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 - February 10, 2005
Data since your previous Directors' meeting show the economy grew at a slower pace in the
fourth quarter than seen in the third quarter. Core inflation has become a greater concern and
continued employment increases remain key in sustaining a vibrant economy.
During the fourth quarter, real GDP posted a moderate gain, led by growth in consumption,
equipment and software and inventory investment. The gains in these areas were partly offset
by a negative contribution from exports and an increase in imports.
Despite the sustained increases in core inflation for consumers and wholesalers, consumption
remains strong. Total compensation costs, as measured by the ECI, declined slightly even as
benefit costs edged up. Wage and salary inflation held steady. Productivity growth slowed in
the fourth quarter, while unit labor costs edged up and compensation costs fell slightly.
The limited data available for 2005 suggest continued economic strength. In January, payroll
employment increased and the unemployment rate fell. Initial claims continued to edge down
further.
Also in January, the ISM index declined despite an increase in the employment component.
Consumer confidence and sentiment rose while expectations remained relatively flat.
Auto and light truck sales fell in January after two successive quarters of growth.
During the fourth quarter, real GDP decelerated due primarily to a downturn in
exports and an acceleration in imports. Still, the GDP figures portray an expanding
economy, as consumers continue to spend and businesses continue to invest.
Real Gross Domestic Product
Annualized Percent Change
Annualized Percent Change
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
01:Q4
02:Q2
02:Q1
02:Q4
02:Q3
Source: Bureau of Economic Analysis.
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
Real consumption remained robust in the fourth quarter, aided by increases
in both personal and real disposable income.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
9.0
6.0
Real Disposable
Income
4.0
6.0
Personal Income
3.0
2.0
0.0
0.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
Source: Bureau of Economic Analysis.
Still, consumer spending was somewhat lower in the fourth quarter as consumption
of durable goods decreased. Spending on nondurable goods rose for the second
consecutive quarter.
Annualized Percent Change
Durable and Nondurable Goods
AnnualizedPercent Change
40.0
40.0
Durable Goods
30.0
30.0
20.0
20.0
Nondurable goods
10.0
10.0
0.0
0.0
-10.0
-10.0
01:Q4
02:Q2
02:Q1
02:Q4
02:Q3
Source: Bureau of Economic Analysis.
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
During the fourth quarter, businesses continued to invest in equipment and software,
although at a slower pace than seen in the third quarter. Residential investment
posted its smallest gain in three years.
Residential Investment
Business Investment
Annualized Percent Change
Annualized Percent Change
25.0
25.0
Equipment and
Software
20.0
20.0
15.0
15.0
10.0
10.0
5.0
0.0
5.0
-5.0
0.0
Business Investment
-10.0
-5.0
-15.0
01:Q4
02:Q4
02:Q2
03:Q4
03:Q2
01:Q4
04:Q4
02:Q4
02:Q2
04:Q2
03:Q4
03:Q2
04:Q4
04:Q2
Source: Bureau of Economic Analysis.
Government spending increased slightly in the fourth quarter, yet continues to
contribute less than two-tenths of a percentage point to real GDP.
Government Spending
Annualized Percent Change
Annualized Percent Change
10.0
10.0
8.0
8.0
Government spending and
investment
Contribution to Real GDP
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
01:Q4
02:Q2
Source: Bureau of Economic Analysis.
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
Following a year of diminishing growth, exports fell in the fourth quarter. Imports
also increased to further subtract from real growth.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
20.0
20.0
Imports
15.0
15.0
10.0
10.0
5.0
5.0
0.0
0.0
Exports
-5.0
-5.0
-10.0
-10.0
-15.0
-15.0
01:Q4
02:Q2
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
Source: Bureau of Economic Analysis.
Both consumer and producer prices rose in the fourth quarter, due in large
part to record high energy prices. Inflation in the core indices, which exclude
food and energy, has eased after the rapid increases seen earlier in the year.
Consumer Price Index
Past Six Months
Annualized Percent Change
Percent Change, Year-Over-Year
5.0
5.0
4.0
Consumer
Price Index
Consumer Price Index,
excluding food and energy
3.0
4.0
2.0
3.0
1.0
2.0
0.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
Producer Price Index
Core CPI
Percent Change, Year-Over-Year
0.0
6.0
Producer
Price Index
4.0
1.0
-1.0
2.0
Core PPI
0.0
Producer Price Index,
excluding food and energy
-2.0
-4.0
02:Q4
03:Q2
Source: Bureau of Labor Statistics.
03:Q4
04:Q2
04:Q4
-2.0
-3.0
Jul-04
Sep-04
Nov-04
Aug-04
Oct-04
Dec-04
Oil prices peaked in the fourth quarter, reaching an all-time high in October before
receding in November and December. Recent data shows prices remain at
historically high levels.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
54.0
54.0
48.0
51.0
42.0
Week ending
February 8th,
$46.1
36.0
48.0
30.0
45.0
24.0
42.0
18.0
01:Q1
02:Q3
01:Q4
Oct-04
04:Q1
03:Q2
Dec-05
Nov-04
04:Q4
Feb-05
Jan-05
Source: Wall Street Journal (oil prices).
.
Employee costs decelerated during the fourth quarter, as wages and
salaries were flat and benefit costs increased.
Employment Cost Index
Annualized Percentage Change
Annualized Percentage 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
Wages and Salaries
2.0
2.0
01:Q4
02:Q2
Source: Bureau of Labor Statistics.
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
Productivity growth slowed in the fourth quarter, compared to the third, seeing its
smallest increase in nearly four years. Unit labor costs rose slightly while
compensation costs fell somewhat.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
10.0
10.0
Output Per Hour
Compensation Per Hour
5.0
5.0
0.0
0.0
Unit Labor Costs
-5.0
-5.0
01:Q4
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
Source: Bureau of Labor Statistics.
The labor market continues to show signs of strength. Payroll employment increased
again in January and initial claims edged down further. The unemployment rate fell
to its lowest point in over three years.
Nonfarm Payroll Employment
Unemployment Rate and Initial Claims
Change from Previous Quarter, Average Monthly
Percent
300
6.2
Thousands of Units at Annual Rates
440
Unemployment
Rate
Change from Previous Month
200
Nov-04
Dec-04
Jan-05
132,00
0
133,00
0
146,00
0
100
6.0
420
5.8
400
5.6
380
5.4
360
Initial Claims
0
340
5.2
-100
5.0
02:Q4
03:Q2
03:Q4
04:Q2
04:Q4
03:Q1
03:Q3
04:Q1
04:Q3
Jan-05
320
02:Q4 03:Q2 03:Q4 04:Q2 04:Q4
03:Q1 03:Q3 04:Q1 04:Q3 Jan-05
Source: Bureau of Labor Statistics (employment) Department of Labor, Employment and Training Administration (claims).
The ISM index continued to fall in January, despite a rise in the employment index.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
70.0
70.0
60.0
60.0
ISM Index
Employment Index
50.0
50.0
40.0
40.0
30.0
30.0
01:Q4
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
Jan-05
Source: National Association of Purchasing Management.
Consumer confidence increased and sentiment rose slightly in January while
expectations were bascially flat.
Consumer Confidence and Expectations
Index, 1985 = 100
Index, 1985 = 100
125
125
Confidence
Expectations
100
100
75
75
50
01:Q4
50
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
Consumer Senitment and Expectations
Index, 1966:Q1=100
Jan-05
Index, 1966:Q1=100
120.0
120.0
100.0
Sentiment
100.0
Expectations
80.0
80.0
60.0
60.0
01:Q4
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
Source: The Conference Board (confidence) and University of Michigan (sentiment).
04:Q2
04:Q1
04:Q4
04:Q3
Jan-05
Despite the increases in consumer attitudes, auto and light truck sales fell
in January but remain at a high level.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
18.0
18.0
17.0
17.0
16.0
16.0
15.0
15.0
01:Q4
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
02:Q1
03:Q4
03:Q3
04:Q2
04:Q1
04:Q4
04:Q3
Jan-05
Source: Federal Reserve, Board of Governors.
Overall the economy grew at a slower pace in the fourth quarter than seen in the
third quarter. Core inflation has become a greater concern and continued
employment increases remain key to sustaining a vibrant economy.
Percent
Short-Term Interest Rates
3.0
Federal Funds Rate
(effective rate)
2.0
Discount Window
Primary Credit
3.50
3.25
3.00
2.94
2.50
2.00
1.0
1.50
2.42
2.00
2.00
04:Q1
04:Q2
04:Q3
04:Q4
Jan-05
0.0
01:Q4 02:Q1
02:Q2 02:Q3
02:Q4 03:Q1
03:Q2 03:Q3
03:Q4 04:Q1
04:Q2 04:Q3
Source: Federal Reserve Board of Governors.
04:Q4 Jan-05