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The
President’s
Report to the
Board of
Directors
November 5, 2009
CURRENT ECONOMIC DEVELOPMENTS - November 5, 2009
Data since your last Directors' meeting show the economy grew 3.5% in the third quarter
as expected, marking its fastest pace in two years. While the strong growth rate most
certainly signifies a turnaround in the economy, the recovery is likely to be slow as the
labor market takes longer to bounce back and consumers remain cautious.
The growth in real GDP in the third quarter primarily reflected upturns in personal
consumption expenditures, private inventory investment, exports, residential investment,
and a smaller decrease in nonresidential investment. These effects were partly offset
by an upturn in imports, a downturn in state and local government spending, and a
slowdown in federal government spending.
In October, consumer attitudes retreated amid further concerns about employment
conditions and personal finances. Initial claims for unemployment insurance fell again
in October, but remain elevated well above a level considered normal. The ISM index
rose to a three-and a-half year high in October, signifying further recovery in the
manufacturing sector.
Prices continued to fall in the third quarter, at or near record paces. Unit labor costs
also fell further in the third quarter and total compensation costs, as measured by the
ECI, slowed to their lowest growth rate on record. Oil prices rose further in October, with
the average daily price per barrel nearly double that seen at the trough in February.
The increase in real GDP in the third quarter was the largest since the third quarter
of 2007 and was due to increases in most of the major components. The primary
contributors were personal consumption, exports, private inventory investment,
federal government spending, and residential investment.
Real Gross Domestic Product
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
-6.0
-6.0
-8.0
-8.0
06:Q3
07:Q1
07:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q1
08:Q3
09:Q1
09:Q3
Real consumption surged in the third quarter, propelled mostly by the 'Cash-forClunkers' stimulus program. Consumption growth is likely to slow again in the
current quarter due to the expiration of the 'CARS' rebates, falling incomes, and
consumers' desires to build their savings.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
15.0
Real Disposable
Income
4.0
12.0
9.0
2.0
6.0
3.0
0.0
0.0
-2.0
-3.0
Personal
Income
-6.0
-4.0
-9.0
-12.0
-6.0
06:Q3
07:Q3
07:Q1
08:Q3
08:Q1
09:Q3
09:Q1
06:Q3
07:Q3
07:Q1
08:Q3
08:Q1
09:Q3
09:Q1
Source: Bureau of Economic Analysis / Haver Analytics.
Total auto and light truck sales were down in October from their 'CARS'-inflated third
quarter average. Excluding sales in July and August, when the rebate program was
in effect, October produced the highest sales rate for any month this year.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
16.0
12.0
8.0
4.0
0.0
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
08:Q3 08:Q4
09:Q1 09:Q2
09:Q3 Oct-09
Source: Bureau of Economic Analysis / Haver Analytics.
Business investment continued to shrink in the third quarter, but by a much smaller
amount than seen the past several quarters. Equipment and software investment
posted a small increase, its first in nearly two years.
Business Investment
Annualized Percent Change
Annualized Percent Change
30.0
30.0
20.0
20.0
Business Investment
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
Equipment
and Software
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
In the third quarter new orders for durable goods continued to improve, but were still
down significantly from their year ago levels. Orders of nondefense capital goods,
excluding aircraft, followed the same pattern.
Durable Goods Orders
Percent Change, previous quarter
Percent Change, previous quarter
8.0
8.0
Durable Goods,
New Orders
4.0
Capital Goods Nondefense,
Excluding Aircraft
4.0
0.0
0.0
-4.0
-4.0
-8.0
-8.0
Percent change, year-over-year
-12.0
2008:Q4
2009:Q1
2009:Q2
2009:Q3
Dur.
-17.23
-25.74
-24.82
-20.88
Cap.
-8.72
-22.00
-23.16
-20.13
-12.0
-16.0
-16.0
06:Q3
07:Q1
07:Q3
Source: U.S. Census Bureau / Haver Analytics.
08:Q1
08:Q3
09:Q1
09:Q3
Residential investment increased in the third quarter, ending a string of fourteen
consecutive drops. From its peak in 2005:Q4 to its low in 2009:Q2, residential
investment fell 44.0%.
Residential Investment
Annualized Percent Change
Annualized Percent Change
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
Source: U.S. Census Bureau / Haver Analytics.
The housing market continued its rebound in the third quarter, aided by stimulus
rebates, lower prices and low mortgage rates. Existing home sales had their
strongest quarter since Q3:2007 and new homes sold at their best pace in a year.
New and Existing Home Sales
Thousands of Units,
Thousands of Units,
Annualized
Annualized
1200
Existing
Home Sales
1000
7000
6500
800
6000
New Home Sales
600
5500
400
5000
200
4500
0
4000
06:Q3
07:Q1
07:Q3
Source: U.S. Census Bureau / Haver Analytics.
08:Q1
08:Q3
09:Q1
09:Q3
Government spending posted another solid gain in the third 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
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
The recovering global economy provided a boost to both imports and exports in the
third quarter. Their combined effects, however, were a slight drag on GDP, marking
the first negative contribution in net exports in the past year.
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
-10.0
-10.0
Net Exports
Contribution to % Change in Real GDP
-20.0
-30.0
2008:Q4
0.45
-40.0
2009:Q1
2.64
2009:Q2
-20.0
-30.0
2009:Q3
1.65
Imports
-0.53
-40.0
-50.0
-50.0
06:Q3
07:Q1
07:Q3
Source: Bureau of Economic Analysis / Haver Analytics.
08:Q1
08:Q3
09:Q1
09:Q3
Consumer attitudes retreated in October from their September levels, as job market
and income concerns outweighed any optimism about improvements in the rest of
the economy. As consumers continue to worry about their personal finances, their
spending will likely remain restricted.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
Confidence
100
100
80
80
60
60
40
Expectations
40
20
20
06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 Oct-09
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
100
100
90
90
Sentiment
80
80
70
70
60
60
Expectations
50
50
40
40
06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 Oct-09
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
Initial claims for unemployment insurance eased considerably in the third quarter, and
continued to fall in October. Still, current levels remain high, suggesting further job
layoffs.
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
06:Q3
07:Q1
06:Q4
07:Q3
07:Q2
08:Q1
07:Q4
08:Q3
08:Q2
09:Q1
08:Q4
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
09:Q3
09:Q2
Oct-09
The manufacturing sector continued to improve in October, as the ISM index rose
to its highest level since April 2006. The employment index also showed further
signs of recovery, breaking above 50 for the first time in 15 months.
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
40.0
35.0
35.0
30.0
30.0
Employment Index
25.0
25.0
20.0
20.0
06:Q3
07:Q1
06:Q4
07:Q3
07:Q2
08:Q1
07:Q4
08:Q3
08:Q2
09:Q1
08:Q4
09:Q3
09:Q2
Oct-09
Source: Institute for Supply Management / Haver Analytics.
During the third quarter, total consumer prices fell at their fastest pace in 60 years,
while core prices grew at their slowest pace since 2004:Q1. Producer prices
experienced similar changes, with the drop in the total index being the biggest on
record.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
6.0
6.0
Consumer Price Index,
excluding food and energy
Consumer Price Index
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
9.0
12.0
Producer Price Index,
excluding food and energy
Producer Price Index
6.0
9.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
-6.0
-6.0
06:Q3
07:Q1
07:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q1
08:Q3
09:Q1
09:Q3
During the third quarter, productivity grew at its fastest pace in three years as output
increased despite further reductions in hours worked. Total compensation accelerated,
but unit labor costs continued to fall.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
9.0
12.0
Compensation
Per Hour
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
-9.0
06:Q3
-6.0
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
-9.0
09:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
In the third quarter, employment costs grew at the slowest annual pace on record,
dating back to 1982. Wages and salaries and benefit costs also set records for slow
growth. On a quarterly basis, the ECI grew 0.4% in the third quarter, only slightly
above the record low of 0.3% set earlier this year.
Employment Cost Index
Percent Change, year-over-year
Percent Change, year-over-year
6.0
6.0
Total
Compensation
5.0
Benefit Costs
5.0
4.0
4.0
3.0
3.0
2.0
2.0
Wages and Salaries
1.0
1.0
0.0
0.0
06:Q3
07:Q1
07:Q3
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q1
08:Q3
09:Q1
09:Q3
Oil prices increased overall in the third quarter, and continued to rise in October.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
80.0
140.0
120.0
75.0
100.0
70.0
80.0
60.0
65.0
40.0
60.0
20.0
06:Q3
07:Q2
08:Q1
08:Q4
09:Q3
Jun-09
Aug-09
Oct-09
Source: Wall Street Journal / Haver Analytics.
Overall, data since your last Directors' meeting show the economy grew 3.5% in the
third quarter as expected, marking its fastest pace in two years. While the strong
growth rate most certainly signifies a turnaround in the economy, the recovery is likely
to be slow as the labor market takes longer to bounce back and consumers remain
cautious.
Percent
Short-Term Interest Rates
8.0
7.0
6.0
5.0
4.0
Federal Funds Rate
(effective rate)
Discount Window Primary Credit
2.25
2.00
1.31
3.0
2.0
4.00
08:Q3
08:Q4
0.50
0.50
09:Q1
09:Q2
0.50
0.50
09:Q3 Oct-09
1.0
0.0
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
08:Q3 08:Q4
09:Q1 09:Q2
Source: Federal Reserve Board of Governors / Haver Analytics.
09:Q3 Oct-09
0.00
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
November 12, 2009
Current Economic Developments - Addendum: Data released in the past week
In October, payroll employment posted its 22nd consecutive monthly decline and the
unemployment rate jumped into double-digits. The magnitude of the job losses,
however, continued to lessen. The October decrease was smaller than the monthly
average seen in the third quarter, and well below the average loss over the previous
twelve months.
Wholesale trade rose 0.7% in September, after rising 1.1% in August. Wholesale
inventories fell 0.9% in September, following a 1.3% drop the previous month.
In other data released over the past week, oil prices rose slightly to $79.3 per barrel
from the previous week's average of $78.4.
The Veteran's Day holiday led to this being a quiet week in terms of data releases,
highlighted by U.S. International Trade for September and an early look at November
Consumer Sentiment, both due out Friday.
In October, payrolls lost 190,000 jobs and the unemployment rate rose four-tenths
of a percentage point to 10.2%. In September and August, payroll reductions were
smaller than previously estimated, with the revised data showing 91,000 fewer job
losses.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
200
12.0
0
10.0
-200
8.0
-400
6.0
-600
Change from Previous Month
Aug-09
Sep-09
Oct-09
-154
-219
-190
4.0
2.0
-800
07:Q3
08:Q1 08:Q3
09:Q1 09:Q3
07:Q4
08:Q2
08:Q4
09:Q2 Oct-09
Source: Bureau of Labor Statistics / Haver Analytics.
07:Q3 08:Q1 08:Q3 09:Q1 09:Q3
07:Q4 08:Q2 08:Q4 09:Q2 Oct-09