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The
President’s
Report to the
Board of
Directors
November 30, 2006
CURRENT ECONOMIC DEVELOPMENTS - November 30, 2006
Data released since your last Directors' meeting show the economy slowed in the
third quarter, but not as dramatically as originally estimated. The ongoing correction
in the housing market is likely to continue to restrain growth, but there is good news
to be found in recent employment, inflation, and business investment data.
In November, initial claims for unemployment insurance increased while consumer
attitudes eased. In October, both real consumption and real disposable income
posted solid gains.
The housing market was mixed in October, as new home sales fell and existing
home sales increased a bit. Housing starts and building permits continued their
year-long regression. In the manufacturing sector, industrial production rebounded
in October, but capacity utilization eased. Orders for both durable goods and
nondefense capital goods, excluding aircraft, slowed in October to offset the strong
growth seen in September.
October brought more evidence of stablizing prices, as core CPI slowed for the first
time since February. Overall consumer prices slowed further, and total producer
prices fell. Oil prices held steady in November, a good sign heading into the cold
winter months.
Initial claims for unemployment insurance increased in November, due in part to
seasonal variations that are common during the holiday season.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
400
400
375
Four-week moving average,
week ending November 25,
325,000
375
350
350
325
325
300
300
275
275
Nov-03
May-04
Nov-04
May-05
Nov-05
May-06
Nov-06
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes eased a bit in November. For sentiment, the decrease
represented a reversal from the prior months' improvements, but for confidence it
was the second consecutive monthly decline.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
Consumer
Expectations
140
Future
Expectations
Current
Conditions
Present
Situation
110
130
120
Consumer
Confidence
100
110
Consumer
Sentiment
100
90
90
80
80
70
70
60
50
Nov-04
May-05
Nov-05
May-06
Nov-06
Nov-04
May-05
Nov-05
May-06
60
Nov-06
Source: The University of Michigan.
Source: The Conference Board.
Real personal consumption posted a solid gain in October, aided by the fifth
consecutive monthly increase in disposable incomes.
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
-2.0
Oct-03
Apr-04
Jan-04
Oct-04
Jul-04
Source: Bureau of Economic Analysis.
Apr-05
Jan-05
Oct-05
Jul-05
-4.0
-5.0
Oct-06
Apr-06
Jan-06
Jul-06
Home sale data was mixed in October. Existing home sales managed their first
increase since February, but sales of new homes resumed their decline after rising
in August and September.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
8000
New Home Sales
Existing Home Sales
1300
7500
1200
7000
1100
6500
1000
6000
900
Oct-03
Apr-04
Jan-04
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
5500
Oct-06
Apr-06
Jan-06
Jul-06
Source: U.S. Census Bureau.
In October, housing starts resumed their year-long decline, following a brief rebound
in September. Future starts are likely to continue to fall, as building permits fell for a
ninth consecutive month in October.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
Building Permits
2200
2200
2000
2000
1800
1800
Housing Starts
1600
1600
1400
1400
Oct-03
Apr-04
Jan-04
Source: U.S. Census Bureau.
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Industrial production rebounded in October from a September dip, while capacity
utilization eased for the second month in a row.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
82.0
1.5
Industrial Production
81.0
1.0
80.0
0.5
79.0
0.0
78.0
-0.5
77.0
76.0
-1.0
75.0
Capacity Utilization
(manufacturing)
-1.5
-2.0
Oct-03
Apr-04
Jan-04
Oct-04
Jul-04
74.0
Apr-05
Jan-05
Oct-05
Jul-05
73.0
Oct-06
Apr-06
Jan-06
Jul-06
Source: Federal Reserve Board of Governors.
New orders for durable goods slowed in October, offsetting strong gains seen the
previous month. Orders for nondefense capital goods, excluding aircraft, also
slowed.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
24.0
24.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
20.0
Durable Goods,
New Orders
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
Durable Goods, New Orders
Percent change, month-over-month
0.0
-4.0
Aug-06
Sep-06
Oct-06
0.04
8.72
-8.32
0.0
-4.0
-8.0
-8.0
Oct-03
Apr-04
Jan-04
Source: U.S. Census Bureau.
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Oct-06
Jul-06
Inflation eased in October, as core CPI slowed for the first time since February and
total prices grew at their slowest pace in over three years. At the wholesale level,
total prices fell and core PPI 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
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
Oct-05
Feb-06
1.0
Jun-06
0.0
Oct-06
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
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
Oct-05
0.0
Feb-06
Jun-06
-2.0
Oct-06
Source: Bureau of Labor Statistics.
Oil prices held relatively steady in November, after falling to a nearly one-year low
in October.
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
30.0
20.0
20.0
Nov-03
May-04
Feb-04
Source: Wall Street Journal.
.
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
Nov-06
Aug-06
Real GDP in the third quarter was stronger than originally thought. The upward
revision primarily reflected a downward revision to imports and upward revisions to
private inventory investment and PCE for services that were partially offset by a
downward revision to PCE for durable goods.
Revisions to Third Quarter Real GDP
Description
Advance
Preliminary
1.6
2.2
Real GDP
Personal Consumption
3.1
2.9
Business Investment
8.6
10.0
Equipment and Software
6.4
7.2
-17.4
-18.0
Government
2.0
2.2
Exports
6.5
6.3
Imports
7.8
5.3
Final Sales
1.7
2.1
Residential Investment
Real GDP
8.0
6.0
4.0
2.0
0.0
03:Q3 03:Q4 04:Q1 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy slowed
in the third quarter, but not as dramatically as originally estimated. The ongoing
correction in the housing market is likely to continue to restrain growth, but there is
good news to be found in recent employment, inflation, and business investment data.
Percent
Short-Term Interest Rates
7.0
Discount Window
Primary Credit
6.0
6.50
6.25
5.0
6.25
6.25
6.25
6.25
6.25
Federal Funds Rate
(effective rate)
6.00
Jul-06 Aug-06 Sep-06 Oct-06 Nov-06
4.0
3.0
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Source: Federal Reserve Board of Governors.
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
December 7, 2006
Current Economic Developments - Addendum: Data released in the past week
Auto sales slowed in November to an annualized rate of 16.0 million units, down from
October's estimated rate of 16.1 million. Domestic sales showed a similar decline, to
12.2 million units in November from 12.3 the previous month.
Productivity was revised slightly higher in the third quarter, rising 0.2% instead of the
initial estimate of no change. The higher number reflected gains of 2.7% in output and
1.5% in total hours worked.
The ISM index dropped below 50 in November for the first time in over three-and-a-half
years. The employment index also declined, falling below 50 for the third time this year.
Redbook sales decreased 1.8% in the first week of December, compared to November.
Sales were 2.4% higher than during the same period last year. Oil prices rose during the
past week, averaging 62.9 dollars per barrel compared to last week's average of 59.9.
Due to the timing of the survey, November's employment data was not published last week,
and instead will be released tomorrow. Market expectations are that nonfarm payrolls will
increase by about 110,000 and the unemployment rate will rise to 4.5%.
Total auto and light truck sales slowed in November, equaling the 12-month low
set in August.
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
Nov-03
May-04
Feb-04
Nov-04
Aug-04
Source: Bureau of Economic Analysis.
May-05
Feb-05
Nov-05
Aug-05
10.0
Nov-06
May-06
Feb-06
Aug-06
Productivity was revised to show marginal growth in the third quarter, after originally
being seen unchanged. Unit labor costs and total compensation both grew, but at
slower rates than first reported. Both wage measure were also revised sharply
downward for 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
Output Per Hour
9.0
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
Unit Labor Costs
-6.0
03:Q3
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
-6.0
06:Q3
Source: Bureau of Labor Statistics.
In November, the ISM diffusion index fell for the fourth consecutive month, dropping
below 50 for the first time since April 2003. The employment index also declined
in November, offsetting the prior months' gain.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
ISM Index
60.0
60.0
55.0
55.0
50.0
50.0
Employment Index
45.0
45.0
40.0
40.0
Apr-03
Nov-06
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Source: Institute for Supply Management.