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The
President’s
Report to the
Board of
Directors
June 1, 2006
CURRENT ECONOMIC DEVEOPMENTS - June 1, 2006
Data released since your last Directors' meeting show the economy is growing at a moderate
pace, despite deteriorating consumer attitudes and rising inflation concerns. Current data
suggest a slowdown in second quarter growth, which was expected following the robust first
quarter.
In May, initial claims increased, due in part to a government strike in Puerto Rico. Consumer
attitudes weakened, with sentiment, confidence, and expectations all falling. Real
consumption expenditures increased for the sixth consecutive month in April, despite a slight
decrease in real disposable income.
The housing market showed mixed signs in April. Sales of new homes unexpectedly
increased, but existing home sales, housing starts and building permits all decreased. In the
manufacturing sector, the ISM index decreased a bit in May while industrial production posted
a strong gain in April. But, new orders for both durable goods and for nondefense capital
goods, excluding aircraft, slowed.
Inflation picked up in April, as core consumer prices grew at their fastest pace in over a year.
Total consumer and producer prices also accelerated. Oil prices rose in May, adding to the
record high set in April. Productivity was revised up slightly in the first quarter, and unit labor
costs were revised lower for each of the past two quarters.
During the first quarter, real growth was stronger than originally thought. The upward revision
primarily reflected upward revisions to private inventory investment and to exports that were
partly offset by downward revisions to personal consumption expenditures and equipment and
software.
Initial claims for unemployment insurance rose for the third consecutive month in
May. A government strike in Puerto Rico, however, was partly responsible for the
increase.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
450
450
400
400
350
350
300
300
250
250
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: Department of Labor, Employment and Training Administration.
Consumer attitudes deteriorated in May, as a drop in confidence offset the prior two
month's gains and sentiment fell to its lowest point since October. Consumers'
impressions of current conditions and their future expectations also worsened.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
150
140
Consumer
Expectations
Present
Situation
Consumer
Confidence
Current
Conditions
Future
Expectations
110
130
Consumer
Sentiment
120
100
110
90
100
80
90
80
70
70
60
May-04
Nov-04
May-05
Nov-05
May-06
May-04
Nov-04
May-05
Nov-05
60
May-06
Source: The University of Michigan.
Source: The Conference Board.
Real consumption increased slightly in April, despite a small reduction in real
disposable income.
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
-4.0
-2.0
Apr-03
Oct-03
Jul-03
Apr-04
Jan-04
Source: Bureau of Economic Analysis.
Oct-04
Jul-04
Apr-05
Jan-05
-5.0
Apr-06
Oct-05
Jul-05
Jan-06
New home sales unexpectedly rose for a second straight month in April, enhancing
the rebound from the slower sales seen at the beginning of the year. Sales of
existing homes eased a bit in April.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
7400
1400
Existing Home Sales
7200
1300
7000
New Home Sales
6800
1200
6600
6400
1100
6200
6000
1000
5800
900
5600
Apr-03
Oct-03
Jul-03
Apr-04
Jan-04
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
In April, both housing starts and building permits continued to fall, reaching their
lowest levels since November of 2004 and February of 2004, respectively.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2300
2300
Building Permits
2200
2200
2100
2100
2000
2000
1900
1900
1800
1800
Housing Starts
1700
1700
1600
1600
Apr-03
Oct-03
Jul-03
Source: U.S. Census Bureau.
Apr-04
Jan-04
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
The ISM manufacturing and employment indices fell in May, offsetting the gains
seen in April. The price index rose for the third straight month.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
90.0
90.0
Price Index
80.0
80.0
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
Employment Index
40.0
40.0
May-03
Nov-03
Aug-03
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
Source: Institute for Supply Management.
Industrial production continued to increase in April, while capacity utilization reached
its highest point in nearly six years.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
82.0
1.5
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
Apr-03
72.0
Oct-03
Jul-03
Apr-04
Jan-04
Source: Federal Reserve Board of Governors.
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Apr-06
Jan-06
Growth of new orders for durable goods slowed in April, following a strong March.
Orders for nondefense capital goods, excluding aircraft, also slowed.
New Orders
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
24.0
24.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
20.0
16.0
12.0
16.0
Durable Goods,
New Orders
12.0
8.0
8.0
4.0
4.0
0.0
0.0
-4.0
Durable Goods, New Orders
Percent change, month-over-month
-8.0
-12.0
-16.0
Apr-03
Oct-03
Jul-03
Apr-04
Jan-04
Jan-06
Feb-06
Mar-06
Apr-06
-7.57
3.63
6.58
-4.76
Oct-04
Jul-04
Apr-05
Jan-05
-8.0
-12.0
-16.0
Apr-06
Oct-05
Jul-05
-4.0
Jan-06
Source: U.S. Census Bureau.
Inflation picked up in April, as growth in both overall and core consumer prices
accelerated. However, at the wholesale level, total prices increased, while core
prices eased slightly.
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
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Producer Price Index
Percent Change, Year-Over-Year
1.0
Aug-05
Dec-05
0.0
Apr-06
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
Apr-03
Aug-03
Dec-03
Source: Bureau of Labor Statistics.
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
0.0
Dec-05
-2.0
Apr-06
Oil prices continued to rise in May, averaging greater than $70 per barrel for the first
time.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr 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
May-03
Nov-03
Aug-03
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
May-06
Feb-06
Source: Wall Street Journal.
Productivity increased in the first quarter, helping to offset a strong quarterly gain in
hourly compensation. Unit labor costs, however, were revised downward for both
the first quarter of 2006 and the fourth quarter of 2005.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Output Per Hour
Compensation 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
-6.0
03:Q1
03:Q3
03:Q2
04:Q1
03:Q4
Source: Bureau of Labor Statistics.
04:Q3
04:Q2
05:Q1
04:Q4
05:Q3
05:Q2
06:Q1
05:Q4
Real GDP in the first quarter was stronger than originally thought. The upward
revision primarily reflected upward revisions to private inventory investment and to
exports that were partly offset by downward revisions to personal consumption
expenditures and equipment and software.
Revisions to First Quarter Real GDP
Description
Advanced
Preliminary
4.8
5.3
Real GDP
Personal Consumption
5.5
5.2
Business Investment
14.3
13.1
16.4
13.8
Residential Investment
Equipment and Software
2.6
3.1
Government
3.9
4.3
Exports
12.1
14.7
Imports
13.0
12.8
Final Sales
5.4
5.5
Real GDP
8.0
6.0
4.0
2.0
0.0
03:Q1
03:Q3
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy is
growing at a moderate pace, despite deteriorating consumer attitudes and rising
inflation concerns. Current data suggest a slowdown in second quarter growth,
which was expected following the robust first quarter.
Percent
Short-Term Interest Rates
6.0
Discount Window
Primary Credit
5.0
6.20
5.92
5.75
5.80
5.50
5.40
4.0
5.53
Federal Funds Rate
(effective rate)
5.26
5.00
Jan-06 Feb-06 Mar-06 Apr-06 May-06
3.0
2.0
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Source: Federal Reserve Board of Governors.
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
June 8, 2006
Current Economic Developments - Addendum: Data released in the past week
In May, nonfarm payrolls added 75,000 jobs and the unemployment rate decreased to 4.6%.
April payrolls were revised to show an increase of 126,000 jobs, 12,000 fewer than the
original estimate of a 138,000 job increase, and March payrolls were revised to show an
increase of 175,000 jobs, 25,000 less than the previously reported increase of 200,000.
Domestic auto and light truck sales decreased in May, to an annualized rate of 12.3 million
units. May's sales were the lowest since October's rate of 11.4 million. Total vehicle sales
for May were 16.0 million, down from April's estimate of 16.7 million.
Manufacturers' orders fell 1.8% in April, after rising 4.0% in March. Total shipments were
unchanged in April, while shipments of nondefense capital goods, excluding aircraft, rose
1.0%.
Redbook sales increased 1.9% in the first week of June, compared to May. Sales were 3.3%
higher than during the same period last year. Oil prices increased slightly during the past
week, averaging 71.8 dollars per barrel compared to last week's average of 71.1.
Payroll employment posted a modest gain in May, and revisions to the prior
two months' estimates resulted in a net reduction of 37,000 jobs. Still, the
unemployment rate fell one-tenth of a percentage point in May to 4.6%.
Unemployment Rate
Nonfarm Payroll Employment
Change from Previous Month
Rate
400
5.8
350
5.6
300
5.4
250
5.2
200
5
150
4.8
100
4.6
50
0
May-04
Jan-05
Sep-04
Sep-05
May-05
Source: Bureau of Labor Statistics.
May-06
Jan-06
May-04
Jan-05
Sep-04
4.4
May-06
Sep-05
May-05
Jan-06
In May, domestic auto and light truck sales fell to their lowest level since October.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
18.0
16.0
14.0
12.0
10.0
8.0
May-0
May-04
Aug-04
Aug-04 Nov-04
Nov-04
Source: Bureau of Economic Analysis.
Feb-05
Feb-05
May-05
May-05
Aug-05
Aug-05
Nov-05
Nov-05
Feb-06
Feb-06
May-06
May-06