Download PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,

PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
Current Economic Developments - September 8th, 2005
Data released since your last Directors' meeting show the economy is growing at a
solid pace, but one that is not as fast as previously expected. While continued
employment growth will be important in maintaining this level of growth, the economic
effects of Hurricane Katrina may play a significant role.
In August, payroll employment increased and the unemployment rate fell while initial
claims held steady. Consumer attitudes were mixed in August, with sentiment falling
and confidence rising. Real consumption expenditures slowed in July, yet remain
strong. Real disposable income was unchanged. Auto sales slowed in August as the
effect of special sales began to wear off.
The housing market continued to defy expectations, as new home sales set yet another
record and existing home sales remained high. In the manufacturing sector, the ISM
index eased in August and growth in industrial production slowed in July. Durable goods
orders also slowed in July, as did orders for nondefense capital goods, excluding aircraft.
Revisions to second quarter real GDP growth were minor. The slight downward revision
was due primarily to higher imports and lower consumption, which offset an increase in
inventory investment.
The labor market continues to show signs of strength. Payroll employment increased
again in August and the unemployment rate dropped one-tenth of a percentage point
to reach a four-year low. Initial claims were unchanged in August.
Nonfarm Payroll Employment
Unemployment Rate and Initial Claims
Change from Previous Quarter, Average Monthly
Percent
400
6.2
Three-month
moving average
6.0
300
Thousands of Units at Annual Rates
420
Unemployment
Rate
400
5.8
380
200
5.6
360
5.4
100
340
5.2
0
5.0
-100
Aug-03
Initial Claims
4.8
Apr-04
Dec-03
Dec-04
Aug-04
Aug-05
Apr-05
320
300
Aug-03
Apr-04
Dec-04
Aug-05
Dec-03
Aug-04
Apr-05
Source: Bureau of Labor Statistics (employment) Department of Labor, Employment and Training Administration (claims).
Measures of consumer attitudes were mixed in August, as the University of Michigan
index fell and the Conference Board index rose. Also, the disparity between
consumers feelings toward current conditions and future expectations continued to
widen.
University of Michigan
Conference Board
Index, 1985 = 100
Index, 1966:Q1 = 100
120
130
Future Expectations
Consumer Confidence
Present Situation
120
110
Consumer Expectations
Current Conditions
100
110
Consumer Sentiment
100
90
90
80
80
70
70
60
60
Aug-02
Aug-03
Feb-03
Aug-04
Feb-04
Aug-05
Aug-02
Feb-05
Aug-03
Feb-03
50
Aug-05
Aug-04
Feb-04
Feb-05
Source: The University of Michigan (left panel) and The Conference Board (right panel).
Growth in real consumption was strong for the second consecutive month in July,
though a bit slower. Real disposable income was flat.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
1.5
5.0
4.0
1.0
Real Consumption
3.0
2.0
0.5
1.0
0.0
0.0
-1.0
-0.5
-2.0
-3.0
-1.0
Real Disposable
Income
-4.0
-1.5
Jul-02
Jan-03
Oct-02
Jul-03
Apr-03
Source: Bureau of Economic Analysis.
Jan-04
Oct-03
Jul-04
Apr-04
-5.0
Jul-05
Jan-05
Oct-04
Apr-05
Auto sales receded in August, as special employee-discount-for-everyone sales began
to lose their luster after boosting sales the prior two months.
Total Auto and Light Truck Sales
Millions of Units, Annualized
21.0
20.0
19.0
18.0
17.0
16.0
15.0
Aug- 1
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Source: Federal Reserve, Board of Governors.
The housing market continued to be strong in July, as new home sales set another
record while existing home sales remained high. Also, building permits increased
and housing starts were unchanged.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1600
8000
Existing Home Sales
1400
1200
7000
New Home Sales
6000
1000
800
Jul-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
5000
Jul-05
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2200
2400
Housing Starts
2200
Building Permits
2000
2000
1800
1800
1600
1600
1400
Jul-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
1400
Jul-05
Source: U.S. Census Bureau (new home sales, housing starts and building permits) and National Association of Realtors (existing sales).
The ISM composite and employment indices eased in August, partially offsetting
the prior months' gains.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
ISM Index
60.0
60.0
55.0
55.0
50.0
50.0
Employment Index
45.0
45.0
40.0
40.0
Aug-02
Feb-03
Nov-02
Aug-03
May-03
Feb-04
Nov-03
Aug-04
May-04
Feb-05
Nov-04
Aug-05
May-05
Source: Institute for Supply Management.
In July, industrial production grew slightly and capacity utilization was flat.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
79.0
1.5
Capacity Utilization
(manufacturing)
78.0
1.0
77.0
Industrial Production
0.5
76.0
75.0
0.0
74.0
-0.5
73.0
-1.0
72.0
Jul-02
Jan-03
Oct-02
Jul-03
Apr-03
Source: Federal Reserve Board of Governors.
Jan-04
Oct-03
Jul-04
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
New orders for durable goods grew in July, but at less than half the pace as seen
over the prior two months. Growth also slowed for nondefense capital goods,
excluding aircraft.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
25.0
25.0
20.0
Capital Goods Nondefense,
Excluding Aircraft
Durable Goods,
New Orders
20.0
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-02
Jan-03
Oct-02
Jul-03
Apr-03
Jan-04
Oct-03
Jul-04
Apr-04
Jan-05
Oct-04
Jul-05
Apr-05
Source: U.S. Census Bureau.
As measured by total CPI, inflation increased in July, but core inflation was flat. At
the wholesale level, both overall and core prices increased at a faster pace.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
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-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
1.0
0.0
Jul-05
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
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
Jul-02
Nov-02
Mar-03
Source: Bureau of Labor Statistics.
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
0.0
-2.0
Jul-05
Oil prices continued to surge in August, briefly exceeding $70 per barrel with the
landfall of Hurricane Katrina. Oil prices will continue to rise as damages to oil and
gas supplies in the Gulf of Mexico, as well as refineries in Louisiana, are assessed.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars per Barrel
70.0
70.0
Week ending
September 6th,
$68.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
Sep-02
Mar-03
Dec-02
Sep-03
Jun-03
Mar-04
Dec-03
Sep-04
Jun-04
20.0
Sep-05
Mar-05
Dec-04
Jun-05
Source: Wall Street Journal.
.
Revisions to second quarter real GDP growth were small in most areas. The slight
downward adjustment primarily reflected lower consumption and higher imports,
offsetting an upward revision to inventory investment.
Revisions to Second Quarter Real GDP
Description
Advanced
Preliminary
3.4
3.3
Personal Consumption
3.3
3.0
Business Investment
9.0
8.4
11.0
10.4
Real GDP
Equipment and Software
Government
2.0
2.7
Exports
12.6
13.2
Imports
-2.0
0.5
Final Sales
5.8
5.4
Real GDP
8.0
6.0
4.0
2.0
0.0
02:Q2
02:Q4
Source: Bureau of Economic Analysis.
03:Q2
03:Q4
04:Q2
04:Q4
05:Q2
Productivity growth decreased in the second quarter, offsetting the previous quarters'
increase. Hourly compensation was lower while unit labor costs rose slightly.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
15.0
15.0
Compensation Per Hour
Output Per Hour
10.0
10.0
5.0
5.0
0.0
0.0
Unit Labor Costs
-5.0
-5.0
02:Q2
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
05:Q2
05:Q1
Source: Bureau of Labor Statistics.
Overall, data released since your last Directors' meeting show the economy is
growing at a solid pace, but the third quarter rebound is not expected to be as
significant as earlier anticipated. Economic conditions in the immediate future may
largely be determined by the extent of damages caused by Hurricane Katrina.
Percent
Short-Term Interest Rates
5.0
4.0
Discount Window
Primary Credit
4.80
4.44
4.40
3.0
4.25
3.98
4.00
4.01
Federal Funds Rate
(effective rate)
3.75
3.60
2.0
Apr-05 May-05 Jun-05 Jul-05 Aug-05
1.0
0.0
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Source: Federal Reserve Board of Governors.
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05