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PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS, FEDERAL RESERVE BANK OF BOSTON Current Economic Developments - March 13, 2003 Data released since your last Directors' meeting show the economy tentatively continuing its slow expansion. Nonfarm payroll employment fell by 308,000 in February, marking the largest decrease since 2001. With rising initial claims and the unemployment rate hovering near 5.8%, the labor market remains weak. Consumer confidence continued to fall in February, as economic risks and geo-political concerns continued to rise. Consumer spending fell in January, led by a slowdown in auto sales. Auto sales remained weak in February as well. In fact, so far during the first quarter, average monthly sales are lower than they have been in more than four years. On balance, the housing market weakened somewhat in January. Existing home sales hit a new record high, while new home sales plummeted. Despite recent drops in the ISM index, the manufacturing sector showed some signs of improvement in January, as industrial production and new orders for capital goods rose. Nonfarm payroll employment dropped by 308,000, leaving the three-month average below zero. The unemployment rate rose slightly to 5.8%. Unemployment Rate Nonfarm Payroll Employment Change from Previous Month Percent 200 6.5 Payroll Employment 100 Recession Began 6.0 0 5.5 -100 Unemployment Rate 5.0 -200 4.5 Recession Began -300 3-Month Moving Average -400 -500 Jan-01 Jun-01 Nov-01 Apr-02 Sep-02 Feb-03 Source: Bureau of Labor Statistics. 4.0 3.5 Jan-01 Jun-01 Nov-01 Apr-02 Sep-02 Feb-03 Initial claims rose in February as the latest 4-week moving average edged above 400,000, hitting it's highest level in nine weeks. Initial Claims Thousands of Units at Annual Rates 500 Recession Began 4-Week Moving Average Ending March 1st, 408,750 450 400 350 300 Dec-00 Apr-01 Feb-01 Aug-01 Jun-01 Dec-01 Oct-01 Apr-02 Feb-02 Aug-02 Jun-02 Dec-02 Oct-02 Feb-03 Source: Department of Labor. Consumer confidence and expectations slipped in February, as concerns about the economy and geo-political risks increased. Confidence and Expectations Index, 1985 = 100 Recession Began Consumer Confidence Consumer Expectations 140 120 100 80 Feb-00 Feb-01 60 Feb-03 Feb-02 Source: The Conference Board. Sentiment and Expectations Index, 1966:Q1 = 100 120 Recession Began Consumer Expectations Consumer Sentiment 110 100 90 80 70 Feb-00 Source: The University of Michigan. Feb-01 Feb-02 60 Feb-03 Real consumption fell in January, as auto sales slowed. Real Consumption Percent Change, Previous Month 2.5 Recession Began 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Source: Bureau of Economic Analysis. The slowdown in auto sales continued in February. So far during the first quarter, average monthly sales are the lowest they have been since the third quarter of 1998. Auto and Light Truck Sales Millions of Units at Annual Rates 19.0 1st Quarter Average (January and February) 18.0 17.0 Recession Began 16.0 Nov-02 Dec-02 Jan-03 Feb-03 15.9 18.2 16.1 15.3 15.0 14.0 98:Q1 98:Q3 99:Q1 Source: Bureau of Economic Analysis. 99:Q3 00:Q1 00:Q3 01:Q1 01:Q3 02:Q1 02:Q3 03:Q1 On average, the housing market weakened somewhat in January. Existing home sales hit a new record high, while new homes sales fell to their lowest level since January 2002. Housing starts were basically flat and building permits fell. Housing Starts and Permits New and Existing Home Sales Thousands of Units, Annualized Thousands of Units, Annualized Thousands of Units, Annualized 1100 1900 6200 New Home Sales 6000 Recession Began Recession Began 1050 Building Permits 1800 5800 1000 5600 950 5400 900 5200 850 5000 1700 1600 Housing Starts 800 1500 Existing Home Sales 4800 Jan-00 Jan-01 Jul-00 750 Jan-03 Jan-00 Jan-02 Jul-01 Jul-02 Jan-01 Jul-00 Source: National Association of Realtors (Existing) and U.S. Census Bureau (New). 1400 Jan-03 Jan-02 Jul-01 Jul-02 Source: U.S. Census Bureau. In February, the ISM index dropped for a second consecutive month, hovering just over 50. ISM Indexes Index (50+ = Economic Expansion) 60.0 Recession Began 55.0 50.0 45.0 40.0 35.0 Feb-00 Jun-00 Oct-00 Source: Institute for Supply Management. Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 30.0 Feb-03 Yet, industrial production and capacity utilization showed some improvement in January. Industrial Production and Capacity Utilization Percent of Capacity 84.0 Percent Change, Previous Month 1.0 Recession Began 0.8 83.0 82.0 0.6 81.0 0.4 80.0 0.2 79.0 0.0 78.0 -0.2 77.0 -0.4 Industrial Production 76.0 -0.6 75.0 Capacity Utilization -0.8 74.0 -1.0 73.0 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Source: Federal Reserve Board of Governors. And new orders for capital goods, excluding aircraft, also showed improvement. New Orders for Capital Goods Percent Change, Year-to-Year 30.00 Recession Began 20.00 10.00 0.00 -10.00 Capital Goods Nondefense Excluding Aircraft -20.00 -30.00 Jan-00 Jul-00 Source: U.S. Census Bureau. Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 In February, oil prices rose to over $35.00 dollars a barrel for the first time since October 1990. Oil Prices Dollar/Barrel 40.0 35.0 30.0 25.0 20.0 Recession Began 15.0 10.0 Feb-90 Feb-92 Feb-91 Feb-94 Feb-93 Feb-96 Feb-95 Feb-98 Feb-97 Feb-00 Feb-99 Feb-02 Feb-01 Feb-03 Source: Wall Street Journal. Although rising oil prices have spurred increases in consumer and producer prices, core inflation remains low. Producer Prices Consumer Prices Percent Change, Year-to-Year Percent Change, Year-to-Year 6.0 4.0 Producer Price Index Consumer Price Index, excluding food and energy 5.0 3.5 Producer Price Index, excluding food and energy 3.0 4.0 3.0 2.0 2.5 1.0 2.0 Recession Began 0.0 Recession Began 1.5 -1.0 -2.0 1.0 Consumer Price Index Jan-00 Jan-01 Source: Bureau of Labor Statistics. Jan-02 -3.0 0.5 Jan-03 Jan-00 Jan-01 Source: Bureau of Labor Statistics. Jan-02 -4.0 Jan-03 Although the fourth quarter is behind us, revisions to real GDP indicate growth during the fourth quarter was stronger than originally thought. However, all of the revision was in inventory accumulation. Revisions to Fourth Quarter Real GDP Real Gross Domestic Product Annualized Percent Change 8.0 Recession Began 7.0 Description Advanced Preliminary Real GDP 0.7 1.4 Consumption 1.0 1.5 Business Investment 1.5 2.5 Residential Investment 6.8 9.4 Government 4.6 4.9 Exports -1.7 -4.4 Imports 3.7 7.2 Final Sales 1.3 1.2 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 99:Q4 00:Q2 00:Q4 01:Q2 01:Q4 02:Q2 02:Q4 00:Q1 00:Q3 01:Q1 01:Q3 02:Q1 02:Q3 Source: Bureau of Economic Analysis. All in all, data indicate economic conditions are slightly more fragile compared to last month, while concerns about future consumer spending have increased. Federal Funds Rate Percent 6.0 Discount Window Primary Credit 3.0 1.5 0.0 5.0 4.0 2.5 2.5 3.0 Jan-03 Feb-03 2.0 1.0 0.0 Feb-01 Jun-01 Oct-01 Source: Federal Reserve Board of Governors. Feb-02 Jun-02 Oct-02 Feb-03