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PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
Current Economic Developments - June 12, 2003
Data released since your last Directors' meeting show that the economy continues
to expand slowly. The labor market remained weak in May as nonfarm payrolls
fell and the unemployment rate rose. The four-week moving average of initial
claims posted estimates above 400,000 for the past fourteen weeks and the
help wanted index continued on a downward spiral in April, indicating employers
remain reluctant to hire new workers. Despite the weak labor market, consumer
confidence continued to improve in May and the housing market remained strong.
But, the manufacturing sector remains weak and business investment needs to
pick up before the economy will show real improvement. Inflation decelerated in
April, in part because oil prices fell.
Real growth during the first quarter was somewhat stronger than originally
estimated, reflecting stronger consumer spending and an upward revision to
exports. These effects were partly offset by weaker business investment in
equipment and software and an upward revision to imports.
Nonfarm payroll employment fell in May, following a revised estimate of
no change in April. Annual revisions to employment data show job losses
since January were about one fourth of the number prevously estimated.
Nonfarm Payroll Employment
Change From Previous Month
200
100
0
-100
-200
Three-Month Moving Average
Recession
Began
-300
-400
Jan-01
May-01
Sep-01
Source: Buruea of Labor Statistics.
Jan-02
May-02
Sep-02
Jan-03
May-03
Still, the unemployment rate rose in May to 6.1 percent, hitting its highest level
since July 1994.
Unemployment Rate
Percent
7.0
6.5
Recession
Began
6.0
5.5
5.0
4.5
4.0
3.5
Jan-94
Mar-95
May-96
Jul-97
Sep-98
Nov-99
Jan-01
Mar-02
May-03
Aug-94
Oct-95
Dec-96
Feb-98
Apr-99
Jun-00
Aug-01
Oct-02
Source: Buruea of Labor Statistics.
Initial claims improved somewhat in May, but have been above 400,000 since
February. The help wanted index continued to decline in April, indicating
employers remain reluctant to hire new workers.
Help Wanted Index
Initial Claims for Unemployment Insurance
Thousands of Units at Annual Rates
500
Recession
Began
Four-Week Moving Average
Ending May 31st, 430,500.
Index, 1978 = 100
70.0
475
450
60.0
425
50.0
400
375
40.0
350
30.0
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
325 Apr-01
Dec-01
Aug-02
Apr-03
Aug-01
Apr-02
Dec-02
May-03
Source: Department of Labor (initial claims) and The conference Board (help wanted).
Despite the bleak labor market, consumer confidence rose for a second
consecutive month in May, hitting its highest level in the past six months.
May's rise in consumer confidence was due to rising expectations. Current
conditions fell in May.
Confidence and Expectations
Index, 1985 = 100
180
160
140
Consumer
Confidence
120
Consumer
Expectations
100
80
Recession
Began
Present
Situation
60
40
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Mar-01
Jul-01
Nov-01
Mar-02
Jul-02
Nov-02
Mar-03
Source: The Conference Board.
Real consumption was nearly flat in April. And retail sales in May, as
measured by the Redbook, suggest future spending may be weak.
Redbook, Retail Sales
Real Consumption
Percent Change, Previous Month
Percent Change, Previous Month
1.5
5.0
4.0
1.0
3.0
2.0
0.5
1.0
0.0
0.0
-1.0
-2.0
-0.5
-3.0
-4.0
-1.0
Feb-02
Jun-02
Apr-02
Oct-02
Aug-02
Feb-03
Dec-02
Apr-03
-5.0
Feb-02
Aug-02
Feb-03
May-02
Nov-02
May-03
Source: Bureau of Economic Analysis (real consumption) and Instinet Research (redbook sales).
Vehicle sales eased somewhat in May, compared to April. But, sales so far
during the second quarter are higher than the average seen during the first
quarter.
Millions of
Uni
Auto and Light Truck Sales
ts at Annu
al Rates
22.5
20.0
Recession
Began
17.5
May 2003
16.0 Million
15.0
M
ar
-0
3
M
ay
-0
3
Se
p02
N
ov
-0
2
Ja
n03
Ju
l-0
2
ay
-0
2
M
Ja
n02
M
ar
-0
2
Se
p01
N
ov
-0
1
Ju
l-0
1
ay
-0
1
M
Ja
n01
M
ar
-0
1
12.5
Source: Bureau of Economic Analysis.
Consumers continued to buy homes in April, as new and existing home
sales rose. In fact, April's new home sales hit their third-highest level
on record.
New and Existing Home Sales
Thousands of Units, Annualized
Thousands of Units, Annualized
1100
6200
6000
Recession
Started
New
Homes
1050
Existing
Homes
(left scale)
5800
1000
5600
950
5400
900
5200
850
5000
4800
800
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Source: National Association of Realtors (Existing Homes) and U.S. Census Bureau (New Homes).
Jan-03
Apr-03
Other housing data were somewhat mixed in April. Building permits rose, while
housing starts eased.
Housing Starts and Building Permits
Thousands of Units, Annualized
2000
Recession
Began
1900
Building Permits
Housing Starts
1800
1700
1600
1500
1400
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Source: U.S. Census Bureau.
The manufacturing sector remains weak. Industrial production and capacity
utilization continued to fall in April. And business investment has yet to pick up,
as suggested by April's poor performance in capital goods orders.
Capital Goods Orders
Industrial Production and Capacity Utilization
Percent Change, Previous Month
Percent Change, Year-to-Year
Percent of Capacity
81.0
1.0
Recession
Began
Industrial Production
80.0
0.5
30.00
Recession
Began
Jan-03
Feb-03
Mar-03
Apr-03
5.2
-2.4
4.8
-2.7
20.00
79.0
Percent Change, Previous Month
10.00
78.0
0.0
0.00
77.0
-10.00
76.0
-0.5
75.0
Capital Goods Nondefense
Excluding Aircraft
-20.00
Capacity Utilization
-1.0
74.0
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
-30.00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Source: Federal Reserve Board of Governors (industrial production) and U.S. Census Bureau (capital goods).
The ISM index rose in May, following four months of declines. Still, the
index remains below 50.
Index (50+
ISM Indexes
= Econom
ic Expansi
on)
60.0
Recession
Began
55.0
May 2003
Index = 49.4
50.0
45.0
40.0
35.0
Jan-0
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Source: Institute for Supply Management.
On the inflation front, consumer and producer price increases decelerated
in April, as oil prices fell.
Consumer Prices
Percent Change, Year-to-Year
5.0
Recession
Began
Consumer Price Index
4.0
Consumer Price Index,
excluding food and energy
3.0
2.0
1.0
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
0.0
Apr-03
Producer Prices
Percent Change, Year-to-Year
5.0
Producer Price Index
Producer Price Index,
excluding food and energy
3.0
1.0
-1.0
Recession
Began
Jan-01
-3.0
Apr-01
Jul-01
Source: Bureau of Labor Statistics.
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
-5.0
Apr-03
Import prices also fell in April, led by lower oil costs.
Import Prices
Percent Change, Previous Month
3.0
Recession
Began
2.0
1.0
0.0
-1.0
-2.0
-3.0
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Source: Bureau of Labor Statistics.
Oil prices were basically flat in May, compared to April.
Oil Prices
Dollar/Barrel
40.0
Recession
Began
35.0
30.0
25.0
20.0
15.0
Jan-01
May-01
Mar-01
Sep-01
Jul-01
Source: Wall Street Journal.
Jan-02
Nov-01
May-02
Mar-02
Sep-02
Jul-02
Jan-03
Nov-02
May-03
Mar-03
Real growth in the first quarter was slightly stronger than originally estimated,
as consumer spending and exports were revised upward. On the other hand,
business investment was slightly weaker than originally estimated and there
was an upward revision to imports.
Revisions to First Quarter Real GDP
Real Gross Domestic Product
Annualized Percent Change
8.0
Recession
Began
Description
Advanced
Preliminary
Real GDP
1.6
1.9
5.0
Consumption
1.4
2.0
4.0
Business
Investment
-4.2
-4.8
Residential
Investment
12.0
11.0
1.0
0.0
Government
0.9
0.3
-1.0
Exports
-3.2
-1.4
-2.0
Imports
-7.9
-7.1
-3.0
Final Sales
2.1
2.4
7.0
6.0
3.0
2.0
00:Q1 00:Q3 01:Q1 01:Q3 02:Q1 02:Q3 03:Q1
Source: Bureau of Economic Analysis.
All in all, the economy is expanding slowly. But with businesses reluctant to invest
and hire new employees, future consumer spending remains in question.
Short-Term Interest Rates
Percent
6.0
Recession
Began
Discount Window
Primary Credit
Federal Funds Rate
3.00
2.25
2.25
2.25
2.25
5.0
2.25
4.0
2.00
1.00
0.00
3.0
Jan-03
Mar-03
Feb-03
May-03
Apr-03
2.0
1.0
Jan-01
May-01
Mar-01
Sep-01
Jul-01
Jan-02
Nov-01
Source: Federal Reserve Board of Governors.
May-02
Mar-02
Sep-02
Jul-02
0.0
May-03
Jan-03
Nov-02
Mar-03