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The
President’s
Report to the
Board of
Directors
September 6, 2007
CURRENT ECONOMIC DEVELOPMENTS - September 6, 2007
Data released since your last Directors' meeting show the economy grew faster in
the second quarter than originally estimated. The slow housing market and related
credit issues are still a concern, but recent data shows positive news in consumer
spending and business investment.
In August initial claims increased, the byproduct of consistent weekly gains.
Consumer attitudes fell in August due primarily to financial market turmoil,
offsetting the gains seen in July. Despite the reduced confidence, auto sales
rebounded in August to register their strongest sales in six months. Real
consumption expenditures grew moderately in July, aided by higher incomes.
While the housing market remains weak, there was some positive news in July.
New home sales increased, and sales of existing homes were esentially flat.
Housing starts and permits, however, both decreased. In the manufacturing sector,
the ISM index eased a bit and growth in industrial production slowed in July, but
capacity utilization reached a nine month high. Business investment rebounded in
July, as durable goods orders posted their largest gain in nearly a year.
Inflation remained in check in July, as total consumer prices eased and core CPI
was flat. Oil prices fell, offsetting some of the increase seen over the previous
two months. Growth in hourly compensation and unit labor costs also slowed.
Initial claims for unemployment insurance increased in August, but were only
slightly higher than their one-year average.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
425
425
400
400
375
375
350
350
325
325
300
300
275
275
Aug-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Source: Department of Labor, Employment and Training Administration.
Feb-07
Nov-06
Aug-07
May-07
Consumer attitudes deteriorated in August, as sentiment and confidence both fell
to their lowest points of the year. Measures of expectations and current conditions
also fell.
Consumer Sentiment
Consumer Confidence
Index, 1985 = 100
Index, 1966:Q1 = 100
120
150
Present
Situation
Current
Conditions
110
140
130
100
120
Consumer
Confidence
110
Consumer
Sentiment
90
100
80
90
Future
Expectations
70
60
Aug-05
Feb-06
Aug-06
Feb-07
80
Consumer
Expectations
Aug-07
Aug-05
Feb-06
Aug-06
70
Feb-07
60
Aug-07
Source: The University of Michigan (left panel) and The Conference Board (right panel).
Domestic auto and light truck sales rebounded in August, achieving their highest
sales since February.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
18.0
16.0
14.0
12.0
10.0
8.0
AugAug-04Dec-04
Dec-04Apr-05
Apr-05Aug-05
Aug-05Dec-05
Dec-05 Apr-06
Apr-06 Aug-06
Aug-06Dec-06
Dec-06 Apr-07
Apr-07 May-07
Source: Bureau of Economic Analysis.
Aug-07
Real consumption posted a moderate gain in July, following no change in June,
but its year-over-year growth was the lowest in a year. Real disposable income
grew in July at its fastest pace since February.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
1.5
6.0
Real Consumption
1.0
4.0
0.5
2.0
0.0
0.0
-0.5
-2.0
Real Consumption
Percent change, year-over-year
-1.0
Real Disposable Income
Apr-07
May-07
Jun-07
Jul-07
3.02
2.97
2.85
2.51
-4.0
-1.5
-6.0
Jul-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Source: Bureau of Economic Analysis.
While the housing market remains weak, July sales data did not show any further
deterioration. New home sales improved a bit, and sales of existing homes were
essentially unchanged.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1500
8000
New Home Sales
1400
7500
1300
Existing Home Sales
7000
1200
1100
6500
1000
6000
900
5500
800
700
5000
Jul-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Source: U.S. Census Bureau (new home sales) and National Association of Realtors (existing sales).
Jul-07
Apr-07
Housing starts fell in July, more than offsetting the increase seen in June. Building
permits also fell again, dropping to their lowest level since January 1997.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
Housing Starts
2200
2200
2000
2000
Building Permits
1800
1800
1600
1600
1400
1400
1200
1200
Jul-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Source: U.S. Census Bureau.
The ISM manufacturing index eased a bit further in August, but remains above 50.
Also in August, the employment index increased for the first time since April while
the price index fell for the fourth straight month.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
90.0
90.0
80.0
80.0
Price Index
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
Employment Index
40.0
40.0
Aug-04
Feb-05
Nov-04
Aug-05
May-05
Source: Institute for Supply Management.
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Aug-07
May-07
In July, industrial production eased and capacity utilization increased, reaching a
nine month high.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
2.0
82.0
Industrial Production
1.5
81.0
1.0
80.0
0.5
0.0
79.0
-0.5
78.0
-1.0
77.0
Capacity Utilization
(manufacturing)
-1.5
-2.0
76.0
Jul-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Source: Federal Reserve Board of Governors.
New orders for durable goods surged in July, rebounding from a minor decrease
in June. Orders of nondefense capital goods, excluding aircraft, fell slightly in July.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
20.0
20.0
Durable Goods,
New Orders
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Nondefense Capital Goods,
Excluding Aircraft
-5.0
-5.0
Jul-04
Jan-05
Oct-04
Source: U.S. Census Bureau.
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Jul-07
Apr-07
Consumer prices were relatively stable in July, as total prices eased slightly and core
prices were flat. Both measures of procducer prices, however, accelerated.
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
Jul-04
Nov-04
Mar-05
1.0
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
0.0
Jul-07
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
6.0
Producer Price Index
6.0
4.0
4.0
2.0
2.0
Producer Price Index,
excluding food and energy
0.0
-2.0
Jul-04
Nov-04
Mar-05
Jul-05
0.0
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
-2.0
Jul-07
Source: Bureau of Labor Statistics.
Oil prices eased a bit in August, following the significant increases seen the previous
two months.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars per Barrel
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
Aug-04
Feb-05
Nov-04
Source: Wall Street Journal.
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
30.0
Aug-07
Feb-07
Nov-06
May-07
Productivity increased in the second quarter, at nearly four times the rate seen in
the first quarter. Growth in both hourly compensation and unit labor costs continued
to slow in the second quarter.
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
-3.0
Output
Per Hour
Unit Labor Costs
-3.0
-6.0
-6.0
04:Q2
04:Q4
04:Q3
05:Q2
05:Q1
05:Q4
05:Q3
06:Q2
06:Q1
06:Q4
06:Q3
07:Q2
07:Q1
Source: Bureau of Labor Statistics.
Real GDP growth was revised up in the second quarter. The upward revision
primarily reflected upward revisions to nonresidential structures, to equipment and
software investment, to exports, and a downward revision to imports that were
partly offset by a downward revision to residential fixed investment.
Revisions to Second Quarter Real GDP
Description
Real GDP
Advanced
Preliminary
3.4
4.0
Personal Consumption
1.3
1.4
Business Investment
8.1
11.1
2.3
4.3
Equipment and Software
Government
4.2
4.1
Residential
-9.3
-11.6
Exports
6.4
7.6
Imports
-2.6
-3.2
Final Sales
3.2
3.7
Real GDP
6.0
5.0
4.0
3.0
2.0
1.0
0.0
04:Q2
04:Q4
Source: Bureau of Economic Analysis.
05:Q2
05:Q4
06:Q2
06:Q4
07:Q2
Overall, data released since your last Directors' meeting show the economy grew
faster in the second quarter than originally estimated. The slow housing market and
related credit issues are still a concern, but recent data shows positive news in
consumer spending and business investment.
Percent
Short-Term Interest Rates
7.0
Discount Window Primary Credit
6.0
6.25
6.25
6.25
7.00
6.50
6.25
6.01
6.00
5.50
Apr-07 May-07 Jun-07 Jul-07 Aug-07
Federal Funds Rate
(effective rate)
5.0
4.0
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Source: Federal Reserve Board of Governors.
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
September 13, 2007
Current Economic Developments - Addendum: Data released in the past week
In August, nonfarm payrolls declined by 4,000 jobs and the unemployment rate was
unchanged at 4.7%. July payrolls were revised to show an increase of 68,000 jobs, 24,000
fewer than the original estimate of a 92,000 job increase, and June payrolls were revised to
show an increase of 69,000 jobs, 57,000 less than the previously reported increase of
126,000. The August decrease was the first payroll reduction since August 2003.
The U.S. foreign trade deficit narrowed by 0.3% in July to $59.25 billion. Exports increased
2.7%, led by high-value capital goods, offsetting a 1.8% increase in imports largely caused
by higher oil prices.
Wholesale inventories increased 0.2% in July, after rising a revised 0.3% the previous
month. June inventories were first reported as rising 0.5%. Wholesale trade rose 0.1%
in July, following an increase of 0.4% in June.
Redbook sales increased 1.1% through the first week of September, compared to August.
Sales were 2.8% higher than during the same period last year. Oil prices rose over the
past week, averaging 76.9 dollars per barrel, compared to last week's average of 74.0.
Payroll employment decreased by 4,000 in August, and revisions to the prior two
months' estimates resulted in 81,000 fewer new jobs than originally reported.
Still, the unemployment rate held steady in August at 4.6%.
Nonfarm Payroll Employment
Change from Previous Quarter, Monthly Average
400
Unemployment Rate
Rate
5.4
350
5.2
300
250
5
200
4.8
150
100
4.6
50
4.4
0
-50
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Nov-05
May-06
Nov-06
May-07
Source: Bureau of Labor Statistics.
4.2
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Nov-05
May-06
Nov-06
May-07