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PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
Current Economic Developments - December 11, 2003
Data released since your last Directors' meeting show the economy is gaining
strength as the manufacturing sector continues to improve and the labor market
finally shows signs of growth.
In November, payroll employment posted its fourth consecutive increase and the
unemployment rate fell. Initial claims continued to edged downward in November,
marking their lowest level since February 2001. The ISM employment index rose
above 50 for the first time since July 2000, indicating an expansion in manufacturing
employment is on the horizon.
Industrial production and capacity utilization rose in October and continued growth
in durable goods orders suggest business investment will continue to expand in the
near term. Improvements in the economy boosted consumer confidence in November.
Despite October's fall in retail sales, led by a drop in autos, consumption and residential
investment remains strong. Auto sales rebounded in November, reversing their October
decline.
In October, housing starts and building permits rose. Despite a drop in new and
existing home sales, levels remained at near record highs.
In November, payroll employment rose by a net 57,000 jobs, following a revised
increase of 137,000 in October. Despite the slower pace of hiring in November, the
unemployment rate fell to 5.9%, marking its lowest level since March.
Nonfarm Payroll Employment
Percent
Change from Previous Month
300
200
Unemployment Rate
7.0
Nonfarm Payroll Employment
100
6.0
0
-100
5.0
-200
-300
3-Month Moving Average
4.0
-400
Nov-00
Jul-01
Mar-02
Nov-02
Jul-03
Nov-00
Jul-01
Mar-02
Nov-02
Jul-03
Mar-01
Nov-01
Jul-02
Mar-03
Nov-03
Mar-01
Nov-01
Jul-02
Mar-03
Nov-03
Source: Bureau of Labor Statistics.
Initial claims continued to edge down in November, marking their lowest level since
February 2001. Still, claims need to drop further before their level is consistent with
a falling unemployment rate.
Initial Claims
Thousands of Units at Annual Rates
550
500
450
400
November
363,000
350
300
250
N
ov
-0
3
3
ug
-0
A
Source: Department of Labor, Employment and Training Administration.
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ay
-0
3
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b03
N
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-0
2
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-0
2
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-0
2
2
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N
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-0
1
A
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-0
1
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-0
1
01
Fe
b-
N
ov
-0
0
200
The ISM index posted its fifth consecutive month above 50 in November marking
its strongest level in nearly 20 years. The employment index in November rose
above 50 for the first time since July 2000.
ISM Index
Index (50+ = Economic Expansion)
75.0
70.0
ISM Index
65.0
Employment Index
60.0
55.0
50.0
45.0
40.0
35.0
30.0
Nov-83
Nov-87
Nov-85
Nov-91
Nov-89
Source: National Association of Purchasing Management.
Nov-95
Nov-93
Nov-99
Nov-97
Nov-03
Nov-01
Industrial production and capacity utilization rose in October. Continued growth
in durable goods orders suggest business investment will continue to pick up.
New Orders for Durable Goods
Industrial Production and Capacity Utilization
Percent Change, Year-Over-Year
Percent of Capacity
Percent Change, Previous Month
20.0
84.0
1.0
Capital Goods Nondefense
Excluding Aircraft
Industrial Production
82.0
10.0
0.5
80.0
0.0
78.0
0.0
-10.0
New Orders
76.0
-0.5
-20.0
74.0
Capacity Utilization
-1.0
Oct-00
Oct-01
Apr-01
72.0
Oct-03
Oct-00
Oct-02
Apr-02
Apr-03
Oct-01
Apr-01
-30.0
Oct-03
Oct-02
Apr-02
Apr-03
Source: Federal Reserve Board of Governors (industrial production) and U.S. Census Bureau (new orders).
The index of leading indicators rose in October, led by falling initial claims and
rising building permits. Continued growth in the leading index suggests
sound economic growth should continue in the near term.
Index of Leading Indicators
Percent Change, Previous Month
1.5
1.0
0.5
0.0
-0.5
Jan-02
Apr-02
Source: The Conference Board.
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
-1.0
Oct-03
Consumer attitudes continued to improve in November, as confidence hit its
highest level in over a year and sentiment hit its highest level in a year and a half.
Confidence and Expectations
Sentiment and Expectations
Index, 1966:Q1=100
110
100
Index, 1985 = 100
120
Sentiment
90
Expectations
110
100
80
Expectations
90
70
80
60
70
50
Confidence
50
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Ja 02
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Ju 3
lSe 03
pN 03
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-0
3
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M -03
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Ju 03
l-0
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p
N -03
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-0
3
60
Source: University of Michigan (sentiment) and The Conference Board (confidence).
Housing starts and building permits remained strong in October.
Housing Starts and Building Permits
Thousands of Units,
Annualized
2500
Building Permits
Housing Starts
2000
1500
1000
500
Oct-83
Oct-85
Oct-87
Oct-89
Oct-91
Oct-93
Oct-95
Oct-97
Oct-99
Oct-01
Oct-03
Oct-84
Oct-86
Oct-88
Oct-90
Oct-92
Oct-94
Oct-96
Oct-98
Oct-00
Oct-02
Source: U.S. Census Bureau.
New and Existing home sales fell in October, but remained at near record highs
seen earlier in the year.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1300
7000
Existing Home Sales
1200
6500
New Home Sales
1100
6000
1000
5500
900
5000
800
4500
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Source: U.S. Census Bureau (new homes) and National Association of Realtors (existing homes).
In October, despite a rise in real disposable income, real consumption was flat.
A drop in auto sales kept retail sales down.
Retail Sales
Real DPI and Consumption
Percent Change, Previous Month
Percent Change, Previous Month
2.0
3.0
1.5
Real DPI
Retail Sales
2.0
Real Consumption
1.0
1.0
0.5
0.0
0.0
-0.5
-1.0
Retail Sales,
Excluding Autos
-1.0
-1.5
-2.0
Oct-02
Feb-03
Dec-02
Jun-03
Apr-03
Oct-03
Aug-03
Oct-02
Feb-03
Dec-02
Jun-03
Apr-03
Source: Bureau of Economic Analysis (dpi and consumption) and U.S. Census Bureau (retail sales).
Oct-03
Aug-03
But total auto and light truck sales rose in November, reversing the decline
seen in October. However, auto sales in the fourth quarter will most likely be
lower than their third quarter average.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
19.0
18.0
17.0
16.0
15.0
Jan-02
May-02
Mar-02
Sep-02
Jul-02
Jan-03
Nov-02
May-03
Mar-03
Sep-03
Jul-03
Nov-03
Source: Bureau of Economic Analysis.
Real GDP was revised upward by 1.0% in the third quarter, primarily reflecting
stronger exports and investment in inventories, equipment and software, and
housing, that were partly offset by an upward revision to imports.
Real Gross Domestic Product
Annualized Percent Change
9.0
6.0
3.0
0.0
-3.0
00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4 02:Q1 02:Q2 02:Q3 02:Q4 03:Q1 03:Q2 03:Q3
Description
Real GDP
Consumption
Business Investment
Residential Investment
Government
Exports
Imports
Final Sales
Source: Bureau of Economic Analysis.
Advanced
7.2
6.6
11.1
20.4
1.3
9.3
0.1
7.8
Preliminary
8.2
6.4
14.0
22.7
1.3
11.0
1.5
8.0
Inflation remains moderate, especially in core prices.
Consumer Prices
Percent Change, Year-Over-Year
4.0
Consumer Price Index,
excluding food and energy
Consumer Price Index
3.0
2.0
1.0
Oct-00
Feb-01
Jun-01
Oct-01
Feb-02
Jun-02
Oct-02
Feb-03
Jun-03
0.0
Oct-03
Producer Prices
Percent Change, Year-Over-Year
6.0
4.0
Producer Price Index
2.0
0.0
Producer Price Index,
excluding food and energy
Oct-00
Feb-01
Jun-01
Oct-01
Feb-02
Jun-02
Oct-02
Feb-03
Jun-03
Source: Bureau of Labor Statistics.
Overall, the economy is expanding, as the manufacturing sector continues to
improve and the labor market is finally showing signs of improvement. Still,
employment has yet to expand at a rate consistent with a normal recovery.
Percent
Short-Term Interest Rates
2.2
2.0
1.8
Discount Window
Primary Credit
1.6
N
ov
-0
3
3
-0
O
1.0
ct
ug
-0
3
l-0
3
A
Ju
Federal Funds Rate
(effective rate)
1.2
Se
p03
2.00
0.00
1.4
O
ct
-0
3
ug
-0
3
A
A
pr
-0
3
Ju
n03
Source: Federal Reserve Board of Governors.
Fe
b03
ec
-0
2
D
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-0
2
A
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-0
2
Ju
n02
A
pr
-0
2
Fe
b02
D
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-0
1
0.8
-2.0
-4.0
Oct-03