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

Thank you, Mr. Chairman. I have the sense that since our last meeting we’ve received a wealth of data but not necessarily a wealth of information. Between the data that have come in and the conversations that I’ve had with my District contacts in the past six weeks, I’m a little more confident about the outlook for real growth, and I view the inflation outlook as unchanged. Housing is an example of having more data, but not necessarily more information. Though some aspects of the residential housing data have been encouraging, neither futures on housing prices nor reports that I have received from people in the business suggest that the slowdown in that sector will end any time soon. Despite that, it still looks as though the spillovers to consumer spending and financial markets have been limited. At our last meeting, there was also some uncertainty regarding the health of the manufacturing sector. For the most part, the intermeeting data have been favorable for the manufacturing sector. The industrial production numbers, for example, have been strong, but manufacturing employment remains flat.

The usual story that makes sense of these disparate trends is the continuing strength in manufacturing productivity. But I’d like to mention another element in the picture—others have mentioned it this morning—and that’s the skills mismatches. My directors and business contacts in the manufacturing sector tell me that they have jobs available but that they face great difficulty in filling those jobs because they can’t find people with the right skills. Interestingly, as was mentioned in the staff presentation earlier, the JOLTS data show openings as rising, and that’s also true in the manufacturing sector. Openings have been rising over the past two years. This news really isn’t so good per se, but it does suggest that at least some of the sluggishness in manufacturing job growth is coming out of the structural elements in the labor markets and is not purely a cyclical decline in aggregate demand. In a somewhat related vein, according to the National Association of Colleges and Employers, college placements are up 17 percent this year, the strongest showing since 2001. The story is that relatively high profits and good business prospects are driving up demand. We also understand from the Ohio governor’s office that last year, although sales tax receipts were lower, income tax receipts were stronger than expected.

These bits and pieces combined with some of the positive news in the aggregate data reports in the past couple of months make me somewhat less worried about the downside risks to economic growth than I was at the last meeting. I don’t want to go overboard on this. I had that feeling several times last year only to be subsequently moved in the other direction. It is hard to tell whether some of this good news has been related to weather—that is, some spring activity might have shifted into the fourth quarter.

On the inflation front, both the official data and the anecdotal stories from my contacts continue to provide some encouragement that core inflation will moderate over the next year, but the data are not yet entirely convincing. My staff has noted that for most of 2006, especially in the later half of the year, the growth rates of individual CPI components exhibited a bimodal distribution. On an expenditure-weighted basis, most components were either falling in price or rising at a troubling rate. Very few CPI components were rising at a pace that the CPI tells us is about average. This pattern is highly unusual, and I don’t know what to make of it, except to say that it does make it more difficult to tell which way the inflation trend is leaning.

My only material difference of opinion with the staff baseline projection concerns the assumption about labor supply. Economywide, there is some reason to think that aggregate labor supply is more abundant than the Greenbook baseline contemplates. Labor force participation rates for most demographic groups have been running stronger than the staff has been expecting, indicating that the growth of potential output could lie somewhat above the Greenbook estimate. That’s what I am assuming, and therefore I get a slightly better combination of output and inflation .

In the end, my outlook for the economy hasn’t changed. The general contours of the forecast for a modest slowdown in growth coupled with a very gradual decline in core inflation make sense to me. However, I have lowered just slightly my assessment of the risk that real growth will fall short of my projection, and I have not changed my risk assessment of inflation. There’s still a notable risk that year-over-year changes in inflation might remain stuck where they are today as opposed to drifting down half a point or so over time as I would prefer. Thank you, Mr. Chairman.

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