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The
President’s
Report to the
Board of
Directors
July 5, 2007
Current Economic Developments - July 5, 2007
Data released since your last Directors' meeting suggest the economy is improving,
following the slow first quarter. So far during the second quarter, employment growth has
been solid, and business investment has been stronger than seen in the first quarter. These
effects, along with continued strength in exports, should help offset the drag of the housing
market and a slowdown in consumption as consumers adjust to higher gasoline prices.
Initial claims for unemployment insurance increased in June, and consumer attitudes
worsened. In May, consumer spending scarcely increased, restrained by two consecutive
decreases in real disposable income. Total auto sales fell further in June, reaching their
slowest sales pace in close to two years.
The struggles in the housing market continued in May. Sales of both new and existing
homes fell, as did housing starts. Building permits, however, increased.
In the manufacturing sector, the ISM index increased for a third consecutive month in June,
reaching a one-year high. The employment component of the index eased, but remained
above 50. In May, industrial production was unchanged and capacity utilization decreased
a bit, and new orders for durable goods decelerated. Orders for nondefense capital goods,
excluding aircraft, fell.
There were further signs in May that inflation remains contained, as core consumer prices
continued to slow and core producer price growth was steady. However, headline numbers
did rise a bit. Oil prices rose sharply to reach their highest level in a year.
Initial claims for unemployment insurance rose in June, essentially matching their
12-month average.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
400
400
Initial Claims for Unemployment Insurance
Thousands, Quarterly Average
375
375
06:Q3
06:Q4
07:Q1
07:Q2
315
320
322
317
350
350
325
325
300
300
275
Jun-04
Dec-04
Sep-04
Jun-05
Mar-05
Dec-05
Sep-05
Jun-06
Mar-06
Source: Department of Labor, Employment and Training Administration.
275
Jun-07
Dec-06
Sep-06
Mar-07
Consumer attitudes worsened in June, following increases across the board in May.
A perceived softening in present-day business and employment conditions, as well
as high gas prices, contributed to the lower estimates.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
140
Current
Conditions
Present
Situation
130
110
120
Consumer
Confidence
110
100
Consumer
Sentiment
100
90
90
80
80
Consumer
Expectations
60
Jun-05
Dec-05
Jun-06
Dec-06
70
Future
Expectations
70
Jun-07
Jun-05
Dec-05
Jun-06
Dec-06
60
Jun-07
Source: The University of Michigan.
Source: The Conference Board.
Real disposable income decreased for the second month in a row in May, albeit
marginally. Consumption was essentially unchanged.
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
May-04
Nov-04
Aug-04
May-05
Feb-05
Source: Bureau of Economic Analysis.
Nov-05
Aug-05
May-06
Feb-06
-5.0
May-07
Nov-06
Aug-06
Feb-07
Total auto and light truck sales slowed for the fifth consecutive month in June, falling
to their lowest pace since October 2005.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
22.0
22.0
Quarterly Sales
Millions of Units, Annualized
20.0
06:Q3
06:Q4
07:Q1
07:Q2
16.6
16.3
16.5
16.0
20.0
18.0
18.0
16.0
16.0
14.0
14.0
12.0
Jun-04
Dec-04
Sep-04
Jun-05
Mar-05
Dec-05
Sep-05
Jun-06
Mar-06
12.0
Jun-07
Dec-06
Sep-06
Mar-07
Source: Bureau of Economic Analysis.
In May, sales of both new and existing homes decreased marginally. May's
estimate for existing home sales was the lowest in four years.
New Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1600
1600
1400
1400
1200
1200
1000
1000
800
800
600
May-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
Aug-06
Existing Home Sales
Thousands of Units, Annualized
600
May-07
Nov-06
Feb-07
Thousands of Units, Annualized
8000
8000
7000
7000
6000
6000
5000
May-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
5000
May-07
Nov-06
Aug-06
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Feb-07
Housing starts fell in May, after rising in each of the previous three months. Building
permits posted their largest gain of the year, a sign future starts may be stonger.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
Building Permits
2200
2200
Housing Starts
2000
2000
1800
1800
1600
1600
1400
1400
1200
May-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
1200
May-07
Nov-06
Aug-06
Feb-07
Source: U.S. Census Bureau.
The ISM manufacturing index increased further in June, reaching it's highest point
in over a year. The employment index eased, but remained above 50.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65
ISM Index
60.0
60
55.0
50.0
55
Employment Index
50
Quarterly Averages
45.0
06:Q3
06:Q4
07:Q1
07:Q2
ISM
53.8
50.9
50.8
55.2
Emp.
51.5
49.6
49.8
52.0
45
40.0
40
Jun-04
Dec-04
Sep-04
Jun-05
Mar-05
Source: Institute of Supply Management.
Dec-05
Sep-05
Jun-06
Mar-06
Dec-06
Sep-06
Jun-07
Mar-07
Industrial production was unchanged in May, and capacity utilization eased slightly.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
1.5
82.0
Industrial Production
1.0
81.0
0.5
80.0
0.0
79.0
-0.5
78.0
-1.0
77.0
Capacity Utilization
(manufacturing)
-1.5
-2.0
May-04
Nov-04
Aug-04
76.0
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
75.0
May-07
Nov-06
Aug-06
Feb-07
Source: Federal Reserve Board of Governors.
New orders for durable goods slowed in May (on a year-over-year basis), while
orders for nondefense capital goods, excluding aircraft, fell.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
25.0
25.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
Durable Goods,
New Orders
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Percent change, month-over-month
-5.0
-10.0
Feb-07
Mar-07
Apr-07
May-07
Dur.
0.53
5.12
1.05
-2.42
Ex air
-2.42
4.60
1.98
-2.13
-15.0
-5.0
-10.0
-15.0
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: U.S. Census Bureau.
Consumer prices accelerated a bit in May, while core prices slowed further. Total
producer prices also picked up in May, as core prices were flat.
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
May-04
Sep-04
Jan-05
May-05
1.0
Sep-05
Jan-06
May-06
Producer Price Index
Percent Change, Year-Over-Year
Sep-06
Jan-07
0.0
May-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
May-04
Sep-04
Jan-05
May-05
0.0
Sep-05
Jan-06
May-06
Sep-06
Jan-07
-2.0
May-07
Source: Bureau of Labor Statistics.
Oil prices rose sharply in June, reaching their highest level since the previous July.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
80.0
80.0
Quarterly Averages
70.0
06:Q3
06:Q4
07:Q1
07:Q2
70.4
60.1
58.1
65.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
Jun-04
Dec-04
Sep-04
Source: Wall Street Journal.
.
Jun-05
Mar-05
Dec-05
Sep-05
Jun-06
Mar-06
Dec-06
Sep-06
Jun-07
Mar-07
In the first quarter, real GDP was revised slightly upward. The upward revision to
the percent change in real GDP primarily reflected an upward revision to exports
of goods and services.
Real GDP
Annualized Percent Change
Annualized Percent Change
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
First Quarter Revisions
Description
Real GDP
Personal Consumption
Business Investment
Equipment and Software
Residential Investment
Government
Exports
Imports
Final Sales
Preliminary
0.6
4.4
2.9
2.0
-15.4
1.0
-0.6
5.7
1.6
Revised
0.7
4.2
2.6
1.7
-15.8
1.0
0.7
5.5
1.7
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting suggest the economy is improving,
following the slow first quarter. So far during the second quarter, employment growth has
been solid, and business investment has been stronger than seen in the first quarter. These
effects, along with continued strength in exports, should help offset the drag of the housing
market and a slowdown in consumption as consumers adjust to higher gasoline prices.
Percent
Short-Term Interest Rates
6.00
Discount Window Primary Credit
5.75
6.50
6.25
6.25
6.25
6.25
Mar-07
Apr-07
May-07
Jun-07
6.25
5.50
6.00
5.25
Federal Funds Rate
(effective rate)
5.00
4.75
4.50
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Source: Federal Reserve Board of Governors.
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
July 12, 2007
Current Economic Developments - Addendum: Data released in the past week
In June, nonfarm payrolls added 132,000 jobs and the unemployment rate held steady at
4.5%. May payrolls were revised upward to show an increase of 190,000 jobs, 33,000 more
than the original estimate of a 157,000 job increase. April payrolls were also revised upward,
showing the addition of 122,000 jobs instead of the previously reported 80,000 job increase.
Wholesale inventories rose 0.5% in May, following a 0.3% increase in April. Wholesale trade
rose 1.3% in May, after rising a revised 1.5% in April. Trade was originally estimated as rising
1.3% in April.
Redbook sales decreased 1.3% through the fifth and final week of June, compared to May.
Sales for the week ending July 7th were 0.8% higher than during the same period last year.
Oil prices rose during the past week, averaging $72.4 per barrel compared to last week's
average of $70.4.
Payroll employment posted a solid gain of 132,000 jobs in June, and revisions to
the prior two months' growth estimates resulted in a net gain of 75,000 additional
jobs. The unemployment rate was unchanged in June at 4.5%.
Nonfarm Payroll Employment
Change from Previous Month
Unemployment Rate
Rate
375
5.2
300
5
225
4.8
150
4.6
75
4.4
0
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Sep-05
Mar-06
Sep-06
Mar-07
Source: Bureau of Labor Statistics.
4.2
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Sep-05
Mar-06
Sep-06
Mar-07