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The
President’s
Report to the
Board of
Directors
November 1, 2007
CURRENT ECONOMIC DEVELOPMENTS - November 1, 2007
Data since your last Directors' meeting show the economy grew in the third quarter
at it's fastest pace since early 2006, slightly outpacing the growth seen in the second
quarter.
The increase in real GDP in the third quarter reflected positive contributions from
personal consumption expenditures, exports, federal government spending,
equipment and software, nonresidential structures, private inventory investment
and state and local government spending that were partly offset by a negative
contribution from residential fixed investment and an increase in imports.
In October, consumer attitudes deteriorated from their third quarter averages, and
initial claims for unemployment insurance increased. The ISM index declined in
October, following the easing seen in the third quarter. The employment component
of the index, which was also down in the third quarter, showed some improvement
in October.
Inflation data was rather benign in the third quarter. Consumer prices slowed
slightly while producer prices accelerated marginally. Total compensation costs,
as measured by the ECI, grew at the same pace in the third quarter as they did in
the second. Oil prices, however, rose sharply in October, setting record highs
towards the end of the month.
The slight acceleration in real GDP growth in the third quarter primarily reflected
accelerations in personal consumption expeditures and exports that were partially
offset by an upturn in imports, a larger decrease in residential fixed investment, and
a deceleration in nonresidential investment.
Real Gross Domestic Product
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
04:Q3
05:Q1
Source: Bureau of Economic Analysis.
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Real consumption grew in the third quarter at double the rate seen in the second,
aided by strong gains in both personal and real disposable income. On a monthly
basis, the growth in consumption slowed from August to September, suggesting
the potential for less momentum in this area heading into the fourth quarter.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
14.0
Monthly Change
5.0
Jul-07
Aug-07
Sep-07
0.26
0.57
0.09
Personal Income
12.0
10.0
8.0
4.0
6.0
3.0
4.0
2.0
2.0
0.0
-2.0
1.0
Real Disposable
Income
-4.0
-6.0
0.0
04:Q3
05:Q3
05:Q1
06:Q3
06:Q1
04:Q3
07:Q3
05:Q3
05:Q1
07:Q1
06:Q3
06:Q1
07:Q3
07:Q1
Source: Bureau of Economic Analysis.
Growth in business investment slowed in the third quarter, but remains strong.
Equipment and software investment accelerated somewhat.
Business Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
Business Investment
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
-4.0
Equipment and Software
-8.0
-8.0
04:Q3
05:Q1
Source: Bureau of Economic Analysis.
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
New orders for durable goods grew in the third quarter at essentially the same pace
as seen in the second quarter. Orders of nondefense capital goods, excluding
aircraft, fell.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
16.0
16.0
Capital Goods Nondefense,
Excluding Aircraft
12.0
8.0
12.0
8.0
Durable Goods,
New Orders
4.0
4.0
0.0
0.0
Durable Goods, New Orders
Percent change, previous quarter
-4.0
2006:Q4
2007:Q1
2007:Q2
2007:Q3
-1.55
-2.48
3.58
1.99
-4.0
-8.0
-8.0
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Source: U.S. Census Bureau.
The run of significant decreases in residential investment continued in the third
quarter, falling at a faster pace than seen over the previous three quarters. The
third quarter drop reduced overall GDP growth by 1.05 percentage points.
Residential Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
Residential Investment
Contribution to % Change in Real GDP
15.0
10.0
5.0
15.0
2006:Q4
2007:Q1
2007:Q2
2007:Q3
-1.04
-0.93
-0.62
-1.05
10.0
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
04:Q3
05:Q1
Source: U.S. Census Bureau.
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
The housing market continued to slump in the third quarter, as new home sales
fell to their lowest level in ten years and sales of existing homes reached their
lowest level in over five years.
New and Existing Home Sales
Thousands of Units,
Annualized
Thousands of Units,
Annualized
1400
7500
New Home Sales
1300
7000
1200
Existing Home Sales
1100
6500
1000
6000
900
800
5500
700
600
5000
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Source: U.S. Census Bureau.
Government spending posted another solid gain in the third quarter.
Government Spending
Annualized Percent Change
Annualized Percent Change
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
04:Q3
05:Q1
Source: Bureau of Economic Analysis.
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Export growth accelerated in the third quarter and continue to be a source of
strength for the economy. Imports grew in the third quarter after falling in the
second.
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
-5.0
-5.0
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Source: Bureau of Economic Analysis.
Consumer attitudes underwent some mixed, and relatively minor, changes in the
third quarter, as confidence and sentiment eased a bit and expectations improved
slightly. October, however, saw attitudes deteriorating across both measures.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
Confidence
110
110
100
100
90
90
80
80
Expectations
70
70
60
60
04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 Oct-07
Index, 1966:Q1=100
Consumer Sentiment and Expectations
110
110
100
Sentiment
90
80
100
90
80
70
60
Index, 1966:Q1=100
70
Expectations
60
50
50
04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 Oct-07
Source: The Conference Board (confidence) and University of Michigan (sentiment).
Initial claims for unemployment insurance eased slightly in the third quarter, but
rose moderately in October.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
375
375
350
350
325
325
300
300
275
275
04:Q3
05:Q1
04:Q4
05:Q3
05:Q2
06:Q1
05:Q4
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
Oct-07
Source: Department of Labor, Employment and Training Administration.
Both the ISM manufacturing and employment indices decreased in the third quarter,
offsetting some of the increases seen in the second quarter. The ISM index slipped
further in October, but the employment index improved slightly on its September
estimate.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
65.0
65.0
ISM Index
60.0
60.0
55.0
55.0
50.0
50.0
45.0
45.0
Employment Index
40.0
40.0
35.0
35.0
30.0
30.0
04:Q3
05:Q1
04:Q4
05:Q3
05:Q2
Source: Institute for Supply Management.
06:Q1
05:Q4
06:Q3
06:Q2
07:Q1
06:Q4
07:Q3
07:Q2
Oct-07
Consumer prices eased slightly in the third quarter, and core prices slowed for the
fourth consecutive quarter. Producer prices were essentially unchanged, while
core prices accelerated a bit.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
5.0
5.0
Consumer Price Index,
excluding food and energy
Consumer Price Index
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
Producer Price Index
6.0
Producer Price Index,
excluding food and energy
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Source: Bureau of Labor Statistics.
In the third quarter, employment costs grew at a steady pace despite slight
decelerations in wages and salaries and benefit costs. Overall, the ECI has been
quite stable over the past year.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
8.0
8.0
7.0
7.0
Benefit Costs
6.0
6.0
5.0
5.0
Total
Compensation
4.0
4.0
3.0
3.0
2.0
2.0
Wages and Salaries
1.0
1.0
0.0
0.0
04:Q3
05:Q1
Source: Bureau of Labor Statistics.
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
Oil prices rose sharply in the third quarter, and continued to rise in October.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
90.0
90.0
80.0
85.0
70.0
80.0
60.0
75.0
50.0
70.0
40.0
65.0
60.0
30.0
04:Q3
05:Q2
06:Q1
06:Q4
07:Q3
Jun-07
Aug-07
Oct-07
Source: Wall Street Journal (oil prices).
Overall, the economy grew in the third quarter at its fastest pace since early 2006,
slightly outpacing the growth seen in the second quarter. Strong consumption and
exports continue to help offset the drag of the housing market, but the potential
spillover effects of that slump continue to be a source of concern.
Percent
Short-Term Interest Rates
9.0
8.0
Discount Window Primary Credit
7.0
6.25
6.25
6.25
5.93
6.0
4.0
6.00
5.24
5.0
7.00
6.50
6.25
5.50
5.00
4.50
06:Q3
06:Q4
07:Q1
07:Q2
Federal Funds Rate
(effective rate)
07:Q3 Oct-07
3.0
2.0
1.0
0.0
04:Q3 04:Q4
05:Q1 05:Q2
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
Source: Federal Reserve Board of Governors.
07:Q3 Oct-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
November 8, 2007
Current Economic Developments - Addendum: Data released in the past week
In October, payroll employment posted its biggest gain in five months, but net job
increases in the previous two months were revised downward. Despite October's
large gain in payrolls, the unemployment rate rose from its third quarter average.
Total auto and light vehicle sales decreased slightly in October, from September's
estimate. The October estimate was an improvement over the third quarter average,
however. Domestic auto sales held steady for the second month in a row.
Productivity posted a strong gain in the third quarter, reflecting a solid increase in
output and a small drop in hours worked. Unit labor costs fell silightly, suggesting
a decrease in inflationary pressures.
In other data released over the past week, oil prices continued to rise, wholesale
inventories and manufacturers' orders both rose, shipments were flat and Redbook
sales fell.
In October, payrolls added 166,000 jobs and the unemployment rate was unchanged
at 4.7%. In September and August, payrolls were revised to show a net reduction
of 10,000 new jobs.
Nonfarm Payroll Employment
Change from Previous Quarter, Monthly Average
Unemployment Rate
Rate
5.2
350
Change from Previous Month
300
Aug-07
Sep-07
Oct-07
93,000
96,000
166,00
0
250
5
4.8
200
150
4.6
100
4.4
50
4.2
0
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
05:Q4
06:Q2
06:Q4
07:Q2 Oct-07
Source: Bureau of Labor Statistics.
05:Q3
06:Q1 06:Q3
07:Q1 07:Q3
05:Q4 06:Q2 06:Q4 07:Q2 Oct-07
Total auto and light truck sales were up a bit in October, after decreasing slightly
during the third quarter.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
18.0
16.0
14.0
12.0
10.0
04:Q3 04:Q4
05:Q1 05:Q2
05:Q3 05:Q4
06:Q1 06:Q2
06:Q3 06:Q4
07:Q1 07:Q2
07:Q3Oct-06
Source: Bureau of Economic Analysis
During the third quarter, productivity grew at its fastest pace in four years. Total
compensation accelerated slightly and unit labor costs fell for the first time in over
a year.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
12.0
9.0
9.0
Compensation
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-6.0
04:Q3
Output Per Hour
Unit Labor Costs
05:Q1
Source: Bureau of Labor Statistics.
05:Q3
06:Q1
06:Q3
07:Q1
-3.0
-6.0
07:Q3