Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Thank you, Mr. Chairman. The anecdotal reports that I have accumulated since we last met are almost—I guess I should eliminate “almost”—are unambiguously on the soft side. I emphasize “soft,” which I think is a better word than “weak,” except perhaps with my trucking industry contact, who says that volume in both March and April is down 6 percent over a year ago and does not know exactly what is happening. Trucking company bankruptcies are up sharply—24 percent above a year ago. Truck shipping rates are weak—for the first quarter they were up just slightly year over year, and in the second quarter they were down a couple of percentage points. My contact says that the volume declines are general across the country and widespread across industry segments. The company has reduced capacity and will continue to do so, and others in the industry are doing the same thing. So there is a big inventory of used trucks sitting out there in the market, and some of these trucks are being sold abroad.

In the package delivery business are FedEx and UPS. I mention the names of those companies because it is obvious who is in the package delivery business; you cannot really disguise that. [Laughter] FedEx says that the business is coming in a little below plan and that its volume in less-than-truckload business is flat. Others are down. Domestic express volume is down 2 percent year over year. The ground package network is growing substantially—a lot of that is diversion from the express business because ground delivery is cheaper. FedEx may be delaying some of its expansion projects, putting them off three to twelve months—not fundamentally changing its long- run expansion plans but delaying some capital expenditures, which are expected to be down 10 percent from the earlier plan for this year but still up 10 percent over the previous fiscal year. My contact expressed confidence that the slowdown is temporary; he expects a pickup in the August- September timeframe. FedEx has no difficulty in hiring the people the company needs except in accounting and audit fields. I heard essentially the same story from UPS. Ground volume there is up about 2 percent year over year. UPS is having to discount rates after putting through price increases last year. Cap-ex is up somewhat in ’07 compared with ’06. Profit margins are under huge pressure; the pricing environment is very competitive.

I developed a new contact in the QSR industry. Now, you may not know what the QSR industry is, but it stands for “quick serve restaurants.” Other people call it fast food. [Laughter] In the restaurant business, the casual dining industry is a more discretionary kind of outlay, and that traffic is down 7 percent year over year. Traffic in the QSR industry is down 5 to 6 percent. This is across the industry, all the different companies in that business. They have been putting through price increases of roughly 3 percent. So in terms of dollar volume, their comps are down—in the 3 percent to 4 percent area.

My contact from a large U.S. bank notes that the economy is in a soft patch that may be extended for a while and that business cash flow and balance sheets are solid. There is something of a mystery as to why cap-ex is not stronger. From proprietary, internal data on credit card usage, I learned that the growth of credit card usage is slowing; it had been about 5 percent year over year and is down to 4 percent. On an early reading of the April data, “distinctly weak” was the comment. Particularly, non-auto sales may have declined—I guess we get the retail sales number on Friday. It is likely that April retail sales are weak. Talking about credit demand, a lot of the demand for C&I loans, according to my contact, is really not the standard C&I type of thing but instead is being driven primarily by merger and acquisition activity, hedge funds, private equity, and state and local government borrowing. Credit quality remains very high.

On the outlook, my take is that the economy has slowed, and the real issue is whether we have a temporary soft patch from which the economy will recover on its own or whether this is the beginning of a cumulative weakness. It is often the case, particularly if you think about some of the models of business cycles, that weakness after a time can feed on itself and become cumulative. I do not think that we know enough to be able to make really a solid estimate on that. I would note that we likely do not have an inventory complication, which has been so important in past business- cycle developments. Inventories seem to be pretty well controlled on the whole. Also, output is certainly being supported by the stock market and by a weaker dollar. I would also note the unabated growth in the monetary aggregates, both MZM and M2—we see no sign of traditional downturn behavior from those measures. I will stop there. Thank you.

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