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The
President’s
Report to the
Board of
Directors
September 4, 2008
CURRENT ECONOMIC DEVELOPMENTS - September 4, 2008
Data released since your last Directors' meeting show the economy grew faster in
the second quarter than originally estimated. The increase was due primaily to
stronger net exports, which has been offsetting some of the weakness seen in the
housing market and consumer spending. But inflation has continued to rise, and as
the trade effects abate, policy makers will need to choose which area to focus on.
In August initial claims increased again, suggesting further softening in the labor
market. Consumer attitudes improved overall in August, but those surveyed were
more pessimistic toward current conditions. Along with the more positive consumer
outlook came higher auto sales, which rebounded in August to register their
strongest sales in four months. Real incomes and consumption fell in July, due in
part to the end of Stimulus rebate distribution.
The weakness in the housing market persisted in July, although new and existing
home sales did post small increases. Housing starts and permits, however, both
decreased. In the manufacturing sector, the ISM index dipped slightly in August
while both industrial production and capacity utilization increased in July. Durable
goods orders, however, continued to fall.
Inflation became more of a concern in July, as both consumer and procuder prices
continued to accelerate. Oil prices fell considerably from their recent highs, but in
a historical context remain quite elevated.
Initial claims for unemployment insurance rose again in August, reaching their
highest level since late 2001.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
450
450
425
425
400
400
375
375
350
350
325
325
300
300
275
275
Aug-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Source: Department of Labor, Employment and Training Administration.
Feb-08
Nov-07
Aug-08
May-08
While consumers' feelings about current conditions worsened in August, their
outlook for the future continued to improve. Both measures of consumers' overall
attitudes increased in August, although the difference was more pronounced in the
Conference Board survey.
Consumer Confidence
Consumer Sentiment
Index, 1985 = 100
Index, 1966:Q1 = 100
120
160
Current
Conditions
110
100
Present
Situation
Consumer
Sentiment
90
140
Consumer
Confidence
120
80
100
70
Future
Expectations
80
Consumer
Expectations
60
60
50
40
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Aug-06
Feb-07
Aug-07
Feb-08
40
Aug-08
Source: The University of Michigan (left panel) and The Conference Board (right panel).
Domestic auto and light truck sales rebounded in August, ending a streak of seven
consecutive monthly declines.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
16.0
14.0
12.0
10.0
8.0
6.0
AugAug-05Dec-05
Dec-05Apr-06
Apr-06Aug-06
Aug-06Dec-06
Dec-06 Apr-07
Apr-07 Aug-07
Aug-07Dec-07
Dec-07 Apr-08
Apr-08 Aug-08
Source: Bureau of Economic Analysis.
Aug-08
Real incomes fell again in July, due in part to the lower level of Stimulus payments.
The reduction in incomes passed through into consumption which posted its largest
decrease in four years.
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
-6.0
Jul-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
Jul-08
Apr-08
Source: Bureau of Economic Analysis.
While the housing market remains weak, July sales data did not show any further
deterioration. New home sales improved a bit, and sales of existing homes rose
above their six-month average and almost matched their 12-month average.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1500
7500
1400
7000
Existing Home Sales
1300
1200
6500
1100
1000
6000
900
New Home Sales
800
5500
700
600
5000
500
400
4500
Jul-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
Source: U.S. Census Bureau (new home sales) and National Association of Realtors (existing sales).
Jul-08
Apr-08
Housing starts and building permits both fell in July, reversing the gains seen in
June.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
2200
Housing Starts
2000
2000
1800
1800
Building Permits
1600
1600
1400
1400
1200
1200
1000
1000
800
800
Jul-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
Jul-08
Apr-08
Source: U.S. Census Bureau.
The ISM manufacturing and employment indices both fell slightly in August,
dropping just below 50. The price index continued to fall from its recent peak.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
100.0
100.0
90.0
Price Index
90.0
80.0
80.0
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
Employment Index
40.0
40.0
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: Institute for Supply Management.
In July, industrial production increased for the second month in a row after falling
the previous four months. Capacity utilization increased for the first time since
March.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
2.0
81.0
Capacity Utilization
(manufacturing)
1.5
80.0
1.0
0.5
79.0
0.0
78.0
-0.5
-1.0
Industrial Production
77.0
-1.5
-2.0
76.0
Jul-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
Jul-08
Apr-08
Source: Federal Reserve Board of Governors.
New orders for durable goods fell for the fifth straight month in July, but orders of
nondefense capital goods, excluding aircraft, showed their strongest growth since
late 2006.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
20.0
20.0
Nondefense Capital Goods,
Excluding Aircraft
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Durable Goods,
New Orders
-5.0
-5.0
-10.0
-10.0
Jul-05
Jan-06
Oct-05
Source: U.S. Census Bureau.
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
Jul-08
Apr-08
Inflation remained a concern in July, as headline measures continued to accelerate on
a year-over-year basis. Total CPI grew at its fastest pace in over 17 years and total
PPI at its fastest in 27 years. Core measures also continued to creep up slowly.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
Consumer Price Index
6.0
6.0
Consumer Price Index,
excluding food and energy
4.0
4.0
2.0
2.0
0.0
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
0.0
Jul-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
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
0.0
-3.0
Jul-08
Source: Bureau of Labor Statistics.
On the other hand, oil prices eased considerably in August.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars 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
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Source: Wall Street Journal.
Productivity growth was revised higher in the second quarter, nearly doubling the
original estimate (4.3% vs. 2.2%). Hourly compensation was virtually flat and unit
labor costs fell.
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
-6.0
05:Q2
05:Q4
05:Q3
06:Q2
06:Q1
06:Q4
06:Q3
07:Q2
07:Q1
07:Q4
07:Q3
08:Q2
08:Q1
Source: Bureau of Labor Statistics.
Real GDP growth was revised up in the second quarter. The upward revision
primarily reflected upward revisions to exports and private inventory investment
and a downward revision to imports.
Revisions to Second Quarter Real GDP
Description
Advanced
Preliminary
1.9
3.3
Personal Consumption
1.5
1.7
Business Investment
2.3
2.2
-3.4
-3.2
Real GDP
Equipment and Software
Government
3.4
3.9
Residential
-15.6
-15.7
Exports
9.2
13.2
Imports
-6.6
-7.6
Final Sales
3.9
4.8
Real GDP
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
05:Q2
05:Q4
Source: Bureau of Economic Analysis.
06:Q2
06:Q4
07:Q2
07:Q4
08:Q2
Overall, data released since your last Directors' meeting show the economy grew
faster in the second quarter than originally estimated. The increase was due primaily
to stronger net exports, which has been offsetting some of the weakness seen in the
housing market and consumer spending. But inflation has continued to rise, and as
the trade effects abate, policy makers will need to choose which area to focus on.
Percent
Short-Term Interest Rates
7.0
6.0
Federal Funds Rate
(effective rate)
5.0
3.00
Discount Window Primary Credit
4.0
2.50
2.49
2.25
3.0
2.25
2.25
2.25
2.00
Apr-08 May-08 Jun-08 Jul-08 Aug-08
2.0
1.0
0.0
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Source: Federal Reserve Board of Governors.
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
September 11, 2008
Current Economic Developments - Addendum: Data released in the past week
In August, nonfarm payrolls fell for the eighth consecutive month and the unemployment
rate rose to its highest point in nearly five years. So far this year payrolls have shed
over 600,000 jobs, for an average of 75,000 per month.
Wholesale inventories increased 1.4% in July, after rising a revised 0.9% the previous
month. June inventories were first reported as rising 1.1%. Wholesale trade fell 0.3%
in July, following an increase of 3.0% in June.
Redbook sales decreased 0.8% through the first week of September, compared to
August. Sales were 1.8% higher than during the same period last year. Oil prices
fell over the past week, averaging $106.6 per barrel, compared to last week's average
of $114.8.
Payroll employment decreased by 84,000 in August, and revisions to the prior two
months' estimates resulted in 58,000 more jobs being cut than originally estimated.
The unemployment rate jumped in August to 6.1%, its highest since September 2003.
Nonfarm Payroll Employment
Change from Previous Month
250
Unemployment Rate
Rate
6.5
200
6.0
150
100
5.5
50
0
-50
5.0
4.5
-100
-150
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Nov-06
May-07
Nov-07
May-08
Source: Bureau of Labor Statistics.
4.0
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Nov-06
May-07
Nov-07
May-08