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The
President’s
Report to the
Board of
Directors
December 6, 2007
CURRENT ECONOMIC DEVELOPMENTS - December 6, 2007
Data released since your last Directors' meeting show the economy grew in the third
quarter at a faster rate than first estimated, but also suggest growth will slow
considerably in the fourth quarter. Waning consumer confidence, the sustained
risk of the housing crisis crossing over into consumption, and weaker manufacturing
data all carry the potential to restrict growth going forward.
In November, initial claims for unemployment insurance increased while consumer
attitudes deteriorated further. Auto sales rose slightly in November, but have been
relatively stable over the past few months. In October, real consumption was flat
and real disposable income decreased incrementally.
The housing market woes continued in October. New home sales rose slightly, but
downward revisions to the prior months' estimates offset that news, and existing
home sales decreased a bit. In the manufacturing sector, the ISM index continued
to fall in November and industrial production decreased in October. Orders for
durable goods slipped further in October, and orders for nondefense capital goods,
excluding aircraft, experienced their biggest fall since February.
Headline consumer inflation continued to rise in October, but core prices held steady.
Oil prices rose sharply in November, a sign that a potentially expensive winter lies
ahead.
Initial claims for unemployment insurance rose further in November, their first
consecutive monthly increases in over a year.
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
Nov-04
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes continued to detiorate in November. Of primary concern are
rising energy costs and falling home prices, while secondary concerns include
employment prospects and recession fears.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
Present
Situation
140
Current
Conditions
110
130
Consumer
Confidence
120
100
110
Consumer
Sentiment
90
100
90
80
80
Consumer
Expectations
70
Future
Expectations
60
50
Nov-05
May-06
Nov-06
May-07
Nov-07
Nov-05
May-06
Nov-06
May-07
70
60
Nov-07
Source: The University of Michigan.
Source: The Conference Board.
Total auto and light truck sales increased a bit in November, offsetting the small dip
seen in October, and remaining in line with their 12-month average.
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
Nov-04
May-05
Feb-05
Nov-05
Aug-05
Source: Bureau of Economic Analysis.
May-06
Feb-06
Nov-06
Aug-06
10.0
Nov-07
May-07
Feb-07
Aug-07
Real personal consumption was essentially unchanged in October, as incomes
posted a small decrease.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
5.0
2.0
4.0
Real Consumption
3.0
1.0
2.0
1.0
0.0
0.0
-1.0
-2.0
-1.0
-3.0
Real Disposable Income
-4.0
-2.0
Oct-04
Apr-05
Oct-05
Jan-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
-5.0
Oct-07
Apr-07
Jan-07
Jul-07
Source: Bureau of Economic Analysis.
The housing market remained weak in October. New home sales posted a small
gain, but sales in the previous two months were revised sharply lower. Sales of
existing homes declined for the eighth month in a row.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1500
8000
New Home Sales
7500
1350
Existing Home Sales
7000
1200
6500
1050
6000
900
5500
750
5000
600
Oct-04
Apr-05
Jan-05
Source: U.S. Census Bureau.
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
4500
Oct-07
Apr-07
Jan-07
Jul-07
Housing starts increased in October, but the continued slide in number of building
permits issued suggests starts are likely to resume their downward trend in the
coming months.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2500
2500
2250
2250
Building Permits
2000
2000
1750
1750
Housing Starts
1500
1500
1250
1250
1000
1000
Oct-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Source: U.S. Census Bureau.
In November, the ISM diffusion index fell for the fifth consecutive month, dropping
to its lowest point since January. The employment index fell sharply in November,
more than offsetting the gains of the previous two months.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
62.0
62.0
60.0
60.0
ISM Index
58.0
58.0
56.0
56.0
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
Nov-04
May-05
Feb-05
Nov-05
Aug-05
Source: Institute for Supply Management.
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
Industrial production fell in October, and capacity utilization dropped to its lowest
level since May.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
82.0
1.5
1.0
81.0
0.5
80.0
0.0
79.0
-0.5
-1.5
78.0
Industrial Production
-1.0
77.0
Capacity Utilization
(manufacturing)
-2.0
Oct-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
76.0
Oct-07
Apr-07
Jan-07
Jul-07
Source: Federal Reserve Board of Governors.
New orders for durable goods posted their third consecutive monthly decrease in
October, despite showing a rebound in year-over-year terms. Orders for
nondefense capital goods, excluding aircraft, also fell in October.
Durable Goods Orders
Percent Change, Previous Month
Percent Change, Previous Month
15.0
15.0
Capital Goods Nondefense,
Excluding Aircraft
Durable Goods,
New Orders
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
Durable Goods, New Orders
Percent change, year-over-year
-10.0
Aug-07
Sep-07
Oct-07
3.48
-6.21
2.18
-10.0
-15.0
-15.0
Oct-04
Apr-05
Jan-05
Source: U.S. Census Bureau.
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Oct-07
Jul-07
Headline consumer inflation accelerated again in October, as prices grew at their
fastest pace in over a year. Core prices were unchanged, however. Total producer
prices also rose sharply, while core prices accelerated mildly.
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
Oct-04
Feb-05
Jun-05
Oct-05
1.0
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
0.0
Oct-07
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
Producer Price Index
6.0
6.0
4.0
4.0
2.0
2.0
Producer Price Index,
excluding food and energy
0.0
-2.0
Oct-04
Feb-05
Jun-05
Oct-05
0.0
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
-2.0
Oct-07
Source: Bureau of Labor Statistics.
Oil prices rose sharply again in November, peaking with a record high of nearly
$99 per barrel on November 20th.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars per Barrel
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
Nov-04
May-05
Feb-05
Source: Wall Street Journal.
.
Nov-05
Aug-05
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
Nov-07
Aug-07
Productivity was revised higher in the third quarter, growing at its fastest pace in
four years. Unit labor costs fell in the third quarter, even as hourly compensation
rose.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
12.0
12.0
Compensation
Per Hour
9.0
9.0
6.0
6.0
3.0
3.0
0.0
0.0
Unit Labor Costs
-3.0
-6.0
04:Q3
05:Q1
Output
Per Hour
05:Q3
06:Q1
06:Q3
-3.0
-6.0
07:Q3
07:Q1
Source: Bureau of Labor Statistics.
Real GDP in the third quarter was stronger than originally thought. The upward
revision primarily reflected upward revisions to private inventory investment and
to exports and a downward revision to imports that were partially offset by a
downward revision to personal consumption expenditures.
Revisions to Third Quarter Real GDP
Description
Advance
Preliminary
3.9
4.9
Personal Consumption
3.0
2.7
Business Investment
7.9
9.4
Real GDP
Equipment and Software
Residential Investment
5.9
7.2
-20.1
-19.7
Government
3.7
3.9
Exports
16.2
18.9
Imports
5.2
4.3
Final Sales
3.5
3.9
Real GDP
6.0
5.0
4.0
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 07:Q3
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy grew in
the third quarter at a faster rate than first estimated, but also suggest growth will slow
considerably in the fourth quarter. Waning consumer confidence, the sustained risk of
the housing crisis crossing over into consumption, and weaker manufacturing data all
carry the potential to restrict growth going forward.
Percent
Short-Term Interest Rates
8.0
Discount Window Primary Credit
7.0
6.25
6.01
5.53
5.24
6.0
Jul-07
5.00
7.00
6.50
6.00
5.50
5.00
4.50
Aug-07 Sep-07 Oct-07 Nov-07
Federal Funds Rate
(effective rate)
5.0
4.0
3.0
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Source: Federal Reserve Board of Governors.
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
December 13, 2007
Current Economic Developments - Addendum: Data released in the past week
Payroll employment posted a modest gain in November, and revisions to the prior two
months' growth estimates resulted in a net reduction of 48,000 new jobs. The
unemployment rate held steady in November at 4.7%.
In early December, consumer attitudes continued to deteriorate. Sentiment fell to its
lowest point since a post-Hurricane Katrina estimate in October 2005. Excluding that
reading, sentiment is at its lowest level in 15 years. Details of the report showed
expectations also fell at the start of December, but current conditions rose slightly.
The U.S. trade deficit widened during October, mostly due to rising prices for imported
oil. In October, exports increased 0.9% and imports grew 1.0%.
Redbook sales fell 0.5% through the first week of December, compared to November.
Sales in the week ending December 8th were 1.6% higher than during the same period
last year. Oil prices fell slightly during the past week, averaging $88.8 per barrel
compared to last week's average of $89.6.
In November, nonfarm payrolls added 94,000 jobs and the unemployment rate held
steady at 4.7%. October payrolls were revised upward by 4,000 to show an increase of
170,000 jobs, but September payrolls were revised sharply downward, showing an
increase of only 44,000 jobs as opposed to the originally estimated 96,000 job increase.
Nonfarm Payroll Employment
Change from Previous Month
Unemployment Rate
Rate
375
5.2
300
5
225
4.8
150
4.6
75
4.4
0
Nov-05
May-06
Nov-06
May-07
Nov-07
Feb-06
Aug-06
Feb-07
Aug-07
Source: Bureau of Labor Statistics.
4.2
Nov-05
May-06
Nov-06
May-07
Nov-07
Feb-06
Aug-06
Feb-07
Aug-07