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 11, 2004
Data since your previous Directors' meeting show an expanding economy. During
the fourth quarter, real GDP posted a decent gain, led by growth in consumption, exports,
equipment and software, inventory investment, and residential investment. Imports rose,
subtracting from GDP.
Core inflation for consumers and wholesalers remains low, and total compensation costs,
measured by the ECI, edged slightly downward, as inflation for wages and salaries
remained flat and the growth in benefit costs slowed.
What little data we have for 2004 suggest continued improvement in economic activity.
In January, payroll employment rose and the unemployment rate edged downward. Initial
claims remained in line with their recent downward trend.
Also in January, the ISM and employment indexes both posted additional increases.
Consumer confidence and expectations rose. However, despite improvements
in consumer attitudes, auto and light truck sales slowed.
During the fourth quarter, real GDP growth slowed to about half of the third quarter
pace. Still, the GDP figures portray an expanding economy, as consumers
continue to spend, businesses continue to invest, and exports continue to rise.
Real Gross Domestic Product
Annualized Percent Change
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
00:Q4
01:Q2
01:Q1
01:Q4
01:Q3
Source: Bureau of Economic Analysis.
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
Real consumption growth in the fourth quarter slowed from its third quarter pace.
But consumers continued to spend, despite a fall in real disposable income.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
4.0
2.0
3.0
1.5
2.0
Personal Income
1.0
1.0
0.0
0.5
Real Disposable Income
-1.0
-2.0
0.0
00:Q4
01:Q4
01:Q2
02:Q4
03:Q4
02:Q2
00:Q4
01:Q4
01:Q2
03:Q2
02:Q4
02:Q2
03:Q4
03:Q2
Source: Bureau of Economic Analysis.
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 second largest gain since the third quarter of 1998.
Residential Investment
Business Investment
Annualized Percent Change
Annualized Percent Change
25.0
20.0
20.0
Equipment and
Software
10.0
15.0
10.0
0.0
5.0
Business Investment
-10.0
0.0
-5.0
-20.0
00:Q4
01:Q4
01:Q2
02:Q4
02:Q2
Source: Bureau of Economic Analysis.
03:Q4
03:Q2
-10.0
98:Q3
00:Q1
01:Q3
03:Q1
99:Q2
00:Q4
02:Q2
03:Q4
Government spending slowed in the fourth quarter, contributing less than
two-tenths of a percentage point to real GDP. Growth in exports nearly
doubled in the fourth quarter, compared to the third quarter, while imports rose,
subtracting from real growth.
Exports and Imports
Government Spending
Annualized Percent Change
Annualized Percent Change
30.0
8.0
Exports
6.0
20.0
4.0
Imports
10.0
2.0
0.0
0.0
Contribution to Real GDP
-2.0
Government spending and
investment
-10.0
-4.0
-20.0
-6.0
00:Q4
01:Q4
01:Q2
02:Q4
02:Q2
03:Q4
03:Q2
00:Q4
01:Q4
01:Q2
02:Q4
02:Q2
03:Q4
03:Q2
Source: Bureau of Economic Analysis.
During the fourth quarter, consumer prices slowed somewhat, compared to the
third quarter, while producer prices rose slightly. Core inflation at both the retail
and wholesale levels remains extremely low.
Consumer Price Index
Percent Change, Year-Over-Year
Consumer Price Index,
excluding food and energy
Consumer Price Index
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
00:Q4 01:Q1 01:Q2 01:Q3 01:Q4 02:Q1 02:Q2 02:Q3 02:Q4 03:Q1 03:Q2 03:Q3 03:Q4
Producer Price Index
Percent Change, Year-Over-Year
6.0
Producer Price Index
Producer Price Index,
excluding food and energy
4.0
2.0
0.0
-2.0
-4.0
00:Q4 01:Q1 01:Q2 01:Q3 01:Q4 02:Q1 02:Q2 02:Q3 02:Q4 03:Q1 03:Q2 03:Q3 03:Q4
Source: Bureau of Labor Statistics.
Employee costs decelerated during the fourth quarter, as wages and
salaries remained flat and benefit costs decreased.
Employment Cost Index
Annualized Percentage Change
7.0
6.0
Benefit Costs
5.0
Total Compensation
4.0
Wages and Salaries
3.0
2.0
00:Q4
01:Q1
01:Q2
01:Q3
01:Q4
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
Source: Bureau of Labor Statistics.
Productivity slowed in the fourth quarter, compared to the third, still unit labor
costs remain low.
Productivity and Costs
Percent Change, Previous Quarter
15.0
Output Per Hour
10.0
Compensation Per Hour
5.0
0.0
-5.0
Unit Labor Costs
-10.0
00:Q4
01:Q2
01:Q1
01:Q4
01:Q3
Source: Bureau of Labor Statistics.
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
Although the labor market is still lagging behind the rest of the economy, payroll
employment continued to expand modestly in January, while the unemployment rate
and initial claims continued to fall.
Nonfarm Payroll Employment
Unemployment Rate and Initial Claims
Change from Previous Quarte, Average Monthly
Percent
200
6.5
460
Unemployment
Rate
January
2004
100
Thousands of Units at Annual Rates
January
2004
6.0
440
420
0
5.5
-100
5.0
400
Initial Claims
Change from Previous Month
-200
4.5
Oct-03
Nov-03
Dec-03
Jan-04
88,000
83,000
16,000
112,000
-300
380
January
2004
360
4.0
-400
340
3.5
00:Q4
01:Q4
01:Q2
02:Q4
02:Q2
03:Q4
320
00:Q4
01:Q4
02:Q4
03:Q4
01:Q2
02:Q2
03:Q2
03:Q2
Source: Bureau of Labor Statistics (employment) Department of Labor, Employment and Training Administration (claims).
The ISM index continued to rise in January, followed by the employment index.
ISM Index
Index (50+ = Economic Expansion)
70.0
ISM Index
60.0
Employment Index
50.0
40.0
30.0
00:Q4
01:Q2
01:Q1
01:Q4
01:Q3
02:Q2
02:Q1
Source: National Association of Purchasing Management.
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
Jan-04
Consumer attitudes continued to improve in January, as confidence and
expectations rose.
Consumer Confidence and Expectations
Index, 1985 = 100
150
Confidence
Expectations
100
50
00:Q4
01:Q2
01:Q1
01:Q4
02:Q2
01:Q3
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
Jan-04
Consumer Senitment and Expectations
Index, 1966:Q1=100
120.0
Sentiment
100.0
Expectations
80.0
60.0
00:Q4
01:Q2
01:Q1
01:Q4
01:Q3
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
Jan-04
Source: The Conference Board (confidence) and University of Michigan (sentiment).
Despite improvements in consumer attitudes, auto and light truck sales slowed
somewhat in January, compared to the fourth quarter.
Total Auto and Light Truck Sales
Millions of Units, Annualized
20.0
19.0
18.0
17.0
16.0
15.0
00:Q4
01:Q2
01:Q1
01:Q4
01:Q3
02:Q2
02:Q1
Source: Federal Reserve, Board of Governors.
02:Q4
02:Q3
03:Q2
03:Q1
03:Q4
03:Q3
Jan-04
Overall, the economy is growing. Business investment is improving. Still,
businesses need to hire more workers before the economic recovery is
considered fully engaged.
Percent
Short-Term Interest Rates
7.0
6.0
Federal Funds Rate
(effective rate)
5.0
Discount Window
Primary Credit
4.0
3.00
2.00
1.00
0.00
3.0
2.0
03:Q1
1.0
03:Q2
03:Q3
03:Q4
Jan-04
Ja
n04
3
03
:Q
4
03
:Q
03
:Q
1
02
:Q
4
02
:Q
3
2
03
:Q
2
Source: Federal Reserve Board of Governors.
02
:Q
02
:Q
1
01
:Q
4
01
:Q
3
01
:Q
2
1
01
:Q
00
:Q
4
0.0