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The
President’s
Report to the
Board of
Directors
December 4, 2008
CURRENT ECONOMIC DEVELOPMENTS - December 4, 2008
Data released since your last Directors' meeting show the economy shrank in the
third quarter at a higher rate than first estimated. Recent data also suggest the
now-official recession could stretch well into next year. Rising unemployment,
worried consumers, and manufacturing cutbacks are all likely to hamper the
economy for the foreseeable future.
In November, initial claims for unemployment insurance increased while consumer
attitudes remained pessimistic. Auto sales fell slightly in November, continuing their
historically low sales pace. In October, real consumption fell further despite an
increase in real disposable income.
The weakness in housing market data persisted in October. Sales of both new and
existing homes slowed, as did housing starts and the issuance of building permits.
In the manufacturing sector, the ISM index continued to fall in November, joined by
its employment component. Industrial production rebounded in October to offset
some of the recent declines. Orders for durable goods fell again in October, as did
orders for nondefense capital goods.
Inflation is certainly no longer a concern, as total prices for both consumers and
producers slowed further in October. Oil prices also continued to fall, and unit labor
costs were revised downward for both the second and third quarters.
Initial claims for unemployment insurance rose further in November, averaging over
500,000 per week for the first time since 1991.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
550
550
525
525
500
500
475
475
450
450
425
425
400
400
375
375
350
350
325
325
300
300
275
275
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Source: Department of Labor, Employment and Training Administration.
While specific measures were mixed in November, consumer attitudes remained
quite negative. Despite the modest increases seen in the Conference Board's
expectations and confidence indices, economic conditions are not likely to improve
in the near future.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
160
140
Consumer
Confidence
120
110
Current
Conditions
Present
Situation
100
Consumer
Sentiment
90
100
80
80
70
60
60
40
Future
Expectations
Consumer
Expectations
20
Nov-06
May-07
Nov-07
May-08
Nov-08
Nov-06
May-07
Nov-07
50
May-08
40
Nov-08
Source: The University of Michigan.
Source: The Conference Board.
Total auto and light truck sales slipped a bit further in November, falling to their
slowest sales pace since October 1982.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
22.0
22.0
20.0
20.0
18.0
18.0
16.0
16.0
14.0
14.0
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
Nov-05
May-06
Feb-06
Nov-06
Aug-06
Source: Bureau of Economic Analysis.
May-07
Feb-07
Nov-07
Aug-07
0.0
Nov-08
May-08
Feb-08
Aug-08
Despite an increase in real disposable income in October, personal consumption
declined for the fifth month in a row.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
1.5
6.0
1.0
4.0
Real Consumption
0.5
2.0
0.0
0.0
-0.5
-2.0
Real Disposable Income
-1.0
-4.0
-1.5
Oct-05
Apr-06
Oct-06
Jan-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
-6.0
Oct-08
Apr-08
Jan-08
Jul-08
Source: Bureau of Economic Analysis.
Sales of both new and existing homes fell again in October. The sales pace for
new homes is the lowest in nearly 18 years. Exisiting home sales have held rather
steady for the past year, and October's pace was above both the six- and
twelve-month average.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
7500
1500
1350
7000
Existing Home Sales
1200
6500
1050
900
New Home Sales
750
6000
5500
600
5000
450
300
Oct-05
Apr-06
Jan-06
Source: U.S. Census Bureau.
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
4500
Oct-08
Apr-08
Jan-08
Jul-08
In October, both housing starts and building permits fell for a fourth consecutive
month. Both series stand more than 60% below their latest peaks seen roughly
three years ago.
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
1000
1000
Housing Starts
750
750
500
500
Oct-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Source: U.S. Census Bureau.
In November, the ISM diffusion index fell again, reaching its lowest point since May
1982. The employment index also slipped a bit further.
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
Nov-05
May-06
Feb-06
Nov-06
Aug-06
Source: Institute for Supply Management.
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
Industrial production rebounded in October, from the sharp decrease seen over
the previous two months. Capacity utilization also picked up a bit after falling
throughout most of the year.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
4.0
84.0
3.0
Capacity Utilization
(manufacturing)
82.0
2.0
80.0
1.0
0.0
78.0
-1.0
76.0
Industrial Production
-2.0
74.0
-3.0
-4.0
Oct-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
72.0
Oct-08
Apr-08
Jan-08
Jul-08
Source: Federal Reserve Board of Governors.
In October, new orders for durable goods posted their largest year-over-year drop
in seven years. Orders for nondefense capital goods, excluding aircraft, also fell.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
20.0
20.0
15.0
15.0
Durable Goods,
New Orders
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-10.0
-5.0
Durable Goods, New Orders
Percent change, previous month
Aug-08
Sep-08
Oct-08
-5.54
-0.02
-6.94
Capital Goods Nondefense,
Excluding Aircraft
-10.0
-15.0
-15.0
Oct-05
Apr-06
Jan-06
Source: U.S. Census Bureau.
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
Oct-08
Jul-08
Headline inflation eased further in October, due primarily to falling energy and
commodity prices. Core consumer prices also slowed, but core producer prices
accelerated.
Consumer Price Index
Percent Change, Year-Over-Year
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Oct-05
Percent Change, Year-Over-Year
Consumer Price Index
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
Oct-07
6.0
5.0
4.0
3.0
2.0
Consumer Price Index,
1.0
excluding food and energy
0.0
Feb-08
Jun-08
Oct-08
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
12.0
9.0
9.0
Producer Price Index
6.0
6.0
3.0
3.0
Producer Price Index,
excluding food and energy
0.0
-3.0
Oct-05
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
0.0
-3.0
Oct-08
Source: Bureau of Labor Statistics.
Oil prices continued their unprecedented fall in November. Since peaking at
$145.3 per barrel in early July, prices have fallen nearly $100 to a reading of $46.8
on December 3, their lowest point in nearly four years.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars per Barrel
160.0
160.0
140.0
140.0
120.0
120.0
100.0
100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
Nov-05
May-06
Feb-06
Source: Wall Street Journal.
.
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Nov-08
Aug-08
Productivity was revised slightly higher in the third quarter, but was still down from
the second quarter estimate. Compensation and unit labor costs were revised
downward for both the third and second quarters.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
12.0
Compensation
Per Hour
Output
Per Hour
9.0
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
-6.0
08:Q3
08:Q1
Source: Bureau of Labor Statistics.
Real GDP in the third quarter was weaker than originally thought. The downward
adjustment primarily reflected downward revisions to personal consumption
expenditures and exports that were partly offset by an upward revision to private
nonfarm inventory investment and a downward revision to imports.
Revisions to Third Quarter Real GDP
Description
Advance
Preliminary
-0.3
-0.5
Personal Consumption
-3.1
-3.7
Business Investment
-1.0
-1.5
Real GDP
Equipment and Software
-5.5
-5.7
-19.1
-17.6
Government
5.8
5.4
Exports
5.9
3.4
Imports
-1.9
-3.2
Final Sales
-0.8
-1.4
Residential Investment
Real GDP
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
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
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy shrank in
the third quarter at a higher rate than first estimated. Recent data suggest the
now-official recession could stretch well into next year. Rising unemployment, worried
consumers, and manufacturing cutbacks are all likely to hamper the economy for the
foreseeable future.
Percent
Short-Term Interest Rates
7.0
6.0
Federal Funds Rate
(effective rate)
5.0
Discount Window Primary Credit
4.0
2.25
2.25
2.25
3.0
2.0
Jul-08
1.81
1.25
4.00
3.00
2.00
1.00
0.00
Aug-08 Sep-08 Oct-08 Nov-08
1.0
0.0
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Source: Federal Reserve Board of Governors.
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
December 11, 2008
Current Economic Developments - Addendum: Data released in the past week
Payroll employment plummetted by 533,000 in November, the largest single-month
fall since December 1974. Payrolls for the previous two months were also revised
downward by 199,000 jobs, the result being nearly 1.3 million jobs lost over the past
three months, and over 1.9 million lost this year. The mounting losses also brought
the unemployment rate up to 6.7% in November, a 15-year high.
Wholesale inventories fell 1.1% in October, their steepest decline in seven years.
Wholesale trade fell 4.1% in October, the second-largest drop in the history of the
series, which dates back to 1967. The record was a 4.2% fall in February 1972.
Redbook sales fell 0.4% through the first week of December, compared to November.
Sales in the week ending December 6th were 0.8% lower than during the same period
last year. Oil prices fell slightly during the past week, averaging $43.4 per barrel
compared to last week's average of $50.9.
In November, nonfarm payrolls shed 533,000 jobs and the unemployment rate rose
to 6.7%. October payrolls were revised downward by 80,000 to show a decrease of
320,000 jobs, and September payrolls were revised downward by 119,000, showing a
decrease of 403,000 jobs as opposed to the previously estimated 284,000 job decrease.
Nonfarm Payroll Employment
Change from Previous Month
300
Unemployment Rate
Rate
7.0
200
6.5
100
0
6.0
-100
5.5
-200
-300
5.0
-400
4.5
-500
-600
Nov-06
May-07
Nov-07
May-08
Nov-08
Feb-07
Aug-07
Feb-08
Aug-08
Source: Bureau of Labor Statistics.
4.0
Nov-06
May-07
Nov-07
May-08
Nov-08
Feb-07
Aug-07
Feb-08
Aug-08