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PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS, FEDERAL RESERVE BANK OF BOSTON Current Economic Developments - September 11, 2003 Data released since your last Directors' meeting show the economy is picking up steam. However, the labor market remains weak. Nonfarm payroll employment fell in August for the seventh consecutive month. The unemployment rate fell one-tenth of a percentage point, as more discouraged workers left the labor force. Although Initial claims edged slightly downward in August, their level remained above 400,000. Consumer confidence was mixed in August, but overall confidence levels have been little changed over the past few months. Yet, uncertainty about the economy has not slowed consumer spending. In July, home sales remained high and auto sales rose. In August, auto and light truck sales hit their highest level since October 2001, marking their second highest level on record. The manufacturing sector showed some improvement in July and August. In July, industrial production posted a large gain and capacity utilization edged upward. The ISM index in August marked its highest level this year. But, new orders for capital goods, excluding aircraft, were flat in July, suggesting future strength may still be in question. Nonfarm payroll employment fell in August for the seventh consecutive month. And the unemployment rate fell one-tenth of a percentage point, as more discouraged workers dropped out of the labor force. Nonfarm Payroll Employment Unemployment Rate Change from Previous Month 200 Nonfarm Payroll Employment Percent 6.5 6.4 100 6.3 0 6.2 6.1 -100 6.0 5.9 -200 5.8 3-Month Moving Average -300 5.7 5.6 -400 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 May-01 Nov-01 May-02 Nov-02 May-03 Source: Bureau of Labor Statistics. 5.5 Aug-02 Feb-03 Aug-03 Nov-02 May-03 The four-week moving average of initial claims ending August 30th, indicate claims edged slightly downward in August. Still, claims remained above 400,000. The help wanted index was flat in July, after rising in June. Initial Claims Help Wanted Index Index, 1978 = 100 Thousands of Units at Annual Rates 50.0 500 475 45.0 450 425 40.0 400 375 Four-Week Moving Average Ending August 30th, 401,500 35.0 350 325 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Jul-02 30.0 Jan-03 Jul-03 Oct-02 Apr-03 Source: Department of Labor, Employment and Training Administration (claims), and The Conference Board (help wanted). Surveys of consumer attitudes were mixed in August. Overall, confidence has been little changed over the past few months. Consumer Confidence and Expectations Consumer Sentiment and Expectations Index, 1966:Q1 = 100 Index, 1985 = 100 120 100 Consumer Sentiment 110 Consumer Expectations 100 Consumer Expectations 95 90 90 85 80 80 70 Consumer Confidence 75 60 70 50 Dec-01 Aug-02 Apr-02 Apr-03 Dec-02 Aug-03 65 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Source: The Conference Board (Confidence) and The University of Michigan (Sentiment). Real consumption rose in July, as consumer's continued to spend, especially on durable goods. Retail sales, excluding autos, edged slightly downward in July, still growth in this area remains healthy. Real Consumption Percent Change, Previous Month Retail Sales Percent Change, Previous Month Percent Change, Previous Month 1.5 3.0 10.0 Retail Sales Real Consumption 2.0 Excluding Autos 1.0 Durable Goods 5.0 1.0 0.5 0.0 0.0 0.0 -5.0 -1.0 -0.5 -1.0 Jan-02 Jul-02 Apr-02 -10.0 Jul-03 Jan-03 Oct-02 Apr-03 -2.0 Jan-02 Jul-02 Jan-03 Jul-03 Apr-02 Oct-02 Apr-03 Source: Bureau of Economic Analysis (Consumption) and U.S. Census Bureau (Retail Sales). Consumer's continued to purchase autos in August, as vehicle sales marked their second highest level on record. Sales hit a record high in October 2001. Auto and Light Truck Sales Millions of Units, Annualized 24.0 22.0 20.0 18.0 16.0 14.0 12.0 O N ct -0 1 ov -0 D 1 ec -0 Ja 1 n0 Fe 2 b0 M 2 ar -0 A 2 pr M 02 ay -0 Ju 2 n0 Ju 2 l-0 A 2 ug -0 Se 2 p0 O 2 ct -0 N 2 ov -0 D 2 ec -0 Ja 2 n0 Fe 3 b0 M 3 ar -0 A 3 pr M 03 ay -0 Ju 3 n0 Ju 3 l-0 A 3 ug -0 3 10.0 Source: Bureau of Economic Analysis. Existing home sales rose in July, hitting a new record-high. New home sales slipped in July, after hitting a record-high in June. New and Existing Home Sales Thousands of Units, Annualized 6500 Thousands of Units, Annualized 6250 6000 1300 Existing Homes 5750 New Homes 1200 5500 1100 5250 1000 2 ec -0 Ja 2 n0 Fe 3 b03 M ar -0 3 A pr -0 3 M ay -0 Ju 3 n03 Ju l-0 3 800 D -0 -0 ct ov N O pSe 2 02 2 2 -0 -0 A Ju l ug 2 02 n- Ju M ay -0 -0 pr A ar -0 2 2 02 900 M bFe nJa D ec -0 02 1 5000 Source: National Association of Realtors (Existing Homes) and U.S. Census Bureau (New Homes). Housing starts and building permits remained strong in July. Housing Starts and Building Permits Thousands of Units, Annualized 2000 Building Permits 1900 Housing Starts 1800 1700 1600 D ec -0 1 Ja n02 Fe b02 M ar -0 2 A pr -0 M 2 ay -0 2 Ju n02 Ju l-0 A 2 ug -0 Se 2 p02 O ct -0 N 2 ov -0 D 2 ec -0 2 Ja n03 Fe b03 M ar -0 3 A pr -0 M 3 ay -0 3 Ju n03 Ju l-0 3 1500 Source: U.S. Census Bureau. The manufacturing sector showed signs of life in July, as industrial production posted its largest gain since January and capacity utilization edged upward. Industrial Production and Capacity Utilization Percent of Capacity Percent Change, Previous Month 1.0 84.0 Industrial Production 82.0 0.5 80.0 0.0 78.0 76.0 -0.5 74.0 Capacity Utilization -1.0 72.0 Jul-00 Jan-01 Oct-00 Jul-01 Apr-01 Jan-02 Oct-01 Jul-02 Apr-02 Jan-03 Oct-02 Jul-03 Apr-03 Source: Federal Reserve Board of Governors. New orders for capital goods, excluding aircraft, were flat in July, following two months of positive growth. July's flat estimate suggests the strength of future orders may still be in question. Durable and Capital Goods Orders Percent Change, Previous Month 10.00 Capital Goods Nondefense Excluding Aircraft 5.00 0.00 -5.00 Durable Goods Orders -10.00 Dec-01 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Source: U.S. Census Bureau. The ISM index continued to rise in August, marking its highest level this year. The employment index has yet to improve. ISM Index Index (50+ = Economic Expansion) 60.0 55.0 50.0 45.0 40.0 35.0 30.0 Dec-01 Apr-02 Feb-02 Aug-02 Jun-02 Dec-02 Oct-02 Apr-03 Feb-03 Aug-03 Jun-03 Source: U.S. Census Bureau (orders) and Institute for Supply Management (ism index). Consumer and producer prices remain low, especially core prices. Consumer Prices Percent Change, Year-to-Year 3.5 3.0 Consumer Price Index 2.5 2.0 1.5 Consumer Price Index, excluding food and energy Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 1.0 Mar-03 May-03 0.5 Jul-03 Producer Prices Percent Change, Year-to-Year 4.0 Producer Price Index 2.0 0.0 -2.0 Producer Price Index, excluding food and energy Jan-02 Mar-02 May-02 Source: Bureau of Labor Statistics. Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 -4.0 Jul-03 Second quarter real GDP was revised upward, reflecting increases in consumption, federal defense spending, and business investment. Real GDP 6.0 4.0 2.0 0.0 -2.0 00:Q2 00:Q4 01:Q2 01:Q4 02:Q2 02:Q4 03:Q2 Revisions to Second Quarter Real GDP Description Advanced Preliminary 2.4 3.1 Consumption 3.3 3.8 Business Investment 6.9 8.0 Residential Investment 6.0 4.5 Government 7.5 8.2 Exports -3.1 -1.2 Imports 9.2 7.9 Final Sales 3.2 4.0 Real GDP Source: Bureau of Economic Analysis. Upward revisions to productivity in the second quarter show workers were more productive than previously thought. 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 All in all, consumption and residential investment remains strong. And business investment appears to be picking up. But, the labor market remains weak and there has been little sign of improvement. Percent Short-Term Interest Rates 4.0 Federal Funds Rate (effective rate) 3.0 Discount Window Primary Credit 2.0 3.00 2.25 2.20 2.00 2.00 2.00 1.00 1.0 0.00 May-03 Jul-03 Jun-03 Aug-03 0.0 Aug- Oct-01 Dec-01 Feb-02 Apr-02 Source: Federal Reserve Board of Governors. Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03