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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