Download document 8877865

PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
Current Economic Developments - August 14, 2003
Data released since your last Directors' meeting show the economy is improving,
despite the weak labor market and consumer attitudes about future expectations.
In July, payroll employment continued to fall, posting its sixth consecutive drop this
year. The unemployment rate edged down two-tenths of a percentage point,
but the drop was due to a fall in the labor force. Still, the most recent four-week
moving average of initial claims moved below 400. Surveys on consumer confidence
were mixed in July, yet auto and light trucks posted their fastest sales rate since last
December. As a result, retail sales showed a strong increase in July.
During the second quarter, real GDP growth was boosted by consumption, investment
and government expenditures. Consumption rose as consumer's continued
to buy autos and invest in new homes. Nonresidential investment increased, as
businesses spent at their highest rate in three years. And increases in government
expenditures were led by defense spending.
In July, nonfarm payroll employment posted its sixth consecutive drop. Job losses
in July were at a slower pace than seen in the previous two months.
Nonfarm Payroll Employment
Change from Previous Month
200
Nonfarm Payroll Employment
100
0
-100
-200
-300
3-Month Moving Average
-400
Jan-01
Apr-01
Jul-01
Source: Bureau of Labor Statistics.
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
The unemployment rate edged down two-tenths of a percentage point in July, as
the labor force fell. Still, the most recent four-week moving average of initial
claims moved below 400. The help wanted index rose in June, hitting its highest
level since February.
Unemployment and Initial Claims
Percent
Help Wanted Index
Index, 1978 = 100
Thousands of Units at Annual Rates
7.0
50.0
500
6.5
475
Unemployment
Rate
45.0
6.0
450
5.5
425
5.0
400
40.0
4.5
375
Four-Week Moving
Average Ending
August 2nd,
397,250
4.0
35.0
350
3.5
325
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
30.0
Jun-02
Dec-02
Jun-03
Sep-02
Mar-03
Source: Bureau of Labor Statistics (unemployment), Department of Labor, Employment and Training Administration (claims),
and The Conference Board (help wanted).
Consumer attitudes towards future expectations are falling, but consumption has
remained strong and tax refunds expected later this year may help fuel more
spending.
Consumer Sentiment
Current and Future Expectations
Index, 1966:Q1 = 100
Index, 1966:Q1 = 100
120
120
110
Current Conditions
100
90
90
80
80
70
Jul-00
Jul-01
Jul-02
110
100
60
Jul-03
Future Expectations
Jul-00
Jul-01
Jul-02
70
60
Jul-03
Confidence and Expectations
Index, 1985 = 100
Consumer
Confidence
200
Consumer
Expectations
150
100
50
Jul-00
Oct-00 Jan-01 Apr-01
Jul-01
Oct-01 Jan-02 Apr-02
Jul-02
Source: The University of Michigan (top panel) and The Conference Board (bottom panel).
Oct-02 Jan-03 Apr-03
0
Jul-03
Contributions from consumption, investment and government defense spending
boosted real GDP in the second quarter.
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:Q3 00:Q4
01:Q1 01:Q2 01:Q3 01:Q4
02:Q1 02:Q2 02:Q3 02:Q4
03:Q1 03:Q2
Source: Bureau of Economic Analysis.
Real consumption rose as consumers continued to buy durable goods,
especially automobiles.
Real Consumption
Annualized Percent Change
Annualized Percent Change
7.0
40
6.0
30
Durable Goods
2003:Q2 = 22.6
20
5.0
4.0
10
3.0
0
2.0
-10
Real Consumption
2003:Q2 = 3.3
-20
00:Q2
1.0
0.0
00:Q4
Source: Bureau of Economic Analysis.
01:Q2
01:Q4
02:Q2
02:Q4
03:Q2
Auto and light truck sales continued to rise in July, posting their highest level
since December. As a result, retail sales showed a strong increase in July.
Retail Sales
Auto and Light Truck Sales
Millions of Units, Annualized
Percent Change, Previous Month
20.0
6.0
5.0
4.0
19.0
3.0
18.0
2.0
Retail Sales
1.0
0.0
17.0
-1.0
Excluding Autos
16.0
-2.0
-3.0
-4.0
15.0
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
-5.0
Jan-02
Jul-02
Jan-03
Jul-03
Source: Bureau of Economic Analysis (autos) and U.S. Census Bureau (retail sales).
Residential investment remained strong during the second quarter, fueled by new
highs in home sales during May and June.
Residential Investment
Annualized Percent Change
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
00:Q2
00:Q4
01:Q2
01:Q4
02:Q2
02:Q4
03:Q2
New Home Sales
Thousands of Units, Annualized
1200
1150
1100
1050
1000
950
900
850
800
Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-02
Source: Bureau of Economic Analysis (residential investment) and U.S. Census Bureau (New Homes).
Nonresidential investment picked up during the second quarter, as businesses
increased their spending on structures and equipment and software.
Business Investment
Annualized Percent Change
20.0
15.0
Business Investment
(right scale)
Structures
10.0
10.0
Equipment and Software
(right scale)
5.0
0.0
0.0
-10.0
-5.0
-20.0
-10.0
-30.0
-15.0
-40.0
-20.0
00:Q2
00:Q4
00:Q3
01:Q2
01:Q1
01:Q4
01:Q3
02:Q2
02:Q1
02:Q4
02:Q3
03:Q2
03:Q1
Source: Bureau of Economic Analysis.
The ISM index rose above 50 in July, suggesting the manufacturing sector
is gaining strength. But, the employment index shows hiring has not yet picked
up.
ISM Index
Index (50+ = Economic Expansion)
60.0
55.0
50.0
45.0
40.0
35.0
30.0
Jan-01
Jul-01
Apr-01
Jan-02
Oct-01
Jul-02
Apr-02
Jan-03
Oct-02
Source: U.S. Census Bureau (orders) and Institute for Supply Management (ism index).
Jul-03
Apr-03
Government expenditures rose during the second quarter, spurred by federal
spending on defense.
Government Spending
Annualized Percent Change
Annualized Percent Change
12.0
50
Federal
Defense
Spending
2003:Q2 = 44.1
40
10.0
8.0
30
6.0
20
4.0
10
2.0
Government
Spending
2003:Q2 = 7.5
0
-10
0.0
-2.0
00:Q2
00:Q4
01:Q2
01:Q4
02:Q2
02:Q4
03:Q2
Source: Bureau of Economic Analysis.
Core inflation measures have edged downward since the last recession.
---
Consumer and Producer Prices
Percent Change, Year-to-Year
10.0
7.5
Producer Price Index
5.0
Consumer Price Index,
excluding food and energy
2.5
0.0
Consumer Price Index
Producer Price Index,
excluding food and energy
-2.5
-5.0
Jun-00
Dec-00
Sep-00
Jun-01
Mar-01
Source: Bureau of Labor Statistics.
Dec-01
Sep-01
Jun-02
Mar-02
Dec-02
Sep-02
Jun-03
Mar-03
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: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
Source: Bureau of Labor Statistics.
Productivity remained strong in the second quarter, rising at its fastest rate
in nine months.
Productivity
Annualized Growth Rate
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
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
Source: Bureau of Labor Statistics.
Overall, data indicate the economy is improving. The labor market remains weak,
but business investment has started to pick up and consumers are continuing
to spend, despite worries about future economic conditions.
Percent
Short-Term Interest Rates
4.0
Federal Funds Rate
(effective rate)
3.0
Discount Window
Primary Credit
2.0
3.00
1.50
0.00
1.0
Apr-03
May-03
Jun-03
Jul-03
0.0
Jul-0
Sep-01
Nov-01
Jan-02
Mar-02
Source: Federal Reserve Board of Governors.
May-02
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
May-03
Jul-03