Bil.)
30.7
39.8
Real GDP
Real GDP
8.0
4.0
0.0
-4.0
-8.0
08:Q1
08:Q3
09:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q3
10:Q1
10:Q3
11:Q1
Corporate profits posted their weakest quarter of the recovery in the first quarter, with
after tax profits falling for the first time in over two years. All of the decrease came from
domestic firms, as profits rose for overseas operations. The decreases were due
primarily to slower productivity growth (from increased hiring) and the higher cost of
imported materials.
Corporate Profits
Percent Change, Annual Rate
Percent Change, Annual Rate
150
150
Total Profits, After Tax
(w/ IVA and CCAdj.)
100
100
Total Profits, Before Tax
(w/ IVA and CCAdj.)
50
50
0
0
Corporate Profits, % Change, Annual Rate
-50
-100
08:Q1
08:Q3
08:Q2
09:Q1
08:Q4
Domestic
2010:Q
3
11.95
2010:Q
4
16.02
2011:Q
1
-7.39
Foreign
-8.79
-9.48
60.45
09:Q3
09:Q2
10:Q1
09:Q4
10:Q3
10:Q2
-50
-100
11:Q1
10:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
Data released since your last Directors' meeting has come in mostly below expectations but show
that the economy continues to recover, albeit at a slow pace. The housing market remains weak,
contributions from manufacturing have slowed, and downside risks remain in foreign debt issues,
domestic budget constraints, and the effects of the recent spate of natural disasters. Despite the
recent downturn in data, economic growth is expected to pick up a bit in the coming months.
Percent
Short-Term Interest Rates
0.4
0.3
Federal Funds Rate
(effective rate)
1.50
1.00
0.2
Discount Window Primary Credit
0.75
0.75
0.75
0.75
0.75
0.50
0.00
Jan-11 Feb-11 Mar-11 Apr-11 May-11
0.1
0.0
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Source: Federal Reserve Board of Governors / Haver Analytics.
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
June 9, 2011
Current Economic Developments - Addendum: Data released in the past week
Nonfarm payrolls posted their smallest single-month gain in eight months in May, far below
expectations and more evidence of a soft patch in the economy. The weakness in the jobs
report was widespread, with losses seen in manufacturing, motor vehicles and parts, retail
sales, nonresidential construction and government. Health services and food and drinking
places were the strongest gainers.
There were some positive aspects to the data as well. The hours worked index ticked up a
bit and average hourly earnings posted a second consecutive 0.3% gain. Also, the labor force
grew as some previously discouraged workers returned to the labor market with the belief that
jobs were more readily available.
The ISM nonmanufacturing index unexpectedly rose in May, signifying further expansion of
the services sector. The employment sub-index also rose in May, implying that the servicerelated job gains seen in April continued into the following month.
Redbook sales rose 1.3% through the first week of June, compared to May, and were up 4.2%
from the same period last year. Oil prices eased a bit further in early June, averaging $99.8
per barrel in the week ending June 7th, compared to $101.2 per barrel in the previous week.
Payroll employment rose by only 54,000 jobs in May, and payroll additions were
revised downward by 39,000 for the previous two months. Also in May, the
unemployment rate rose one-tenth of a percentage point to 9.1 percent, as a small
gain in civilian employment was outpaced by a larger increase in the labor force.
Nonfarm Payroll Employment
Unemployment Rate
Rate
Change from Previous Month
750
10.5
500
10.0
250
0
9.5
-250
9.0
-500
-750
May-09
Jan-10
Sep-09
Sep-10
May-10
May-11
Jan-11
Source: Bureau of Labor Statistics / Haver Analytics.
8.5
May-09
Jan-10
Sep-10
May-11
Sep-09
May-10
Jan-11