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The
President’s
Report to the
Board of
Directors
December 31, 2008
CURRENT ECONOMIC DEVELOPMENTS - December 31st, 2008
Data released since your last Directors' meeting suggest economic conditions have
deteriorated further. Employment conditions remain weak, the slump in the housing
market has deepened, and the holiday shopping season appears to have been one of
the worst in recent memory. The economy likely shrank in the fourth quarter at its
fastest rate since the early 1980s, and growth may remain negative through the middle
of 2009.
In December, initial claims rose further, building on the steep increase seen in November.
Consumer attitudes were mixed, as sentiment rose slightly but confidence fell to an
all-time low. Real disposable personal income increased in November, helping
consumption post its first gain in six months.
The struggles of the housing market continued in December. Existing home sales,
housing starts and building permits all fell to record lows, and new home sales fell to
their lowest point since January 1991.
In the business sector, industrial production and capacity utilization both decreased in
November after improving the previous month. Durable goods orders fell further in
November while captial goods excluding aircraft posted a surprising gain.
Recent price data shows deflation is now the primary price risk, replacing the inflation
concerns of just a few months ago. Most of the lower inflation data can be attributed to
decreasing energy prices, including oil prices that continued to fall in December.
Initial claims for unemployment insurance rose further in December, reaching the
highest levels seen in the past 25 years.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
600
600
Initial Claims for Unemployment Insurance
Thousands, Quarterly Average
550
500
08:Q1
08:Q2
08:Q3
08:Q4
352
374
441
519
550
500
450
450
400
400
350
350
300
300
250
250
Dec-05
Jun-06
Mar-06
Dec-06
Sep-06
Jun-07
Mar-07
Dec-07
Sep-07
Source: Department of Labor, Employment and Training Administration.
Jun-08
Mar-08
Dec-08
Sep-08
Consumer attitudes were mixed in December, as sentiment improved slightly and
confidence dipped. Consumers' views on current economic conditions displayed a
similar disparity, although more pronounced.
Consumer Sentiment
Index, 1966:Q1=100
120
110
100
90
80
70
60
50
40
Dec-05
Index, 1966:Q1=100
Current Conditions
Sentiment
Expectations
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
120
110
100
90
80
70
60
50
40
Dec-08
Consumer Confidence
Index, 1985 = 100
160
140
120
100
80
60
40
20
Dec-05
Index, 1985 = 100
Present Situation
Confidence
Expectations
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
160
140
120
100
80
60
40
20
Dec-08
Source: University of Michigan (top panel) and The Conference Board (bottom panel).
In November real consumption rose for the first time since May, aided by holiday
shopping and a further increase in incomes.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
6.0
6.0
5.0
5.0
4.0
4.0
Real
Consumption
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
Real Disposable
Personal Income
-3.0
-3.0
-4.0
Nov-05
May-06
Feb-06
Nov-06
Aug-06
Source: Bureau of Economic Analysis.
May-07
Feb-07
Nov-07
Aug-07
-4.0
Nov-08
May-08
Feb-08
Aug-08
Residential investment continued to struggle in November. Existing home sales
fell to their lowest pace on record, and new home sales dropped to a nearly 18-year
low.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
8000
1400
7500
Existing
Home Sales
1200
7000
1000
6500
New Home Sales
800
6000
5500
600
5000
400
4500
200
4000
Nov-05
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
Source: U.S. Census Bureau.
Housing starts and building permits both continued to fall in November, registering
new record lows for both series.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2500
2500
2250
2250
Building Permits
2000
2000
1750
1750
1500
1500
1250
1250
1000
1000
Housing Starts
750
750
500
500
Nov-05
May-06
Feb-06
Source: U.S. Census Bureau.
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
After briefly rising in October, industrial production and capacity utilization fell again
in November. Capacity utilization is at its lowest level since April 2002.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
84.0
5.0
4.0
Capacity Utilization
(manufacturing)
3.0
82.0
80.0
2.0
1.0
78.0
0.0
76.0
-1.0
-2.0
74.0
Industrial Production
-3.0
72.0
-4.0
-5.0
70.0
Nov-05
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
Source: Federal Reserve Board of Governors.
In November, durable goods orders posted their biggest year-over-year decline since
the previous recession in 2001. Orders for nondefense capital goods, excluding
aircraft, rebounded a bit in November.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
24.0
24.0
20.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
Percent change, month-over-month
-8.0
-12.0
-16.0
-8.0
Aug-08
Sep-08
Oct-08
Nov-08
Durable
-5.5
0.0
-8.4
-1.0
Capital
-2.3
-3.4
-6.6
4.7
-12.0
Durable Goods,
New Orders
-16.0
-20.0
-20.0
Nov-05
May-06
Feb-06
Source: U.S. Census Bureau.
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
Overall prices decelerated dramatically in November, led by falling energy prices.
The recent slowdown in price growth has spawned new concerns about potential
deflation in the coming months.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
6.0
6.0
5.0
Consumer Price Index
5.0
Consumer Price Index,
excluding food and energy
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
Nov-05
Mar-06
Jul-06
Mar-07
Jul-07
Nov-07
Producer Price Index
Percent Change, Year-Over-Year
10.0
Nov-06
Mar-08
Jul-08
Percent Change, Year-Over-Year
10.0
Producer Price Index
Producer Price Index,
excluding food and energy
6.0
0.0
Nov-08
6.0
2.0
2.0
-2.0
-2.0
Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08
Source: Bureau of Labor Statistics.
Oil prices continued to fall in December. The $30.81 price recorded on December
22nd was the lowest in over six years ($30.71 on December 5, 2003).
Domestic Spot Oil Price
Dollar per Barrel
Dollar per Barrel
160.0
160.0
2008 Quarterly Averages
140.0
120.0
Q1
Q2
Q3
Q4
98.0
124.0
118.0
58.3
140.0
120.0
100.0
100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
Dec-05
Jun-06
Mar-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Source: West Texas Intermediate, Wall Street Journal.
Real GDP growth was unrevised in the final third quarter estimate, although many
components were subjected to minor revisions, the most significant of which was a
downward adjustment to equipment and software investment.
Real GDP
8.0
6.0
4.0
2.0
0.0
-2.0
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Revisions to Third Quarter Real GDP
Description
Preliminary
Revised
-0.5
-0.5
Consumption
-3.7
-3.8
Business Investment
-1.5
-1.7
-5.7
-7.5
Real GDP
Equipment & Software
Residential Investment
-17.6
-16.0
Government
5.4
5.8
Exports
3.4
3.0
Imports
-3.2
-3.5
Final Sales
-1.4
-1.3
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting suggests economic conditions have
deteriorated further. Employment conditions remain weak, the slump in the housing market
has deepened, and the holiday shopping season appears to have been one of the worst in
recent memory. The economy likely shrank in the fourth quarter at its fastest rate since the
early 1980s, and growth may remain negative through the middle of 2009.
Short-Term Interest Rates
Percent
Percent
7.0
7.0
4.00
Federal Funds Rate
(effective rate)
6.0
3.00
Discount Window Primary Credit
2.25
2.25
2.25
2.00
6.0
1.81
1.25
1.00
5.0
0.89
5.0
0.00
Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
Dec-06
Mar-07
Jun-07
Sep-07
Source: Federal Reserve Board of Governors.
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
January 8, 2009
Current Economic Developments - Addendum: Data released in the past week
In December, vehicle sales surprisingly rose a bit from their November level, but were
still down over 30% from last year. The sales pace for the fourth quarter was the
slowest since the early 1980s and the sales total for the year was the worst since 1992.
Recent manufacturing data remained weak, as the ISM index continued to fall in
December along with its employment component. Manufacturers' orders and
shipments both fell in November for the fourth month in a row.
Redbook sales finished December 0.6% lower than they were in November. In the
week ending January 3rd, sales were down 1.3% from the same period last year. Oil
prices increased during the past week, averaging $46.8 per barrel compared to last
week's average of $35.2.
Payroll employment data for December will be released by the BLS Friday morning.
Various forecasts predict an additional loss of 450,000 - 500,000 jobs occured during
the month, with the unemployment rate rising to 7.0%.
Lightweight vehicle sales posted a small, yet surprising gain in December, but sales
overall for the fourth quarter were the lowest since the third quarter of 1982.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
22.0
22.0
Quarterly Sales, 2008
Millions of Units, Annualized
20.0
18.0
Q1
Q2
Q3
Q4
15.2
14.1
12.9
10.3
20.0
18.0
16.0
16.0
14.0
14.0
12.0
12.0
10.0
10.0
8.0
Dec-05
Jun-06
Mar-06
Source: Bureau of Economic Analysis.
Dec-06
Sep-06
Jun-07
Mar-07
Dec-07
Sep-07
8.0
Dec-08
Jun-08
Mar-08
Sep-08
The steep declines in the ISM index continued in December, bringing both the total
and employment indices to their lowest levels in over 25 years.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
60.0
60.0
ISM
Index
55.0
55.0
50.0
50.0
45.0
45.0
40.0
Q1
Q2
Q3
Q4
ISM
49.2
49.5
47.8
35.8
Emp.
47.4
44.9
47.8
32.9
35.0
30.0
40.0
Employment
Index
2008 Quarterly Averages
35.0
30.0
25.0
25.0
Dec-05
Jun-06
Mar-06
Dec-06
Sep-06
Source: Institute for Supply Management.
Jun-07
Mar-07
Dec-07
Sep-07
Jun-08
Mar-08
Dec-08
Sep-08