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The
President’s
Report to the
Board of
Directors
November 6, 2008
CURRENT ECONOMIC DEVELOPMENTS - November 6, 2008
Data since your last Directors' meeting show the economy contracted slightly in the
third quarter, the second such contraction in the past year. The economy will likely
continue to struggle going forward, hampered by falling consumption, rising
unemployment and historically low consumer attitudes.
The decrease in real GDP in the third quarter primarily reflected negative contributions
from personal consumption expenditures, residential fixed investment, and equipment
and software that were largely offset by positive contributions from federal government
spending, exports, private inventory investment and nonresidential structures.
In October, consumer attitudes plunged amid the most recent financial market turmoil
and weaker job market conditions. A further increase in initial claims for unemployment
insurance in October was additional evidence of the softening labor marker. The ISM
index fell to a 26-year low in October, and was joined by a drop in the employment
component of the index which resulted in a 17-year low.
While inflation data peaked early in the third quarter, it then began slowing and is no
longer a primary concern, as the downturn in the economy is expected to further restrict
price growth. Unit labor costs accelerated in the third quarter and total compensation
costs, as measured by the ECI, slowed. Oil prices fell at unprecedented rates in the third
quarter and kept falling throughout October.
The decrease in real GDP growth in the third quarter was the largest since the
third quarter of 2001 and was due to decreases in most of the major contributors.
Most significant were a downturn to PCE for nondurable goods, a smaller decrease
in imports, a larger decrease in PCE for durable goods and a deceleration in exports.
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
05:Q3
06:Q1
Source: Bureau of Economic Analysis.
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Real consumption fell sharply in the third quarter, its first decline in 17 years. While
personal income posted a small gain in the third quarter, real disposable income
decreased considerably. Part of the dramatic change in disposable income was due
to the stimulus rebates, which boosted incomes in the second quarter but were no
longer being dispersed in the third.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
14.0
12.0
Personal Income
5.0
10.0
4.0
8.0
3.0
6.0
2.0
4.0
1.0
2.0
0.0
0.0
-2.0
-1.0
-4.0
-2.0
Real Disposable
Income
-3.0
-6.0
-8.0
-10.0
-4.0
05:Q3
06:Q3
06:Q1
07:Q3
07:Q1
08:Q3
08:Q1
05:Q3
06:Q3
06:Q1
07:Q3
07:Q1
08:Q3
08:Q1
Source: Bureau of Economic Analysis.
Total auto and light truck sales continued to slide in October, falling to a 25-year low.
Partly to blame for the lackluster sales were shaky consumer confidence and the
inability for some would-be buyers to obtain credit.
Total Auto and Light Truck Sales
Millions of Units, Annualized
22.0
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
08:Q3 Oct-08
Source: Bureau of Economic Analysis
Growth in business investment dipped in the third quarter, and equipment and
software investment fell for the third consecutive quarter.
Business Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
16.0
16.0
Business Investment
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
Equipment and Software
-8.0
-8.0
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Source: Bureau of Economic Analysis.
New orders for durable goods fell in the third quarter at their fastest rate in six years,
on both a year-over-year and quarterly basis. Orders of nondefense capital goods,
excluding aircraft, increased.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
16.0
16.0
Durable Goods, New Orders
Percent change, previous quarter
12.0
12.0
2007:Q4
2008:Q1
2008:Q2
2008:Q3
-1.33
-1.50
-0.25
-1.81
8.0
8.0
Durable Goods,
New Orders
4.0
4.0
0.0
0.0
-4.0
-4.0
Capital Goods Nondefense,
Excluding Aircraft
-8.0
-8.0
05:Q3
06:Q1
Source: U.S. Census Bureau.
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Residential investment continues to be a serious drag on the economy.
Residential Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
Residential Investment
Contribution to % Change in Real GDP
10.0
2007:Q4
2008:Q1
2008:Q2
2008:Q3
-1.33
-1.12
-0.52
-0.72
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Source: U.S. Census Bureau.
The housing market continued to slump in the third quarter, as new home sales
fell for the fifth consecutive quarter. Sales of existing homes did increase a bit,
however.
New and Existing Home Sales
Thousands of Units,
Annualized
Thousands of Units,
Annualized
1400
7500
7000
1200
Existing Home Sales
6500
1000
6000
New Home Sales
800
5500
600
5000
400
4500
05:Q3
06:Q1
Source: U.S. Census Bureau.
06:Q3
07:Q1
07:Q3
08:Q1
08: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
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Source: Bureau of Economic Analysis.
Export growth slowed in the third quarter but continued to be a source of strength
for the economy. This effect is likely to abate in the coming months with the
weakening global outlook.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
30.0
30.0
25.0
25.0
Exports
20.0
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
Imports
-10.0
-10.0
05:Q3
06:Q1
Source: Bureau of Economic Analysis.
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Recent financial market turmoil sent consumer attitudes downward in October,
after some brief signs of optimism during the third quarter. Consumer confidence
is at an all-time low, and sentiment experienced its biggest one-month drop on
record in October.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
Confidence
100
100
80
80
60
60
Expectations
40
40
20
20
05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 Oct-08
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
05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 Oct-08
Source: The Conference Board (confidence) and University of Michigan (sentiment).
Initial claims for unemployment insurance rose sharply in the third quarter in
conjunction with the softening labor market, and continued to rise in October.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
500
500
475
475
450
450
425
425
400
400
375
375
350
350
325
325
300
300
275
275
05:Q3
06:Q1
05:Q4
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
Source: Department of Labor, Employment and Training Administration.
08:Q1
07:Q4
08:Q3
08:Q2
Oct-08
The ISM manufacturing index dropped well below 50 in October, indicating a
significantly faster rate of decline in manufacturing than seen in the third quarter.
The employment index also fell steeply in October from its third quarter level, as
employment decreased across most industries.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
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
05:Q3
06:Q1
05:Q4
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
08:Q1
07:Q4
08:Q3
08:Q2
Oct-08
Source: Institute for Supply Management.
The primary measures of inflation all accelerated during the third quarter, but rising
prices are of little concern as inflation is expected to moderate significantly in
response to the slowdown in the economy.
Consumer Price Index
Percent Change, Year-Over-Year
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Percent Change, Year-Over-Year
Consumer Price Index
05:Q3
06:Q1
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Consumer Price Index,
excluding food and energy
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
10.0
8.0
10.0
8.0
Producer Price Index
6.0
6.0
Producer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
05:Q3
06:Q1
Source: Bureau of Labor Statistics.
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
During the third quarter, productivity slowed but still produced an increase as a drop in
hours worked more than offset a smaller decrease in output. Total compensation
and unit labor costs both accelerated in the third quarter.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
12.0
9.0
Compensation
Per Hour
9.0
Output
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-6.0
05:Q3
-3.0
Unit Labor Costs
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
-6.0
08:Q3
Source: Bureau of Labor Statistics.
In the third quarter, employment costs grew a bit more slowly aided by slight
decelerations in wages and salaries and benefit costs.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
7.0
7.0
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
0.0
0.0
05:Q3
06:Q1
Source: Bureau of Labor Statistics.
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
Oil prices declined in the third quarter, in response to lower global demand. Prices
continued to slide in October, even as daily production caps were announced by
suppliers.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
150.0
140.0
130.0
140.0
120.0
130.0
110.0
120.0
100.0
110.0
90.0
80.0
100.0
70.0
90.0
60.0
80.0
50.0
70.0
40.0
05:Q3
06:Q2
07:Q1
07:Q4
08:Q3
Jun-08
Aug-08
Oct-08
Source: Wall Street Journal.
Overall, data since your last Directors' meeting show the economy contracted slightly
in the third quarter, the second such contraction in the past year. The economy will
likely continue to struggle going forward, hampered by falling consumption, rising
unemployment and historically low consumer attitudes.
Percent
Short-Term Interest Rates
10.0
9.0
8.0
Discount Window Primary Credit
5.93
5.02
3.67
7.0
2.33
6.0
5.0
07:Q3
07:Q4
08:Q1
08:Q2
2.25
1.81
08:Q3 Oct-08
8.00
6.00
4.00
2.00
0.00
Federal Funds Rate
(effective rate)
4.0
3.0
2.0
1.0
0.0
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1 08:Q2
Source: Federal Reserve Board of Governors.
08:Q3 Oct-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
November 13, 2008
Current Economic Developments - Addendum: Data released in the past week
In October, payroll employment continued to fall, posting its tenth consecutive
monthly decline. September's loss was revised higher, resulting in the largest
single-month drop since November 2001. The accumulated job losses brought the
unemployment rate up to 6.5% in October, a 14-year high.
Wholesale inventories dipped 0.1% in September, following a revised increase of
0.6% in August. August inventories were first reported as rising 0.8%. Wholesale
trade fell 1.5% in September, after dropping a revised 1.6% the previous month,
previously seen as a 1.0% decrease.
In other data released over the past week, oil prices continued to fall, dropping
to $61.8 per barrel from the previous week's average of $77.4. Redbook sales fell
1.2% in the first week of November, compared to October, and sales were down
1.0% compared to the same week last year.
In October, payrolls lost 240,000 jobs and the unemployment rate rose four-tenths
of a percentage point to 6.5%. In September and August, payroll reductions were
revised upward to show the loss of an additional 179,000 jobs.
Nonfarm Payroll Employment
Change from Previous Quarter, Monthly Average
Unemployment Rate
Rate
7.0
250
200
6.5
150
100
6.0
50
0
5.5
-50
-100
-150
-200
-250
5.0
Change from Previous Month
Aug-08
Sep-08
Oct-08
-127
-284
-240
4.5
4.0
-300
06:Q3
07:Q1 07:Q3
08:Q1 08:Q3
06:Q4
07:Q2
07:Q4
08:Q2 Oct-08
Source: Bureau of Labor Statistics.
06:Q3
07:Q1 07:Q3
08:Q1 08:Q3
06:Q4 07:Q2 07:Q4 08:Q2 Oct-08