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 - December 8, 2004
Data released since your last Directors' meeting show the economy is improving,
but the labor market needs to see continued growth in order to sustain the recovery.
In November, nonfarm payrolls added only about half the number of jobs anticipated
by the market. Despite November's disappointing job growth, the unemployment
rate fell one-tenth of a percentage point. Initial claims continued to fall in November.
Consumer attitudes were somewhat mixed in November. The University of
Michigan's consumer sentiment index rose in November, but has been basically
flat over the past several months. The Conference Board's consumer confidence
index continued to fall.
Consumer and Producer prices rose in October, but core inflation remained
moderate. Oil prices continued to fall in November and in the first week of December.
In the third quarter real GDP was revised upward, led by an increase in
personal consumption expenditures and a slowdown in imports.
In November, nonfarm payrolls rose at only about half the pace anticipated by
the market. Still, the unemployment rate posted one-tenth of a percentage
point drop, reversing the rise seen in October.
Change in Nonfarm Payroll Employment
The Unemployment Rate
Change, Previous Month
Change, Previous Month
6.0
400
300
5.9
3-month moving average
200
5.8
100
5.7
0
5.6
-100
5.5
-200
5.4
-300
5.3
Nov-02
Jul-03
Mar-03
Source: Bureau of Labor Statistics.
Mar-04
Nov-03
Nov-04 Nov-03
Jul-04
Mar-04
Jul-04
Nov-04
Jan-04
May-04
Sep-04
Initial claims continued to fall in November.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
380
380
360
360
4-week moving average
ending November 27th
336,500
340
340
320
320
Nov-03
Jan-04
Dec-03
Mar-04
Feb-04
May-04
Apr-04
Jul-04
Jun-04
Sep-04
Aug-04
Nov-04
Oct-04
Source: Department of Labor, Employment and Training Administration.
Consumer attitudes were somewhat mixed in November. Consumer sentiment
has been basically flat over the past several months, while confidence continued
to fall.
Consumer Sentiment
Consumer Confidence
Index, 1966:Q1 = 100
Index, 1985 = 100
120
110
Consumer Expectations
110
Current Conditions
100
100
90
90
80
Present Situation
80
70
Consumer Sentiment
70
60
Future Expectations
Consumer Confidence
60
50
Nov-02
Jul-03
Mar-04
Nov-04
Mar-03
Nov-03
Jul-04
Nov-02
Jul-03
Mar-04
Nov-04
Mar-03
Nov-03
Jul-04
Source: The University of Michigan (left panel) and The Conference Board (right panel).
Real disposable income rose in October, while real consumption eased somewhat.
October's slowdown in spending was led by a reduction in vehicle sales.
Retail Sales
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
2.0
3.0
Real Disposable Income
1.5
Retail Sales
Real Consumption
2.0
Retail Sales,
Excluding Autos
1.0
1.0
0.5
0.0
0.0
-0.5
-1.0
-1.0
-1.5
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Jan-03
Jul-03
Jan-04
Jul-04
-2.0
Apr-04
Jun-04
Aug-04
Oct-04
May-04
Jul-04
Sep-04
Sources: Bureau of Economic Analysis (income and consumption) and U.S. Census Bureau (retail sales).
Domestic auto and light truck sales continued to fall in November.
Domestic Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
15.0
15.0
14.0
14.0
13.0
13.0
12.0
12.0
11.0
11.0
Nov-02
Mar-03
Jan-03
Jul-03
May-03
Source: Bureau of Economic Analysis.
Nov-03
Sep-03
Mar-04
Jan-04
Jul-04
May-04
Nov-04
Sep-04
The housing market remains strong, despite recent increases in interest rates.
New and existing home sales were little changed in October.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1300
7000
1200
6500
New Home Sales
1100
6000
Existing Home Sales
1000
5500
900
5000
Oct-02
Feb-03
Dec-02
Jun-03
Apr-03
Oct-03
Aug-03
Feb-04
Dec-03
Jun-04
Apr-04
Oct-04
Aug-04
Source: U.S. Census Bureau (new homes sales) and National Association of Realtors (existing home sales).
Housing starts rose in October, while building permits eased slightly.
Housing Starts and Building Permits
Thousands of Units, Annualized
Thousands of Units, Annualized
2300
2300
Building Permits
2200
2200
2100
2100
Housing Starts
2000
2000
1900
1900
1800
1800
1700
1700
1600
1600
1500
1500
Oct-02
Feb-03
Dec-02
Source: U.S. Census Bureau.
Jun-03
Apr-03
Oct-03
Aug-03
Feb-04
Dec-03
Jun-04
Apr-04
Oct-04
Aug-04
According to the ISM index, the manufacturing sector continued to expand in
November for its 18th straight month.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
ISM Index
60.0
60.0
55.0
55.0
Employment Index
50.0
50.0
45.0
45.0
40.0
40.0
Nov-02
May-03
Nov-03
Feb-03
Aug-03
May-04
Nov-04
Feb-04
Aug-04
Source: Institute for Supply Management.
Industrial production and capacity utilization also posted gains in October.
Industrial Production and Capacity Utilization
Percent of Capacity
Percent Change, Previous Month
1.5
78.0
Capacity Utilization
(manufacturing)
77.0
Industrial Production
1.0
76.0
0.5
75.0
0.0
74.0
-0.5
73.0
-1.0
72.0
Oct-02
Feb-03
Dec-02
Jun-03
Apr-03
Source: Federal Reserve Board of Governors.
Oct-03
Aug-03
Feb-04
Dec-03
Jun-04
Apr-04
Oct-04
Aug-04
New orders for capital goods, nondefense excluding aircraft, fell in October, but
from very high levels.
Durable Goods Orders
Percent Change, Previous Month
Percent Change, Previous Month
10.0
10.0
5.0
5.0
Durable Goods,
New Orders
0.0
0.0
-5.0
-5.0
Capital Goods Nondefense,
Excluding Aircraft
-10.0
-10.0
Oct-02
Feb-03
Dec-02
Jun-03
Apr-03
Oct-03
Aug-03
Feb-04
Dec-03
Jun-04
Apr-04
Oct-04
Aug-04
Source: U.S. Census Bureau.
Consumer and Producer prices rose in October, led by an increase in oil prices. But core
rates of inflation remain moderate.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
3.5
3.5
Consumer Price Index
Consumer Price Index,
3.0
3.0
excluding food and energy
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04
Producer Price Index
Percent Change, Year-Over-Year
5.5
4.0
Producer Price Index
Percent Change, Year-Over-Year
Producer Price Index,
excluding food and energy
5.5
4.0
2.5
2.5
1.0
1.0
-0.5
-0.5
-2.0
-2.0
Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04
Source: Bureau of Labor Statistics.
Oil prices continued to fall in November and in the first week of December.
Domestic Spot Oil Price
Dollar per Barrel
Dollar per Barrel
60.0
60.0
Week Ending
December 7th
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
Nov-02
Mar-03
Jan-03
Jul-03
May-03
Nov-03
Sep-03
Mar-04
Jan-04
Jul-04
May-04
Nov-04
Sep-04
Source: Wall Street Journal (oil prices).
.
Third quarter real GDP was revised upward, led by an increase in personal
consumption expenditures and a slowdown in imports.
Real GDP
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
04:Q1
04:Q2
Revisions to Third Quarter Real GDP
Description
Real GDP
Personal Consumption
Business Investment
Residential Investment
Government
Exports
Imports
Final Sales
Source: Bureau of Economic Analysis.
Advanced
3.7
4.6
11.7
3.1
1.4
5.1
7.7
4.2
Preliminary
3.9
5.1
12.9
1.7
1.2
6.3
6.0
4.9
04:Q3
Productivity was slower in the third quarter, compared to the second.
Compensation and unit labor costs also eased.
Productivity and Costs
Annualized Percent Change
Annualized Percent Change
10.0
10.0
Output Per Hour
7.5
7.5
Compensation Per Hour
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5
Unit Labor Costs
-5.0
-5.0
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
04:Q1
04:Q2
04:Q3
Source: Bureau of Labor Statistics.
Overall, the economy is improving, but the labor market needs to see continued
growth in order to sustain the recovery.
Short-Term Interest Rates
Percent
2.5
Percent
2.5
Federal Funds Rate
(effective rate)
Discount Window
Primary Credit
2.0
2.0
3.50
3.00
2.50
1.5
2.25
2.75
2.58
2.43
3.00
2.00
1.5
1.50
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
1.0
1.0
0.5
0.5
Nov-03
Jan-04
Dec-03
Mar-04
Feb-04
Source: Federal Reserve Board of Governors.
May-04
Apr-04
Jul-04
Jun-04
Sep-04
Aug-04
Nov-04
Oct-04