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The
President’s
Report to the
Board of
Directors
December 1, 2005
CURRENT ECONOMIC DEVELOPMENTS - December 1, 2005
Data released since your last Directors' meeting show the economy is growing at
its fastest pace since the first quarter of 2004. The recovery from Hurricanes Rita
and Katrina is evident in the data, and should continue into early 2006.
In November, initial claims for unemployment insurance decreased to return to
their pre-hurricane levels. Consumer attitudes improved dramatically, as all
measures of confidence and sentiment rebounded from the prior months' doldrums.
In October, real consumption grew for the first time since the hurricanes and real
disposable income experienced little change.
The housing market was mixed in October, as new home sales increased to a
record high, yet housing starts and building permits decreased to their lowest levels
since March. In the manufacturing sector, the ISM index decreased slightly in
November while industrial production grew at its fastest pace in over a year in
October. New orders for durable goods rose due to strong aircraft demand and
orders for nondefense capital goods, excluding aircraft, also increased.
During the third quarter, real GDP was greater than originally thought. The upward
revision primarily reflected stronger residential investment and higher consumer
spending.
Initial claims for unemployment insurance decreased in November, returning to
a level more consistent with where they were during the first half of the year before
the storms struck.
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
Nov-02
May-03
Nov-03
May-04
Nov-04
May-05
Nov-05
Feb-03
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Source: Department of Labor, Employment and Training Administration.
In November, consumer attitudes started to recover from their hurricane induced
reductions While the effects of the storms are still evident, the rebound is a good
sign as the holiday spending season begins.
Consumer Confidence
Consumer Sentiment
Index, 1966:Q1 = 100
Index, 1985 = 100
120
130
Present
Situation
Consumer
Confidence
120
Current
Conditions
Future
Expectations
110
Consumer
Expectations
110
Consumer
Sentiment
100
100
90
90
80
80
70
70
60
50
Nov-03
May-04
Nov-04
May-05
Nov-05
Nov-03
May-04
Nov-04
May-05
60
Nov-05
Source: The University of Michigan.
Source: The Conference Board.
Real consumption grew for the first time in three months in October, while growth in
real disposable income slowed.
Real Consumption and Real DPI
Percent Change, Previous Month
Percent Change, Previous Month
5.0
1.5
4.0
Real Consumption
1.0
3.0
2.0
0.5
1.0
0.0
0.0
-1.0
-0.5
-2.0
-1.0
-3.0
Real Disposable
Income
-1.5
Oct-02
Apr-03
Jan-03
Oct-03
Jul-03
Source: Bureau of Economic Analysis.
Apr-04
Jan-04
-4.0
Oct-04
Jul-04
-5.0
Oct-05
Apr-05
Jan-05
Jul-05
The housing market was mixed in October. Sales of new homes reached a new record
pace, and existing home sales remained strong. However, housing starts and building
permits were down slightly in October following a strong September.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
8000
1600
Existing Home Sales
1400
1200
7000
New Home Sales
6000
1000
800
Oct-02
Feb-03
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
5000
Oct-05
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2400
2400
2200
Building Permits
Housing Starts
2200
2000
2000
1800
1800
1600
1600
1400
Oct-02
Feb-03
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
1400
Oct-05
Source: U.S. Census Bureau (new home sales, housing starts and building permits) and National Association of Realtors (existing sales).
The ISM manufacturing composite index fell slightly in November, but the
employment index rose to its highest point since February. The price index fell
after three consecutive monthly increases.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
90.0
90.0
80.0
80.0
Price Index
70.0
70.0
ISM Index
60.0
60.0
50.0
50.0
Employment Index
40.0
40.0
30.0
30.0
Nov-02
May-03
Feb-03
Nov-03
Aug-03
Source: Institute for Supply Management.
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
Industrial production rebounded in October from a weak September, while capacity
utilization recouped the prior month's losses.
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent of Capacity
80.0
1.5
1.0
79.0
Industrial Production
78.0
0.5
77.0
0.0
76.0
-0.5
75.0
-1.0
74.0
Capacity Utilization
(manufacturing)
-1.5
-2.0
Oct-02
Apr-03
Jan-03
Oct-03
Jul-03
73.0
Apr-04
Jan-04
Oct-04
Jul-04
72.0
Oct-05
Apr-05
Jan-05
Jul-05
Source: Federal Reserve Board of Governors.
New orders for durable goods increased in October, as strong demand for aircraft
offset a decline in motor vehicle orders. Orders for nondefense capital goods,
excluding aircraft, also rose.
Durable Goods Orders
Percent Change, Year-over-year
Percent Change, Year-over-year
24.0
24.0
Capital Goods Nondefense,
Excluding Aircraft
20.0
20.0
Durable Goods,
New Orders
16.0
16.0
12.0
12.0
8.0
8.0
4.0
4.0
Durable Goods, New Orders
Percent change, month-over-month
0.0
-4.0
Aug-05
Sep-05
Oct-05
3.88
-2.04
3.43
0.0
-4.0
-8.0
-8.0
Oct-02
Apr-03
Jan-03
Source: U.S. Census Bureau.
Oct-03
Jul-03
Apr-04
Jan-04
Oct-04
Jul-04
Apr-05
Jan-05
Oct-05
Jul-05
Inflation eased in October, as total CPI slowed for the first time since June and core
price growth was flat. Similar changes were seen at the wholesale level, with total
PPI decelerating and core producer prices easing 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
Oct-02
Feb-03
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
1.0
0.0
Oct-05
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
Oct-02
Feb-03
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
0.0
-2.0
Oct-05
Source: Bureau of Labor Statistics.
Oil prices fell for a second consecutive month in November, bringing the spot price
per barrel below $60 for the first time since the hurricanes.
Domestic Spot Oil Price
Dollasr per Barrel
Dollars 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
Nov-02
May-03
Feb-03
Source: Wall Street Journal.
.
Nov-03
Aug-03
May-04
Feb-04
Nov-04
Aug-04
May-05
Feb-05
Nov-05
Aug-05
Real GDP in the third quarter was stronger than originally thought. The upward
revision primarily reflected stronger residential investment, personal consumption,
and equipment and software investment. These gains were partly offset by an
upward revision to imports.
Revisions to Third Quarter Real GDP
Description
Advance
Preliminary
3.8
4.3
Personal Consumption
3.9
4.2
Business Investment
6.2
8.8
8.9
10.8
Residential Investment
4.8
8.4
Government
3.2
3.2
Exports
0.8
0.8
Imports
0.0
2.1
Final Sales
4.4
4.7
Real GDP
Equipment and Software
Real GDP
8.0
6.0
4.0
2.0
0.0
02:Q3 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: Bureau of Economic Analysis.
Overall, data released since your last Directors' meeting show the economy is
growing at its fastest pace of the year. The continued recovery of consumer attitudes,
reductions in energy prices, and an improving job outlook will be key in sustaining
this rate of growth into next year.
Percent
Short-Term Interest Rates
6.0
Discount Window
Primary Credit
5.0
4.0
3.0
5.25
5.00
4.75
4.50
4.25
4.00
5.00
4.44
4.59
4.75
4.25
Federal Funds Rate
(effective rate)
Jul-05 Aug-05 Sep-05 Oct-05 Nov-05
2.0
1.0
0.0
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Source: Federal Reserve Board of Governors.
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
December 8, 2005
Current Economic Developments - Addendum: Data released in the past week
In November, nonfarm payrolls added 215,000 jobs and the unemployment rate held at 5.0.
October payrolls were revised to show an increase of 44,000 jobs, 12,000 fewer than the
original estimate of a 56,000 job increase. But September payrolls were revised to a 17,000
job increase, up from the previous estimate of an 8,000 job decrease.
Auto sales increased in November for the first time since July. While sales are still relatively
low, lower gas prices coupled with new manufacturers incentives should lead to stronger sales
going forward.
Productivity grew at its fastest pace since mid-2003 in the third quarter, while unit labor costs
decreased. Costs were also revised to show a 1.2% decrease in the second quarter,
originally estimated as a 1.8% increase.
Redbook sales decreased 0.3% in the first week of December, compared to November. Sales
were 3.3% higher than during the same period last year. Oil prices increased during the past
week, averaging 59.0 dollars per barrel compared to last week's average of 57.4.
Payroll employment posted a strong gain in November, and revisions to the prior
two months' estimates resulted in a net gain of 13,000 additional jobs. The
unemployment rate was unchanged in November at 5.0%.
Nonfarm Payroll Employment
Change from Previous Month
Unemployment Rate
Rate
6
375
5.8
300
5.6
225
5.4
150
5.2
75
5
0
Nov-03
May-04
Nov-04
May-05
Nov-05
Feb-04
Aug-04
Feb-05
Aug-05
Source: Bureau of Labor Statistics.
4.8
Nov-03
May-04
Nov-04
May-05
Nov-05
Feb-04
Aug-04
Feb-05
Aug-05
Auto sales increased in November, but only to their second-lowest total of the year.
Still, the vehicle sales market is improving behind new manufacturers incentives,
larger inventories, and lower gas prices.
Total Auto and Light Truck Sales
Millions of Units, Annualized
21.0
20.0
19.0
18.0
17.0
16.0
15.0
14.0
Nov-1
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Source: Federal Reserve, Board of Governors.
In the third quarter productivity grew at its fastest pace in two years, but total hours
worked were restrained by the hurricanes and may have inflated the productivity
estimate. Unit labor costs decreased for the second straight quarter.
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:Q3
03:Q1
02:Q4
03:Q3
03:Q2
Source: Bureau of Labor Statistics.
04:Q1
03:Q4
04:Q3
04:Q2
05:Q1
04:Q4
05:Q3
05:Q2