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The
President’s
Report to the
Board of
Directors
October 5, 2006
CURRENT ECONOMIC DEVELOPMENTS - October 5th, 2006
Data released since your last Directors' meeting show the economy's second quarter
slowdown was more pronounced than previously reported, and suggest the soft patch will
continue into the third quarter. Signs that inflation is stabilizing and some positive news in
the housing market may aid in achieving the goal of a 'soft landing' for the economy.
In September, initial claims decreased marginally, equaling their 12-month average.
Consumer attitudes mostly improved, following an August dip. Auto sales increased in
September, almost fully offsetting the prior month's drop. Personal income increased
slightly in August, but spending decreased for the first time in almost one year.
The housing market displayed mixed signs in August, as new home sales increased and
existing home sales held mostly steady. Housing starts and building permits both continued
to fall, much as they have throughout the year.
In the business sector, industrial production posted a small loss in August, as did capacity
utilization. In September, the ISM diffusion index eased and its employment component
fell below 50. Orders for both durable goods and nondefense captial goods, excluding
aircraft, slowed in August, offsetting the gains seen the previous month.
Total consumer prices slowed further in August, but core prices rose after holding steady in
July. Oil prices fell more than nine dollars per barrel in September, dropping to their lowest
level since March.
Initial claims for unemployment insurance decreased slightly in September, and the
help wanted index fell one point in August to 31, its lowest point in over 45 years.
Help Wanted Index
Initial Claims
Index, 1978=100
Thousands of Units at Annual Rates
44.0
400
42.0
375
40.0
350
38.0
36.0
325
34.0
300
32.0
30.0
275
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Source: Department of Labor, Employment and Training Administration (claims) and The Conference Board (help wanted).
Consumer attitudes mostly improved in September, due primarily to lower gas prices.
While the Michigan survey showed a dropoff in feelings toward current conditions,
those same consumers judged the year-ahead prospects much more favorably than
they did in August.
Consumer Sentment
Index, 1966:Q1=100
120
Current Conditions
110
100
90
80
70
60
50
Sep-03
Jan-04
May-04
Index, 1966:Q1=100
Sentiment
Expectations
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
120
110
100
90
80
70
60
50
Sep-06
Consumer Confidence
Index, 1985 = 100
Index, 1985 = 100
150
150
Present Situation
Confidence
130
130
110
110
90
90
70
70
Expectations
50
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
50
Sep-06
Source: University of Michigan (sentiment) and The Conference Board (confidence).
Domestic auto and light truck sales rose in September, enabling third-quarter sales
to be stronger than those seen in the second quarter.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
18.0
18.0
Quarterly Sales, 2006
Millions of Units, Annualized
16.0
Q1
Q2
Q3
13.4
12.6
12.8
16.0
14.0
14.0
12.0
12.0
10.0
10.0
8.0
Sep-03
Mar-04
Dec-03
Sep-04
Jun-04
Source: Bureau of Economic Analysis.
Mar-05
Dec-04
Sep-05
Jun-05
8.0
Sep-06
Mar-06
Dec-05
Jun-06
In August, real disposable income posted a small gain, but real consumption fell
for the first time since last September.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
5.0
5.0
4.0
4.0
Real Disposable Income
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
Real Consumption
-2.0
-2.0
-3.0
-3.0
-4.0
-4.0
-5.0
Aug-03
Feb-04
Nov-03
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
-5.0
Aug-06
Feb-06
Nov-05
May-06
Source: Bureau of Economic Analysis.
New home sales unexpectedly increased in August, aided by easing home prices
and a downwardly revised July sales number. Sales of existing homes decreased
marginally.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
8000
New Home Sales
1300
Existing
Home Sales
7500
1200
7000
1100
6500
1000
6000
900
5500
Aug-03
Feb-04
Nov-03
Source: U.S. Census Bureau.
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Building activity continued to slow in August. Fewer building permits were issued
for the seventh consecutive month, and housing starts declined for the sixth time
during that same period.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2300
2300
Building Permits
2200
2200
2100
2100
2000
2000
1900
1900
1800
1800
Housing Starts
1700
1700
1600
1600
Aug-03
Feb-04
Nov-03
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Source: U.S. Census Bureau.
Industrial production fell in August for the first time since January, while capacity
utilization decreased slightly from the six-year high established in July.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
82.0
2.0
81.0
Industrial Production
80.0
1.0
79.0
78.0
0.0
77.0
76.0
-1.0
75.0
Capacity Utilization
(manufacturing)
74.0
-2.0
73.0
Aug-03
Feb-04
Nov-03
Aug-04
May-04
Source: Federal Reserve Board of Governors.
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
The ISM diffusion index eased for the second straight month in September, but
remains above 50. However, the employment component of the index declined
sharply to fall below 50 for the second time in the past four months.
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
Sep-03
Mar-04
Dec-03
Sep-04
Jun-04
Mar-05
Dec-04
Sep-05
Jun-05
Mar-06
Dec-05
Sep-06
Jun-06
Source: Institute for Supply Management.
In August, new orders for durable goods slowed to offset the previous months' gains.
Orders for nondefense capital goods, excluding aircraft, exhibited a similar decline.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
24.0
24.0
20.0
20.0
Durable Goods,
New Orders
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
Durable Goods, New Orders
Percent change, month-over-month
-4.0
Capital Goods Nondefense,
Excluding Aircraft
-8.0
May-06
Jun-06
Jul-06
Aug-06
0.29
3.25
-2.82
-0.01
-4.0
-8.0
-12.0
-12.0
Aug-03
Feb-04
Nov-03
Source: U.S. Census Bureau.
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06
Growth in overall consumer prices slowed for the second straight month in August,
but core prices rose slightly after holding steady in July. Both core and overall
producer prices slowed.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
5.0
5.0
Consumer Price Index,
excluding food and energy
4.0
Consumer Price Index
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
0.0
Aug-06
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
Producer Price Index,
Producer Price Index
6.0
6.0 excluding food and energy
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06
Source: Bureau of Labor Statistics.
Oil prices fell significantly in September, dropping to their lowest level since March.
Domestic Spot Oil Price
Dollar per Barrel
Dollar 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
Sep-03
Mar-04
Dec-03
Sep-04
Jun-04
Mar-05
Dec-04
Source: West Texas Intermediate, Wall Street Journal.
Sep-05
Jun-05
Mar-06
Dec-05
Sep-06
Jun-06
Real GDP growth was revised down in the final second quarter estimate, due
primarily to a downward revision to private inventory investment, an upward revision
to imports, and a downward revision to private residential investment that were partly
offset by an upward revision to PCE for services.
Real GDP
8.0
6.0
4.0
2.0
0.0
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
06:Q2
Revisions to Second Quarter Real GDP
Description
Preliminary
Final
2.9
2.6
Consumption
2.6
2.6
Business Investment
4.7
4.4
-1.6
-1.4
Residential Investment
-9.8
-11.1
Government
0.9
0.8
Exports
5.1
6.2
Imports
0.6
1.4
Final Sales
2.3
2.1
Real GDP
Equipment & Software
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy's second
quarter slowdown was more pronounced than previously reported, and suggest the
soft patch will continue into the third quarter. Signs that inflation is stabilizing and
some positive news in the housing market may aid in achieving the goal of a 'soft
landing' for the economy.
Short-Term Interest Rates
Percent
7.0
Percent
7.0
Discount Window Primary Credit
6.0
5.0
6.50
6.00
6.25
5.92
6.25
6.0
Federal Funds Rate
(effective rate)
6.25
6.02
5.0
5.75
5.50
Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
Sep-04
Dec-04
Mar-05
Jun-05
Source: Federal Reserve Board of Governors.
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
October 12, 2006
Current Economic Developments - Addendum: Data released in the past week
In September, nonfarm payrolls added 51,000 jobs and the unemployment rate dropped to
4.6%. August payrolls were revised upward to show an increase of 188,000 jobs, 60,000
more than the original estimate of a 128,000 job increase. July payrolls were revised up
by 2,000 to an increase of 123,000 jobs. Overall in the third quarter, payrolls increased by
an average of 121,000 jobs per month, up from the second quarter estimate of 115,000.
Wholesale inventories rose 1.1% in August, following a 0.9% increase in July. Wholesale
trade also rose 1.1% in August, after rising 0.5% in July.
Redbook sales increased 1.3% in the first week of October, compared to September. Sales
were 3.4% higher than during the same period last year. Oil prices fell during the past week,
averaging $59.5 per barrel compared to last week's average of $61.7.
Payroll employment posted a modest gain in September, and revisions to the prior
two months' growth estimates resulted in a net addition of 62,000 new jobs. The
unemployment rate fell one-tenth of a percentage point in September to 4.6%.
Nonfarm Payroll Employment
Change from Previous Month
375
300
Unemployment Rate
Rate
5.6
5.4
5.2
225
5
150
4.8
75
0
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Dec-04
Jun-05
Dec-05
Jun-06
Source: Bureau of Labor Statistics.
4.6
4.4
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Dec-04
Jun-05
Dec-05
Jun-06