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The
President’s
Report to the
Board of
Directors
February 2, 2006
CURRENT ECONOMIC DEVELOPMENTS - February 2, 2006
Data since your last Directors' meeting show the economy grew in the fourth quarter
at its slowest pace in three years, following strong growth in the third quarter.
The increase in real GDP in the fourth quarter was due primarily to private inventory
investment, personal consumption expenditures, equipment and software, exports,
and residential fixed investment. The contributions of these components were partly
offset by a negative contribution from federal government spending and an increase
in imports.
In January, consumer attitudes rose to recover the losses incurred over the previous
year, and initial claims for unemployment insurance dropped to their lowest level in
over five years. Both the ISM manufacturing and employment indices increased in
the fourth quarter before easing slightly in January.
Inflation concerns continue to be mild, as core consumer prices held steady in the
fourth quarter and core producer prices slowed slightly. Unit labor costs increased
in the fourth quarter, and total compensation costs, as measured by the ECI, were
flat. Oil prices approached $70 per barrel again in January, due in part to political
issues overseas, after receding a bit in the fourth quarter.
Real GDP growth decelerated in the fourth quarter, primarily reflecting a slowdown
in PCE, an acceleration in imports, a downturn in government spending and a
deceleration in residential investment. These effects were partially offset by an
acceleration in inventory investment.
Real Gross Domestic Product
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
-2.0
-2.0
02:Q4
03:Q2
Source: Bureau of Economic Analysis.
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
In the fourth quarter, despite increases in both personal income and real DPI, real
consumption grew at its slowest pace in three years. The slowdown in consumption
was due mainly to a plunge in auto sales.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
14.0
12.0
Personal Income
10.0
4.0
8.0
6.0
4.0
2.0
2.0
0.0
Real Disposable
Income
-2.0
-4.0
0.0
02:Q4
03:Q4
03:Q2
04:Q4
04:Q2
05:Q4
02:Q4
03:Q4
03:Q2
05:Q2
04:Q4
04:Q2
05:Q4
05:Q2
Source: Bureau of Economic Analysis.
In the fourth quarter, auto sales dropped to their lowest level since 1998, as special
manufacturer incentives offered in the middle of the year may have prompted many
consumers to purchase a vehicle earlier than they would have without the sales;
therefore shifting sales from the fourth quarter. Overall, light vehicle sales in 2005
were identical to those seen in 2004.
Total Auto and Light Truck Sales
Total Sales, Millions of Units
Millions of Units, Annualized
20.0
2003
2004
2005
16.64
16.87
16.87
18.0
16.0
14.0
12.0
10.0
02:Q4
03:Q1
03:Q2
03:Q3
Source: Bureau of Economic Analysis
03:Q4
04:Q1
04:Q2
04:Q3
04:Q4
05:Q1
05:Q2
05:Q3
05:Q4
Growth in business investment decreased in the fourth quarter, due in large part
to a deceleration in equipment and software investment.
Business Investment
Annualized Percent Change
Annualized Percent Change
20.0
20.0
16.0
16.0
Equipment and Software
12.0
12.0
8.0
8.0
4.0
4.0
0.0
0.0
Business Investment
-4.0
-4.0
-8.0
-8.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Source: Bureau of Economic Analysis.
In the fourth quarter, new orders for durable goods grew at their fastest pace in over
ten years, despite a reduction in vehicle orders. Orders of nondefense capital goods,
excluding aircraft, picked up a bit in the fourth quarter.
Durable Goods Orders
Motor Vehicle Orders
Percent Change, year-over-year
Percent Change, previous quarter
6.0
16.0
Capital Goods Nondefense,
Excluding Aircraft
12.0
4.0
8.0
2.0
4.0
Durable Goods,
New Orders
0.0
0.0
-2.0
-4.0
-8.0
-4.0
02:Q4
03:Q2
03:Q4
Source: U.S. Census Bureau.
04:Q2
04:Q4
05:Q2
05:Q4
04:Q4
05:Q2
05:Q4
Residential investment cooled further in the fourth quarter, resulting in its slowest
growth of the year.
Residential Investment
Annualized Percent Change
Annualized Percent Change
25.0
25.0
20.0
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Source: U.S. Census Bureau.
In the fourth quarter, sales of existing homes dropped from the previous quarter's
record high, while the pace of new home sales held relatively steady.
New and Existing Home Sales
Thousands of Units,
Annualized
Thousands of Units,
Annualized
1400
7500
Existing Home Sales
New Home Sales
1300
7000
1200
6500
1100
6000
1000
5500
900
5000
02:Q4
03:Q2
Source: U.S. Census Bureau.
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Government spending decreased in the fourth quarter, following three quarters of
increasing growth. Government spending was a drag on real GDP for the first time
in nearly three years.
Government Spending
Annualized Percent Change
Annualized Percent Change
8.0
8.0
Government spending and investment
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
Contribution to Real GDP
-2.0
-2.0
-4.0
-4.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Source: Bureau of Economic Analysis.
Import growth accelerated in the fourth quarter, and exports were essentially
unchanged.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
25.0
25.0
20.0
20.0
Exports
Imports
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
02:Q4
03:Q2
Source: Bureau of Economic Analysis.
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
After falling further in the fourth quarter, consumer attitudes surged in January
due in large part to more positive job market opinions.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
120
120
Confidence
110
110
100
100
90
90
80
80
Expectations
70
70
60
60
02:Q4 03:Q1 03:Q2 03:Q3 03:Q4 04:Q1 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 Jan-06
Consumer Sentiment and Expectations
Index, 1966:Q1=100
Index, 1966:Q1=100
110
110
Sentiment
100
100
90
90
80
80
70
70
Expectations
60
60
02:Q4 03:Q1 03:Q2 03:Q3 03:Q4 04:Q1 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 Jan-06
Source: The Conference Board (confidence) and University of Michigan (sentiment).
Initial claims for unemployment insurance fell sharply in January, reaching their lowest
level in nearly six years.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
450
450
425
425
400
400
375
375
350
350
325
325
300
300
275
275
02:Q4
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
Source: Department of Labor, Employment and Training Administration.
05:Q2
05:Q1
05:Q4
05:Q3
Jan-06
In January, both the ISM and employment indices decreased following fourth quarter
gains. Both measures remain above 50.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
65.0
65.0
60.0
60.0
ISM Index
55.0
55.0
50.0
50.0
45.0
45.0
40.0
40.0
Employment Index
35.0
35.0
30.0
30.0
02:Q4
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
05:Q2
05:Q1
05:Q4
05:Q3
Jan-06
Source: Institute for Supply Management.
Inflation exhibited little change in the fourth quarter. Total consumer prices slowed
slightly, while core inflation was flat. Producer prices, both total and core, slowed a bit.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
5.0
5.0
Consumer Price Index
Consumer Price Index,
excluding food and energy
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
6.0
8.0
Producer Price Index
Producer Price Index,
excluding food and energy
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
02:Q4
03:Q2
Source: Bureau of Labor Statistics.
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Productivity decreased in the fourth quarter for the first time since 2001. Unit labor
costs rose during the quarter, and total compensation slowed.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Compensation Per Hour
Output 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
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
-6.0
05:Q4
Source: Bureau of Labor Statistics.
In the fourth quarter, total employment costs were flat as wages and salaries increased
and benefit costs decreased.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
8.0
8.0
Benefit Costs
7.0
7.0
6.0
6.0
5.0
5.0
Total
Compensation
4.0
4.0
3.0
3.0
2.0
2.0
Wages and Salaries
1.0
1.0
0.0
0.0
02:Q4
03:Q2
Source: Bureau of Labor Statistics.
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Oil prices eased a bit in the fourth quarter, but rose sharply in January due in part to
political issues overseas.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
70.0
70.0
60.0
65.0
50.0
40.0
60.0
30.0
20.0
02:Q4
03:Q3
04:Q2
05:Q1
05:Q4
Sep-05
Nov-05
55.0
Jan-06
Source: Wall Street Journal (oil prices).
.
Overall, the economy grew in the fourth quarter at its slowest pace in three years.
But the economy remains resilient in the face of recent shocks, and hurricance
reconstrucion should help support growth in early 2006. Positive employment data
has helped boost consumer attitudes, but high energy prices could restict spending
and a cooling housing market will likely temper economic growth during the year.
Percent
Short-Term Interest Rates
5.0
Discount Window
Primary Credit
4.0
6.00
3.0
5.00
4.00
3.00
2.0
2.94
3.44
3.91
4.43
4.97
5.26
Federal Funds Rate
(effective rate)
2.00
04:Q4
05:Q1
05:Q2
05:Q3
05:Q4 Jan-06
1.0
0.0
02:Q4 03:Q1
03:Q2 03:Q3
03:Q4 04:Q1
04:Q2 04:Q3
04:Q4 05:Q1
05:Q2 05:Q3
Source: Federal Reserve Board of Governors.
05:Q4 Jan-06
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
February 9, 2006
Current Economic Developments - Addendum: Data released in the past week
In January, nonfarm payrolls added 193,000 jobs and the unemployment rate decreased
to 4.7%. December payrolls were revised to show an increase of 140,000 jobs, 32,000
more than the original estimate of a 108,000 job increase, and November payrolls were
revised to show an increase of 354,000 jobs, 49,000 more than the previously reported
increase of 305,000.
Auto sales increased in January, to an annualized rate of 17.6 million units. It was the
second consecutive monthly increase, and was the result of a new round of manufacturer
incentives designed to boost sales following the slower fourth quarter sales.
Consumer sentiment, after imporving in early January, fell back to its December level by the
end of the month. Sentiment closed the month at 91.2, nearly identical to the 91.5 recorded
in December. Expectations decreased slightly to 78.9 in January, from 80.2 in December.
Redbook sales increased 0.4% in the first week of February, compared to January. Sales
were 3.3% higherer than during the same period last year. Oil prices decreased during the
past week, averaging 65.0 dollars per barrel compared to last week's average of 67.1.
Payroll employment posted a strong gain in January, and revisions to the prior
two months' estimates resulted in a net gain of 81,000 additional jobs. The
unemployment rate fell two-tenths of a percentage point in January to 4.7%.
Nonfarm Payroll Employment
Change from Previous Quarter, Monthly Average
Unemployment Rate
Rate
6
400
Change from Previous Month
350
5.8
Nov-05
Dec-05
Jan-06
354,000
140,000
193,000
300
5.6
250
5.4
200
5.2
150
5
100
4.8
50
4.6
0
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
04:Q1
04:Q3
05:Q1
05:Q3 Jan-06
Source: Bureau of Labor Statistics.
03:Q4 04:Q2 04:Q4 05:Q2 05:Q4
04:Q1 04:Q3
05:Q1 05:Q3 Jan-06