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

Well, Mr. Chairman, first on our cheaper, more affordable, and perhaps luckier Eleventh District economy, we estimate that employment growth ran at a rate slightly greater than 3.2 percent last year and our output growth exceeded 4 percent. We do see some possible slowing, but there is still very strong momentum in the Texas economy and to an extent in the New Mexican economy, despite a lower rig count.

What I’m about to talk about is not based on the buoyancy of the Eleventh District economy but on my talking with CEOs as well as the economic projections of our own staff. I’ve talked with twenty-five CEOs for today’s discussion. I’ve added two, and just for the record they are the CEO of Disney and the CEO of MasterCard.

First, my retail contacts, with one exception, report a pickup in dollar volume and foot traffic that began with the second half of December and has continued. As a result, the Wal-Mart CEO for the United States is much more optimistic and is now forecasting volume expansion of about 2 to 3 percent. My contact from JCPenney, which is in an income range that is double that of Wal-Mart, reports a similar pattern of behavior that started the Friday before Christmas and has carried forward and says that the consumers “feel good about the economy.” The one exception, incidentally, is 7-Eleven, and I would be upset, too. Tobacco constitutes 30 percent of their sales, and Texas just levied a $10 tax on a $30 carton of cigarettes. Otherwise, the retailers seem to be much more optimistic than they were when I last reported. A not unimportant factor in this report has to do with the phenomenon of gift cards. In the public release of Safeway is an interesting piece of data: Their gift card business, which is called Blackhawk, grew 100 percent last year and dropped $100 million to the pretax bottom line. Wal-Mart reports—and this is not yet public information—a peak gift-card balance for this season of $1.2 billion. Now, mind you, 70 percent of the card use occurs before February 1. So this business has extended the retail season, and it may well have affected the buoyancy that I’m hearing from retailers in terms of their current activity. MasterCard confirms the pickup in consumer activity, particularly that it began late in the Christmas season, and its CEO reports from his contacts certainly much less “noise” about a possible recession and sees that risk abating. Just to jump forward, we forecast, based on economic research, economic growth in our District of 2.7 percent for 2007, which is what MasterCard happens to be projecting—so I found that CEO to be instantly credible. Disney reports extremely strong advertising growth. They expect the year-over-year growth to be 20 percent in terms of their first- quarter network advertising, with strength in every sector except for autos, according to the CEO. They also report record foot traffic at their parks over the holidays. In contrast, UPS reports a weak start to December but a strong finish in the last seven days of the year, with year-over-year numbers for January not as robust as expected—running around 1 percent. The rails also report a bit slower volume, as the CEO of one of the large rail companies said. There are clearly shifts taking place. For example, lumber shipments of Union Pacific and Burlington Northern are down 25 percent year over year, reflecting the falloff in the construction of homes. Both CEOs caution that company year-over-year numbers are like comparing apples and oranges, given the robust growth in the first quarter of 2006. I did talk to two of the top five housing CEOs and a third one, a smaller company. They seem to confirm the sense of the staff in that they feel that the housing situation is bottoming out, but they continue to caution that any reading of the housing industry between Thanksgiving and the Super Bowl is of questionable value.

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