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The
President’s
Report to the
Board of
Directors
April 3, 2008
Current Economic Developments - April 3, 2008
Data released since your last Directors' meeting suggest growth during the first quarter will
be even slower than in the fourth quarter. The combined effects of the weak housing market,
the soft labor market, cautious consumers, and slower business investment have brought the
economy to very slow, and possibly negative, growth.
In March, initial claims for unemployment insurance rose further, bringing their first quarter
average to a four year high. Consumer attitudes continued to worsen, falling to levels
previously seen only during times of recession, and total auto sales fell to their lowest point
in over two years. In February, real consumption was unchanged despite an increase in real
disposable incomes.
Struggles in the housing market persisted in February. Sales of existing homes was the
only measure to display any improvement, although new home sales and housing starts
experienced only minor decreases.
In the business sector, both the ISM manufacturing and employment indices improved
in March, but remain below 50. In February, industrial production and capacity utilization
both posted moderate declines, while new orders for durable goods slowed and orders for
nondefense capital goods, excluding aircraft, were flat.
Headline inflation slowed for both consumers and producers in February, but remained
elevated. Core prices also slowed for consumers, but accelerated a bit for producers.
Oil prices continued to rise in March, establishing yet another record high.
Initial claims rose sharply in March, reaching their highest level since September
2005.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
425
425
Initial Claims for Unemployment Insurance
Quarterly Averages
400
375
07:Q2
07:Q3
07:Q4
08:Q1
315
317
337
353
400
375
350
350
325
325
300
300
275
Mar-05
Sep-05
Jun-05
Mar-06
Dec-05
Sep-06
Jun-06
Mar-07
Dec-06
Source: Department of Labor, Employment and Training Administration.
275
Mar-08
Sep-07
Jun-07
Dec-07
Measures of consumer attitudes continued to deteriorate in March, falling to levels
not seen since past recessions. Consumers are primarily worried about the state of
the economy as a whole, but are also worried about job market conditions and the
effects of higher food and energy prices on their financial situation.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
160
Consumer
Expectations
Present
Situation
140
Current
Conditions
Future
Expectations
110
100
Consumer
Confidence
120
Consumer
Sentiment
90
100
80
80
70
60
60
40
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Mar-06
Sep-06
Mar-07
Sep-07
50
Mar-08
Source: The University of Michigan.
Source: The Conference Board.
Real disposable income grew for the third consecutive month in February, but real
consumption was unchanged. Consumption may continued to be hampered as
consumers have begun concentrating on paying off debt and building their savings
due to their concerns over the state of the economy.
Percent Change, Previous Month
Real DPI and Consumption
Percent Change, Previous Month
3.0
3.0
2.0
Real Consumption
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
Real Disposable Income
-3.0
Feb-05
Aug-05
May-05
Feb-06
Nov-05
Source: Bureau of Economic Analysis.
Aug-06
May-06
Feb-07
Nov-06
-3.0
Feb-08
Aug-07
May-07
Nov-07
Total auto and light truck sales eased in March, and first quarter sales were their
lowest since the third quarter of 1998 when sales were 14.8 million.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
22.0
22.0
Quarterly Sales
Millions of Units, Annualized
20.0
07:Q2
07:Q3
07:Q4
08:Q1
16.0
15.9
16.1
15.2
20.0
18.0
18.0
16.0
16.0
14.0
14.0
12.0
Mar-05
Sep-05
Jun-05
Mar-06
Dec-05
Sep-06
Jun-06
Mar-07
Dec-06
12.0
Mar-08
Sep-07
Jun-07
Dec-07
Source: Bureau of Economic Analysis.
The housing market continued to struggle in February, although existing home
sales did post their first significant increase since last February.
New Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1600
1400
1200
1000
800
600
400
Feb-05
Aug-05
May-05
Feb-06
Nov-05
Aug-05
May-05
Feb-07
Nov-06
Aug-07
May-07
Existing Home Sales
Thousands of Units, Annualized
7500
7000
6500
6000
5500
5000
4500
Feb-05
Aug-06
May-06
Feb-06
Nov-05
Aug-06
May-06
Nov-07
Thousands of Units, Annualized
Feb-07
Nov-06
1600
1400
1200
1000
800
600
400
Feb-08
7500
7000
6500
6000
5500
5000
4500
Feb-08
Aug-07
May-07
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Nov-07
Housing starts were essentially unchanged in February, and building permits
continued to fall. The prolonged slump in the housing market has brought both
these measures down to a level half of that seen two years ago.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
2200
Building Permits
2000
2000
Housing Starts
1800
1800
1600
1600
1400
1400
1200
1200
1000
1000
800
Feb-05
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
800
Feb-08
Aug-07
May-07
Nov-07
Source: U.S. Census Bureau.
The ISM manufacturing and employment indices increased in March, but both
measures remain below 50. On a quarterly basis, the ISM index was little changed
in the first quarter from the fourth, but the employment index dropped despite the
improvement seen in March.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65
Quarterly Averages
07:Q2
07:Q3
07:Q4
08:Q1
ISM
53.0
51.3
49.6
49.2
Emp.
51.5
50.9
49.6
47.4
ISM Index
60.0
60
55.0
55
50.0
50
45.0
45
Employment Index
40.0
40
Mar-05
Sep-05
Jun-05
Mar-06
Dec-05
Source: Institute of Supply Management.
Sep-06
Jun-06
Mar-07
Dec-06
Sep-07
Jun-07
Mar-08
Dec-07
Industrial production fell in February, offsetting the gains seen over the past three
months. Capacity utilization also declined in February, falling to its lowest level
since November 2006.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
80.5
2.0
Industrial Production
80.0
1.0
79.5
0.0
79.0
78.5
-1.0
Capacity Utilization
(manufacturing)
-2.0
Feb-05
78.0
77.5
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: Federal Reserve Board of Governors.
New orders for durable goods decelerated in February (year-over-year), while orders
for nondefense captial goods, excluding aircraft, were essentially flat. On a
month-over-month basis, both measures decreased for the second month in a row.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
20.0
20.0
Durable Goods,
New Orders
16.0
16.0
Capital Goods Nondefense,
Excluding Aircraft
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
Percent Change, Previous Month
-4.0
-8.0
Dec-07
Jan-08
Feb-08
Durables
4.39
-4.43
-1.14
Ex. Air.
5.16
-0.96
-2.39
-12.0
-4.0
-8.0
-12.0
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: U.S. Census Bureau.
Core consumer inflation slowed in February, while core producer inflation picked up
a bit. Total prices slowed for both consumers and producers.
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
1.0
2.0
Consumer Price Index,
excluding food and energy
0.0
Feb-05
1.0
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
0.0
Feb-08
Aug-07
May-07
Nov-07
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
10.0
8.0
6.0
Producer Price Index
6.0
4.0
4.0
2.0
2.0
Producer Price Index,
0.0
0.0 excluding food and energy
-2.0
-2.0
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: Bureau of Labor Statistics.
Oil prices surged in March, rising more than $10 per barrel. The latest record high
was set on March 13, when oil prices closed at $110.33 per barrel.
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
120.0
120.0
110.0
110.0
Quarterly Averages
100.0
07:Q2
07:Q3
07:Q4
08:Q1
65.0
75.5
90.9
98.0
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
Mar-05
Sep-05
Jun-05
Source: Wall Street Journal.
Mar-06
Dec-05
Sep-06
Jun-06
Mar-07
Dec-06
Sep-07
Jun-07
Mar-08
Dec-07
Real GDP growth was unrevised in the fourth quarter, primarily reflecting a
downward revision to inventory investment and smaller downward revisions to other
GDP components that were largely offset by upward revisions to PCE and exports.
Real GDP
Annualized Percent Change
Annualized Percent Change
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
04:Q4
05:Q2
05:Q4
06:Q2
06:Q4
07:Q2
07:Q4
Fourth Quarter Revisions
Description
Real GDP
Personal Consumption
Business Investment
Equipment and Software
Residential Investment
Government
Exports
Imports
Final Sales
Preliminary
0.6
1.9
6.9
3.3
-25.2
2.2
4.8
-1.9
2.1
Revised
0.6
2.3
6.0
3.1
-25.2
2.0
6.5
-1.4
2.4
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting suggest growth during the first
quarter will be even slower than in the fourth quarter. The combined effects of the weak
housing market, the soft labor market, cautious consumers, and slower business
investment have brought the economy to very slow, and possibly negative, growth.
Percent
Short-Term Interest Rates
8.0
7.0
Federal Funds Rate
(effective rate)
6.0
Discount Window Primary Credit
6.00
5.00
4.00
3.00
2.00
5.0
5.00
4.48
3.50
Nov-07
4.0
4.83
Jan-08
3.01
Mar-08
3.0
2.0
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Source: Federal Reserve Board of Governors.
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
April 10, 2008
Current Economic Developments - Addendum: Data released in the past week
In March, nonfarm payrolls posted their largest monthly decrease in five years and the
unemployment rate rose to its highest point in two-and-a-half years. Payroll losses for
January and February were revised further negative, bringing the average number of jobs
reduced per month for 2008 to 77,000. The last time payroll employment dropped three
consecutive months was in early 2003 when the job market was still recovering from the
2001 recession.
Wholesale inventories rose 1.1% in February, following a revised increase of 1.3% in
January. Inventories were originally estimated as rising 0.8% in January. Wholesale trade
fell 0.8% in February, after rising 2.3% in January.
Redbook sales ended March up 1.6% compared to February. For the week ending April 5,
sales were 0.8% higher than during the same period last year. Oil prices increased during
the past week, averaging 105.7 dollars per barrel compared to last week's average of 104.3.
Payroll employment decreased by 80,000 in March, and downward revisions to
each of the prior two months reduced payrolls by an additional 67,000 jobs. The
unemployment rate rose three-tenths of a percentage point in March to 5.1%.
Nonfarm Payroll Employment
Change from Previous Month
300
250
Unemployment Rate
Rate
5.4
5.2
200
150
100
50
5
4.8
4.6
0
-50
-100
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Jun-06
Dec-06
Jun-07
Dec-07
Source: Bureau of Labor Statistics.
4.4
4.2
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Jun-06
Dec-06
Jun-07
Dec-07