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The
President’s
Report to the
Board of
Directors
March 6, 2008
Current Economic Developments - March 6, 2008
Data released since your last Directors' meeting show the economy grew in the fourth
quarter at the same pace as originally estimated, and also suggest the slowdown will
continue through the early parts of this year.
In February, initial claims increased sharply and consumer attitudes continued to worsen
amid recession fears and job market concerns. Real consumption expenditures were flat in
January, and incomes increased only marginally.
The housing market continued to struggle in January. Home sales decreased further, as
did building permits. In the manufacturing sector, the ISM manufacturing index fell back
below 50 and the employment index dropped to its lowest point in nearly five years. In
January, industrial production posted a small increase and capacity utilzation eased. Also
in January, however, new orders for both durable goods and nondefense capital goods,
excluding aircraft, accelerated.
Headline inflation measures for both consumers and producers accelerated in January,
offsetting the slowdowns of the previous month, and remain elevated. Core measures are
also rising, but remain close to the levels seen over the previous year. Oil prices rose
again in February, establishing a new record high.
The preliminary estimate of fourth quarter real GDP growth was unrevised from the advance
estimate, primarily reflecting a downward revision to imports that was largely offset by a
downward revision to private inventory investment.
Initial claims for unemployment insurance rose significantly in February, resulting
in their highest monthly average since September 2005 in the aftermath of
Hurricane Katrina.
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
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes deteriorated in February, continuing the trend seen over the
past year. Primary concerns include job availability and falling home values, as well
as general concerns about the health of the economy as a whole.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
Expectations
Present
Situation
140
Current
Conditions
Expectations
110
130
100
120
Confidence
Sentiment
110
90
100
80
90
80
70
70
60
60
50
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Feb-06
Aug-06
Feb-07
Aug-07
50
Feb-08
Source: The University of Michigan.
Source: The Conference Board.
Total auto and light truck sales were unchanged in February.
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
Feb-05
Aug-05
May-05
Feb-06
Nov-05
Source: Bureau of Economic Analysis.
Aug-06
May-06
Feb-07
Nov-06
10.0
Feb-08
Aug-07
May-07
Nov-07
In January, real disposable income posted a small increase and real consumption
was essentially flat for the second straight month.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
4.0
4.0
3.0
3.0
Real Consumption
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
Real Disposable Income
-3.0
-4.0
Jan-05
Jul-05
Apr-05
Jan-06
Oct-05
-3.0
Jul-06
Apr-06
Jan-07
Oct-06
-4.0
Jan-08
Jul-07
Apr-07
Oct-07
Source: Bureau of Economic Analysis.
The slump in the housing market continued in January. Sales of both new and
existing home sales slid further, as did the issuance of building permits. Housing
starts managed a very minor increase.
New and Existing Home Sales
Thousands of Units, Annualized
1600
1400
1200
1000
800
600
400
Jan-05
Thousands of Units, Annualized
8000
New Home Sales
7000
6000
5000
Existing Home Sales
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
4000
Jan-08
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2200
2000
1800
1600
1400
1200
1000
800
Jan-05
Building Permits
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
2400
2200
2000
Housing Starts
1800
1600
1400
1200
1000
800
May-07
Sep-07
Jan-08
Source: U.S. Census Bureau (new home sales, housing starts and building permits) and National Association of Realtors (existing sales).
The ISM manufacturing index fell in February, falling back below 50. The
employment index dropped for the third time in four months, resulting in its lowest
reading in nearly five years.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
58.0
58.0
56.0
56.0
ISM Index
54.0
54.0
52.0
52.0
50.0
50.0
48.0
48.0
Employment Index
46.0
46.0
44.0
44.0
Feb-05
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Feb-08
Nov-07
Source: Institute of Supply Management.
In January, industrial production posted a small increase, while capacity utilization
fell to its lowest level since February 2007.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
81.5
2.0
Industrial
Production
81.0
1.0
80.5
80.0
0.0
79.5
79.0
-1.0
78.5
Capacity Utilization
(manufacturing)
-2.0
Jan-05
78.0
77.5
Jul-05
Apr-05
Jan-06
Oct-05
Source: Federal Reserve Board of Governors.
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Jan-08
Oct-07
New orders for durable goods accelerated in January on a year-over-year basis,
and orders for nondefense capital goods excluding aircraft increased in consecutive
months for the first time since late 2006. Despite the improvements over last year,
January's estimate was down compared to December 2007.
New Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
30.0
30.0
Percent Change, Previous Month
25.0
Nov-07
Dec-07
Jan-08
Durables
0.46
4.39
-5.13
Ex. Air.
-0.09
5.16
-1.54
20.0
25.0
20.0
15.0
15.0
Durable Goods,
New Orders
10.0
10.0
5.0
5.0
0.0
0.0
Capital Goods Nondefense,
Excluding Aircraft
-5.0
-5.0
-10.0
-10.0
Jan-05
Jul-05
Apr-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.
Headline inflation measures remained elevated in January, increasing to offset the
easing seen in December. Core inflation also accelerated in January, but remain
more in line with the readings seen over the past 12 months.
Consumer Price Index
Percent Change, Year-Over-Year
6.0
5.0
4.0
3.0
2.0
Consumer Price Index,
1.0
excluding food and energy
0.0
Jan-05
May-05
Sep-05
Percent Change, Year-Over-Year
Consumer Price Index
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Jan-08
Producer Price Index
Percent Change, Year-Over-Year
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
Jan-05
May-05
Sep-05
Source: Bureau of Labor Statistics.
0.0
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
-2.0
Jan-08
Oil prices rose again in February, establishing new record highs for both one
day ($102.60/barrel on February 28) and monthly average ($95.35).
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
110.0
110.0
100.0
100.0
90.0
90.0
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
Feb-05
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Feb-08
Nov-07
Source: Wall Street Journal.
.
Productivity slowed in the fourth quarter, while compensation accelerated. Unit
labor costs increased during the quarter after falling for the previous two quarters.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
12.0
9.0
Output
Per Hour
Compensation
Per Hour
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-6.0
04:Q4
Unit Labor Costs
05:Q2
Source: Bureau of Labor Statistics.
05:Q4
06:Q2
06:Q4
07:Q2
-3.0
-6.0
07:Q4
Real GDP growth was unrevised in the fourth quarter, although many of its
components underwent slight alterations. Most notably, downward revisions to
business and residential investment were offset by an upward revision to exports
and a downward revision to imports.
Revisions to Fourth Quarter Real GDP
Advanced
Preliminary
0.6
0.6
Personal Consumption
2.0
1.9
Business Investment
7.5
6.9
Description
Real GDP
Equipment and Software
3.8
3.3
-23.9
-25.2
Government
2.6
2.2
Exports
3.9
4.8
Imports
0.3
-1.9
Final Sales
1.9
2.1
Residential Investment
Real GDP
6.0
4.0
2.0
0.0
04:Q4
05:Q2
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy grew
in the fourth quarter at the same pace as originally estimated, and also suggest the
slowdown will continue through the early parts of this year.
Percent
Short-Term Interest Rates
9.0
8.0
Discount Window Primary Credit
5.24
5.00
4.83
7.0
6.00
5.00
4.48
3.50
6.0
4.00
3.00
Oct-07 Nov-07 Dec-07 Jan-08 Feb-08
5.0
Federal Funds Rate
(effective rate)
4.0
3.0
2.0
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Source: Federal Reserve Board of Governors.
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
March 13, 2008
Current Economic Developments - Addendum: Data released in the past week
In February, nonfarm payrolls posted their largest monthly decrease in nearly five
years, and estimates of the previous two months' payrolls were revised lower.
Despite these payroll reductions, the unemployment rate fell by one-tenth of a
percentage point for the second month in a row.
The U.S trade deficit widened slightly in January, as both imports and exports
reached new record highs. Also in January, wholesale inventories rose 0.8%,
building on the 1.1% increase seen in December. Wholesale trade advanced
2.7% in January, more than offsetting the 0.5% fall of the previous month.
Redbook sales increased 1.6% through the first week of March, compared to
February. Sales were 1.0% higher than during the same period last year. Oil
prices continued to rise over the past week, averaging $106.40 per barrel and
setting a new record high of $108.76 on March 11th.
Nonfarm payrolls were reduced by 63,000 jobs in February, the largest monthly
drop since March 2003. Payrolls were also downwardly revised for the previous
two months, by 5,000 in January and 41,000 in December. Still, the unemployment
rate fell by one-tenth of a percentage point in February to 4.8%.
Unemployment Rate
Nonfarm Payroll Employment
Rate
Change from Previous Month
5.2
300
250
5
200
150
4.8
100
4.6
50
0
4.4
-50
-100
Feb-06
Oct-06
Jun-06
Jun-07
Feb-07
Source: Bureau of Labor Statistics.
Feb-08
Oct-07
Feb-06
Oct-06
Jun-06
4.2
Feb-08
Jun-07
Feb-07
Oct-07