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The
President’s
Report to the
Board of
Directors
July 2, 2008
Current Economic Developments - July 2, 2008
Data released since your last Directors' meeting suggest the economy is growing, albeit at
a restrained pace. Soaring energy prices and a weaker labor market have eroded consumer
attitudes and expectations. Despite these issues, the stimulus rebates have helped support
consumer spending so far. Growth is likely to remain weak going forward, as the effects of
the housing slump, tight credit conditions, and higher prices will continue to be a drag on the
economy.
Initial claims for unemployment insurance increased in June, and consumer attitudes
continued to deteriorate. In May, consumer spending increased as incomes were
significantly boosted by the financial stimulus rebates.
The struggles in the housing market continued in May, but there have been signs that
perhaps the worst of the slump has passed. New home sales have been relatively steady
and existing home sales were above their six-month average in May.
In the manufacturing sector, the ISM index increased for the second month in a row in June,
returning to the positive side of 50. The employment component of the index fell to a five
year low, further evidence of a softer labor market. In May, industrial production decreased
again and capacity utilization fell further. Durable goods orders also fell in May, but by less
than seen in April. Orders of nondefense capital goods, excluding aircraft, increased.
There were further signs in May that inflation may become more of a concern. Energy prices
continue to increase, keeping headline inflation measures elevated. Core consumer prices
have been holding relatively steady, but core producer prices have been creeping upward.
Initial claims for unemployment insurance rose sharply through the first three weeks
of June, bringing them to their highest sustained levels since the aftermath of
Hurricane Katrina. The second quarter average so far is the highest since 2003.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
400
400
Initial Claims for Unemployment Insurance
Thousands, Quarterly Average
375
350
07:Q3
07:Q4
08:Q1
08:Q2*
317
337
352
373
375
350
325
325
300
300
275
Jun-05
Dec-05
Sep-05
Jun-06
Mar-06
Dec-06
Sep-06
Source: Department of Labor, Employment and Training Administration.
Jun-07
Mar-07
275
Jun-08*
Dec-07
Sep-07
Mar-08
* - June estimate based on 3-week average ending 6/21.
Consumer attitudes continued their descent towards record lows in June. Soaring
prices, declining home values and mounting job losses brought Sentiment to its
third-lowest reading ever (April and May, 1980), while the Conference Board's
measure of Expectations fell to its lowest point on record.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
Current
Conditions
Present
Situation
135
Consumer
Confidence
120
110
100
Consumer
Sentiment
105
90
90
80
Consumer
Expectations
75
70
Future
Expectations
60
60
45
50
30
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Jun-06
Dec-06
Jun-07
Dec-07
40
Jun-08
Source: The University of Michigan.
Source: The Conference Board.
Real incomes increased dramatically in May, due to the stimulus rebate checks
that started being sent in late April. Without the effect of the rebates, incomes still
rose, but at a much lower rate. The rebates also helped real consumption grow in
May at its fastest pace since August.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
6.0
6.0
Nominal Disposable Personal Income
Percent change, month-over-month
4.0
March
April
May
w/ stimulus
0.3
0.4
5.7
w/o stimulus
0.3
0.2
0.4
4.0
2.0
2.0
0.0
0.0
Real Disposable Income
-2.0
-2.0
Real Consumption
-4.0
May-05
Nov-05
Aug-05
May-06
Feb-06
Source: Bureau of Economic Analysis.
Nov-06
Aug-06
May-07
Feb-07
-4.0
May-08
Nov-07
Aug-07
Feb-08
The housing market continues to struggle, but may be showing signs that the most
severe drops are behind us. New home sales decreased slightly in May, but have
been little changed over the past three months. Existing home sales rose in May,
and are above their six-month average.
New Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1500
1500
1200
1200
900
900
600
600
300
May-05
Nov-05
Aug-05
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
Aug-07
Existing Home Sales
Thousands of Units, Annualized
300
May-08
Nov-07
Feb-08
Thousands of Units, Annualized
8000
8000
7000
7000
6000
6000
5000
5000
4000
May-05
Nov-05
Aug-05
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
4000
May-08
Nov-07
Aug-07
Feb-08
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Housing starts declined a bit in May, offsetting the small increase seen in April.
Building permits were essentially flat following a moderate gain the previous month.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
2200
Building Permits
2000
2000
1800
Housing Starts
1800
1600
1600
1400
1400
1200
1200
1000
1000
800
May-05
Nov-05
Aug-05
Source: U.S. Census Bureau.
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
800
May-08
Nov-07
Aug-07
Feb-08
The ISM manufacturing index increased in June, returning above 50 for the first
time since January. The employment index fell further in June, following a pause
in May.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65
Quarterly Averages
60.0
07:Q3
07:Q4
08:Q1
08:Q2
ISM
51.3
49.6
49.2
49.5
Emp.
50.9
49.6
47.4
44.9
ISM Index
60
55.0
55
50.0
50
45.0
45
Employment Index
40.0
40
Jun-05
Dec-05
Sep-05
Jun-06
Mar-06
Dec-06
Sep-06
Jun-07
Mar-07
Dec-07
Sep-07
Jun-08
Mar-08
Source: Institute of Supply Management.
Industrial production decreased for the third time in four months in May, and
capacity utilization fell to its lowest point in three-and-a-half years.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
2.0
81.0
1.5
80.5
Industrial Production
1.0
80.0
0.5
79.5
0.0
79.0
-0.5
78.5
-1.0
78.0
Capacity Utilization
(manufacturing)
-1.5
77.5
-2.0
May-05
Nov-05
Aug-05
May-06
Feb-06
Source: Federal Reserve Board of Governors.
Nov-06
Aug-06
May-07
Feb-07
77.0
May-08
Nov-07
Aug-07
Feb-08
New orders for durable goods declined again in May (on a year-over-year basis),
while orders for nondefense capital goods, excluding aircraft, accelerated.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
25.0
25.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
20.0
Durable Goods,
New Orders
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Percent change, month-over-month
-5.0
-10.0
Feb-08
Mar-08
Apr-08
May-08
Dur.
1.13
-0.22
-0.99
0.03
Ex air
-0.93
-1.00
3.09
-0.39
-5.0
-10.0
-15.0
-15.0
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: U.S. Census Bureau.
Consumer prices accelerated in May, after slowing the previous three months.
Total producer prices also picked up in May. Core inflation for both measures
was essentially unchanged in May.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
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
May-05
Sep-05
Jan-06
Percent Change, Year-Over-Year
1.0
May-06
Sep-06
Jan-07
May-07
Producer Price Index
Sep-07
Jan-08
0.0
May-08
Percent Change, Year-Over-Year
10.0
10.0
8.0
8.0
Producer Price Index
6.0
6.0
4.0
4.0
2.0
0.0
2.0
Producer Price Index,
excluding food and energy
-2.0
May-05
Sep-05
Jan-06
Source: Bureau of Labor Statistics.
0.0
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
-2.0
May-08
Oil prices rose for the sixth consecutive month in June, with each of the last four
breaking the record high set the previous month. The price per barrel closed over
$140 for the first time ever on June 27.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
160.0
160.0
140.0
120.0
140.0
Quarterly Averages
07:Q3
07:Q4
08:Q1
08:Q2
75.5
90.9
98.0
124.0
120.0
100.0
100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
Jun-05
Dec-05
Sep-05
Jun-06
Mar-06
Dec-06
Sep-06
Jun-07
Mar-07
Dec-07
Sep-07
Jun-08
Mar-08
Source: Wall Street Journal.
.
In the first quarter real GDP was revised slightly upward, reflecting upward revisions
to exports, PCE, and equipment and software that were mostly offset by an upward
revision to imports and a downward revision to private nonfarm inventory investment.
Real GDP
Annualized Percent Change
Annualized Percent Change
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
First Quarter Revisions
Description
Real GDP
Personal Consumption
Business Investment
Equipment and Software
Residential Investment
Government
Exports
Imports
Final Sales
Source: Bureau of Economic Analysis.
Preliminary
0.9
1.0
-0.2
-0.9
-25.5
2.0
2.8
-2.6
0.7
Revised
1.0
1.1
0.6
0.2
-24.6
2.1
5.4
-0.7
0.9
08:Q1
Overall, data released since your last Directors' meeting suggest the economy is growing,
albeit at a restrained pace. Soaring energy prices and a weaker labor market have eroded
consumer attitudes and expectations. Despite these issues, the stimulus rebates have
helped support consumer spending so far. Growth is likely to remain weak going forward,
as the effects of the housing slump, tight credit conditions, and higher prices will continue
to be a drag on the economy.
Percent
Short-Term Interest Rates
8.0
7.0
Federal Funds Rate
(effective rate)
6.0
Discount Window Primary Credit
4.00
5.0
3.04
2.49
2.25
2.25
Mar-08
3.0
Apr-08
May-08
Jun-08
2.0
1.0
0.0
Jun-07
3.00
2.00
4.0
Jul-07
Aug-07
Sep-07
Oct-07
Source: Federal Reserve Board of Governors.
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
1.00
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
July 9, 2008
Current Economic Developments - Addendum: Data released in the past week
In June, nonfarm payrolls fell for the sixth consecutive month. Through the first half of the
year, payrolls have been reduced by nearly 450,000 jobs. The unemployment rate was
unchanged at 5.5% in June, but has risen one-half of a percentage point since December.
Lightweight vehicle sales continued to slow in June, falling to a 15 year low. The slowdown
is due in part to high gas prices, which have kept consumers from purchasing trucks and
SUVs. While some of those potential sales have transferred to more fuel-efficient autos,
supply of those vehicles has not always been able to meet demand.
Wholesale inventories rose 0.8% in May, following a 1.4% increase in April. Wholesale
trade rose 1.6% in May, matching the revised estimate for April. Trade was originally
estimated as rising 1.4% in April.
Redbook sales decreased 0.5% through the fifth and final week of June, compared to May.
Sales for the week ending July 5th were 2.9% higher than during the same period last year.
Oil prices rose during the past week, averaging $141.9 per barrel compared to last week's
average of $139.0.
Nonfarm payrolls were reduced further in June, declining by 62,000 jobs. Also,
revisions to the prior two months' estiamtes revealed payrolls were cutback by an
additional 52,000 jobs to a total loss of 129,000 jobs. Despite these losses, the
unemployment rate was unchanged in June at 5.5%.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Rate
300
6.00
250
5.75
200
5.50
150
5.25
100
5.00
50
4.75
0
4.50
-50
4.25
-100
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Sep-06
Mar-07
Sep-07
Mar-08
Source: Bureau of Labor Statistics.
4.00
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Sep-06
Mar-07
Sep-07
Mar-08
Total auto and light truck sales slowed for the fifth consecutive month in June, falling
to their lowest pace since August 1993.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
22.0
22.0
Quarterly Sales
Millions of Units, Annualized
20.0
18.0
07:Q3
07:Q4
08:Q1
08:Q2
15.9
16.1
15.2
14.1
20.0
18.0
16.0
16.0
14.0
14.0
12.0
12.0
10.0
Jun-05
Dec-05
Sep-05
Jun-06
Mar-06
Source: Bureau of Economic Analysis.
Dec-06
Sep-06
Jun-07
Mar-07
10.0
Jun-08
Dec-07
Sep-07
Mar-08