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The
President’s
Report to the
Board of
Directors
March 2, 2006
Current Economic Developments - March 2, 2006
Data released since your last Directors' meeting show the economy grew in the fourth quarter
at a faster pace than originally estimated, but one that is still the slowest in three years. Data
released thus far in 2006 suggest first quarter growth will be stronger.
In February, initial claims held close to the five year low reached the previous month. Overall
consumer attitudes edged downward in February, but their feelings toward current conditions
remain high. Real consumption expenditures grew in January, but at a slighly slower pace
than seen in December.
The housing market showed mixed signs in January. New home sales declined for the fourth
time in six months, and existing home sales slowed for the fifth straight month. Despite the
slower sales, housing starts and permits both increased in January. In the manufacturing
sector, the ISM manufacturing and employment indices both increased in February. In
January, industrial production fell, new orders for durable goods dropped as transportation
orders declined sharply, and orders for nondefense captial goods, excluding aircraft, also
slowed.
Despite an acceleration in overall consumer prices, core inflation slowed slightly in January.
Core producer prices also slowed a bit in January and oil prices eased in February.
During the fourth quarter, real GDP was stronger than originally thought. The upward revision
primarily reflected greater exports, higher government spending, increased spending on
equipment and software, and stronger inventory buildup. These positive revisions were partly
offset by increased imports.
In February, initial claims for unemployment rose slightly, staying close to the five
year low established in January.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
450
450
400
400
350
350
300
300
250
250
Feb-03
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
May-03
Nov-03
May-04
Nov-04
May-05
Nov-05
Source: Department of Labor, Employment and Training Administration.
Consumer confidence dipped in February, as did future expectations. However,
consumers' attitudes toward current conditions remained positive.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
140
Present
Situation
Confidence
130
Expectations
Current
Conditions
110
120
Expectations
110
100
Sentiment
100
90
90
80
80
70
70
60
50
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Feb-04
Aug-04
Feb-05
Aug-05
60
Feb-06
Source: The University of Michigan.
Source: The Conference Board.
In January, both real income and consumption slowed for the second consecutive
month.
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
5.0
5.0
4.0
4.0
3.0
3.0
Real Consumption
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
Real Disposable Income
-3.0
-4.0
Jan-03
Jul-03
Apr-03
Jan-04
Oct-03
Source: Bureau of Economic Analysis.
Jul-04
Apr-04
-3.0
Jan-05
Oct-04
-4.0
Jan-06
Jul-05
Apr-05
Oct-05
The housing market was mixed in January. Sales of new homes declined, offsetting
the prior month's gains, and existing home sales decreased again. But housing
starts and building permits increased in January, after falling in December.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1400
8000
New Home Sales
1200
7000
1000
6000
Existing Home Sales
800
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
5000
Jan-06
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2200
2400
Housing Starts
Building Permits
2200
2000
2000
1800
1800
1600
1600
1400
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
1400
Jan-06
Source: U.S. Census Bureau (new home sales, housing starts and building permits) and National Association of Realtors (existing sales).
The ISM manufacturing and employment indices both increased in February, partially
offsetting previous losses. The price index declined a bit.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
100.0
100.0
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
30.0
30.0
Feb-03
Aug-03
May-03
Feb-04
Nov-03
Source: Institute of Supply Management.
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
In January, industrial production fell for the first time in four months, but capacity
utilization continued to rise.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
81.0
1.5
80.0
Industrial Production
1.0
79.0
0.5
78.0
77.0
0.0
76.0
-0.5
75.0
74.0
-1.0
Capacity Utilization
(manufacturing)
-1.5
Jan-03
73.0
72.0
Jul-03
Apr-03
Jan-04
Oct-03
Jul-04
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
Jan-06
Oct-05
Source: Federal Reserve Board of Governors.
In January, new orders for durable goods experienced thier largest drop in over five
years, due primarily to large decreases in aircraft orders. Also in January, new
orders for nondefense capital goods excluding aircraft decreased.
New Orders
Percent Change, Previous Month
Percent Change, Previous Month
20.0
15.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
Durable Goods,
New Orders
15.0
10.0
10.0
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
-15.0
-15.0
Jan-03
May-03
Sep-03
Jan-04
New Orders, Durable Goods
Transportation Equipment
May-04
Sep-04
Jan-05
May-05
Sep-05
Dec-05
Jan-06
3.6
-31.2
Nondefense Aircraft
-2.8
-68.2
Defense Aircraft
31.8
-22.0
Source: U.S. Census Bureau.
Jan-06
Inflation, as measured by total CPI, increased in January while core inflation was
essentially flat. At the wholesale level, overall prices accelerated mildly while core
prices slowed 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
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
1.0
Sep-05
0.0
Jan-06
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
8.0
6.0
6.0
Producer Price Index
4.0
4.0
2.0
2.0
Producer Price Index,
excluding food and energy
0.0
-2.0
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
0.0
Sep-05
-2.0
Jan-06
Source: Bureau of Labor Statistics.
Oil prices eased a bit in February, following a sharp rise in January.
Domestic Spot Oil Price
Dollars per Barrel
Dollasr per Barrel
70.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
Feb-03
Aug-03
May-03
Source: Wall Street Journal.
.
Feb-04
Nov-03
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
Feb-06
Nov-05
Real GDP in the fourth quarter was stronger than originally thought. The upward
revision primarily reflected greater exports, higher government spending, increased
spending on equipment and software, and stronger inventory buildup. These
positive revisions were partly offset by increased imports.
Revisions to Fourth Quarter Real GDP
Description
Advanced
Preliminary
1.1
1.6
Personal Consumption
1.1
1.2
Business Investment
2.8
5.4
3.5
6.2
Real GDP
Equipment and Software
Residential Investment
3.5
2.6
Government
-2.4
-0.7
Exports
2.4
5.7
Imports
9.1
12.8
Final Sales
-0.3
0.0
Real GDP
8.0
6.0
4.0
2.0
0.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
05:Q4
Source: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy grew in
the fourth quarter at a faster pace than originally estimated, but one that is still the
slowest in three years. Data released thus far in 2006 suggest first quarter growth
will be stronger.
Percent
Short-Term Interest Rates
6.0
Discount Window
Primary Credit
5.0
5.50
4.0
5.50
5.00
5.00
5.26
Federal Funds Rate
(effective rate)
4.75
4.50
3.0
5.15
Oct-05 Nov-05 Dec-05 Jan-06 Feb-06
2.0
1.0
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Source: Federal Reserve Board of Governors.
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
March 9, 2006
Current Economic Developments - Addendum: Data released in the past week
Auto sales slowed in February to an annualized rate of 16.6 million units, down from
January's estimated rate of 17.6 million. February's decrease was the first monthly decline
since October.
Productivity was revised slightly higher in the fourth quarter, dropping 0.5% instead of the
initial estimate of 0.6%. The higher number reflected gains of 1.5% in output and 2.0% in
total hours worked.
Consumer sentiment closed February largely unchanged from its mid-month estimates.
Sentiment ended the month at 86.7, down slightly from the 87.4 seen in the middle of
February. Expectations were essentially flat, finishing the month at 74.5 after registering
a 74.4 earlier.
Redbook sales decreased 2.5% in the first week of March, compared to February. Sales
were 2.4% lower than during the same period last year. Oil prices rose during the past week,
averaging 62.6 dollars per barrel compared to last week's average of 60.2.
Due to the timing of the survey, February's employment data was not published last week,
and instead will be released tomorrow. Nonfarm payrolls are expected to increase by
210,000, with the unemployment rate holding at 4.7%.
Total auto and light truck sales slowed in February, following three consecutive
monthly increases.
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
12.0
10.0
Feb-03
Aug-03
May-03
Feb-04
Nov-03
Source: Bureau of Economic Analysis.
Aug-04
May-04
Feb-05
Nov-04
10.0
Feb-06
Aug-05
May-05
Nov-05
Productivity decreased in the fourth quarter, but by slightly less than originally
estimated. 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
-6.0
02:Q4
-3.0
Unit Labor Costs
03:Q2
Source: Bureau of Labor Statistics.
03:Q4
04:Q2
04:Q4
05:Q2
-6.0
05:Q4