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The
President’s
Report to the
Board of
Directors
March 1, 2007
Current Economic Developments - March 1, 2007
Data released since your last Directors' meeting show the economy grew in the fourth quarter
at a slower pace than originally estimated, but one that was still a bit stronger than seen in
the third quarter.
In February, initial claims increased as harsh winter weather affected large parts of the
country. Consumer attitudes were mixed in February, as confidence rose but sentiment
weakened. Real consumption expenditures eased in January, even as incomes picked up.
The housing market showed mixed signs in January. New home sales fell sharply, but
existing home sales increased for the second straight month and reached their highest point
since June. Housing starts and building permits both decreased in January. In the
manufacturing sector, the ISM manufacturing and employment indices both rose in
February to return to the positive side of 50. In January, industrial production fell, new
orders for durable goods eased slightly and orders for nondefense captial goods, excluding
aircraft, fell.
Headline consumer inflation decelerated in January, but core prices picked up after easing
for three consecutive months. Both core and total producer prices slowed in January while
oil prices rose in February.
During the fourth quarter, real GDP was weaker than originally thought. The downward
revision primarily reflected downward revisions to private inventory investment and to
personal consumption expenditures for goods, as well as an upward revision to imports of
goods.
Initial claims for unemployment insurance rose significantly in February, due
in part to winter storms that affected the Midwest and Northeast.
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
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
May-04
Nov-04
May-05
Nov-05
May-06
Nov-06
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes were mixed in February. Confidence rose to a five year high,
while sentiment fell to offset its January increase. The two surveys' measures of
present conditions and expectations displayed a similar disparity.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
140
Expectations
Expectations
Current
Conditions
Present
Situation
110
130
120
100
Confidence
110
Sentiment
100
90
90
80
80
70
70
60
50
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Feb-05
Aug-05
Feb-06
60
Feb-07
Aug-06
Source: The University of Michigan.
Source: The Conference Board.
In January, real consumption eased slightly despite an acceleration in real
disposable income.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
5.0
5.0
4.0
4.0
Real Consumption
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
Real Disposable Income
-3.0
-3.0
-4.0
Jan-04
Jul-04
Apr-04
Jan-05
Oct-04
Source: Bureau of Economic Analysis.
Jul-05
Apr-05
Jan-06
Oct-05
-4.0
Jan-07
Jul-06
Apr-06
Oct-06
The housing market was mixed in January. Sales of new homes fell to a four year
low, while existing home sales increased. Housing starts and building permits also
decreased in January, after rising in December.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
8000
New Home Sales
1200
7000
1000
6000
Existing Home Sales
800
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
5000
Jan-07
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2200
2400
Building Permits
2200
Housing Starts
2000
2000
1800
1800
1600
1600
1400
1400
1200
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
1200
Jan-07
Source: U.S. Census Bureau (new home sales, housing starts and building permits) and National Association of Realtors (existing sales).
The ISM manufacturing and employment indices both increased in February, once
again moving above 50. The price index also increased.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
100.0
100.0
90.0
90.0
Price Index
80.0
80.0
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
40.0
40.0
Employment Index
30.0
30.0
Feb-04
Aug-04
May-04
Feb-05
Nov-04
Source: Institute of Supply Management.
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
In January, industrial production decreased to offset the improvement seen in
December, and capacity utilization fell to its lowest level since October 2005.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
82.0
1.5
Industrial Production
1.0
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
Jan-04
75.0
Jul-04
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Source: Federal Reserve Board of Governors.
In January, growth in new orders for durable goods was essentially unchanged and
new orders for nondefense capital goods excluding aircraft fell for the first time in
nearly three years.
New Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
25.0
20.0
25.0
Durable Goods,
New Orders
Capital Goods Nondefense,
Excluding Aircraft
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
Jan-04
Jul-04
Apr-04
Source: U.S. Census Bureau.
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Jan-07
Oct-06
Inflation, as measured by total CPI, eased in January while core inflation increased
marginally. At the wholesale level, growth in both overall and core prices slowed.
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
Jan-04
May-04
Sep-04
Jan-05
May-05
1.0
Sep-05
Jan-06
May-06
Sep-06
0.0
Jan-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
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
0.0
Jan-06
May-06
Sep-06
-2.0
Jan-07
Source: Bureau of Labor Statistics.
Oil prices rose in February, following a sharp decrease in January.
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
Feb-04
Aug-04
May-04
Source: Wall Street Journal.
.
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Feb-07
Nov-06
Real GDP in the fourth quarter was weaker than originally thought. The downward
revision primarily reflected downward revisions to private inventory investment and
to personal consumption expenditures for goods, as well as an upward revision to
imports of goods.
Revisions to Fourth Quarter Real GDP
Description
Advanced
Preliminary
3.5
2.2
Real GDP
Personal Consumption
4.4
4.2
Business Investment
-0.4
-2.4
Equipment and Software
Residential Investment
-1.8
-3.2
-19.2
-19.1
Government
3.7
3.3
Exports
10.0
10.5
Imports
-3.2
-2.2
Final Sales
4.2
3.6
Real GDP
6.0
4.0
2.0
0.0
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
06:Q2
06:Q4
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy grew in
the fourth quarter at a slower pace than originally estimated, but one that was still
stronger than seen in the third quarter.
Percent
Short-Term Interest Rates
7.0
Discount Window Primary Credit
6.50
6.0
6.25
6.25
6.25
6.25
6.25
6.25
6.00
5.0
Federal Funds Rate
(effective rate)
Oct-06 Nov-06 Dec-06 Jan-07 Feb-07
4.0
3.0
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Source: Federal Reserve Board of Governors.
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
March 8, 2007
Current Economic Developments - Addendum: Data released in the past week
Total auto and light truck sales slowed in February to an annualized rate of 16.5 million units,
down from January's estimated rate of 16.7 million. Domestic sales were unchanged at a
rate of 12.7 million units.
Productivity was revised higher in the fourth quarter, rising 1.6% instead of the initial
estimate of 3.0%. The lower number reflected gains of 2.5% in output and 0.9% in total
hours worked.
Consumer sentiment closed February down from its mid-month estimates. Sentiment ended
the month at 91.3, down from the 93.3 seen in the middle of February. Expectations fell by
a similar amount, finishing the month at 81.5 after registering an 83.7 earlier.
Redbook sales decreased 1.1% in February, compared to January. Sales were 2.9%
higher than during the same period last year. Oil prices rose during the past week,
averaging 61.2 dollars per barrel compared to last week's average of 60.5.
Due to the timing of the survey, February's employment data was not published last week,
and instead will be released tomorrow. Nonfarm payrolls are expected to increase by
100,000, with the unemployment rate holding at 4.6%.
Total auto and light truck sales slowed in February, but were still slightly higher
than 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
Feb-04
Aug-04
May-04
Feb-05
Nov-04
Source: Bureau of Economic Analysis.
Aug-05
May-05
Feb-06
Nov-05
10.0
Feb-07
Aug-06
May-06
Nov-06
Productivity rose in the fourth quarter, but by less than originally estimated. Both
unit labor costs and total compensation accelerated significantly during the 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
-6.0
03:Q4
-3.0
Unit Labor Costs
04:Q2
Source: Bureau of Labor Statistics.
04:Q4
05:Q2
05:Q4
06:Q2
-6.0
06:Q4