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The
President’s
Report to the
Board of
Directors
August 31, 2006
CURRENT ECONOMIC DEVELOPMENTS - August 31, 2006
Data released since your last Directors' meeting show the economy has slowed
down, although not as prominently as originally estimated. The cooling housing
market and the stretched consumer dollar raise concerns that the economy is in a
soft patch. Recent data on prices suggest inflation has stabilized.
In August, initial claims increased marginally and consumer attitudes fell to their
lowest levels of the year. Real consumption expenditures grew at their fastest
monthly pace in a year in July, and real disposable incomes continued to grow.
The housing market continued to wane in July, as new and existing home sales fell.
The lower sales have helped reduce housing starts and building permits to their
lowest levels in over a year. In the manufacturing sector, industrial production
slowed in July while capacity utilization eased slightly from the six-year high
established in June. Business investment seems to have rebounded as durable
goods orders accelerated in July, as did orders for nondefense capital goods,
excluding aircraft.
Inflation concerns remained elevated in July. A decline in oil prices mitigated total
CPI and PPI slowed, but core CPI held steady at 2.7%.
Initial claims edged up slightly through late August.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
425
425
400
400
Four-Week Moving Average,
Ending August 26th,
317,500
375
375
350
350
325
325
300
300
275
275
Aug-03
Feb-04
Nov-03
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
Source: Department of Labor, Employment and Training Administration.
Feb-06
Nov-05
Aug-06
May-06
Consumer attitudes deteriorated in August, as sentiment and confidence both fell
to their lowest points of the year. Measures of expectations and current conditions
also fell.
Consumer Sentiment
Consumer Confidence
Index, 1985 = 100
Index, 1966:Q1 = 100
120
150
Future Expectations
Current Conditions
Consumer Confidence
Consumer Expectations
140
110
130
Present Situation
100
120
Consumer Sentiment
110
90
100
80
90
80
70
70
60
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Aug-04
Feb-05
Aug-05
Feb-06
60
Aug-06
Source: The University of Michigan (left panel) and The Conference Board (right panel).
In July, real consumption posted its strongest monthly gain since the previous July,
but its year-over-year growth was the lowest in over three years. Real disposable
income grew in July at the same pace seen the prior month.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
1.5
6.0
Real Consumption
1.0
4.0
0.5
2.0
0.0
0.0
-0.5
-2.0
Real Consumption
Percent change, year-over-year
-1.0
Real Disposable Income
-1.5
Apr-06
May-06
Jun-06
Jul-06
2.92
3.39
2.71
2.37
-4.0
-6.0
-2.0
-8.0
Jul-03
Jan-04
Oct-03
Jul-04
Apr-04
Source: Bureau of Economic Analysis.
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
The downturn in the housing market continued in July, as existing home sales fell
for the fourth month in a row. Sales of new homes, following a brief improvement
earlier in the year, decreased for a second consecutive month.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
8000
New Home Sales
7500
Existing Home Sales
1300
7000
1200
6500
6000
1100
5500
1000
5000
Jul-03
Jan-04
Jul-04
Oct-03
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Source: U.S. Census Bureau (new home sales) and National Association of Realtors (existing sales).
As a result, housing starts dipped further in July, and building permits continued to
fall, reaching their lowest point in over three years.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
Housing Starts
2200
2200
Building Permits
2000
2000
1800
1800
1600
1600
1400
1400
Jul-03
Jan-04
Oct-03
Source: U.S. Census Bureau.
Jul-04
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
In July, industrial production eased and capacity utilization decreased a bit.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
1.5
82.0
Industrial Production
1.0
80.0
0.5
78.0
0.0
76.0
-0.5
74.0
-1.0
Capacity Utilization
(manufacturing)
-1.5
72.0
Jul-03
Jan-04
Oct-03
Jul-04
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
Source: Federal Reserve Board of Governors.
New orders for both durable goods and nondefense capital goods, excluding aircraft,
accelerated in July.
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
Durable Goods,
New Orders
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
Jul-03
Jan-04
Oct-03
Source: U.S. Census Bureau.
Jul-04
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Jul-06
Apr-06
July brought some positive news on the inflation front, as growth in overall consumer
prices slowed, but core inflation held steady. Producer prices, both core and overall,
also decelerated.
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
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
1.0
Nov-05
Mar-06
0.0
Jul-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
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
0.0
Nov-05
Mar-06
-2.0
Jul-06
Source: Bureau of Labor Statistics.
Oil prices eased a bit in August, after peaking at $78 per barrel early in the month.
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
Aug-03
Feb-04
Nov-03
Source: Wall Street Journal.
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
20.0
Aug-06
Feb-06
Nov-05
May-06
Real GDP growth was revised up in the second quarter. The upward revision primarily
reflected upward revisions to exports, to nonresidential structures, to private inventory
investment, and to state and local government spending that were partly offset by a
downward revision to residential fixed investment.
Revisions to Second Quarter Real GDP
Description
Advanced
Preliminary
2.5
2.9
Personal Consumption
2.5
2.6
Business Investment
2.7
4.7
-1.0
-1.6
Government
0.6
0.9
Exports
3.3
5.1
Imports
0.2
0.6
Final Sales
2.1
2.3
Real GDP
Equipment and Software
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
Source: Bureau of Economic Analysis.
Overall, Data released since your last Directors' meeting show the economy has
slowed down, although not as prominently as originally estimated. The cooling housing
market and the stretched consumer dollar raise concerns that the economy is in a soft
patch. Recent data on prices suggest inflation has stabilized.
Percent
Short-Term Interest Rates
7.0
6.0
Discount Window
Primary Credit
5.0
5.93
6.25
5.75
7.00
6.25
6.02
6.50
6.00
Federal Funds Rate
(effective rate)
5.50
4.0
Apr-06 May-06 Jun-06 Jul-06 Aug-06
3.0
2.0
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Source: Federal Reserve Board of Governors.
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
September 7, 2006
Current Economic Developments - Addendum: Data released in the past week
In August, nonfarm payrolls added 128,000 jobs and the unemployment rate decreased to
4.7%. July payrolls were revised to show an increase of 121,000 jobs, 8,000 more than the
original estimate of a 113,000 job increase, and June payrolls were revised to show an
increase of 134,000 jobs, 10,000 more than the previously reported increase of 124,000.
Consumer sentiment improved in late August, rising to 82.0 from the mid-month estimate of
78.7. Expectations also improved on their mid-month number, however both estimates were
still below their July levels. Auto sales fell in August, as the special incentives offered the
previous month expired.
Productivity growth in the second quarter was revised up to 1.6%, from the initial estimate of
1.1%. Unit labor costs rose 4.9%, after soaring a revised 9.0% in the first quarter. The ISM
index decreased slightly in August, while the employment component rose to its highest level
since April.
Redbook sales were flat through the first week of September, compared to August. Sales
were 3.9% higher than during the same period last year. Oil prices eased during the past
week, averaging 69.5 dollars per barrel, compared to last week's average of 71.2.
Payroll employment posted a solid gain in August, and revisions to the prior two
months' estimates resulted in a net gain of 18,000 additional jobs. The
unemployment rate fell one-tenth of a percentage point in August to 4.7%.
Nonfarm Payroll Employment
Change from Previous Quarter, Monthly Average
400
350
Unemployment Rate
Rate
5.6
5.4
300
250
200
150
5.2
5
4.8
100
50
0
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Nov-04
May-05
Nov-05
May-06
Source: Bureau of Labor Statistics.
4.6
4.4
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Nov-04
May-05
Nov-05
May-06
Auto sales decreased in August, following the strong, incentive-induced sales seen
in July.
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
Aug-03
Feb-04
Nov-03
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
12.0
Aug-06
Feb-06
Nov-05
May-06
Source: Bureau of Economic Analysis.
Productivity growth slowed in the second quarter. Unit labor costs and compensation
were revised up to show a significant increase in the first quarter, and continued to
grow quickly in the second quarter.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
Compensation Per Hour
12.0
12.0
Output Per Hour
9.0
9.0
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-6.0
03:Q2
-3.0
Unit Labor Costs
03:Q4
Source: Bureau of Labor Statistics.
04:Q2
04:Q4
05:Q2
05:Q4
-6.0
06:Q2
The ISM manufacturing index eased marginally in August, while the employment
measure rose sharply, almost completely offsetting the losses seen earlier this year.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65
ISM Index
60.0
60
55.0
55
50.0
50
Employment Index
45.0
45
40.0
40
Aug-03
Feb-04
Nov-03
Aug-04
May-04
Source: Institute of Supply Management.
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Aug-06
May-06