Download President’s Report Board Directors

The
President’s
Report to the
Board of
Directors
July 6, 2006
Current Economic Developments - July 6, 2006
Data released since your last Directors' meeting suggest the economy is slowing, as expected,
following the robust growth in the first quarter. The combined effects of higher energy prices
and the cooling housing market can be seen in the data, and will likely be present through the
rest of the year.
Initial claims for unemployment insurance decreased in June, and consumer attitudes
increased. In May, consumer spending scarcely increased, restrained by real disposable
incomes that haven't grown over the past few months. Total auto sales increased a bit in
June, but were lower overall in the second quarter compared to the first.
The housing market displayed mixed signs in May. New home sales increased for a third
consecutive month, but sales of existing homes slowed. Housing starts rose to offset losses
seen in April, but building permits fell to their lowest point in over two years.
In the manufacturing sector, the ISM manufacturing index fell in June, as did its employment
component. In May, industrial production and capacity utilization both eased slightly, and
new orders for durable goods decelerated. However, orders for nondefense capital goods,
excluding aircraft, a better measure of future investment, increased.
Inflation concerns persist, as core consumer prices grew in May at their fastest pace in four
years. Total consumer and producer prices also accelerated. Oil prices held steady in June,
but rose sharply overall during the second quarter.
After rising for four consecutive months, initial claims for unemployment insurance
decreased in June.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
450
450
Initial Claims for Unemployment Insurance
Thousands, Quarterly Average
425
05:Q3
05:Q4
06:Q1
06:Q2
342
322
300
318
425
400
400
375
375
350
350
325
325
300
300
275
Jun-03
Dec-03
Sep-03
Jun-04
Mar-04
Dec-04
Sep-04
Jun-05
Mar-05
Source: Department of Labor, Employment and Training Administration.
275
Jun-06
Dec-05
Sep-05
Mar-06
Consumer attitudes mostly improved in June, rebounding a bit from decreases in
May. The Conference Board's present situation index was the exception, easing
slightly in June.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
140
Present
Situation
Consumer
Expectations
130
Future
Expectations
Current
Conditions
110
120
100
110
90
100
90
80
80
Consumer
Confidence
70
60
Jun-04
Dec-04
Consumer
Sentiment
Jun-05
Dec-05
Jun-06
Jun-04
Dec-04
70
Jun-05
Dec-05
60
Jun-06
Source: The University of Michigan.
Source: The Conference Board.
Real disposable income was virtually unchanged in May, and consumption posted
a minimal increase. Consumption has been restrained over the past few months
due to a lack of any meaningful income increases.
Percent Change, Previous Month
Real DPI and Consumption
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-03
Nov-03
Aug-03
May-04
Feb-04
Source: Bureau of Economic Analysis.
Nov-04
Aug-04
May-05
Feb-05
-5.0
May-06
Nov-05
Aug-05
Feb-06
Auto sales increased in June, but their second quarter average fell from the first
quarter.
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
05:Q3
05:Q4
06:Q1
06:Q2
17.9
15.8
16.9
16.3
20.0
18.0
18.0
16.0
16.0
14.0
14.0
12.0
Jun-03
Dec-03
Sep-03
Jun-04
Mar-04
Dec-04
Sep-04
Jun-05
Mar-05
12.0
Jun-06
Dec-05
Sep-05
Mar-06
Source: Bureau of Economic Analysis.
In May, new home sales increased for the third consecutive month reaching their
highest level this year. But sales of existing homes continued to ease.
New Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
1400
1200
1200
1000
1000
800
May-03
Nov-03
Aug-03
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
Aug-05
Existing Home Sales
Thousands of Units, Annualized
800
May-06
Nov-05
Feb-06
Thousands of Units, Annualized
8000
8000
7000
7000
6000
6000
5000
May-03
Nov-03
Aug-03
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
5000
May-06
Nov-05
Aug-05
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Feb-06
Housing starts increased in May, despite recent reductions in building permits. After
falling for a fourth straight month, permits reached a 30-month low in May.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
Housing Starts
2300
2300
Building Permits
2200
2200
2100
2100
2000
2000
1900
1900
1800
1800
1700
1700
1600
1600
1500
May-03
Nov-03
Aug-03
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
1500
May-06
Nov-05
Aug-05
Feb-06
Source: U.S. Census Bureau.
The ISM manufacturing index decreased in June, while the employment measure
fell below 50 for the first time since May 2005.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65
ISM Index
60.0
60
55.0
55
50.0
50
Quarterly Averages
45.0
05:Q3
05:Q4
06:Q1
06:Q2
ISM
56.0
57.0
55.6
55.2
Emp.
53.1
54.8
52.9
52.5
Employment Index
45
40.0
40
Jun-03
Dec-03
Sep-03
Jun-04
Mar-04
Source: Institute of Supply Management.
Dec-04
Sep-04
Jun-05
Mar-05
Dec-05
Sep-05
Jun-06
Mar-06
Industrial production dipped a bit in May, after three months of growth. Capacity
utilization eased slightly in May, but remains high.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
1.5
82.0
81.0
Industrial Production
1.0
80.0
79.0
0.5
78.0
0.0
77.0
76.0
-0.5
75.0
74.0
-1.0
Capacity Utilization
(manufacturing)
-1.5
May-03
Nov-03
Aug-03
73.0
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
72.0
May-06
Nov-05
Aug-05
Feb-06
Source: Federal Reserve Board of Governors.
In May, new orders for durable goods grew at their slowest pace in over a year, on a
year-over-year basis. Orders for nondefense capital goods, excluding aircraft,
however, accelerated.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
25.0
25.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
20.0
15.0
10.0
15.0
Durable Goods,
New Orders
10.0
5.0
5.0
0.0
0.0
Durable Goods, New Orders
Percent change, month-over-month
-5.0
-10.0
Feb-06
Mar-06
Apr-06
May-06
3.63
6.02
-4.68
-0.20
-15.0
-5.0
-10.0
-15.0
May-03
Nov-03
May-04
Nov-04
May-05
Nov-05
May-06
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Source: U.S. Census Bureau.
Consumer prices accelerated in May, while core prices grew at their fastest pace in
four years. Total producer prices also accelerated in May.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
5.0
5.0
4.0
4.0
Consumer Price Index
3.0
3.0
2.0
2.0
Consumer Price Index,
excluding food and energy
1.0
0.0
May-02
Jan-03
Sep-02
Sep-03
May-03
Jan-04
Jan-05
Sep-04
0.0
May-06
Sep-05
May-05
Producer Price Index
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
May-02
May-04
1.0
Jan-06
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
May-06
Producer Price Index
Producer Price Index,
excluding food and energy
Jan-03
Sep-02
Sep-03
May-03
May-04
Jan-04
Jan-05
Sep-04
Sep-05
May-05
Jan-06
Source: Bureau of Labor Statistics.
Oil prices held steady in June, but rose sharply overall during the second quarter.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
80.0
80.0
Quarterly Averages
70.0
60.0
70.0
05:Q3
05:Q4
06:Q1
06:Q2
63.1
60.0
63.3
70.5
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
Jun-03
Dec-03
Sep-03
Source: Wall Street Journal.
.
Jun-04
Mar-04
Dec-04
Sep-04
Jun-05
Mar-05
Dec-05
Sep-05
Jun-06
Mar-06
In the first quarter, real GDP was revised slightly upward. The upward revision to
the percent change in real GDP primarily reflected a downward revision to imports.
Real GDP
Annualized Percent Change
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
03:Q1
03:Q3
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
First Quarter Revisions
Description
Real GDP
Personal Consumption
Business Investment
Equipment and Software
Residential Investment
Government
Exports
Imports
Final Sales
Change in Private Inventories
Preliminary
5.3
5.2
13.1
13.8
3.1
4.3
14.7
12.8
5.5
32.3
Revised
5.6
5.1
14.2
14.8
3.3
4.8
14.7
10.7
5.9
29.5
Source: Bureau of Economic Analysis.
Data released since your last Directors' meeting suggest the economy is slowing, as
expected, following the robust growth in the first quarter. The combined effects of
higher energy prices and the cooling housing market can be seen in the data, and
will likely be present through the rest of the year.
Percent
Short-Term Interest Rates
6.0
Discount Window
Primary Credit
5.0
6.40
6.00
5.60
4.0
5.75
5.93
6.02
Federal Funds Rate
(effective rate)
5.53
5.20
Mar-06
Apr-06
May-06
Jun-06
3.0
2.0
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Source: Federal Reserve Board of Governors.
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
July 13, 2006
Current Economic Developments - Addendum: Data released in the past week
In June, nonfarm payrolls added 121,000 jobs and the unemployment rate held steady at
4.6%. May payrolls were revised upward to show an increase of 92,000 jobs, 17,000 more
than the original estimate of a 75,000 job increase. April payrolls were revised downward,
showing the addition of 112,000 jobs instead of the previously reported 126,000 job increase.
The U.S. trade deficit widened slightly in May to $63.8 billion, from a revised estimate
of $63.3 billion in April. U.S. imports increased 1.8% in May, but exports increased 2.4%.
Wholesale inventories rose 0.8% in May, following a 1.3% increase in April. Wholesale trade
rose 1.6% in May, after rising a revised 1.3% in April. Trade was originally estimated as rising
1.3% in April.
Redbook sales decreased 1.7% in the first week of July, compared to June. Sales were
3.5% higher than during the same period last year. Oil prices rose during the past week,
averaging $74.4 per barrel compared to last week's average of $73.2.
Payroll employment posted a solid gain in June, and revisions to the prior two
months' growth estimates resulted in a net addition of 3,000 new jobs. The
unemployment rate was unchanged in June at 4.6%.
Nonfarm Payroll Employment
Change from Previous Month
375
Unemployment Rate
Rate
5.8
5.6
300
5.4
225
150
5.2
5
4.8
75
4.6
0
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Sep-04
Mar-05
Sep-05
Mar-06
Source: Bureau of Labor Statistics.
4.4
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Sep-04
Mar-05
Sep-05
Mar-06