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The
President’s
Report to the
Board of
Directors
May 31, 2007
CURRENT ECONOMIC DEVEOPMENTS - May 31, 2007
Data released since your last Directors' meeting show the economy is growing at its slowest
pace in over four years. Weaker business investment and the continued real estate slump
have hampered growth through the early part of the year, but there are signs inflation is
being contained and consumers continue to spend.
In May, initial claims decreased to their lowest level in over a year, and consumer attitudes
improved following recent deterioration.
The housing market showed mixed signs in April. Sales of new homes posted a strong
increase, but existing home sales fell for the second straight month. In the manufacturing
sector, industrial production and capacity utilization both improved. New orders for both
durable goods and for nondefense capital goods, excluding aircraft, also rose after falling
the previous two months.
Inflation eased a bit in April, as both core consumer and producer prices slowed for the
second month in a row. Total consumer prices also slowed, while total producer prices were
unchanged. Oil prices were essentially flat in May.
During the first quarter, real growth was weaker than originally thought. The downward
revision primarily reflected a downward revision to private inventory investment and an
upward revision to imports that were partly offset by an upward revision to personal
consumption expenditures.
Initial claims for unemployment insurance fell sharply through late May, reaching
their lowest point since February of last 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
Four-week moving average,
week ending May 26
304,500
275
275
May-04
Nov-04
May-05
Nov-05
May-06
Nov-06
May-07
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Source: Department of Labor, Employment and Training Administration.
Consumer confidence and sentiment both improved in May, offsetting the decreases
seen in April. Expectations of future economic conditions also improved, while
assessments of the current situation were contradictory.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
140
Consumer
Expectations
Future
Expectations
Present
Situation
Current
Conditions
110
130
100
120
Consumer
Confidence
110
Consumer
Sentiment
90
100
80
90
80
70
70
60
May-05
Nov-05
May-06
Nov-06
May-07
May-05
Nov-05
May-06
Nov-06
60
May-07
Source: The University of Michigan.
Source: The Conference Board.
New home sales surged in April, nearly offsetting the losses seen during the
previous three months. Sales of existing homes have followed an opposite pattern,
falling for a second straight month in April after rising earlier in the year.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
7400
1500
Existing Home Sales
7200
1400
New Home Sales
7000
1300
6800
1200
6600
1100
6400
6200
1000
6000
900
5800
800
5600
Apr-04
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Apr-07
Jan-07
In April, housing starts increased for the second consecutive month, but building
permits fell to their lowest level in nearly ten years.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
2200
Building Permits
2000
2000
1800
1800
1600
1600
Housing Starts
1400
1400
1200
1200
Apr-04
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Source: U.S. Census Bureau.
Industrial production continued its pattern of alternating gains and losses in April,
posting a solid gain. Capacity utilization also rose.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
82.0
1.5
1.0
Industrial Production
81.0
0.5
80.0
0.0
79.0
-0.5
78.0
-1.0
77.0
-1.5
76.0
Capacity Utilization
(manufacturing)
-2.0
Apr-04
75.0
Oct-04
Jul-04
Apr-05
Jan-05
Source: Federal Reserve Board of Governors.
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Apr-07
Jan-07
Orders of both durable goods and nondefense capital goods, exculding aircraft,
increased in April, after falling the previous few months.
New 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
Durable Goods, New Orders
Percent change, month-over-month
Capital Goods Nondefense,
Excluding Aircraft
-5.0
-10.0
Apr-04
Oct-04
Jul-04
Jan-07
Feb-07
Mar-07
Apr-07
-6.12
0.53
5.05
0.60
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
-5.0
-10.0
Apr-07
Oct-06
Jul-06
Jan-07
Source: U.S. Census Bureau.
Inflation slowed a bit more in April, with core consumer prices down more than half
a percentage point from the 10-year high reached seven months ago. Total inflation
for consumers also slowed, while producer price growth held steady.
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
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
1.0
Apr-06
Producer Price Index
Percent Change, Year-Over-Year
Aug-06
Dec-06
0.0
Apr-07
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
Apr-04
Aug-04
Dec-04
Source: Bureau of Labor Statistics.
Apr-05
Aug-05
Dec-05
0.0
Apr-06
Aug-06
Dec-06
-2.0
Apr-07
Oil prices were little changed in May.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
May-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
Source: Wall Street Journal.
Real GDP in the first quarter was weaker than originally thought. The downward
revision primarily reflected a downward revision to private inventory investment
and an upward revision to imports that were partly offset by an upward revision to
personal consumption expenditures.
Revisions to First Quarter Real GDP
Description
Advanced
Preliminary
1.3
0.6
Personal Consumption
3.8
4.4
Business Investment
2.0
2.9
Real GDP
Equipment and Software
Residential Investment
1.9
2.0
-17.0
-15.4
Government
0.9
1.0
Exports
-1.2
-0.6
Imports
2.3
5.7
Final Sales
1.6
1.6
Real GDP
6.0
5.0
4.0
3.0
2.0
1.0
0.0
04:Q1
04:Q3
Source: Bureau of Economic Analysis.
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
Overall, data released since your last Directors' meeting show the economy is
growing at its slowest pace in over four years. Weaker business investment and the
continued real estate slump have hampered growth through the early part of the year,
but there are signs inflation is being contained and consumers continue to spend.
Percent
Short-Term Interest Rates
7.0
Discount Window Primary Credit
6.5
6.50
6.0
5.5
6.25
6.25
6.25
6.25
6.25
6.25
6.00
Jan-07 Feb-07 Mar-07 Apr-07 May-07
Federal Funds Rate
(effective rate)
5.0
4.5
4.0
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Source: Federal Reserve Board of Governors.
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
June 7, 2007
Current Economic Developments - Addendum: Data released in the past week
In May, nonfarm payrolls added 157,000 jobs and the unemployment rate held staedy at
4.6%. April payrolls were revised to show an increase of 80,000 jobs, 8,000 fewer than the
original estimate of an 88,000 job increase, and March payrolls were revised to show an
increase of 175,000 jobs, 2,000 less than previously estimated.
Domestic auto and light truck sales decreased in May, to an annualized rate of 12.3 million
units and total vehicle sales for May were 16.1 million, down slightly from April's estimate of
16.2 million. Also in May, the ISM index rose for the second straight month and the
employment index eased, but remained above 50.
In April, real consumption rose after being flat in March. The increase came despite the
first decrease in real disposable income in almost a year. Manufacturers' orders rose 0.3%
in April, after rising 4.1% in March. Total shipments increased 1.0% in April, while shipments
of nondefense capital goods, excluding aircraft, rose 1.0%.
Productivity was revised downward in the first quarter to an increase of 1.0%, originally
reported as a 1.7% rise. Consumer sentiment was revised down to 88.3 in May, from the
mid-month estimate of 88.7. Still, it was an improvement on the final April estimate of 87.1.
Payroll employment posted a strong gain in May, while revisions to the prior
two months' estimates resulted in a net reduction of 10,000 jobs. The
unemployment rate was unchanged in May at 4.5%.
Unemployment Rate
Nonfarm Payroll Employment
Change from Previous Month
Rate
5.2
400
350
5
300
250
4.8
200
4.6
150
100
4.4
50
0
May-05
Jan-06
Sep-05
Sep-06
May-06
Source: Bureau of Labor Statistics.
May-07
Jan-07
May-05
Jan-06
Sep-05
4.2
May-07
Sep-06
May-06
Jan-07
Domestic auto and light truck sales declined slightly in May, but held close to their
one-year average.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
18.0
16.0
14.0
12.0
10.0
8.0
MayMay-04 Sep-04
Sep-04 Jan-05
Jan-05 May-05
May-05 Sep-05
Sep-05 Jan-06
Jan-06 May-06
May-06
Source: Bureau of Economic Analysis.
Sep-06
Sep-06 Jan-07
Jan-07 May-07
May-07
The ISM manufacturing index rose a bit in May, while the employment component
fell. The price index decreased after rising for four straight months.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
90.0
90.0
Price Index
80.0
80.0
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
Employment Index
40.0
40.0
May-04
Nov-04
Aug-04
May-05
Feb-05
Source: Institute for Supply Management.
Nov-05
Aug-05
May-06
Feb-06
Nov-06
Aug-06
May-07
Feb-07
In April, real consumption rebounded from a flat March, despite the first decrease in
real disposable income in nearly a year.
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
Apr-04
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
-5.0
Apr-07
Oct-06
Jul-06
Jan-07
Source: Bureau of Economic Analysis.
Productivity increased in the first quarter, at about half the rate as seen in the fourth
quarter. Growth in both hourly compensation and unit labor costs slowed dramatically
in the first quarter.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
Compensation Per Hour
12.0
9.0
12.0
9.0
Output Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
-6.0
04:Q1
04:Q3
04:Q2
05:Q1
04:Q4
Source: Bureau of Labor Statistics.
05:Q3
05:Q2
06:Q1
05:Q4
06:Q3
06:Q2
07:Q1
06:Q4