Download President’s Report Board Directors

The
President’s
Report to the
Board of
Directors
October 4, 2007
CURRENT ECONOMIC DEVELOPMENTS - October 4th, 2007
Data released since your last Directors' meeting show the economy's second quarter
rebound wasn't quite as strong as previously reported, and other data suggest a return to
below potential growth in the third quarter. Financial markets have shown some
improvement recently, but effects of the recent turmoil are still evident in the data. The
continued slump in the housing market also remains a concern.
In September, initial claims decreased and overall consumer attitudes worsened, with some
measures falling and others holding steady. Auto sales decreased slightly in September,
but overall third quarter sales matched those seen in the second quarter. Personal income
increased again in August, and spending posted its largest gain in over two years.
The deterioration of the housing market continued in August, as sales of both new and
existing homes fell. Housing starts and building permits also continued to fall, much as
they have throughout the past year and a half.
In the business sector, industrial production posted a small increase in August, and capacity
utilization eased. In September, the ISM diffusion index showed that manufacturing
expanded at a slower pace than seen in the previous month, but was still above 50.
Growth in orders for durable goods slowed in August, and orders for captial goods excluding
aircraft decreased for the fourth month in a row.
Inflation news was positive in August, as core and total price growth eased for both
consumers and producers. Oil prices, however, rose sharply in September after easing
a bit in August.
Initial claims for unemployment insurance decreased in September. Claims have
been fairly volatile over the past several months, averaging about 320 over the
past year.
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
375
06:Q4
07:Q1
07:Q2
07:Q3
320
322
317
315
350
350
325
325
300
300
275
275
Sep-04
Mar-05
Dec-04
Sep-05
Jun-05
Mar-06
Dec-05
Sep-06
Jun-06
Source: Department of Labor, Employment and Training Administration.
Mar-07
Dec-06
Sep-07
Jun-07
Overall consumer attitudes worsened somewhat in September. The Michiga
measures were essentially unchanged, and the measures from the Conference
Board all declined for the second month in a row. Confidence fell to its lowest
point in two years amid concerns over business conditions and the job market.
Consumer Sentment
Index, 1966:Q1=100
120
110
100
90
80
70
60
50
Sep-04
Index, 1966:Q1=100
Current Conditions
Sentiment
Expectations
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
120
110
100
90
80
70
60
50
Sep-07
Consumer Confidence
Index, 1985 = 100
Index, 1985 = 100
150
150
130
130
Present Situation
Confidence
110
110
90
90
70
70
Expectations
50
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
50
Sep-07
Source: University of Michigan (sentiment) and The Conference Board (confidence).
Domestic auto and light truck sales slowed a bit in September, but third-quarter
sales matched those seen in the second quarter.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
18.0
18.0
Quarterly Sales, 2007
Millions of Units, Annualized
16.0
16.0
Q1
Q2
Q3
12.6
12.3
12.3
14.0
14.0
12.0
12.0
10.0
10.0
8.0
Sep-04
Mar-05
Dec-04
Sep-05
Jun-05
Source: Bureau of Economic Analysis.
Mar-06
Dec-05
Sep-06
Jun-06
8.0
Sep-07
Mar-07
Dec-06
Jun-07
Both real disposable income and real consumption posted modest gains in
August.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
4.0
4.0
Real Disposable Income
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
Real Consumption
-2.0
-2.0
-3.0
-3.0
-4.0
Aug-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
-4.0
Aug-07
Feb-07
Nov-06
May-07
Source: Bureau of Economic Analysis.
New home sales resumed their downward path in August after briefly rising in
July, and sales of existing homes declined for the sixth consecutive month.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
8000
1500
1400
New Home Sales
7500
1300
Existing
Home Sales
1200
7000
6500
1100
1000
6000
900
5500
800
700
5000
Aug-04
Feb-05
Nov-04
Source: U.S. Census Bureau.
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
The downward trend for both housing starts and building permits continued in
August, as both measures fell to their lowest level since June 1995.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
2200
Building Permits
2000
2000
1800
1800
Housing Starts
1600
1600
1400
1400
1200
1200
Aug-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Source: U.S. Census Bureau.
Industrial production grew in August, but at a slower pace than seen over the
previous two months. Capacity utilization fell a bit from the eleven-month high
seen in July.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
2.0
82.0
81.0
1.0
80.0
0.0
79.0
78.0
-1.0
Industrial Production
77.0
Capacity Utilization
(manufacturing)
-2.0
76.0
Aug-04
Feb-05
Nov-04
Aug-05
May-05
Source: Federal Reserve Board of Governors.
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
The ISM diffusion index eased a bit further in September, but remains above 50, and
the employment component of the index improved. Both measures, however, were
down overall in the third quarter from the second quarter.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
Quarterly Averages
ISM Index
60.0
06:Q4
07:Q1
07:Q2
07:Q3
ISM
50.9
50.8
55.2
52.9
Emp.
49.6
49.8
52.0
51.1
60.0
55.0
55.0
50.0
50.0
Employment Index
45.0
45.0
Sep-04
Mar-05
Dec-04
Sep-05
Jun-05
Mar-06
Dec-05
Sep-06
Jun-06
Mar-07
Dec-06
Sep-07
Jun-07
Source: Institute for Supply Management.
In August, new orders for durable goods grew at half the rate seen the previous
month. Orders for nondefense capital goods, excluding aircraft, decreased for the
fourth straight month.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
24.0
24.0
20.0
20.0
Durable Goods,
New Orders
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
Durable Goods, New Orders
Percent change, month-over-month
-4.0
-8.0
May-07
Jun-07
Jul-07
Aug-07
-2.35
1.76
5.93
-4.86
-4.0
Capital Goods Nondefense,
Excluding Aircraft
-8.0
-12.0
-12.0
Aug-04
Feb-05
Nov-04
Source: U.S. Census Bureau.
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
Growth in overall consumer prices slowed for the third straight month in August,
while core prices also eased. Both core and overall producer prices also slowed.
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
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
0.0
Aug-07
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
Producer Price Index
Producer Price Index,
6.0
6.0
excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07
Source: Bureau of Labor Statistics.
Oil prices jumped in September, averaging nearly $80 per barrel for the month.
Domestic Spot Oil Price
Dollar per Barrel
Dollar per Barrel
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
Sep-04
Mar-05
Dec-04
Sep-05
Jun-05
Mar-06
Dec-05
Source: West Texas Intermediate, Wall Street Journal.
Sep-06
Jun-06
Mar-07
Dec-06
Sep-07
Jun-07
Real GDP growth was revised down in the final second quarter estimate, due
primarily to an upward revision to imports and a downward revision to nonresidential
structures that were partly offset by an upward revision equipment and software.
Real GDP
6.0
4.0
2.0
0.0
04:Q2
04:Q4
05:Q2
05:Q4
06:Q2
06:Q4
07:Q2
Revisions to Second Quarter Real GDP
Description
Real GDP
Preliminary
Final
4.0
3.8
Consumption
1.4
1.4
Business Investment
11.1
11.0
4.3
4.7
Equipment & Software
Residential Investment
-11.6
-11.8
Government
4.1
4.1
Exports
7.6
7.5
Imports
-3.2
-2.7
Final Sales
3.7
3.6
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy's second
quarter rebound wasn't quite as strong as previously reported, and other data suggest
a return to below potential growth in the third quarter. Financial markets have shown
some improvement recently, but effects of the recent turmoil are still evident in the data.
The continued slump in the housing market also remains a concern.
Short-Term Interest Rates
Percent
8.0
Percent
8.0
Discount Window Primary Credit
7.00
7.0
6.50
6.25
6.25
6.25
7.0
6.25
6.01
6.00
6.0
Federal Funds Rate
(effective rate)
5.53
5.50
6.0
Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
Sep-05
Dec-05
Mar-06
Jun-06
Source: Federal Reserve Board of Governors.
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
October 11, 2007
Current Economic Developments - Addendum: Data released in the past week
In September, nonfarm payrolls added 110,000 jobs and the unemployment rate increased
to 4.7%. August payrolls were revised upward to show an increase of 89,000 jobs, as
opposed to the 4,000 job decrease originally estimated. July payrolls were revised up
by 25,000 to an increase of 93,000 jobs. Overall in the third quarter, payrolls increased by
an average of 97,000 jobs per month, down from the second quarter estimate of 126,000.
Wholesale inventories rose 0.1% in August, following a 0.2% increase in July. Wholesale
trade increased 0.4% in August, after rising a revised 0.2% in July, previosuly reported as
a 0.1% increase.
Redbook sales increased 0.3% overall in September, compared to August. Sales in the
week ending October 6th were 1.8% higher than during the same period last year. Oil
prices fell slightly during the past week, averaging $80.4 per barrel compared to last week's
average of $81.0.
Payroll employment posted a moderate gain in September, and revisions to the
prior two months' growth estimates resulted in a net addition of 118,000 new jobs.
The unemployment rate rose one-tenth of a percentage point in September to 4.7%.
Nonfarm Payroll Employment
Change from Previous Month
375
300
Unemployment Rate
Rate
5.4
5.2
5
225
4.8
150
4.6
75
0
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Dec-05
Jun-06
Dec-06
Jun-07
Source: Bureau of Labor Statistics.
4.4
4.2
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Dec-05
Jun-06
Dec-06
Jun-07