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The
President’s
Report to the
Board of
Directors
May 1, 2008
CURRENT ECONOMIC DEVELOPMENTS - May 1, 2008
Data since your last Directors' meeting show the economy grew in the first quarter at
the same pace as the fourth quarter. Reduced spending by both consumers and
businesses, a softer labor market and the persistent slump in the housing market
may continue to restrict growth going forward, but recent monetary policy actions
and the rollout of the fiscal stimulus rebate checks should spur growth over time.
The increase in real GDP in the first quarter was due primarily to positive contributions
from personal consumption expenditures for services, private inventory investment,
exports of goods and services, and federal government spending that were party
offset by negative contributions from residential fixed investment and PCE for durable
goods. Imports, which are a subtraction in the calculation of GDP, increased.
In April, consumer attitudes continued to worsen, extending the slide seen over the
past several quarters. Initial claims for unemployment insurance also rose further
in April. The ISM manufacturing index was unchanged in April from March, but below
its first quarter average. The employment component of the index fell in April.
Inflation continued to be of some concern in the first quarter, as total and core inflation
increased a bit for both consumers and producers. Total compensation costs, as
measured by the ECI, grew at the same pace in the first quarter as seen over the past
three quarters. Oil prices continued their steady rise through the first quarter and into
April, and threaten to climb higher as demand rises entering the summer months.
Real GDP growth in the first quarter matched the growth seen in the fourth quarter,
reflecting an upturn in inventory investment that was offset by an upturn in imports,
and downturns in nonresidential structures, in PCE for durable goods, and in PCE
for nondurable goods.
Annualized Percent Change
Real Gross Domestic Product
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
05:Q1
05:Q3
Source: Bureau of Economic Analysis.
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Both personal and real disposable income grew in the first quarter, but consumption
posted its weakest growth since 2001 as consumers have been more cautious and
have focused on saving.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
15.0
Personal Income
12.0
5.0
9.0
4.0
6.0
3.0
3.0
2.0
0.0
1.0
-3.0
Real Disposable Income
-6.0
0.0
05:Q1
06:Q1
05:Q3
07:Q1
06:Q3
08:Q1
05:Q1
06:Q1
05:Q3
07:Q3
07:Q1
06:Q3
08:Q1
07:Q3
Source: Bureau of Economic Analysis.
Business investment fell in the first quarter, due primarily to a drop in nonresidential
structures. Equipment and software also posted a minor decline.
Business Investment
Annualized Percent Change
Annualized Percent Change
30.0
30.0
25.0
25.0
Equipment
and Software
20.0
20.0
Structures
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Business
Investment
-5.0
-5.0
-10.0
-10.0
05:Q1
05:Q3
Source: Bureau of Economic Analysis.
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
In the first quarter, on a year-over-year basis, new orders for durable goods grew
at a pace close to that seen over the past three quarters and orders of nondefense
capital goods, excluding aircraft, showed their strongest growth since the fourth
quarter of 2006.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
16.0
16.0
12.0
12.0
Capital Goods Nondefense,
Excluding Aircraft
8.0
8.0
4.0
4.0
Durable Goods,
New Orders
0.0
0.0
-4.0
-4.0
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Source: U.S. Census Bureau.
Residential investment continued to fall in the first quarter, posting it's largest drop
since 1981:Q4.
Residential Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
-15.0
-15.0
-20.0
-20.0
-25.0
-25.0
-30.0
-30.0
05:Q1
05:Q3
Source: U.S. Census Bureau.
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
The housing slump persisted in the first quarter. New home sales slowed
significantly, falling to their lowest quarterly pace in nearly sixteen years, and sales
of existing homes eased a bit further.
New and Existing Home Sales
Thousands of Units,
Thousands of Units,
Annualized
Annualized
1400
1300
New
Home Sales
7500
7000
1200
1100
6500
Existing
Home Sales
1000
6000
900
800
5500
700
5000
600
500
4500
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Source: U.S. Census Bureau.
Growth in government spending was unchanged in the first quarter.
Government Spending
Annualized Percent Change
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
05:Q1
05:Q3
Source: Bureau of Economic Analysis.
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Export growth slowed in the first quarter, but continue to provide important support
to the economy. Imports rose, continuing the volatile pattern seen recently.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
25.0
25.0
20.0
20.0
Imports
Exports
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Exports: Contribution to % change in Real GDP
-5.0
07:Q2
07:Q3
07:Q4
08:Q1
0.85
2.10
0.77
0.67
-5.0
-10.0
-10.0
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Source: Bureau of Economic Analysis.
Consumer attitudes deteriorated further in the first quarter, and continued to fall
in April. Consumer sentiment stands at a quarter-century low amid uncertainty
about future living standards and confidence fell to a five year low due to pessimistic
views on the economy, job conditions and income prospects.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
Confidence
100
100
80
80
60
Expectations
60
40
40
05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 Apr-07
Index, 1966:Q1=100
Consumer Sentiment and Expectations
Index, 1966:Q1=100
110
110
100
100
Sentiment
90
90
80
80
70
70
60
60
Expectations
50
50
40
40
05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 Apr-07
Source: The Conference Board (confidence) and University of Michigan (sentiment).
Initial claims for unemployment insurance have grown steadily over the past two
quarters, and continued along that path 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
05:Q1
05:Q3
05:Q2
06:Q1
05:Q4
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
08:Q1
07:Q4
Apr-08
Source: Department of Labor, Employment and Training Administration.
In April, both the ISM and employment indices fell below their first quarter averages.
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
Employment Index
40.0
40.0
05:Q1
05:Q3
05:Q2
06:Q1
05:Q4
Source: Institute for Supply Management.
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
08:Q1
07:Q4
Apr-07
Headline inflation crept slightly higher in the first quarter, for both consumers and
producers. And while food and commodity prices are of greater concern, core
measures of inflation also saw small increases.
Consumer Price Index
Percent Change, Year-Over-Year
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Percent Change, Year-Over-Year
Consumer Price Index
05:Q1
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Consumer Price Index,
excluding food and energy
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
10.0
10.0
8.0
8.0
Producer Price Index
Producer Price Index,
excluding food and energy
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
08:Q1
Source: Bureau of Labor Statistics.
In the first quarter, total employment costs grew at the same rate as seen during the
previous three quarters, as a slight deceleration in wages and salaries offset a similar
acceleration in benefit costs.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
8.0
8.0
7.0
7.0
6.0
6.0
Benefit Costs
5.0
5.0
4.0
Total
Compensation
4.0
3.0
3.0
2.0
2.0
Wages and Salaries
1.0
1.0
0.0
0.0
05:Q1
05:Q3
Source: Bureau of Labor Statistics.
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
Oil prices rose further through the first quarter, and continued to rise in April. The
latest record high was set on April 25th at $121.57 per barrel.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
120.0
110.0
100.0
110.0
90.0
80.0
100.0
70.0
60.0
90.0
50.0
40.0
05:Q1
05:Q4
06:Q3
07:Q2
08:Q1
Dec-07
Feb-08
80.0
Apr-08
Source: Wall Street Journal (oil prices).
.
Overall, data since your last Directors' meeting show the economy grew in the first
quarter at the same pace as the fourth quarter. Reduced spending by both consumers
and businesses, a softer labor market and the persistent slump in the housing market
may continue to restrict growth going forward, but recent monetary policy actions and
the rollout of the fiscal stimulus rebate checks should spur growth over time.
Percent
Short-Term Interest Rates
10.0
Discount Window Primary Credit
8.0
6.25
6.25
5.93
6.00
5.02
5.00
3.67
6.0
7.00
4.00
2.49
3.00
2.00
4.0
07:Q1
07:Q2
07:Q3
07:Q4
Federal Funds Rate
(effective rate)
08:Q1 Apr-08
2.0
0.0
05:Q1 05:Q2
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
Source: Federal Reserve Board of Governors.
08:Q1 Apr-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
May 8, 2008
Current Economic Developments - Addendum: Data released in the past week
Nonfarm payrolls decreased in April for the fourth consecutive month, but by a smaller
amount than averaged in the first quarter. The unemployment rate also improved in
April compared to March, but was a bit higher than its first quarter average.
Total lightweight vehicle sales slowed in April, as consumers continued to be more
cautious in their spending habits. Total sales in April were the lowest since 1998, and
domestic sales were the lowest in 15 years.
Productivity accelerated in the first quarter, due primarily to a decrease in hours worked.
Total hours fell 1.8% during the quarter, the biggest drop since 2003.
Manufacturers' orders rose 1.4% in March, and shipments rose 1.1%. Shipments of
nondefense capital goods, excluding aircraft, also rose 1.1%.
Redbook sales finished April down 1.6%, compared to March. Sales were 1.4% higher
than during the same period last year. Oil prices decreased during the past week,
averaging $116.8 per barrel, compared to last week's average of $118.7.
In April nonfarm payrolls were reduced by 20,000 jobs, and the unemployment rate,
although higher than it's first quarter average, fell one-tenth of a percentage point
to 5.0%. Also, revisions to nonfarm payrolls for the previous two months resulted
in 8,000 fewer jobs than previously estimated.
Nonfarm Payroll Employment
Unemployment Rate
Rate
Change from Previous Quarter, Monthly Average
5.2
300
Change from Previous Month
250
Feb-08
Mar-08
Apr-08
200
-83,000
-81,000
-20,000
5
4.8
150
100
4.6
50
4.4
0
4.2
-50
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
06:Q2
06:Q4
07:Q2
07:Q4 Apr-08
Source: Bureau of Labor Statistics.
06:Q1 06:Q3
07:Q1 07:Q3
08:Q1
06:Q2 06:Q4 07:Q2 07:Q4 Apr-08
After decreasing in the first quarter, auto sales continued to slide in April.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
18.0
16.0
14.0
12.0
10.0
05:Q1 05:Q2
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3 07:Q4
08:Q1Apr-08
Source: Bureau of Economic Analysis
Productivity growth picked up a bit in the first quarter, as both hourly compensation
and unit labor costs slowed.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
12.0
15.0
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:Q1
05:Q3
Source: Bureau of Labor Statistics.
06:Q1
06:Q3
07:Q1
07:Q3
-6.0
08:Q1