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Joan Johnston
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1 PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS, FEDERAL RESERVE BANK OF BOSTON Current Economic Developments - June 10, 2004 Data released since your last Directors' meeting show the economy continues to expand in the first part of In the labor market, non-farm business payrolls accelerated for the third consecutive month in May, and the latest four-week moving average of initial claims hovered around 340, its lowest level in over three years. The ISM employment index rose to its highest level in over thirty years as well. Consumer attitudes were mixed as consumer sentiment fell but consumer confidence saw little change in May. Auto sales and Redbook retail sales posted gains in May, and real disposable income and real consumption both increased in April. News in the residential market remains positive as existing home sales increased, but new home sales fell in April. Building permits rose to their highest level in six months and housing starts were higher in April than their first quarter averages. Inflation risks remain minimal as core consumer prices decelerated in April, despite the average oil price hitting record highs. In the business sector, leading indicators and durable goods continued to rise, and industrial production saw its largest increase since November. The ISM index remained above 50 in May, marking twelve straight months of growth. In May, non-farm business payrolls grew 248,000, marking the third consecuitve month of rapid growth. The three-month moving average reached its highest level in four years. Nonfarm Payroll Employment Change, Previous Month month moving average Mar-00 Aug-00 Jan-01 Jun-01 Nov-01 Apr-02 Sep-02 Feb-03 Jul-03 Dec-03 May-04 Source: Bureau of Labor Statistics.

2 The four-week moving average for initial claims remained near 340, a three year low. Initial Claims Thousands of Units at Annual Rates Four-Week Moving Average Ending June 5th, 346, Nov-00 Jun-01 Jan-02 Aug-02 Mar-03 Oct-03 May-04 Source: Department of Labor, Employment and Training Administration. 300 Consumer attitudes were mixed in April, as confidence saw little change but sentiment fell to its lowest level in six months. Consumer expectations fell to 81.6, the lowest level since October Consumer Sentiment and Expectations Index, 1966:Q1= Sentiment Expectations May-02 Aug-02 Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Confidence and Expectations Index, 1985 = 100 Confidence Expectations May-02 Aug-02 Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Source: University of Michigan (sentiment) and The Conference Board (confidence).

3 Still, total auto and light truck sales rose in May to their highest level since August 2003, Total Auto and Light Truck Sales Millions of Units, Annualized May-02 Aug-02 Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Source: Bureau of Economic Analysis. And Redbook sales posted a gain. Redbook, Retail Sales 3.0 Week Ending June 5th, 0.7% May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May Source: Instinet Research.

4 Also, real disposable income and consumption rose in April as consumers continued to spend. Real DPI and Consumption 1.5 Real DPI Real Consumption Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Source: Bureau of Economic Analysis. Housing starts fell in April, but still remain at twenty-year highs. Building permits rose to a six month high. Housing Starts and Building Permits Thousands of Units, Annualized Building Permits Housing Starts Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr Source: U.S. Census Bureau.

5 Existing home sales increased to their highest level since September 2003, but new home sales fell 11.8%, the largest decline since January Thousands of Units, Annualized 7000 New and Existing Home Sales Thousands of Units, Annualized Existing Home Sales New Home Sales Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Source: U.S. Census Bureau (new homes) and National Association of Realtors (existing homes). The consumer price index increased at its slowest pace in four months in April. The core index rose less than 0.3%, down from March's 0.4% pace. Consumer Prices 0.8 Domestic Spot Oil Price Dollars/Barrel Consumer Price Index Consumer Price Index, excluding food and energy Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Source: Bureau of Labor Statistics Week ending June 8th, 38.7 May-02 Nov-02 May-03 Nov-03 May-04 Source: Wall Street Journal, West Texas Intermediate

6 In the business sector, the index of leading indicators continued to rise in April, although at a slower pace than in March. Index of Leading and Coincident Indicators 1.5 Leading Indicators 0.5 Coincident Indicators -0.5 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 - Source: The Conference Board. Industrial production increased 0.8% in April, the largest gain since November, and capacity utilization rose to its highest level in nearly three years. The three-month moving average of orders for durable goods continues to increase, although at a slower pace in April. Industrial Production and Capacity Utilization New Orders for Durable Goods 1.5 Percent of Capacity Industrial Production 75.0 New Orders Capacity Utilization (manufacturing) Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 3 month moving average Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Source: Federal Reserve Board of Governors (industrial production) and U.S. Census Bureau (new orders).

7 The ISM index rose to 62.8 in May, marking twelve straight months of growth. The employment index rose to 61.9, its best pace since April of ISM Index Index (50+ = Economic Expansion) ISM Index Employment Index May-87 Mar-90 Jan-93 Nov-95 Sep-98 Jul-01 May-04 Source: National Association of Purchasing Management. Real GDP increased 4.4% in the first quarter, over the previously reported 4.2%. The upward revision primarily reflected gains in inventory investment, state and local government spending, and exports. Real Gross Domestic Product Annualized Percent Change :Q2 01:Q1 01:Q4 02:Q3 03:Q2 04:Q1-3.0 Source: Bureau of Economic Analysis.

8 Overall, the economy is expanding into the second quarter of The business sector continues to gain strength, but continued expansion in the labor market is needed for sustained growth. Percent 2.2 Short-Term Interest Rates Discount Window Primary Credit Federal Funds Rate (effective rate) Jan-04 Feb-04 Mar-04 Apr-04 May-04 May- 02 Aug-02 Nov-02 Feb-03 Source: Federal Reserve Board of Governors. May-03 Aug-03 Nov-03 Feb-04 May-04

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