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The
President’s
Report to the
Board of
Directors
May 7, 2009
CURRENT ECONOMIC DEVELOPMENTS - May 7, 2009
Data since your last Directors' meeting show the economy contracted in the first quarter
at nearly the same pace as in the fourth quarter. The weakness in the economy was
widespread in the first quarter, but found some support from resilient consumers. While
the worst of the recession may be over, it could still be some time before a strong
economy returns.
The decrease in real GDP in the first quarter was due primarily to negative contributions
from exports, private inventory investment, equipment and software, nonresidential
structures, and residential investment that were party offset by a positive contribution
from personal consumption expenditures. Imports decreased sharply, also providing
a boost to GDP.
In April, consumer attitudes showed further signs of improvement, but are still relatively
low. Initial claims for unemployment insurance decreased a bit in April from the previous
two months, yet remain historically high. The ISM manufacturing and employment
indices made solid gains in April, but are still well below 50, signaling continued
contraction in manufacturing.
Inflation concerns remained off the radar in the first quarter, as headline measures fell
for both consumers and producers. Unit labor costs decelerated and total compensation
costs, as measured by the ECI, grew at their slowest pace ever in the first quarter. Oil
prices rose a bit further in April, but still stand at less than half the level seen at the same
time last year.
Real GDP shrank in the first quarter at a rate only slightly less than seen in the
fourth quarter. This small improvement was due mostly to stronger consumption
and fewer imports, the effects of which were almost completely offset by a larger
decrease in inventory investment and a downturn in government spending.
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:Q1
06:Q3
Source: Bureau of Economic Analysis.
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Real incomes increased in the first quarter, helping consumption post its first gain
since the second quarter of last year.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
15.0
5.0
Personal Income
12.0
4.0
3.0
9.0
2.0
6.0
1.0
0.0
3.0
-1.0
0.0
-2.0
-3.0
-3.0
-4.0
Real Disposable Income
-6.0
-5.0
-9.0
-6.0
06:Q1
07:Q1
06:Q3
08:Q1
07:Q3
09:Q1
08:Q3
06:Q1
07:Q1
06:Q3
08:Q1
07:Q3
09:Q1
08:Q3
Source: Bureau of Economic Analysis.
Lightweight vehicle sales fell a bit further in the first quarter, and essentially
matched that average in April.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
08:Q3 08:Q4
09:Q1Apr-08
Source: Bureau of Economic Analysis.
Business investment continued to retreat in the first quarter, led by a record drop
in nonresidential structures and the biggest drop in equipment and software since
1958:Q1.
Business Investment
Annualized Percent Change
Annualized Percent Change
50.0
50.0
40.0
40.0
Business
Investment
30.0
30.0
Structures
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
Equipment
and Software
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
-50.0
-50.0
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Source: Bureau of Economic Analysis.
New orders for durable goods and for nondefense capital goods, excluding aircraft,
both experienced their biggest drops on record in the first quarter.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
30.0
30.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
20.0
10.0
10.0
0.0
0.0
Durable Goods,
New Orders
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
06:Q1
06:Q3
Source: U.S. Census Bureau.
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Residential investment continued to fall in the first quarter, posting it's largest drop
since 1980:Q2.
Residential Investment
Annualized Percent Change
Annualized Percent Change
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
-15.0
-15.0
-20.0
-20.0
-25.0
-25.0
-30.0
-30.0
-35.0
-35.0
-40.0
-40.0
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Source: U.S. Census Bureau.
Home sales brought a burst of optimism when they increased in February, but the
brief improvement was not enough to prevent the quarterly data from continuing
along their downward paths.
New and Existing Home Sales
Thousands of Units,
Thousands of Units,
Annualized
Annualized
1400
Existing
Home Sales
1200
New
Home Sales
7000
6500
1000
6000
800
5500
600
5000
400
4500
200
4000
06:Q1
06:Q3
Source: U.S. Census Bureau.
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Government spending decreased in the first quarter for the first time in over three
years.
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
-6.0
-6.0
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Source: Bureau of Economic Analysis.
Exports and imports fell significantly in the first quarter, as the recession continued
to reduce both global and domestic demand.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
40.0
40.0
30.0
30.0
Exports
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
Imports
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
06:Q1
06:Q3
Source: Bureau of Economic Analysis.
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Consumer attitudes started to improve in the first quarter, and continued to rebound
in April. Though still close to historically low levels, sentiment and confidence both
stand at their highest points since late last year.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
100
100
Confidence
80
80
60
60
40
40
Expectations
20
20
0
0
06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 Apr-09
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
110
110
100
100
Sentiment
90
90
80
80
70
70
60
60
Expectations
50
50
40
40
06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 Apr-09
Source: The Conference Board (confidence) and University of Michigan (sentiment).
Initial claims for unemployment insurance surged to near-record highs late in the
first quarter, before subsiding a bit in April.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
700
700
650
650
Monthly Levels
600
550
Jan-09
Feb-09
Mar-09
Apr-09
573
637
658
630
600
550
500
500
450
450
400
400
350
350
300
300
250
250
06:Q1
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
08:Q1
07:Q4
Source: Department of Labor, Employment and Training Administration.
08:Q3
08:Q2
09:Q1
08:Q4
Apr-09
The ISM index improved slowly through the first quarter, and gained even more
ground in April. Still, the index remains well below 50, as does the employment
index.
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
20.0
20.0
06:Q1
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
08:Q1
07:Q4
08:Q3
08:Q2
09:Q1
08:Q4
Apr-09
Source: Institute for Supply Management.
Total prices fell in the first quarter for both consumers and producers. Core inflation
slowed during the quarter, while the consumer index grew at its slowest pace in five
years.
Consumer Price Index
Percent Change, Year-Over-Year
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
Percent Change, Year-Over-Year
Consumer Price Index
06:Q1
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
Consumer Price Index,
excluding food and energy
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
9.0
12.0
Producer Price Index
9.0
Producer Price Index,
excluding food and energy
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
06:Q1
06:Q3
Source: Bureau of Labor Statistics.
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Productivity posted a small gain in the first quarter, offsetting the drop seen in the
fourth quarter. Growth in hourly compensation and unit labor costs slowed.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
9.0
12.0
Output
Per Hour
Compensation
Per Hour
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
-6.0
09:Q1
Source: Bureau of Labor Statistics.
Total compensation grew at the slowest pace on record in the first quarter, as wages,
salaries, and benefit costs continue to decelerate.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
6.0
6.0
Total
Compensation
5.0
4.0
5.0
Benefit Costs
4.0
3.0
3.0
2.0
2.0
Wages and Salaries
1.0
1.0
0.0
0.0
06:Q1
06:Q3
Source: Bureau of Labor Statistics.
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
Oil prices fell overall during the first quarter, but rose sharply in March and
continued to rise in April.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
60.0
130.0
120.0
55.0
110.0
100.0
50.0
90.0
45.0
80.0
70.0
40.0
60.0
50.0
35.0
40.0
30.0
06:Q1
06:Q4
07:Q3
08:Q2
09:Q1
Dec-08
Feb-09
30.0
Apr-09
Source: Wall Street Journal (oil prices).
.
Overall, data since your last Directors' meeting show the economy contracted in the first
quarter at nearly the same pace as in the fourth quarter. The weakness in the economy
was widespread in the first quarter, but found some support from resilient consumers.
While the worst of the recession may be over, it could still be some time before a strong
economy returns.
Percent
Short-Term Interest Rates
10.0
8.0
Federal Funds Rate
(effective rate)
6.0
5.00
4.00
3.00
4.0
2.00
1.00
Discount Window Primary Credit
3.67
2.33
2.25
1.31
0.50
0.50
0.00
08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 Apr-09
2.0
0.0
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
08:Q3 08:Q4
Source: Federal Reserve Board of Governors.
09:Q1 Apr-09
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
May 14, 2009
Current Economic Developments - Addendum: Data released in the past week
Nonfarm payrolls fell again in April, but by a smaller amount than seen over the previous
five months. Since the onset of the recession, payrolls have been reduced by nearly
6 million. As a result, the unemployment rate has risen to 8.9%, its highest level since
September 1983.
Retail sales fell 0.4% in April, led by falling sales of gasoline and electronics. Excluding
autos, sales were down 0.5%. The U.S. trade deficit widened a bit in March, as a 2.4%
drop in exports more than offset a 1.0% decline in imports.
Also in March, wholesale inventories fell 1.6% and sales decreased 2.4%. Business
inventories dropped 1.0% while sales were off 1.6%.
Redbook sales rose 0.1% in the first two weeks of May, compared to April. Sales were
0.3% higher last week than during the same period last year. Oil prices increased during
the past week, averaging $57.8 per barrel, compared to last week's average of $52.7.
In April nonfarm payrolls shed 539,000 jobs, and revisions to the previous two
months' estimates resulted in 66,000 additional jobs being lost. Also in April, the
unemployment rate rose four-tenths of a percentage point to 8.9%, it's highest point
in over 25 years.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
200
10.0
9.0
0
8.0
-200
7.0
-400
6.0
Change from Previous Month
-600
Feb-09
Mar-09
Apr-09
-681,00
0
-699,00
0
-539,000
5.0
4.0
-800
07:Q1 07:Q3
08:Q1 08:Q3
09:Q1
07:Q2
07:Q4
08:Q2
08:Q4 Apr-09
Source: Bureau of Labor Statistics.
07:Q1 07:Q3 08:Q1 08:Q3 09:Q1
07:Q2 07:Q4 08:Q2 08:Q4 Apr-09