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The
President’s
Report to the
Board of
Directors
June 5, 2008
CURRENT ECONOMIC DEVEOPMENTS - June 5, 2008
Data released since your last Directors' meeting show that while first quarter growth was
stronger than originally thought, the economy is still restrained. Escalating oil prices and
weaker employment conditions are wearing on consumers, and investment data has been
mixed. Combined with the prolonged housing slump, these factors are likely to continue
to restrict growth through the second quarter and into the second half of the year.
In May, initial claims increased and consumer attitudes continued to deteriorate. Lightweight
vehicle sales slowed a bit more in May, due in part to rising fuel costs. In April, both real
disposable income and real consumption were flat.
The sustained weakness in the housing market was still evident in April, but there was some
positive movement. New home sales posted a small increase, as did both housing starts
and building permits. In the manufacturing sector, the ISM index continued to show
contraction in May and industrial production and capacity utilization both decreased in
April. New orders for durable goods fell in April, but orders for nondefense capital goods,
excluding aircraft, rose for the third time in four months.
Headline inflation eased a bit in April, and core prices also slowed for consumers. Oil prices
continued to surge in May, reaching new record levels above $130 per barrel.
During the first quarter, real growth was stronger than originally thought. The upward revision
primarily reflected a downward revision to imports and upward revisions to nonresidential
structures and PCE for nondurable goods that were partly offset by downward revisions to
private inventory investments, exports, and PCE for services.
Initial claims for unemployment insurance rose again in May, offsetting part of the
decline seen in April.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
400
400
375
375
350
350
325
325
300
300
275
275
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes continued to deteriorate in May, as confidence fell to a 16-year
low and sentiment dropped to its lowest point in 28 years. Consumers are concerned
about rising fuel and food prices, as well as weakening job and business conditions.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
160
Consumer
Expectations
Present
Situation
140
Future
Expectations
Current
Conditions
110
100
Consumer
Sentiment
Consumer
Confidence
120
90
80
100
70
80
60
60
50
40
May-06
Nov-06
May-07
Nov-07
May-08
May-06
Nov-06
May-07
Nov-07
40
May-08
Source: The University of Michigan.
Source: The Conference Board.
Total auto and light truck sales slipped lower in May, led by a dramatic decline in
truck sales as consumers avoided poor fuel economy vehicles. Domestic auto sales
picked up in May, and outsold domestic trucks for the first time in almost 10 years.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
24.0
24.0
Domestic Light Vehicle Sales
Millions of units, annualized
22.0
20.0
22.0
Feb-08
Mar-08
Apr-08
May-08
Auto
5.04
4.95
4.89
5.33
Truck
6.63
6.20
5.67
5.11
20.0
18.0
18.0
16.0
16.0
14.0
14.0
12.0
12.0
10.0
10.0
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Source: Bureau of Economic Analysis.
In April, real disposable income was flat for the second straight month. Real
consumption was also unchanged in April, after posting only a minor gain in March.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
3.0
3.0
2.0
2.0
Real Consumption
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
Real Disposable Income
-3.0
Apr-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
-3.0
Apr-08
Oct-07
Jul-07
Jan-08
Source: Bureau of Economic Analysis.
The weakness in the real estate market continued in April. Existing home sales
fell for the second consecutive month, erasing the gain seen in February. Sales of
new homes increased in April, but that was due primarily to a significant downward
revision to sales in March.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1600
8000
New Home Sales
7500
1400
Existing
Home Sales
7000
1200
6500
1000
6000
800
5500
600
5000
400
4500
Apr-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Apr-08
Jan-08
In April, housing starts rose and building permits enjoyed their largest one-month
gain since December 2006.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
2200
Building Permits
2000
2000
1800
1800
1600
1600
Housing Starts
1400
1400
1200
1200
1000
1000
800
800
Apr-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
Source: U.S. Census Bureau.
The ISM manufacturing index was below 50 for the fourth consecutive month in
May, but did show improvement. The employment component of the index was
essentially unchanged in May following the steep drop seen in April.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
60.0
60.0
ISM Index
55.0
55.0
50.0
50.0
Employment Index
45.0
45.0
40.0
40.0
May-05
Nov-05
Aug-05
May-06
Nov-06
May-07
Nov-07
May-08
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Source: Institute of Supply Management.
Industrial production experienced its second sharp drop in three months in April,
and capacity utilization fell to its lowest point since November 2004.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
82.0
2.0
Industrial Production
81.0
1.0
80.0
0.0
79.0
78.0
-1.0
Capacity Utilization
(manufacturing)
-2.0
Apr-05
77.0
76.0
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Apr-08
Jan-08
Source: Federal Reserve Board of Governors.
Durable goods orders fell for the second straight month in April, while orders of
nondefense capital goods excluding aircraft rose.
New Orders
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
20.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
15.0
15.0
New Orders,
Durable Goods
10.0
10.0
5.0
5.0
0.0
0.0
Durable Goods, New Orders
Percent change, month-over-month
-5.0
Jan-08
Feb-08
Mar-08
Apr-08
-4.66
1.13
-0.22
-0.55
-10.0
Apr-05
Oct-05
Jul-05
Source: U.S. Census Bureau.
Apr-06
Jan-06
-5.0
Oct-06
Jul-06
Apr-07
Jan-07
-10.0
Apr-08
Oct-07
Jul-07
Jan-08
Consumer prices slowed a bit in April, although headline inflation remains elevated
at nearly 4.0%. Total prices for producers also eased, but core inflation sped up
for the fourth consecutive month.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
6.0
6.0
5.0
5.0
Consumer Price Index
4.0
4.0
3.0
3.0
2.0
2.0
Consumer Price Index,
excluding food and energy
1.0
0.0
Apr-05
Aug-05
Dec-05
Apr-06
Percent Change, Year-Over-Year
1.0
Aug-06
Dec-06
Apr-07
Producer Price Index
10.0
8.0
6.0
4.0
2.0
0.0
Producer Price Index,
-2.0
excluding food and energy
-4.0
Apr-05 Aug-05 Dec-05
Apr-06
Aug-07
Dec-07
Percent Change, Year-Over-Year
Producer Price Index
Aug-06
Dec-06
0.0
Apr-08
Apr-07
Aug-07
Dec-07
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Apr-08
Source: Bureau of Labor Statistics.
Oil prices continued their rapid ascent in May. The average price for a barrel of oil
has risen $30 since February, and nearly doubled over the past year. A new
single-day record of $132.78 was set on May 21st.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
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
May-05
Nov-05
Aug-05
Source: Wall Street Journal.
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
May-08
Feb-08
Productivity increased in the first quarter, while compensation and unit labor costs
slowed.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
12.0
Compensation
Per Hour
9.0
Output
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
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
-6.0
08:Q1
07:Q3
Source: Bureau of Labor Statistics.
Real GDP growth in the first quarter was stronger than originally thought. The
upward revision primarily reflected a downward adjustment to imports and upward
revisions to nonresidential structures and PCE for nondurable goods. These
positive changes were partly offset by downward revisions to private inventory
investment, exports, and PCE for services.
Revisions to First Quarter Real GDP
Description
Real GDP
Personal Consumption
Nondurable Goods
Services
Business Investment
Equipment and Software
Residential Investment
Advanced
Preliminary
0.6
0.9
1.0
1.0
-1.3
-0.3
3.4
3.0
-2.5
-0.2
-0.7
-0.9
-26.7
-25.5
Exports
5.5
2.8
Imports
2.5
-2.6
Final Sales
-0.2
0.7
Real GDP
6.0
5.0
4.0
3.0
2.0
1.0
0.0
05:Q1
05:Q3
Source: Bureau of Economic Analysis.
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Overall, data released since your last Directors' meeting show that while first quarter growth
was stronger than originally thought, the economy is still restrained. Escalating oil prices and
weaker employment conditions are wearing on consumers, and investment data has been
mixed. Combined with the prolonged housing slump, these factors are likely to continue to
restrict growth through the second quarter and into the second half of the year.
Percent
Short-Term Interest Rates
10.0
9.0
8.0
7.0
Federal Funds Rate
(effective rate)
6.00
5.00
4.00
3.00
2.00
1.00
6.0
5.0
4.0
Discount Window Primary Credit
4.48
3.50
3.04
2.49
2.25
Jan-08 Feb-08 Mar-08 Apr-08 May-08
3.0
2.0
1.0
0.0
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Source: Federal Reserve Board of Governors.
Mar-08
May-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
June 11, 2007
Current Economic Developments - Addendum: Data released in the past week
In May, nonfarm payrolls posted their fifth straight monthly decline and the
unemployment rate rose to its highest level in over three-and-a-half years. Nonfarm
payrolls were reduced by 49,000 jobs in May, bringing the total number of jobs lost
this year to 324,000. The unemployment rate rose to 5.5%, last matched in October
2004.
The U.S. international trade deficit widened in April, due primarily to higher oil prices.
Both imports and exports grew in April, building on their previously set record highs.
Wholesale inventories and sales both rose in April, the rise in inventories led by an
increase in petroleum stocks. Both measures had also risen in March.
Redbook sales fell 1.0% through the first week of June, compared to May. Year-overyear, sales rose 2.1%. Oil prices continued to rise in early June, averaging $130.86 per
barrel in the week ending June 10, compared to $127.42 per barrel the week before.
A new record high was set on June 6 at $138.55.
Payroll employment fell by 49,000 jobs in May, and estimates for the previous two
months were revised downward by a total of 15,000 jobs. The unemployment rate
increased by half of a percentage point to 5.5%, the largest single-month increase
in 22 years.
Nonfarm Payroll Employment
Change from Previous Month
Unemployment Rate
Rate
300
5.75
250
5.5
200
5.25
150
5
100
4.75
50
4.5
0
4.25
-50
-100
May-06
Jan-07
Sep-06
Sep-07
May-07
Source: Bureau of Labor Statistics.
May-08
Jan-08
4
May-06
Jan-07
Sep-07
May-08
Sep-06
May-07
Jan-08