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PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
Current Economic Developments - November 13, 2003
Data released since your last Directors' meeting shows the economy expanded rapidly
in the third quarter, with moderate improvements in the labor market.
In October, nonfarm payroll grew at its fastest pace in nine months, contributing to the
first drop in the unemployment rate since July. In addition, initial claims fell below 400
and the latest four-week moving average marked its lowest level in nearly three years.
During the third quarter, real GDP growth was boosted by consumption, business and
residential investment, and net exports. Consumption rose as consumers continuted
to spend on both durable and non-durable goods. Also, consumers continued to
invest in new housing. Businesses increased their spending on equipment and
software. Net exports improved as exports increased and imports decreased.
In the business sector, the ISM index remained above 50 for the fourth consecutive
month. However, consumer attitudes saw little change, auto sales slowed considerably,
and concerns remain as the labor market shows only moderate improvement.
In October, nonfarm payroll employment increased 126,000, the largest growth since
January. September's estimate was also revised upward to 125,000. The
unemployment rate saw its first drop since July as it edged down to 6.0%.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Month
Percent
300
Nonfarm Payroll
Employment
6.5
6.4
200
6.3
100
6.2
6.1
0
6.0
-100
5.9
-200
3-Month Moving Average
5.8
5.7
-300
5.6
-400
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Source: Bureau of Labor Statistics.
Oct-02
5.5
Oct-03
Apr-03
Jan-03
Jul-03
Initial claims ended below 400 in October, and fell to their lowest level
in almost three years in the most recent four-week moving average.
Initial Claims
Thousands of Units at Annual Rates
500
475
450
425
400
375
Four-Week Moving Average
Ending November 1st,
380,000
350
325
Jan-01
Jul-01
Apr-01
Jan-02
Oct-01
Jul-02
Apr-02
Jan-03
Oct-02
Jul-03
Apr-03
Oct-03
Source: Department of Labor, Employment and Training Administration
Consumer attitudes increased only slightly in October, despite improvements
in the job market.
Consumer Sentiment
Current and Future Expectations
Index, 1966:Q1 = 100
Index, 1966:Q1 = 100
120
120
110
Current Conditions
110
100
100
90
90
80
80
70
60
Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03
Future Expectations
Jul-00
Aug-01
Sep-02
70
60
Oct-03
Confidence and Expectations
Index, 1985 = 100
200
Consumer
Confidence
Consumer
Expectations
150
100
50
0
Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03
Source: The University of Michigan (top panel) and The Conference Board (bottom panel).
In October, auto and light truck sales fell to their lowest level in eight months.
Auto and Light Truck Sales
Millions of Units, Annualized
20.0
19.0
18.0
17.0
16.0
15.0
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Source: Bureau of Economic Analysis .
Real GDP surged in the third quarter led by consumption, investment, and exports.
Real Gross Domestic Product
Annualized Percent Change
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
00:Q2
00:Q4
00:Q3
01:Q2
01:Q1
Source: Bureau of Economic Analysis.
01:Q4
01:Q3
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q3
Real consumption rose as consumers continued to spend, especially on durable
and non-durable goods.
Real Consumption
Annualized Percent Change
Annualized Percent Change
40.0
9.0
8.0
Durable Goods (left scale)
2003:Q3 = 26.9
30.0
Non-Durable Goods
2003:Q3 = 7.9
Real Consumption
2003:Q3 = 6.6
7.0
6.0
20.0
5.0
4.0
10.0
3.0
2.0
0.0
1.0
0.0
-10.0
-1.0
00:Q3
01:Q1
01:Q3
02:Q1
02:Q3
03:Q1
03:Q3
Source: Bureau of Economic Analysis.
Nonresidential investment picked up during the third quarter, as businesses
increased their spending on equipment and software.
Business Investment
Annualized Percent Change
16.0
Business Investment
12.0
Equipment and Software
8.0
4.0
0.0
-4.0
-8.0
-12.0
-16.0
-20.0
00:Q2
00:Q4
00:Q3
01:Q2
01:Q1
Source: Bureau of Economic Analysis.
01:Q4
01:Q3
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q3
Residential investment remained strong during the third quarter as new home sales
and building permits continue to rise.
Residential Investment
Annualized Percent Change
24.0
12.0
0.0
-12.0
00:Q3
00:Q4
01:Q1
01:Q2
Thousands of Units, Annualized
01:Q3
01:Q4
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
New Home Sales and Building Permits
03:Q2
03:Q3
Thousands of Units, Annualized
1900
1800
1200
New Home Sales
Building Permits
(left scale)
1100
1700
1000
1600
900
1500
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
800
Source: Bureau of Economic Analysis (Residential Investment) and U.S. Census Bureau (New Homes and Permits).
During the third quarter, an increase in exports and a decrease in imports resulted
in positive improvements for net exports.
Exports and Imports
Percent Change, Previous Period
6.0
4.0
Imports
2.0
0.0
Exports
-2.0
-4.0
-6.0
00:Q3
01:Q2
Source: Bureau of Economic Analysis.
02:Q1
02:Q4
03:Q3
The ISM index remained above 50 in the third quarter, suggesting the manufacturing
sector is gaining strength. The employment index also increased in October.
ISM Index
Index (50+ = Economic Expansion)
60.0
ISM Index
Employment Index
55.0
50.0
45.0
40.0
35.0
Jan-01
Jul-01
Apr-01
Jan-02
Oct-01
Jul-02
Apr-02
Jan-03
Oct-02
Jul-03
Apr-03
Oct-03
Source: National Association of Purchasing Management.
Increases in total employee compensation remain moderate, although benefit
costs are increasing.
Employment Cost Index
Growth, Year-Over-Year
7.0
ECI: Benefit Costs
6.0
5.0
ECI: Total Compensation
4.0
3.0
ECI: Wages and Salaries
2.0
00:Q3
00:Q4
01:Q1
01:Q2
Source: Bureau of Labor Statistics.
01:Q3
01:Q4
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
--- inflation measures saw little change in the third quarter, suggesting low
Core
inflation risk.
Consumer and Producer Prices
Growth, Year-Over-Year
15.0
10.0
Producer Price Index
5.0
Consumer Price Index,
excluding food and energy
0.0
Consumer Price Index
Producer Price Index,
excluding food and energy
-5.0
-10.0
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
Source: Bureau of Labor Statistics.
Productivity remained strong in the third quarter, growing at its fastest rate
in eighteen months.
Productivity
Annualized Growth Rate
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
00:Q2
00:Q4
00:Q3
01:Q2
01:Q1
Source: Bureau of Labor Statistics.
01:Q4
01:Q3
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
03:Q3
Overall, the labor market showed improvement for both September and October.
The third quarter GDP growth was strong as business and manufacturing continues
to accelearte. However, consumer attitudes, on average, remain flat.
Percent
Short-Term Interest Rates
3.0
2.5
Federal Funds Rate
(effective rate)
2.0
Discount Window
Primary Credit
2.00
0.00
1.5
Jul-03
1.0
Aug-03
0.5
Sep-03
Oct-03
0.0
Oct-0
Dec-01
Feb-02
Apr-02
Jun-02
Source: Federal Reserve Board of Governors.
Aug-02
Oct-02
Dec-02
Feb-03
Apr-03
Jun-03
Aug-03
Oct-03