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The
President’s
Report to the
Board of
Directors
October 2, 2008
CURRENT ECONOMIC DEVELOPMENTS - October 2nd, 2008
Data released since your last Directors' meeting show the economy's second quarter growth
wasn't quite as strong as previously reported, and other data suggest growth will be much
slower in the second half of the year. Financial markets have been volatile in reaction to
multiple bank failures and mergers and bailout speculation, the labor and housing markets are
struggling, and consumers and businesses are being conservative as they face the uncertainty
of the coming months.
In September, initial claims increased as the labor market softened further. Consumer
attitudes improved overall in September, but the surveys were conducted before the most
recent financial market turmoil. Personal income decreased again in August, and consumer
spending was flat following two consecutive declines. Third quarter consumption is likely to be
negative for the first time in over 17 years.
There were no signs of improvement in the housing market in August. Both new and existing
home sales fell, as did housing starts and building permits. The construction data was the
weakest seen since the early 1990s.
In the business sector, industrial production and capacity utilization both fell in August. In
September, the ISM diffusion index fell to a seven year low. Orders of durable goods fell
again in August, but orders for captial goods excluding aircraft increased for the ninth month
in a row.
Inflation news was positive in August, as total prices slowed for both consumers and
producers. Oil prices also continued to fall in September.
Initial claims for unemployment insurance rose even higher in September, primarily
the result of a softer labor market and also some hurricane related job losses. The
latest week's figure of 497,000 initial claims was a seven year high.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
500
500
Initial Claims for Unemployment Insurance
Thousands, Quarterly Average
475
475
450
07:Q4
08:Q1
08:Q2
08:Q3
450
425
337
352
374
440
425
400
400
375
375
350
350
325
325
300
300
275
275
Sep-05
Mar-06
Dec-05
Sep-06
Jun-06
Mar-07
Dec-06
Sep-07
Jun-07
Source: Department of Labor, Employment and Training Administration.
Mar-08
Dec-07
Sep-08
Jun-08
Consumer attitudes improved for the most part in September, highlighted by further
increases in sentiment and confidence. The lone deterioration was the Conference
Board's measure of the present situation. It is worth noting that these surveys were
conducted prior to the recent financial turmoil, so the increased optimism may be
short lived.
Consumer Sentment
Index, 1966:Q1=100
Index, 1966:Q1=100
120
120
Current Conditions
100
100
Sentiment
80
80
60
60
Expectations
40
Sep-05
Jan-06
May-06
Sep-06
May-07
Sep-07
Expectations
May-06
Sep-06
Jan-07
May-07
May-08
40
Sep-08
Index, 1985 = 100
Confidence
Jan-06
Jan-08
Consumer Confidence
Index, 1985 = 100
150
130
110
90
70
50
30
Sep-05
Jan-07
Sep-07
150
130
Present Situation
110
90
70
50
30
Jan-08
May-08
Sep-08
Source: University of Michigan (sentiment) and The Conference Board (confidence).
Real incomes fell for the third month in a row in August, following the rebate-induced
surge seen in May. Real consumption was flat in August.
Percent Change, Previous Month
Real DPI and Consumption
Percent Change, Previous Month
6.0
6.0
Real Disposable Income
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
Real Consumption
-4.0
-4.0
-6.0
Aug-05
Feb-06
Nov-05
Aug-06
May-06
Source: Bureau of Economic Analysis.
Feb-07
Nov-06
Aug-07
May-07
-6.0
Aug-08
Feb-08
Nov-07
May-08
In August, new home sales experienced their biggest drop since November which
resulted in the slowest sales pace in 17 years. Existing home sales also slowed in
August, but remained close to their 6- and 12-month averages.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
7500
7000
Existing
Home Sales
1200
6500
1000
6000
New Home Sales
800
5500
600
5000
400
4500
Aug-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Feb-08
Nov-07
Aug-08
May-08
Source: U.S. Census Bureau.
Housing starts and building permits both fell for a second consecutive month in
August, with both measures reaching their lowest level since early 1991.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2500
2500
2250
2250
2000
2000
Building Permits
1750
1750
1500
1500
1250
1250
Housing Starts
1000
1000
750
750
500
500
Aug-05
Feb-06
Nov-05
Source: U.S. Census Bureau.
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Feb-08
Nov-07
Aug-08
May-08
Industrial production fell sharply in August, following two small increases. Capacity
utilization fell further in August, and has now dropped 3.5 percentage points from the
recent high seen last August.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
81.0
2.0
Capacity Utilization
(manufacturing)
80.0
1.0
79.0
0.0
78.0
-1.0
Industrial Production
77.0
-2.0
76.0
Aug-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Feb-08
Nov-07
Aug-08
May-08
Source: Federal Reserve Board of Governors.
The ISM diffusion index fell sharply in September, bringing its third quarter average
to its lowest point in seven years. The employment component also dropped
significantly in September, but managed to improve overall during the quarter.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
60.0
60.0
ISM Index
55.0
55.0
50.0
50.0
Quarterly Averages
45.0
07:Q4
08:Q1
08:Q2
08:Q3
ISM
49.6
49.2
49.5
47.8
Emp.
49.6
47.4
44.9
47.8
45.0
Employment Index
40.0
40.0
Sep-05
Mar-06
Dec-05
Sep-06
Jun-06
Source: Institute for Supply Management.
Mar-07
Dec-06
Sep-07
Jun-07
Mar-08
Dec-07
Sep-08
Jun-08
New orders for durable goods fell for the sixth straight month in August, on a yearover-year basis. Conversely, orders of nondefense capital goods, excluding aircraft,
rose again, albeit at a slower pace.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
24.0
24.0
Durable Goods, New Orders
Percent change, month-over-month
Durable Goods,
New Orders
20.0
16.0
May-08
Jun-08
Jul-08
Aug-08
0.09
1.39
0.70
-4.85
20.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
Capital Goods Nondefense,
Excluding Aircraft
-8.0
-8.0
-12.0
-12.0
Aug-05
Feb-06
Nov-05
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
May-06
Nov-06
May-07
Nov-07
May-08
Source: U.S. Census Bureau.
Headline consumer inflation slowed in August, after three consecutive monthly
accelerations. The decrease was due in part to falling energy prices, which was
reflected in the unchanged core index. Total producer prices also slowed a bit.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
6.0
8.0
Consumer Price Index
6.0
Consumer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Producer Price Index
Percent Change, Year-Over-Year
Dec-07
Apr-08
Percent Change, Year-Over-Year
12.0
9.0
0.0
Aug-08
12.0
9.0
Producer Price Index
Producer Price Index,
excluding food and energy
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
Aug-05
Dec-05
Apr-06
Source: Bureau of Labor Statistics.
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
-3.0
Aug-08
Oil prices fell further in September, following the significant drop seen in August.
Domestic Spot Oil Price
Dollar per Barrel
Dollar per Barrel
150.0
150.0
140.0
140.0
130.0
130.0
120.0
120.0
110.0
110.0
100.0
100.0
90.0
90.0
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Source: West Texas Intermediate, Wall Street Journal.
Real GDP growth was revised down in the final second quarter estimate, due
primarily to downward revisions to personal consumption expenditures, exports, and
equipment and software. These changes were partly offset by an upward revision to
nonresidential structures.
Real GDP
6.0
4.0
2.0
0.0
-2.0
05:Q2
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
Revisions to Second Quarter Real GDP
Description
Real GDP
Preliminary
Final
3.3
2.8
Consumption
1.7
1.2
Business Investment
2.2
2.5
Equipment & Software
-3.2
-5.0
-15.7
-13.3
Government
3.9
3.9
Exports
13.2
12.3
Imports
-7.6
-7.3
Final Sales
4.8
4.4
Residential Investment
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy's second quarter
growth wasn't quite as strong as previously reported, and other data suggest growth will be
much slower in the second half of the year. Financial markets have been volatile in reaction to
multiple bank failures and mergers and bailout speculation, the labor and housing markets are
struggling, and consumers and businesses are being conservative as they face the uncertainty
of the coming months.
Percent
3.00
7.0
Percent
Short-Term Interest Rates
8.0
8.0
Discount Window Primary Credit
7.0
Federal Funds Rate
(effective rate)
2.50
6.0
2.49
2.25
2.25
2.25
2.25
2.25
2.00
5.0
Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08
6.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
Sep-06
Dec-06
Mar-07
Jun-07
Source: Federal Reserve Board of Governors.
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
October 7, 2008
Current Economic Developments - Addendum: Data released in the past week
In September, nonfarm payrolls lost 159,000 jobs. It was the seventh consecutive monthly
decline and the largest since March 2003. Payrolls dropped 251,000 total jobs during the
third quarter and have lost 760,000 so far this year. Despite the large drop in payrolls in
September, the unemployment rate was unchanged in the month at 6.1%.
Auto sales slowed in September, constricted by the slower economy and tighter credit
conditions. Sales had been slowing steadily throughout the year, and despite the spike
seen in August, sales for the third quarter were the lowest in 17 years.
Redbook sales decreased 1.4% overall in September, compared to August. Sales in the
week ending October 4th were 0.8% higher than during the same period last year. Oil
prices fell during the past week, averaging $95.0 per barrel compared to last week's
average of $105.2.
Payroll employment fell again in September, but losses in the prior two months
were revised to show 4,000 fewer jobs being cut than originally estimated. The
unemployment rate held steady in September.
Nonfarm Payroll Employment
Change from Previous Month
250
Unemployment Rate
Rate
6.5
200
150
6.0
100
5.5
50
0
5.0
-50
-100
4.5
-150
-200
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Dec-06
Jun-07
Dec-07
Jun-08
Source: Bureau of Labor Statistics.
4.0
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Dec-06
Jun-07
Dec-07
Jun-08
Domestic auto and light truck sales slowed in September, offsetting most of the
increase seen in August. For the third quarter, sales were the lowest since 1991.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
16.0
16.0
Quarterly Sales, 2008
Millions of Units, Annualized
15.0
15.0
14.0
Q1
Q2
Q3
14.0
13.0
11.5
10.4
9.7
13.0
12.0
12.0
11.0
11.0
10.0
10.0
9.0
9.0
8.0
8.0
7.0
Sep-05
Mar-06
Dec-05
Sep-06
Jun-06
Source: Bureau of Economic Analysis.
Mar-07
Dec-06
Sep-07
Jun-07
7.0
Sep-08
Mar-08
Dec-07
Jun-08